International Transactions in Goods: Global Sales in Comparative Context 0195388186, 9780195388183

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International Transactions in Goods

International Transactions in Goods Global Sales in Comparative Context

Martin Davies David V. Snyder

Oxford University Press is a department of the University of Oxford. It furthers the University’s objective of excellence in research, scholarship, and education by publishing worldwide. Oxford New York Auckland Cape Town Dar es Salaam Hong Kong Karachi Kuala Lumpur Madrid Melbourne Mexico City Nairobi New Delhi Shanghai Taipei Toronto With oices in Argentina Austria Brazil Chile Czech Republic France Greece Guatemala Hungary Italy Japan Poland Portugal Singapore South Korea Switzerland hailand Turkey Ukraine Vietnam Oxford is a registered trademark of Oxford University Press in the UK and certain other countries. Published in the United States of America by Oxford University Press 198 Madison Avenue, New York, NY 10016

© Oxford University Press 2014 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, without the prior permission in writing of Oxford University Press, or as expressly permitted by law, by license, or under terms agreed with the appropriate reproduction rights organization. Inquiries concerning reproduction outside the scope of the above should be sent to the Rights Department, Oxford University Press, at the address above. You must not circulate this work in any other form and you must impose this same condition on any acquirer. Library of Congress Cataloging-in-Publication Data Davies, Martin, 1957- author. International transactions in goods : global sales in comparative context / Martin Davies, David V. Snyder. p. cm. Includes bibliographical references and index. ISBN 978-0-19-538818-3 ((hardback) : alk. paper) 1. Export sales contracts. I. Snyder, David V., author. II. Title. K1030.D39 2014 343.08'78—dc23 2013047590 1 3 5 7 9 8 6 4 2 Printed in the United States of America on acid-free paper

Note to Readers his publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is based upon sources believed to be accurate and reliable and is intended to be current as of the time it was written. It is sold with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional services. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. Also, to conirm that the information has not been afected or changed by recent developments, traditional legal research techniques should be used, including checking primary sources where appropriate. (Based on the Declaration of Principles jointly adopted by a Committee of the American Bar Association and a Committee of Publishers and Associations.) You may order this or any other Oxford University Press publication by visiting the Oxford University Press website at www.oup.com.

To Jane With whom all is not only possible but good D.V.S. And to all the unseen men and women who risk their lives carrying goods by sea M.D.

Contents

Acknowledgments Preface 1.

2.

An Introduction to International Sales Transactions and the Laws Governing hem I. International Sales Transactions: Goods, Payments, and Businesses A. he Goods B. Payment C. Business Models II. A Sample Transaction A. Introduction B. he Transaction Continues (Part 1) C. he Transaction Continues (Part 2) D. A Variation to the Transaction E. Possible Future for the Transaction III. Commodity Trading IV. Diferent Sources of Law, Diferent Legal Methods, and Diferent Legal Cultures A. Public Law and Private Law B. Comparative Law C. International Law V. Public Law Issues Governing Law I. Introduction II. When Does the CISG Apply? A. he Location of the Parties 1. General McDowell Valley Vineyards, Inc. v. Sabaté USA Inc. 2. Hong Kong and Macau, Two Special Cases

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1 1 2 3 7 8 8 10 12 19 21 22 26 26 27 32 35 39 39 42 42 42 43 47

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3.

B. What Are Goods? 1. Goods in General 2. Intangible Items and Sotware 3. Crops, Timber, and Mineral Resources 4. Hybrid Service Contracts 5. Framework and Distributorship Contracts Amco Ukrservice v. American Meter Co. C. What Is a Sale? D. Applying National Law Even When the CISG Governs 1. Filling the Gaps in the CISG 2. he Validity Exception Norfolk Southern Ry. Co. v. Power Source Supply, Inc. 3. Preemption and Domestic/National Law Claims Not Based on Contract Electrocrat Arkansas, Inc. v. Super Electric Motors Ltd. III. Contracting Out of the CISG BP Oil International Ltd. v. Empresa Estatal Petroleos de Ecuador IV. Application of the UCC to International Sales MWL Brasil Rodas & Eixos Ltda v. K-IV Enterprises LLC V. Neutral hird Country Law Negotiation, Formation, Terms, and Interpretation I. Introduction II. Negotiation III. Formation A. Reaching Agreement through Ofer and Acceptance 1. he Ofer Standard Sotware Case Eastern Air Lines, Inc. v. Gulf Oil Corp. 2. Firm Ofers 3. Acceptance B. Beyond Ofer and Acceptance 1. Battle of the Forms Filanto, S.p.A. v. Chilewich International Corp. Powdered Milk Case 2. Commercial Letters of Conirmation IV. Modiications of the Sales Contract Chateau des Charmes Wines Ltd. v. Sabaté USA Inc. V. Formal Matters A. Writing Requirements (or Not): he (Anti) Statute of Frauds Forestal Guarani S.A. v. Daros International, Inc. B. Writings and heir Electronic Equivalents C. Consideration

48 48 48 50 51 52 52 54 55 55 57 59 61 61 64 64 66 67 68 73 73 74 89 90 90 96 101 104 111 118 118 125 133 138 139 142 145 145 146 154 155

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VI.

4.

Terms of the Contract and Contract Interpretation A. he Efect of Writings: he (Anti) Parol Evidence Rule B. Subjective and Objective Intent MCC-Marble Ceramic Center, Inc. v. Ceramica Nuova D’Agostino, S.P.A. ECEM European Chemical Marketing B.V. v. Purolite Co. C. Interpretation: Understanding What the Parties Understand D. Interpretation: Filling True Gaps in the Parties’ Agreement VII. Standard Terms (da capo al ine) Golden Valley Grape Juice & Wine, LLC v. Centrisys Corp. he Goods I. Introduction: Four Key Terms about the Goods hemselves II. he Express Requirements of the Contract A. he Truly Express Term B. An Assurance through Custom and Practice C. An Assurance by Sample or Model Delchi Carrier SpA v. Rotorex Corporation III. Suitability of the Goods A. he Basic Concept: Fitness for the Ordinary Purpose B. Marketable, Average or Reasonable Quality? And What about the Buyer’s Purpose? Condensate Crude Oil Mix Case C. Territorial Fitness: Suitable for Use Where? he Mussels Case Medical Marketing International, Inc. v. Internazionale Medico Scientiica, S.R.L. IV. Products Liability V. Notice of Nonconformity A. Reasonable Notice CME Cooperative Maritime Etaploise S.A.C.V v. Bos Fishproducts URK BV (he Rotten Fish Case) Chicago Prime Packers, Inc. v. Northam Food Trading Co. Shuttle Packaging Systems v. INA Plastics Corp. Beijing Light Automobile Co., Ltd. v. Connell Limited Partnership Condensate Crude Oil Mix Case B. Burden of Proof Schmitz-Werke GmbH & Co. v. Rockland Industries, Inc. C. Failure of Notice: Bar, Absent Buyer’s “Reasonable Excuse” or Seller’s Knowledge or Waiver Acrylic Blankets Case VI. Buyer’s Lack of Reliance VII. Disclaimer of Warranties and Other Assurances, with Comparative Notes on Domestic Laws

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156 157 161 162 170 174 178 180 180 185 185 188 188 190 190 191 194 194 195 196 206 206 207 209 212 213 213 214 218 220 227 228 228 231 231 232 233

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VIII. Beyond the Goods, beyond the Statutes, beyond the Treaty:  Quality Assurance Processes, Human Rights Protections, Environmentalism, and Other Issues 5. Delivery and the Passing of Risk I. Introduction II. Contractual Delivery and the Passing of Risk A. Incoterms 2010® and the Passing of Risk BP Oil International Ltd. v. Empresa Estatal Petroleos de Ecuador B. Default Provisions in the CISG on Delivery and the Passing of Risk Chicago Prime Packers, Inc. v. Northam Food Trading Co. Case No. VIII ZR 67/04 (he Frozen Pork Case) C. Default Provisions in the UCC on Delivery and the Passing of Risk Pestana v. Karinol Corp. Larsen v. A.C. Carpenter, Inc. Buenger v. Pruden D. Foreign Domestic Law: he Example of the United Kingdom Stora Enso Oyj v. Port of Dundee III. Physical Delivery to the Buyer Allied Chemical International Corp. v. Companhia Navegacao Lloyd Brasileiro 6. Payments, Credit, and Performance Guarantees I. Introduction II. Documentary Collections Inox Wares Pvt. Ltd. v. Interchange Bank III. Letters of Credit A. How the Credit Works, UCP 600, and UCC Article 5 B. Strict Compliance and Strict Preclusion Beyene v. Irving Trust Co. Boston Hides & Furs, Ltd. v. Sumitomo Bank, Ltd. Voest–Alpine Trading USA Corp. v. Bank of China C. he Independence or Autonomy Principle and the Fraud Exception Mid-America Tire, Inc. v. PTZ Trading Ltd. D. Standby Letters of Credit as a Means of Securing Performance IV. Deferred Payment A. Time Drats, Bills of Exchange, and Deferred Payment Letters of Credit B. he Fraud Exception and Deferred Payment 7. Excused Performance When Circumstances Change I. Introduction United Aluminum Corp. v. BOC Group, Inc.

236 245 245 248 248 249 254 254 255 257 257 260 261 263 263 265 266 271 271 273 277 281 281 286 290 292 295 298 300 311 313 313 317 321 321 323

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II.

8.

Relief Under the CISG for Performance Prevented by “Impediment” A. Introduction B. Impediment Raw Materials, Inc. v. Manred Forberich G.m.b.H. & Co., K.G. C. Hardship as Impediment D. Nonconforming Goods and Supply Failures Case No. VIII ZR 121/98 (he Vine Wax Case) III. Relief Under the UCC When Performance Becomes “Impracticable” Transatlantic Financing Corp. v. United States IV. Force Majeure and Hardship Clauses Macalloy Corp. v. Metallurg, Inc. Harriscom Svenska, A.B. v. Harris Corp. Remedies I. Introduction A. Remedies as the Crux of the Contract B. Some Basic Concepts in the Structure of Remedies II. Remedies at the Performance Stage A. Suspension of Performance and Adequate Assurances B. Anticipatory Repudiation and Its Relation to Suspension of Performance and Adequate Assurances Magellan International Corp. v. Salzgitter Handel GmbH C. Cure, Plus a Word on the Nachrist Notice III. Ending the Contract A. Avoidance under the CISG 1. Fundamental Breach Rynpoort Trading & Transport NV v. Meneba Meel Wormerveer B.V. 2. Delayed Performance, Nonperformance, and Nachrist Notice Valero Marketing & Supply Co. v. Greeni Oy 3. Notes on German and French Law 4. Installment Sales under Article 73 5. Short Deliveries and Partially Conforming Deliveries under Article 51 Italian Shoes Case 6. he Relation among Cure, Fundamental Breach, and Avoidance Designer Clothes Case 7. Efects of Avoidance B. Cancellation under the UCC C. Ending the Contract under French Law and German Law IV. Performance as a Remedy A. Comparative Law: Such a Great Divide? 1. Domestic Law in the United States 2. he Performance Remedy in French Law 3. he Performance Remedy under German Law

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326 326 327 328 332 334 335 336 337 341 344 344 347 347 347 348 351 351 354 357 360 367 367 367 368 372 374 379 381 384 386 387 389 391 391 392 398 398 399 401 402

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B. Functional, Practical, and Strategic Aspects of the Performance Remedy 1. he Reality of a Damages Preference across Legal Systems 2. Eicient Breach and Its Relation to Performance Remedies C. Comparative Conclusions on the Performance Remedy D. Performance Remedies under the CISG Magellan International Corp. v. Salzgitter Handel GmbH V. Monetary Remedies A. Damages 1. he CISG and the UCC Delchi Carrier SpA v. Rotorex Corp. 2. German Law and French Law on Fault and Damages B. Price Reduction C. Interest and Attorneys’ Fees Zapata Hermanos Sucesores, S.A. v. Hearthside Baking Co. VI. he Place of the Goods hemselves in the Remedies Scheme: Security Interests and Preservation Duties VII. Contractual Remedies Table of Statutes Table of Cases Index

405 405 406 408 409 410 413 413 413 421 437 441 445 447 449 453 461 469 475

Acknowledgments

his book has been long in the making, and our debts have grown as the years have gone by and the pages have stacked higher. First, we want to acknowledge what we see as a deep intellectual debt. Despite our generally minimalistic approach to citations, we want to make clear that we have relied on gited scholars whose work has inluenced our views. Even from the Preface, the reader will see the inluence of the great comparatists René David, Konrad Zweigert, and Hein Kötz, and we have made frequent use of their work not only for their grand visions but, particularly with respect to the latter two scholars, for their detailed work on the doctrines we explore, made accessible with great learning and insight by the late Tony Weir. See Konrad Zweigert & Hein Kötz, Introduction to Comparative Law (Tony Weir trans., 3d rev. ed. 1998). On German law we have usually looked to The German Law of Contract by Sir Basil Markesinis, Hannes Unberath, and Angus Johnston (2d ed. 2006) and to Reinhard Zimmermann’s The New German Law of Obligations: Historical and Comparative Perspectives (2005). Our constant sources on French law have been Principles of French Law (2d ed. 2008) by John Bell, Sophie Boyron, and Simon Whittaker, as well as other works by them and their coauthors, in addition to the less up-to-date but concise and penetrating classic by Barry Nicholas, The French Law of Contract (1992). In addition, for French law itself, we have used standard references like the annotated Code civil and Philippe le Tourneau’s Droit de la responsabilité et des contrats in their most recent Dalloz editions. As to the CISG, we wish to acknowledge the historic work of John O. Honnold and Peter Schlechtriem, scholars who were there before the treaty and who not only witnessed but made much of the international law of sales. hey have gone during the writing of this book, but their works have been with us—piled on our desks, usually—as is the work by their intellectual fellow travelers, Harry Flechtner and Ingeborg Schwenzer. See John O. Honnold, Uniform Law for International Sales under the 1980 United Nations Convention (Harry Flechtner ed., 4th ed. 2009); Schlechtriem & Schwenzer, Commentary on the UN Convention on the International Sale of Goods

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(CISG) (Ingeborg Schwenzer ed., 3d ed. 2010). Aside from these works, we have oten looked to the recent UN Convention on Contracts for the International Sale of Goods (CISG) edited by Stefan Kröll, Loukas Mistelis, and Pilar Perales Viscasillas (2011). We also acknowledge the assistance we have gained from the work of Michael Bridge, whose scholarship covers both of the sometimes warring worlds of English law and the CISG, his The International Sale of Goods: Law and Practice (2d ed. 2007), being the preeminent example. As will be apparent, these are hardly all of our main sources, but these have been so prominent as to inluence our thinking in ways we perhaps barely recognize. We can only hope to tread the same path behind these scholars whom we acknowledge and follow. Teachers and scholars have not been our only guides. Both of us have taught the law of international sales for a number of years, and countless colleagues and students have taught us even as we have taught them; some have helped with research, and many have helped with discussion, debate, and questions. Not all can be named, but we wish to acknowledge in particular the help of Rémi Auba Bresson, Sârra-Tilila Bounfour, Michael Tyler Brown, Shaleen Brunsdale, Bénédicte Fauvarque-Cosson, Robert Force, Michael Francel, Janette Hays, Jessica Marrero, Adeen Postar, Matthew Ribe, Benjamin Ross, David J.  and Justin Snyder (amazingly, no relation to each other or to us), Lisa Spagnolo, and Diana Verm. hese good friends and colleagues have saved us from many errors. We have no doubt that many remain, which are of course our own responsibility, and we would be grateful to readers who call them to our attention (gently, we hope). Both of us can easily be reached by e-mail. We would also like to thank Patty Cooper for her excellent work in creating the sample documents reproduced in Chapter 1. We hope she does not put her skills to work in a future career as a forger. Our editors at Oxford have shown us extraordinary good cheer and everlasting patience. We note our gratitude particularly to Alden Domizio, Jennifer Gong, Michelle Lipinski, Blake Ratclif, Brooke Smith, and Lori Wood. And none of this would have been possible without the support of our deans, Claudio M. Grossman, David D. Meyer, and Lawrence Ponorof, whose generous summer research grants have enabled us to devote the necessary time to this project. Our time belongs to our families as well as to our work, and our families have been an indispensable support through this project. Our debt to them goes beyond what we can say, and we will not try to bound the boundless by hedging it about with words. On this score, we can only give our thanks. In addition to these many debts, we gratefully acknowledge permission to use the excerpts and translations that appear in the text. In this regard, we wish to acknowledge these copyright holders for permission to use extracts from the following works: American Law Institute for Restatement (Second) of Torts (Copyright 1965) and the Restatement (hird) of Torts: Products Liability (Copyright 1998). American Law Institute and Uniform Law Commissioners for the Uniform Commercial Code (copyrights of various dates).

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Columbia Law Review Association for E. Allan Farnsworth, Precontractual Liability and Preliminary Agreements: Fair Dealing and Failed Negotiations, 87 Colum. L. Rev. 217 (1987) (permission conveyed through Copyright Clearance Center, Inc.). Harvard Law Review Association for Alan Schwartz & Robert E. Scott, Precontractual Liability and Preliminary Agreements, 120 Harv. L. Rev. 661 (2007) (permission conveyed through Copyright Clearance Center, Inc.). International Chamber of Commerce for the Incoterms 2010 and for UCP 600: Uniform Customs and Practice for Documentary Credits (2007). Oxford University Press for Hans Stoll & Georg Gruber on Article 77 in Schlechtriem & Schewenzer, Commentary on the UN Convention on the International Sale of Goods (CISG) ¶¶ 4-5, at 788-89 (2d English ed. 2005), and for Ingeborg Schwenzer on Article 77 in id. ¶¶ 4-5 at 1042-43 (3d English ed., Ingeborg Schwenzer ed. 2010). Pace CISG Database at http://www.cisg.law.pace.edu/. Temple Journal of International and Comparative Law for Lisa Spagnolo, Opening Pandora’s Box: Good Faith and Precontractual Liability in the CISG, 21 Temple Int’l & Comp. L.J. 261 (2008).

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his is a book for learning in an international and commercial context. It is written with the assumption that students of international sales will come from many backgrounds, with varying knowledge and experience of common law, civil law, international law, and the world of commerce. All four aspects are crucial, but because some students may have no background in one or more of these areas, we try to explain all four. And because students with diferent backgrounds are oten used to diferent styles of teaching and learning, we have tried to accommodate diferent habits of thought. he book includes extensive textual explanation (ordinary for many civil law students but unusual for US students) along with case excerpts to show how the law is put into action in the context of litigation (ordinary for US students but unusual for civil law students) and a plethora of problems, the vast majority of which are based on actual cases (to give further knowledge of how the rules work in real life, and to make sure everyone can use what has just been learned). Everyone, including students, teachers, and ordinary readers, should ind much that is familiar along with much that will allow expansion into unfamiliar methods of learning, analysis, and thinking—which is of course part of the goal. Running through all of this is a belief that there is nothing more interesting and nothing more important than what happens in the real world, and that law is itself interesting and important because it must operate in the real world. Although this is a law book, it is meant to be oriented to commercial practice. Understanding the “real world” of business is as much a part of understanding the law as knowing the provisions of a commercial code or the articles of a treaty. his approach is animated by three simple ideas. First is that the reader will want to practice law in the world of international sales. Second, the law is much easier to understand in context. he rules are oten designed for particular commercial problems, and even if the rules were not designed that way, they have evolved that way. A similar point is worth making in the international context: the principles and policies underlying the rules are aimed at particular international goals. Once the reasons behind the rules are clear, the rules usually fall neatly into place. (Most of the time. When they do not, then there

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is a problem to be solved, and that is one of the central callings of a successful lawyer.) he international and commercial context of the transactions and disputes makes sense of most of the rules. hird, putting the law together with commercial and international dynamics—always changing, with diferent aspects acting on each other, leading to further changes in law, business, and the world—is among the most attractive and exciting parts of law practice in international commerce. his is not abstract stuf. his is about the law needing to resolve problems when goods move from one country to another, which may involve diferent languages for negotiation and documentation, weeks of ocean carriage, and varying expectations and understandings. his will not be about mere exposition or idle debate (“Oh, isn’t it interesting!” or “Let us discuss the role of international institutions!”). In the problems and cases in this book, there will oten be winners and losers, and the amount of the win or the loss can generally be measured in money. his is the real world. Helping the client win—a lot—is part of the job. Knowing when a loss is in prospect and that it is time to settle is also part of the job. At the same time, particularly on the transactional rather than the litigation side, there may be winners and winners. hat is the idea of the transaction: both parties think that they will be better of for the transaction, and oten they will both be right. Helping clients achieve these goals, good for them, good for the economy, and good for society, is also part of the lawyer’s job. his book is meant to help the reader become that lawyer in the context of international sales. his approach has practical and theoretical implications, some of which we have tried to indicate in the title. he book is about international sales, but there is much more to the transaction than the law of sales. Perhaps most apparent are questions of payment and credit. In the international context, transportation of the goods is a close second. We have tried to view a sale as a holistic transaction, addressing all of its commercial aspects, from the negotiation and conclusion of the contract to the arrangements for payment and transport, including legal and commercial sources of leverage, as well as remedies for reaching solutions, or at least resolutions, when the transaction goes wrong. For example, the book covers not only the legal default rules on delivery but also of course the Incoterms. Even so, the Incoterms are just more rules. We also try to explore the dirty (and not coincidentally, interesting) details, like how it works to put the goods into containers (those big metal shipping boxes), how the containers enable multimodal transport (moving the container from truckbed to rail car to container yard to the deck of a ship, perhaps covering hundreds of miles before the goods even leave the country of origin), and how this current practice its poorly with traditional shipping terms, but how newer ones are designed to solve the problem. In short, our task has been to write a book about the law governing the commercial transaction, not just the law of sales.1 Similarly, although the book is about the law of international sales, the book is not just about the United Nations Convention on Contracts for the International Sale of Goods

1. his approach has limits. Although the book endeavors to cover the law of the “commercial transaction,” public law remains outside the scope of this volume. Matters of customs law, free trade agreements, countervailing duties, and so on are a diferent area of law and oten a diferent area of law practice.

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(Vienna 1980), generally called the CISG. To be sure, the CISG is oten at the center of each topic in the book, and plenty of space is given to international law. But while the Convention governs many international sales, many are governed by domestic law. For that reason, quite a lot of the book is about domestic law. As one volume hardly can cover the domestic sales laws of the whole world, the book instead includes the most important and exemplary systems. On the common law side, the domestic sales law of the United States and of England receive attention. Both are important commercially, and sales contracts are oten governed by the law of England or the law of New York, for instance. London and New York are also frequent venues for litigation and arbitration. On the civil law side, the book covers French and German domestic law, not only because of the commercial and legal markets in those countries but also because most civil law systems around the world are descended from, or based on, one or the other of those systems. As will be apparent now, this book is as much a work of comparative law as it is of international law. We emphasize, though, that comparative law here is a strategic subject, not an abstract one. Generally the parties will be able to choose which law will govern their transaction. he lawyer must ask, “Which law will be better for my client?” And of course the lawyer for the other party must be asking similar questions. his is an issue of concrete comparison with particular trade-ofs in light of negotiating moves by the other party: an intensely strategic decision that must be made with knowledge of multiple legal systems. hat knowledge must include not only the diferences between alternative rules but also enough nuance to see how those rules may move toward each other under commercial pressure, even as difering cultural and legal attitudes may prevent them from converging entirely. his book aims to expose the difering rules, to explore them in enough depth to see that they are rarely diametrically opposed, to understand the commercial impetus to convergence, and to appreciate the difering outlooks that may keep them apart. Although it may seem curious, the practical orientation employed here makes theory no less important, particularly in an international context. Most immediately for the reader and the student, the rules are overwhelming without understanding the theories that hold them together. he theories that thread through the rules, like the business realities that instigate those same rules, help to make sense of the rules so they are easier to understand and remember. Further, since the book cannot hope to cover the law of the whole world, knowing the theory behind the exemplary domestic laws (the United States and England on the one hand and France and Germany on the other) will allow a lawyer to grasp the laws of other countries quickly: they will it within a framework already understood and assimilated, and even where particular rules may difer, those diferences can be identiied, appreciated, and exploited more readily because of the systematic knowledge already acquired. So we have tried to pay attention to theory at the same time as we retain our commitment to a practical approach. All of this is a large task. Not everyone will have time for it all. For that reason, the book is designed for adaptation to diferent scales. A short, quick course may take on only the international law of sales—just the CISG. More time would allow treatment of matters like choice of law or letters of credit or both. A full course in law school can cover the whole

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book. It is a matter of priority and time, let to the interests and desires of the reader or the teacher. Because this is meant to be a coursebook that makes the law as plain as possible, we have tried to keep citations to a bare minimum. In our explanations of what the law is, we have not included citations to the many treatises discussing each of the issues. Usually only primary sources are cited—the CISG, for example, or the Uniform Commercial Code or the French Code civil. he text may occasionally cite a particular secondary work that could prove diicult to ind without a citation, but otherwise we generally have not cited secondary sources. Further, in keeping with the convention for casebooks, most citations and footnotes within excerpted materials are omitted without ellipsis. Each excerpt is headed by a citation so a researcher can ind the original source with full text and full internal citations. Footnotes that are retained are renumbered to it within the numbering of the chapter. Along similar lines, we have not cited in the text the cases on which so many of the problems are based. It is tendentious to suggest that students look up all of those cases. If the problem is posed, students should have from the reading all they need to answer it or, more likely, to make the arguments for both sides and to reach an informed, if not entirely certain, conclusion. Citations to the cases on which the problems are based are given in the Teacher’s Manual. here are two main exceptions to our very light use of citations. When one of us has written on a subject and may for that reason be thought inclined to a particular view, we have tried to include citations to our own work, and where relevant, work by leading opposing scholars. Second, in the section on the performance remedy, we have included fuller citation because we believe some of the ideas and arguments are relatively new, and support for our views is therefore given. Even so, we have foregone the usual lengthy citations that weigh down the page with notes, explanations, and qualiications. Clarity is our goal. Simplicity aids clarity, but law is not always simple. International law is simple even less oten, and comparative law is no simpler. Still, we have thought throughout that if we can be clear about what is clear and can also be clear about what is unclear, then we, and other students of the law of international transactions, can move forward eiciently in ways that will be useful and realistic in a globalizing marketplace permeated by law. M. D. D. V. S. January 2014

BANK in SELLER’S COUNTRY ADVISING/CONFIRMING BANK

BUYER’S BANK ISSUER

GOODS $$$$$ SELLER BENEFICIARY

BUYER APPLICANT

FIGURE 1.1 he Letter of Credit. he buyer and seller would like to exchange goods for money, but distance and the buyer-seller trust problem prevent them from doing this directly. he letter of credit solves this problem. In this diagram, light green represents the application for, the issuance of, and the advising or conirmation of the letter of credit. he gray arrows represent the movement of the goods. he blue arrows represent the issuance and movement of the bill of lading. he dark green represents the movement of money. In the end, the seller will get its money (the money bag) and the buyer will have the goods (the crate).

BANK in SELLER’S COUNTRY ADVISING/CONFIRMING BANK

BUYER’S BANK ISSUER

GOODS $$$$$ SELLER BENEFICIARY

BUYER APPLICANT

FIGURE 6.2 he Letter of Credit. he buyer and seller would like to exchange goods for money, but distance and the buyer-seller trust problem prevent them from doing this directly. he letter of credit solves this problem. In this diagram, light green represents the application for, the issuance of, and the advising or conirmation of the letter of credit. he gray arrows represent the movement of the goods. he blue arrows represent the issuance and movement of the bill of lading. he dark green represents the movement of money. In the end, the seller will get its money (the money bag) and the buyer will have the goods (the crate).

1

An Introduction to International Sales Transactions and the Laws Governing hem For many students, international sales transactions on a commercial scale—which are the subject of this book—are surprisingly strange and unfamiliar. In more basic courses in Contracts and domestic Sales, even commercial transactions can oten be it into, or adapted from, the familiar consumer paradigms familiar to many of us. International sales of goods, although they need not be enormous or exotic, frequently lie in a realm full of vocabulary that is at best vaguely familiar: letters of credit and Incoterms 2010® are commonplace in international sales, but most people have only barely heard of them and have perhaps a slippery grasp of what they are and how they work. he good news is that, like many business transactions and legal devices, they make sense, even though they are sometimes complex. Keeping in mind the problem to be solved is the crucial irst step: with a clear grasp of the problem, the solutions (including their complexities) can be understood easily enough as people’s responses to perfectly understandable issues—issues that are resolved through a combination of commercial devices and legal rules. We start with these fundamental matters because treating them irst, although they may seem complicated early on, will make it simpler to understand the transactional structures and the laws governing them.

I. International Sales Transactions: Goods, Payments, and Businesses We might begin with the most familiar scenario, even though it will not detain us long. A  used car dealer in Germany (or the United States, or any number of countries) might buy one or two or three used cars from another car dealer in a neighboring country, like Italy (or Mexico, or wherever). Although it is a commercial sale, it is small in scale, perhaps amounting to just $10,000 to $20,000. here are only two parties, who may well know each other and may be near each other. It is much like a domestic sale, and it is not far from a

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domestic consumer sale in terms of our expectations and paradigms. he main diference is that, depending on the countries involved and the parties’ contract, it may be governed by a diferent body of law than the usual domestic law that would have applied if it were not an international sale. Most prominent among these international sales laws, both in the world and in this book, is the United Nations Convention on Contracts for the International Sale of Goods, which was signed at Vienna in 1980. It is oten called the CISG, or sometimes the Vienna Convention. (Calling it the Vienna Convention is confusing, though, as there are many Vienna Conventions; the Austrian capital has been a popular place to sign treaties, and still is.) At this writing, the Convention is in force in about 79 countries, including the United States. hese countries are called “Contracting States”: the countries have contracted into the Convention, and in international law, countries are referred to as “states.” Roughly speaking, the CISG governs sales of goods between businesses located in diferent Contracting States, unless the buyer and seller have otherwise agreed. See generally CISG arts. 1(1)(a), 6. here is much more to analyzing what law would apply; governing law is discussed a bit more in this chapter and is treated in some detail in Chapter 2. Discussing governing law is jumping the gun a bit, from our perspective. What needs to come irst is an understanding of the business transactions. he small transaction just mentioned is so simple that the only remarkable thing about its being across a border is that international law may apply. Many international sales, though, are not so simple on the business side, and many of the legal rules and commercial devices have evolved to solve the problems that are typical of diferent kinds of larger international transactions. Perhaps the most obvious issue is that the parties may be far away from each other, and that distance may have a variety of implications. Aside from the number of miles involved (and potentially the seas between the parties), there are other issues. We raise them here so you can keep them in mind as we continue through the book, issue by issue. To see them, it is easiest to keep a few basic transaction types in mind. A neat way to categorize international transactions is along three axes. Each variable— each determinant, to use the apt mathematical term—triggers a set of transactional issues. Like much commercial law in general, international commercial law is largely devoted to providing “gapillers,” or suppletive rules that set out what the parties’ agreement will be presumed to provide if the parties are silent on the issue. For instance, when will payment be due if the parties do not say? Commercial law generally provides an answer to such questions, and international commercial law is no diferent. A good method for thinking about the law, then, is to think about what gaps will have to be illed. In terms of top-level issues, perhaps the main ones are (1) the quality and quantity of the goods; (2) the way payment will be made for them; and (3) the business models that are driving the transaction. Each of these three issues might be divided into three possibilities that could be considered typical. As we are obviously simplifying here, and telling a bit of a fairy tale of international transactions in a world that is obviously more complicated than the outline here, we igured we may as well follow the Rule of hree of classic storytelling. We will keep this introductory account to three points on each of the three axes.

A. he Goods As to the goods themselves, the irst example to consider might be a commodity sold in bulk. When a buyer orders 10,000 metric tons of US No. 1 Hard Red Winter Wheat (ordinary

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protein), it is ordering a bulk commodity. Wheat comes in varieties and is graded. Within the speciied variety and grade, it is fungible—this ton of US No. 1 Hard Red Winter Wheat (ordinary protein) is the same as that ton of US No. 1 Hard Red Winter Wheat (ordinary protein). he same is true of, say, West Texas Intermediate crude oil, known generally as WTI or as Texas light sweet, or of USDA Illinois North Central No. 2 Yellow Corn. hese are likely to be bought and sold in what would appear to a consumer to be extremely large quantities—thousands of tons of wheat or corn, thousands of barrels of oil. It will have to be transported by a mode than can accommodate large quantities over potentially very long distances. Trucks are a possibility, but rail or ship would be more likely. More than one mode of transport may be required. Another possibility is on the other end of the spectrum: the sale of a good or goods speciically identiied at the time the contract is made. When Mirage Resorts (owner of the Bellagio hotel in Las Vegas) buys a Rembrandt from a dealer in Maastricht (which is in the Netherlands), the goods are not tons of commodities but one very speciic painting that the buyer (or its experts) has examined and decided to purchase. It will need transportation, but it is unlikely to travel by train or ship. It will probably be carefully crated and will travel by air with an art expert to babysit it the whole time. Less glamorously, in our irst example, when the car dealer bought the used cars, those cars were existing and identiied at the time the contract was made. hey are not cars bought in bulk, and they do not need to be manufactured; they were manufactured some time ago, and in fact have been used. hey seem likely to be delivered by truck. In between those two ends of the spectrum might be manufactured goods. Consider now the US car dealer who orders dozens of cars from the manufacturer in Japan. he quantity (and the payment) may be large, but the cars are not like the fungible commodities sold in bulk, like crude oil or wheat. Particular models, options, and colors are probably speciied. he cars may already exist—they may already have been made—or they may not. Or consider the US department store that places an order for particular clothes from a European design house. he clothes were probably shown at a fashion show months or a year ahead of time. he orders come aterward, but still well before the season starts. (Consider that spring clothes go up in stores shortly ater Christmas, that is, in January, when the weather is at its coldest. he stores ordered those clothes weeks or months before then.) he clothes may or may not yet exist when the store places its order. hey may still need to be manufactured. And again, particular clothes are likely to be speciied. Many of the crazy outits that the models wore on the runways in Milan and Paris may never get manufactured, as there will be insuicient orders for them.

B. Payment As with the goods, we will note three main possibilities for payment. One possibility is the same as is common in domestic sales: trade credit. he seller sends an invoice, and the buyer is to pay it sometime (e.g., 30 days) ater receiving the invoice and the goods. Even if the invoice says the amount is “immediately due and payable,” the seller is giving the buyer credit. he buyer will have received the goods without paying for them yet. he seller is thus trusting the buyer—giving credit to the buyer—so the buyer can pay later. In domestic sales, trade credit is common. he business communities are smaller and individual businesses are more

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easily researched. Credit reporting is readily available, even standardized. he seller is taking some risk, which extending credit always entails, but businesses do not expect or even want to live in a world without risk. he risk can be investigated and determined, and the seller can charge good money, explicitly (through a stated interest rate) or implicitly (by raising the price of the goods) for taking the risk. Sometimes this same thinking can be applied to international transactions. he buyer and seller will know each other from experience or reputation, or research or investigation may be quick and easy, or the transaction may be small. he electronic funds transfer is another straightforward way to arrange payment. he buyer and seller agree that the buyer will pay by “EFT,” or by “wiring” the money to the seller. What this means is that the buyer instructs its bank to remove money from the buyer’s bank account and to have the money put into the seller’s account at the seller’s bank. he mechanisms for achieving an electronic transfer of these funds are variable, but two or three systems are dominant when a US party is involved. One is a transfer through SWIFT, the Society for Worldwide Interbank Financial Telecommunications. SWIFT allows its member banks to send automated electronic messages to transfer money between themselves. It is likely to be used if the transfer is not in dollars. If dollars are denominated, the “wire” will likely go through CHIPS in New York. CHIPS is the Clearing House for Interbank Payment Systems. CHIPS is owned by its members, which are generally very large international banks with a branch in New York. Smaller banks may participate in CHIPS by having an account with a CHIPS member that will efect the transfer. he other system to note is CHAPS, which is the London equivalent of CHIPS. In addition, Fedwire (operated by the Federal Reserve) might be mentioned because it is an important US system used for commercial “wire” payments, but it is less likely to be relevant in an international transaction: its use is domestic. Before discussing the third typical payment option—the classic one, which is the letter of credit—let us notice that the traditional paradigm of a buyer and seller exchanging goods for money simultaneously is impossible in international sales. he legal imagination for centuries has seemed to envision a seller holding out a good to a buyer simultaneously with a buyer holding out some money to the seller. he seller would then grasp the money and let go of the good while the buyer would at the same time grasp the good and let go of the money. Once they had let go, perhaps they shook hands, but no one had to trust anyone. If the buyer failed to hold out the money, the seller would never have occasion to let go of the good; if the seller failed to hold out the good, the buyer would never have any occasion to let go of the money. Sales law thus contemplates a paradigm without trust—which is to say in economic terms, without credit. Simultaneous exchange obviates credit. But if simultaneous exchange was ever practical, it is not now, at least for large commercial transactions, and it certainly is not practical in international sales. In the two payment scenarios discussed so far—trade credit and EFT—one party had to grant the other credit. With trade credit, the seller gives the buyer credit because the buyer gets the goods before it has to pay for them. If the buyer receives the goods but is unable or unwilling to pay the bill, the seller will be (to put it mildly) unhappy. An EFT similarly involves one party giving the other credit. If the buyer transfers the money before getting the goods, the buyer is giving the seller credit. If, on the other hand, the contract calls for the buyer to wire the money ater receiving the goods, the seller is giving the buyer credit.

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As should be clear by now, we live in a credit economy. One of the great boons of credit is that it allows trade to move beyond the primitive model of simultaneous exchange. Credit, of course, is not without risk: indeed, credit is all about risk and who will bear that risk. his risk, and the issues that go with it, are magniied in the international context. Reputational information may be less readily available; credit checks may be impractical or impossible; enforcement through lawsuits may be prohibitively costly, uncertain, or worse (particularly in an unfriendly forum). We refer to this issue as the buyer-seller trust problem, but it is really just a question of credit. Commercial and legal practice has long had an elegant, if complicated, solution to this problem. he solution is not complete; risk cannot be entirely eliminated. But the letter of credit goes a long way to minimizing risks at reasonable cost. Its details are let to Chapter 6, but letters of credit are so central to international sales that a basic understanding is necessary from the beginning. To summarize: the buyer and seller would like to trade with each other. hey think. hey are not sure, because they do not know each other and do not have practical or economical ways of checking on each other. So they have the typical buyer-seller trust problem. To solve it, the parties agree to their sale with payment by letter of credit. To obtain the letter of credit, the buyer goes to its bank and applies for it. he buyer is thus the applicant and the bank (assuming it approves the application) is the issuer. Ater approval, the bank issues the letter of credit for the beneit of the seller. he seller is thus the beneiciary. What the letter of credit says, to paraphrase (unrealistically) into ordinary English, is something like “We, the Bank, promise to pay to you, the seller, the price of the goods, provided that you present us with the following documents by the deadline set below.” By issuance of the letter of credit in its favor, the seller becomes the beneiciary of the bank’s—not just the buyer’s—promise to pay. Most people would feel considerably better if an actual bank, rather than an ordinary unknown business, promised to pay. his letter will probably be sent to the seller through customary banking channels, so rather than receiving the letter of credit in the mail, the seller will probably be advised by a bank in the seller’s own country that a letter of credit has been issued in its favor. he bank that gives the seller this happy news is thus called the advising bank. Please refer to FIGURE 1.1 he Letter of Credit, which is located between pages 12 and 13. he news might not be so happy, however, if the seller has never heard of the issuing bank, or if the seller is worried about the stability of the bank or possibly the whole country where the buyer and the buyer’s bank are located. Case law involving letters of credit is full of grim tales involving banks from unstable countries. But again, a solution is possible. A  letter of credit can be conirmed by a bank in the seller’s country. he conirming bank undertakes, just like the issuing bank, to pay. Now the seller has the commitment of three parties to pay: the buyer, the issuing bank, and the conirming bank. If the seller knows and trusts the conirming bank, it has little reason to worry about being paid. A seller who has doubts about being paid, therefore, can negotiate that payment be made by letter of credit, and if the seller is particularly worried, by a letter of credit conirmed by a bank of international repute located in its own country. his mechanism allays the seller’s concerns about payment, but what about the buyer? he documents required by the letter of credit are the key to the buyer’s protection. Parties always insist that a commercial invoice be one of the documents included, but probably the

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most obvious assurance for the buyer comes from the traditional requirement that the seller also present a negotiable bill of lading in order to get paid. A bill of lading is the document that a carrier (e.g., a shipping line) issues ater it has loaded goods. (You will notice that loading and lading are related words.) A negotiable bill of lading has three functions. Most simply, it serves as a receipt for the goods. Second, it is evidence of the contract of carriage that sets the obligations of the shipper and the carrier. Notice that the shipper is the person who ships the goods, typically the seller, and should not be confused with the carrier, which is the shipping line, or trucking company, or railroad, or whatever; unfortunately, technical and legal usage does not quite match colloquial usage. he bill of lading is evidence of the agreement between the shipper and the carrier for transportation of the goods. hird, a negotiable bill of lading represents the right to possession of the goods. he holder of a negotiable bill of lading is entitled to collect them from the carrier. he simpliied account of how letters of credit work should probably end here, if not before, but one more point should perhaps be mentioned. It is possible, perhaps even likely, that the carrier will not take the kind of responsibility contemplated in the story as it has been told so far. It may not issue a bill of lading for 10,000 metric tons of US No. 1 Hard Red Winter Wheat (ordinary protein) because it may not be able to weigh or inspect it. he carrier in such a case will disclaim liability with a notation like “SHIPPER’S LOAD AND COUNT” or “Said to Contain” or STC (short for “Said to Contain”) on the bill of lading, particularly for goods that the carrier receives in sealed containers. (Remember that the shipper is the seller, not the carrier.) his is the carrier’s way of saying, “We didn’t load this stuf—the seller did. We will deliver this stuf to the holder of the bill, but we are not taking responsibility for exactly what this stuf is or how much of it there is.” If the buyer is concerned about this sort of disclaimer, it can require another document: an inspection certiicate. Ports have inspection services available. For a fee, a qualiied and independent expert can inspect the goods and certify that they are, indeed, No. 1 quality, not No. 2, and that the goods are hard red wheat, not something else, and so on. With many commodities, such as oil, laboratory testing will be necessary. his is just the kind of service that can be obtained, although of course these services are not free. Many details are omitted from this account, but the structure should be apparent, and more important, the way it solves the buyer-seller trust problem should be clear. With an appropriate letter of credit, the seller knows that a bank it trusts will pay when the seller presents documents showing it has shipped the goods. By specifying appropriate documents, the buyer knows that the goods conform to the contractual speciications and have been shipped. If the buyer does not eventually pay, that is not the seller’s problem: it will already have received payment from the bank. If the seller does not ship the goods and present the necessary documents by the deadline, it will not be able to obtain payment, the letter of credit will expire, and the buyer will never have to pay (or, if the buyer has paid its bank already, the money will be put back into its account). he buyer-seller trust problem is thus solved. As mentioned, this solution comes at a cost. Banks typically charge the applicant about 3  percent to 4  percent of the amount to be paid under the credit. his cost (which, like much other relevant material, is discussed in Chapter 6) is not prohibitive because of one of the subtle elegances of the structure. he seller and buyer cannot practically and economically check on each other. But it is easy for the buyer’s bank (the issuer) to check on its own

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customer. he bank can take the money out of its customer’s account immediately and will not have to worry about being paid by its customer when it (the bank) honors the letter of credit and pays. Or if the bank did not take out the money immediately, it knew it was making a loan to its customer, and the bank is in a good position to decide whether its customer is an appropriate credit risk. Assuming that the parties have included a conirming bank, that bank can easily check on the issuing bank. hey may not be in the same country, but banks have established methods of checking on each other’s creditworthiness. And inally the seller will know the conirming bank, in its own country and of good repute, is trustworthy. Although there is some credit risk, then, it is manageable: the uncertain and thus large credit risk between the buyer and the seller has been considerably reduced by introducing intermediaries (the banks and the carrier) into the structure. In each segment of the transaction, the credit risk is not so great, and even when the risk at each segment is added, the sum is not very great—and most important, is less than the credit risk between the buyer and seller. If it were the other way around, the parties would simply trade directly and forego the letter of credit and its attendant costs.

C. Business Models Adding one more axis ills out a three-dimensional mental picture of the international transaction: the business model. Again, we will take note of three. First, all of that oil, wheat, or corn might be bought by a business that actually is going to use it. In that sense, businesses can be “consumers” too, that is, businesses may use or consume the goods. he ordered goods might be necessary to fuel a plant, or they may be machines used to manufacture other goods, or they may be raw materials that are inputs for the buyer’s manufacturing. he possibilities are endless, but this irst-line idea is that the buyer may be obtaining the goods because it needs them and will use them. For lack of a better term, we refer to these sorts of sales as involving an end user. he other two types of buyers—and sellers—are those who are in the business of reselling the goods. Many parties in international transactions are brokers or traders. he buyer who ordered the tons of wheat or corn probably was not planning to eat it, or to serve it for lunch to its employees. It probably will not ever see the commodity it is ordering. It is planning to resell the goods, possibly to an end user or possibly to another trader or broker. his resale may happen before or ater the goods arrive in the buyer’s country, and may happen before or ater the trader even buys the goods. A  trader may well make commitments to deliver a commodity a few months in advance, planning ater making this sale to acquire the goods that it will need to meet its commitments. Alternatively, a trader may buy the goods and resell them before they even arrive at the port; indeed, goods may be sold many times over while they are still on the high seas. Obviously, these traders and brokers are both buyers and sellers in international transactions. he same is true of a middle example: a distributor. In its broadest sense, a distributor is a business that arranges to buy goods from someone else—paradigmatically, the manufacturer— for further sale down the chain of distribution to, say, a retailer. For example, a wine distributor in New York may discover an excellent winery in France. he US distributor will contract with the proprietors of the French château to import the wine into the United States. he

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distributor will then make contracts to sell the wine to wine and liquor retailers in New York. he distributor may also make contracts to sell the wine to other distributors, perhaps in different regions of the United States. his arrangement may or may not be an exclusive distributorship on one side or another: the buyer may commit not to distribute other wines (or other French wines); the seller may commit not to sell its wine to anyone else in the United States. One or the other may make such a commitment, or neither. Regardless of its exclusivity, the arrangement is a distributorship. As we will see in Chapter 2, the distribution contract is itself about the relationship of the parties, but is not generally considered a sale itself. Rather, individual sales are made pursuant to the structure set up by the distribution contract. hese broad descriptions should help form a better picture of diferent kinds of international commercial transactions in goods. he level of generality is still fairly high, though. It can be much more concrete, and in the life of a lawyer or a business, it will almost always be concrete and particular. he next section gives some examples.

II. A Sample Transaction A. Introduction Maggia, S.p.A., based in Milan, Italy, is a manufacturer of cofee-making machines. Its products are distributed widely throughout Italy and southern Europe, and it now seeks to expand into the North American market. Representatives from Maggia attend a trade fair in Toronto, Canada, where they display their range of products in the hope of attracting North American buyers. heir ultimate goal is to establish a relationship with a buyer who will become the exclusive distributor of their products: that is, a buyer with whom Maggia can establish a long-term relationship, who will regularly buy large quantities of Maggia products to distribute them throughout North America by on-selling them to wholesalers as well as department store chains and restaurants. At the trade fair, Carla from Maggia strikes up a conversation with Ralph, who represents South Philly Restaurant Supplies, Inc. (South Philly), a company based in South Philadelphia. Ralph is very interested in the Maggia machines and he and Carla exchange business cards. Carla explains Maggia’s long-term plans, and Ralph expresses keen interest in the possibility of South Philly becoming Maggia’s exclusive distributor in the United States and, possibly, the whole of North America. Ralph explains that before South Philly commits to a long-term relationship with Maggia, it would like to buy a single shipment of a variety of restaurant-sized Maggia cofee machines to test the market in the United States. Ralph and Carla agree to communicate further. Ater the trade fair is over, Carla returns to Milan and Ralph to Philadelphia. hey conduct the following exchange by e-mail. As you read it, you should bear in mind the legal implications of the following exchanges and documents even though this is not like most law school examinations in which something goes wrong and litigation ensues. As we will see in Chapter 2, the Convention on the International Sale of Goods (the CISG) governs the question of whether Maggia and South Philly have made a contract, and in what terms, because both the United States and Italy are party to that Convention. As we will see in Chapter 3,

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the CISG takes a strict ofer and acceptance approach to the question of contract formation. Any reply to an ofer that contains additions, limitations, or other modiications is a rejection of the ofer and constitutes a counterofer: see CISG art. 19. Where any term appears in square brackets like [this], it does not form part of the actual exchange but is included to explain to you the terms that Carla and Ralph use with one another.

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B. he Transaction Continues (Part 1) Carla asked, rather apologetically, for payment by letter of credit. Remember, banks charge about 3 percent to 4 percent of the amount to be paid, which will wipe out about half of the discount Ralphie negotiated. On this transaction for $376,068, South Philly will have to pay its bank $11,282 if the bank charges 3 percent. Nevertheless, Maggia’s request was prudent, as it had had no prior dealings with South Philly and therefore presumably knew little or nothing about South Philly’s creditworthiness. As we have seen, payment by letter of credit ensures that Maggia will be paid by South Philly’s bank once the cofee machines are shipped to Philadelphia, whether or not South Philly actually has the money to pay for them. he credit risk of South Philly not paying is then borne by its bank, NatiBank. Because letters of credit are expensive, Carla promises Ralphie that Maggia will not ask for payment in this form if their two companies establish a long-term relationship in the future.

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Having agreed that it would pay by letter of credit, South Philly approaches NatiBank, applying for the issue of a letter of credit in favor of Maggia in the sum of $376,068 (i.e., 92.5 percent of the price originally quoted by Carla, relecting the 7.5 percent discount he negotiated). Before agreeing to issue the credit, NatiBank would ask South Philly to provide some form of security for payment. Because the security arrangements between South Philly and NatiBank are purely domestic banking arrangements, dependent to some extent

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on South Philly’s credit and standing as NatiBank’s customer, they do not concern us here. Let it suice to say that a prudent bank would immediately place a hold on $376,068 that South Philly had on deposit at the bank, or more likely (because few businesses will keep that kind of cash at their banks), will treat the $376,068 as a loan to South Philly. Many businesses operate with a line of credit at their banks; in that case, the bank would treat the issuance of the letter of credit like a draw on the line of credit (e.g., if South Philly had a $1  million line of credit with no outstanding balance, the available credit would become $623,932 upon issuance of the letter of credit). In any event, assume that NatiBank agrees (for a fee) to perform this service for South Philly. NatiBank then issues a letter of credit to Maggia as beneiciary. In the old days, a letter of credit was just that, a letter, but now it takes the form of an electronic message sent through the secure international interbank messaging system operated by the Society for Worldwide Interbank Financial Telecommunication (SWIFT) to a bank in the seller/beneiciary’s country. Although, as we shall see in Chapter 6, NatiBank does not necessarily have to use Maggia’s own bank for this purpose, let us assume, for the sake of convenience, that it does so. Natibank would send the SWIFT message to Maggia’s bank, asking Maggia’s bank to advise Maggia of the credit in its favor.

C. he Transaction Continues (Part 2) Once Maggia receives advice from its bank that the letter of credit has been opened in its favor, it makes arrangements for carriage of the cofee machines from Milan to Philadelphia. Exporting companies oten engage other companies to do this for them: in Europe and Asia, such companies are usually called freight forwarders; in the United States, they are generally called NVOCCs (non-vessel-owning common carriers). Rather confusingly, there are entities called freight forwarders in the United States, too, but they do not perform the same functions as NVOCCs. We do not need to worry about these technicalities in our example, though, as Maggia arranges the transportation itself, a practice quite common among companies that export regularly and that do not want to pay the extra fee that a freight forwarder/ NVOCC would charge. Maggia books space on the ship RSL Esempio for carriage of one shipping container of cofee machines from Genoa to Philadelphia. Maggia also arranges cargo insurance with a US insurer to cover the cofee machines against loss or damage on the voyage to Philadelphia. As stipulated in the letter of credit, the insurance covers the machines for 110 percent of the CIP cost, to provide for an appreciation in value between Milan and Philadelphia. (Remember that the term CIP that Carla and Ralphie used means that the price Maggia negotiated with South Philly covers not only the cost of the cofee machines but also insurance premiums and carriage costs to Philadelphia.) Maggia stufs (yes, that is the right verb) the container at its warehouse in Milan. he container is sealed by customs authorities for export, who then issue a document known as a certiicate of origin, attesting to the fact that the cofee machines are from Italy. he container is carried by road on Maggia’s own truck from Milan to Genoa, where it is handed over at the container terminal at the port of Genoa. (he notation “Genova CY” on the bill of lading below stands for “Genoa Container Yard.”) he container sits in the container terminal until RSL Esempio arrives. he ocean carrier, RSL, then issues a bill of lading acknowledging receipt of the container for shipment, and containing an undertaking to carry it

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to Philadelphia. Because the bill of lading is made out “to order,” it is a negotiable bill of lading, and the holder of the original document is entitled to take delivery of the container in Philadelphia but only upon presenting the original document. (his process is explained in more detail in Chapters 5 and 6.) hus, it is mainly this document, the bill of lading, that South Philly wants to receive in return for the purchase price, as this is the document that it needs to get possession of the container on arrival in Philadelphia.

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While RSL Esempio is en route from Italy to the United States carrying the container of cofee machines, Maggia presents to its bank, Banco Popolare di Lombardia, the documents listed in the letter of credit and reproduced in this section: the bill of lading, a signed invoice, a packing list, a certiicate of origin, and an insurance certiicate. What they establish for South Philly’s purposes are the following things, respectively: that South Philly can take delivery of the container when RSL Esempio arrives in Philadelphia; the value of the cofee machines for purposes of the customs declaration that South Philly will have to make to US Customs and Border Patrol; the fact that the container actually contains the cofee machines, a fact not established by the bill of lading itself, which uses the notation “STC,” meaning “Said to Contain”; that the cofee machines are from Italy; and that the cofee machines are insured to 110 percent of their value against all risks of loss or damage on the voyage. Once South Philly has conirmation of all those facts, it is prepared to pay the purchase price, even though it has not yet seen the actual cofee machines. Having veriied that the documents presented by Maggia conform to the description in the letter of credit, Banco Popolare di Lombardia pays Maggia $376,068. (In fact, the documents do not conform exactly to the credit. For example, they are not all in English, as required by line 46A of the letter of credit, and there are some things not quite right about the certiicate of origin. Can you spot them? he question of how closely the documents must match the description in the letter of credit is considered in detail in Chapter 6.) Banco Popolare di Lombardia forwards the documents by air courier (e.g., DHL) to NatiBank in Philadelphia, which then reimburses Banco Popolare di Lombardia the amount paid to Maggia. NatiBank then releases the documents to South Philly, either in return for payment of the purchase price or in return for some undertaking for future payment, if neither was done at the time the bank issued the letter of credit, depending on the banking deal done between South Philly and NatiBank. When RSL Esempio arrives in Philadelphia, South Philly presents to RSL (or its local agent) the original bill of lading issued in Genoa and takes delivery of the container of cofee machines. South Philly now has its cofee machines and Maggia has its money. It is the beginning of a long and beautiful relationship, we hope.

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D. A Variation to the Transaction Buyers oten want to defer payment, depending on their cash low and their credit standing. South Philly has agreed to pay $376,068 for the Maggia cofee machines. However large its business and cash reserves, it might still prefer to defer payment until it has sold at least some of the machines to its customers, which will provide it with the money to send to Maggia. he details of how deferred payment works are dealt with in Chapter 6. For present purposes, it is suicient to note that the two main mechanisms that are used for this purpose are

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deferred payment letters of credit and time drats, which are called bills of exchange in the English-speaking world outside the United States. A deferred payment letter of credit looks just like an ordinary letter of credit, but instead of agreeing to pay upon presentation of the stipulated documents (see the words “By Payment” in paragraph 41D of the sample above), the bank agrees to pay at some time in the future, measured from the date of presentation of the documents. he deferral period is usually a multiple of 30  days. hus, Maggia and South Philly might agree that South Philly does not have to pay for 90  days. NatiBank would then issue a deferred payment letter of credit promising to pay on the ninetieth day ater presentation of conforming documents by Maggia to Banco Popolare di Lombardia. In all other respects, the letter of credit would look identical to the sample above. South Philly would not have to pay for 90 days, and Maggia would still have the security of a promise from a bank and could actually get paid right away by selling that promise to a third party, in a process described in Chapter 6.

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Another, rather more old-fashioned, method of securing deferred payment is by use of a time drat/bill of exchange. his is a document drawn up by the seller and signed (“accepted” is the technical term) by either the buyer or its bank, depending on what has been agreed between the parties. Again, the details of this process can wait for Chapter 6, but we now reproduce a sample time drat/bill of exchange to show you what one would look like. his sample shows you both alternatives: a time drat to be accepted by South Philly and one to be accepted by NatiBank. (Despite the way the sample document actually looks, only one of the two, South Philly or NatiBank, would actually accept by signing.) his document would be sent to NatiBank by Maggia with the other documents reproduced above. he signature space at the bottom would be let blank. South Philly or NatiBank would accept the drat by signing, and would return it to Maggia.

E. Possible Future for the Transaction If Maggia and South Philly do negotiate an exclusive distribution agreement, as they hope to, Maggia will regularly sell cofee machines to South Philly. he nature and terms of the exclusive distribution agreement lie beyond the scope of this book, but the contract will contain (among other things) promises by Maggia not to sell cofee machines to anyone in North America other than South Philly, and by South Philly not to buy cofee machines from anyone other than Maggia. Because the parties will be establishing a long-term relationship with a degree of trust and conidence in one another, Maggia will no longer ask for payment by letter of credit, which, as we have seen, adds considerably to the cost of the transaction for South Philly. he parties will use what is called open account, another arrangement discussed in more detail in Chapter 6. In short, Maggia will periodically send invoices to South Philly, which will pay by electronic funds transfer (EFT) to Maggia’s bank. South Philly’s bank, NatiBank, will charge for this service, too, but nothing like as much as it would charge for the undertaking it has to give under a letter of credit. Maggia would most likely demand some guarantee of payment in the event of default by South Philly. hat guarantee might well be a standby letter of credit, also discussed in Chapter 6. Banks use their own forms for EFT applications, some online, some still on paper. In its application to NatiBank, South Philly will have to give an International Bank Account Number (IBAN) for Maggia and a SWIFT code for Banco Popolare di Lombardia, so that NatiBank knows where to send the money. he money transfer message will then be sent from NatiBank to Banco Popolare di Lombardia via SWIFT. A  typical EFT application looks something like the following sample.

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III. Commodity Trading Goods sold in bulk, usually in large quantities, such as wheat, iron ore, or crude oil, may be bought by a buyer for use or resale, just like a manufactured product such as cofee machines. A large lour producer may regularly buy wheat to produce lour for on-sale to bakeries and supermarkets; a steel mill may regularly buy iron ore to make its steel; an oil company may regularly buy crude oil to reine into petroleum and other products. In these situations, very little would difer between the sale of the bulk commodity and the sale of the cofee machines in the example above. Oten, however, the international sale of

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bulk commodities is afected by the fact that the market price of such fungible items goes up and down daily, and, in the case of many commodities, even throughout every trading day. (hink how oten you have heard on the news about today’s market price of crude oil.) If a buyer of 80,000 tons of light sweet crude oil agreed to pay the seller $84 a barrel when the contract was made, but now, when the oil is presently on an oil tanker in the middle of the Atlantic Ocean, the market price has gone up to $92 a barrel, the buyer has a really strong incentive to sell the cargo to someone else at today’s market price. Eighty thousand tons of light sweet crude oil is 600,000 barrels, for which the buyer promised to pay $50.4  million. (he number of barrels per ton can vary between six and eight, depending on the viscosity of the oil. Light sweet crude oil is usually about 7.5 barrels per ton, the number used for these calculations.) Six hundred thousand barrels at $92 a barrel comes to $55.2 million. hat means that there is a $4.8 million dollar proit sailing along in the middle of the Atlantic Ocean, waiting to be made. he buyer would have to have a really powerful need to use that crude oil itself in order to keep it from selling the oil to another buyer. he next buyer would be happy to pay $92 a barrel because that is today’s price. Tomorrow the price may be $96 a barrel, and there will be another $2.4 million proit to be made. Bulk commodities are oten bought and sold many times while in transit by commodity traders whose sole interest is to make a proit out of the movement of the market. Imagine a smart commodity trader, with nothing other than an oice (or even just a sofa), a computer, an Internet connection, and a line of credit, but certainly with no oil reinery at its disposal, who thinks that the market price of light sweet crude oil is going to go up over the next few days. he trader ofers to buy from the original buyer at $92 a barrel, today’s price. he original buyer agrees, pockets its $4.8 million proit, and makes other plans to service its need for 80,000 tons of light sweet crude oil, hoping that the market will go down in the future, even by a few dollars a barrel, so that it can keep some of that proit. he trader now owns $55.2 million worth of light sweet crude oil, but, of course, it has no reinery and no use for the oil. If the price of light sweet crude oil reaches $96 a barrel two days later our trader can sell to a reinery—or another trader—and cash out its $2.4 million proit. Of course, if the price of light sweet crude oil slumps to $82, our trader will lose $6 million on this trade: the $55.2 million it paid to buy the oil minus the $49.2 million it will receive when it sells the oil. If the trader thinks the market will go lower, it is time to get out now and swallow that $6 million loss, which might be $8 million by tomorrow. he lucky buyer who buys at $82 a barrel may be the original buyer, who bought at $84 a barrel and sold at $92 a barrel. Now it has made two proits on one cargo! his is how fortunes are made and lost in the commodities markets, just as in the share (equity) markets, by correctly predicting the future movement of the market. Meanwhile, the ship and its cargo of 80,000 tons of light sweet crude oil sails serenely on across the Atlantic, as wily traders buy and sell the cargo perhaps dozens of times, depending on how dramatically the market is moving. Eventually, the ship will have to discharge the oil at an oil reinery, but that is part of the grimy business of dealing in the goods themselves. Commodities traders deal in risk and probability, not actual wheat, iron ore, and light sweet crude oil. hey never want to have anything to do with the goods themselves; theirs is a world

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of money. here is a big diference between the people who produce and consume the physical product and the intermediate speculators. he former do not usually take market risks; they can buy or sell a product at the price prevailing on that day and then use it for their own purposes, regardless of what has happened to the market price. he latter are concerned only with the market risks, not the product. his practice of buying and reselling occurs with all kinds of commodities, not just light sweet crude oil. If the price of any commodity changes from day to day, week to week, or even month to month, there is a proit (or a loss) to be made by someone on that change in market price. As a result, bulk commodities are oten traded many times and the resulting succession of sales and on-sales—sometimes many in a day—is called a string sale (or, in the oil trade, rather charmingly, a daisy chain). he details of how string sales work are well beyond the scope of a book such as this, but it is important to know that for some goods, the simple, easily understandable model of a seller selling physical goods to a buyer—Carla and Maggia selling cofee machines to Ralphie and South Philly—is not how all international sales work. he concept of “booking out” shows quite how abstract the commodities markets can be, and quite how far removed from the tangible goods. Imagine that our original seller of light sweet crude oil (let us call it A) sells to B at $84 per barrel, B sells to C at $88 per barrel, C sells to D at $82 per barrel and D sells the oil back to A at $83 per barrel. A 84

B

83

85

88

D

82 C

B O O K I N G O U T A S T R I N G S A L E O R DA I SY C H A I N.

If A had bought at $83 per barrel, A has made a proit of $1 per barrel (it sold at $84), B has made a proit of $4 per barrel (it bought at $84 and sold at $88), C has lost $6 per barrel (it bought at $88 and sold at $82), and D has made a proit of $1 per barrel (it bought at $82 and sold at $83). As A is now once again the owner of the oil, there is little point in the parties passing the documents relating to the oil from hand to hand, incurring large bank fees as millions of dollars are passed around the loop, just so that they can make their paper proits and losses. Instead of going to all that trouble and incurring all those transaction costs, the parties agree to “book out” the circle. A, B, C, and D agree on a notional base price—in our example, let us say $85, which lies somewhere in the middle of the prices agreed between the parties. Each then pays the others an amount calculated by reference to that base price, without the need to actually pass the full contract value around the loop. hus, instead of A receiving $84 per barrel from B and paying D $83 per barrel, A pays B $1

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per barrel (the amount by which A’s sale price to B is less than the agreed base price of $85) and D pays A $2 per barrel (the amount by which D’s sale price to A is less than the agreed base price of $85). he end result is that A still makes the same net proit of $1 per barrel, as it receives $2 per barrel from D and pays B $1 per barrel. he same process goes on around the loop: B receives $1 per barrel from A (base price of $85 minus A-to-B agreed price of $84) and $3 per barrel from C (B-to-C agreed price of $88 minus base price of $85) for its net proit of $4 per barrel; C pays $3 per barrel to B (B-to-C agreed price of $88 minus base price of $85) and $3 per barrel to D (base price of $85 minus C-to-D agreed price of $82) for its net loss of $6 per barrel; D receives $3 per barrel from C (base price of $85 minus C-to-D agreed price of $82) and pays $2 per barrel to A (base price of $85 minus D-to-A agreed price of $83) for its net proit of $1 per barrel. (Remember that our cargo is 600,000 barrels, so A and D make $600,000, B makes $2.4 million and C loses $3.6 million. he commodities markets are not for the faint-hearted.) he process of “booking out” is explained in some detail in Voest Alpine Intertrading G.m.b.H. v. Chevron International Oil Co. [1987] 2 Lloyd’s Rep. 547. To make matters yet more abstract, commodities are oten traded on futures markets, where traders do not buy and sell actual physical products but make promises to buy and sell at what they expect the price to be at a future date. hus, our “daisy chain” from A to B to C to D to A might not relate to an actual cargo of light sweet crude oil presently sailing across the Atlantic, but to a notional cargo to be loaded in three weeks’ time, as the expected prices from day to day change as the futures market goes up and down. he cargo may be traded many times before it is even loaded, and then many times ater it has been loaded. As noted above, this goes on in relation to all kinds of fungible commodities, such as grain, oils, fats, chemicals, steel, etc. String sales, daisy chains, and futures markets are the main reason most international sales of commodities are not governed by the CISG but by English law, even when there is no connection whatever between the transaction and England. he CISG conceives of a world where tangible goods are exchanged in return for money—which is, let us not forget, a large and very important part of international trade. If Ralphie and South Philly do not like the quality or quantity of the cofee machines, they can proceed against the seller, Maggia. If the inal buyer of our 80,000 tons of light sweet crude oil wants to complain of the quality or quantity of what it has bought, can it proceed against the original seller who pumped it onto the carrying ship, if there have been 8 or 10 intermediate buyers between them? Obviously not, or at least not directly. A convention like the CISG, which conceives of international sales as being a single exchange of tangible goods in return for money, does not fare well in the commodity trades, although some have argued that it is just as able to cope with them as is English law: see, e.g., Bruno Zeller, Commodity Sales and the CISG, in Sharing International Commercial Law Across National Boundaries (Camilla Andersen & Ulrich Schroeter eds., 2008). hat is one reason the CISG is oten excluded in commodity trading standard forms like those mentioned in Chapter 2. Professor Michael Bridge has written that the law of international sales is “bifocal,” with application of the CISG being conined mainly to manufactured products and English law governing the sale of commodities: see Michael Bridge, he Bifocal World of International Sales: Vienna and

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Non-Vienna, in Making Commercial Law (R. Cranston ed., 1997); Michael Bridge, A Law for International Sales, 37 Hong Kong L.J. 17 (2007). his book is concerned with the sale of tangible goods, not the rariied atmosphere of commodity and futures markets.

IV. Diferent Sources of Law, Diferent Legal Methods, and Diferent Legal Cultures With some particular transactions in mind, we need to introduce the obvious legal governance issues. Which law will govern the transaction—the law of the buyer’s country, or the seller’s, or another country, or some kind of international law? here is law that governs which law will apply to a transaction. he “rules of private international law” are the rules that decide which laws will apply—buyer’s law, seller’s law, international law, or something else. he rules of private international law are generally referred to in the United States as the rules of conlicts of laws. hese are crucial and sometimes technical matters; they are the subject of Chapter 2. To understand what is at stake in Chapter 2, we introduce here some of the possible sources of law and the diferent ways that they are used (i.e., diverse legal methods or approaches). We also try to give some idea of the cultural expectations, desires, and fears that may inform how the parties to an international transaction negotiate, decide, or ignore these issues. As the whole world is the subject, some generalizations will be necessary. We hope they are useful, but you should take them with caution.

A. Public Law and Private Law Let us begin by dividing the law into two parts: public law and private law. Private law is the law that governs relations between persons, including juridical persons like corporations. Contracts and torts are core ields within private law. Public law is the law (1) that governs relations between persons and the state, and (2) that organizes the state itself. Criminal law and constitutional law are classic examples. Although a crime is likely committed against a person, it is considered an ofense against the state, for which the state itself imposes punishment through the intervention of a public prosecutor. If the victim of the crime wishes to sue for recompense, that cause of action will sound in tort and is a matter of private law: it is a private matter between the victim and the tortfeasor. Similarly, constitutional law is about the organization of the state and the structure of and limits on the state’s power. his distinction between public law and private law is oten attributed to the Romans. Regardless of its pedigree and its (debatable) usefulness, it is certainly old enough to be measured in centuries and perhaps millennia, and it remains entrenched. Public law and private law subjects are still typically treated separately both in law schools and in legal practice. You take separate courses in criminal law and torts. he same set of facts that constitute both a crime and a tort engenders two lawsuits, one criminal and one civil, and will generally require the employment of two sets of lawyers. International transactions in goods are no diferent. he matters of contract between the parties—formation, performance, and discharge, or breach and remedies—are matters of private law and are the subject of this book. hey are generally handled by commercial

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lawyers. International transactions in goods also generate issues of public law, such as customs rules and export and import duties, as well as rules on what can and cannot be imported or exported, and rules on free trade (without duties). Some of the most talked about are the rules on what governments can do to subsidize their own trade and what duties may be imposed to counter what may be perceived as unfair subsidies. hese are the rules of international trade law, or trade for short. hey are matters of public law; they govern the relations between persons and the state or between states themselves. hey are oten handled by trade lawyers or customs lawyers (for other than routine matters), not by commercial lawyers. hese public law aspects of international transactions in goods are not the subject of this book, although a brief orientation to the issues and the law appears in the next section of this chapter.

B. Comparative Law Comparative law, although it may sound like an academic subject, is one of the most practical and pressing matters for lawyers with an international practice. As is already apparent, an international transaction might be governed by the law of one country or another, or by international law, or by something else. As we will soon see, the parties oten have the power to choose which law will govern their transaction. he immediate question for the lawyer is: “What law is best for my client?” he available laws are not all the same; the answer to the question will have to result from a comparative law analysis. his book will try to take these matters seriously and will, in various places, discuss the most likely diferent choices (or leading examples of them, as it is hardly possible to write or read about all of the possibilities). Particular issues require particular detail and attention. Before we get to them in later chapters, a basic orientation is necessary as diferent countries, and diferent legal systems, have diferent outlooks, approaches, and preferences. Let us again begin by dividing law into two systems, both of which will be treated in this book: the common law system and the civil law system. hey are the leading legal systems of private law in the world. he common law is the law of England and some jurisdictions that were formerly English, including the United States. his system is associated with making law by the accretion of cases decided by judges. he cases form precedents, and those precedents can be generalized into rules of law. he term common law is confusing, as it can mean the law generated by decided cases, sometimes referred to as judge-made law, instead of statutes that are passed by legislatures (e.g., “hat issue is governed by common law, as the statute does not cover it.”). Common law can also refer to the legal system that is associated with England and this method of generating law. he context helps clarify: “he common law is one of the two leading systems” refers to something diferent from “the common law would govern that question as the statute does not apply.” his book will treat both US law and English law. Because of American economic power, US law is likely to be used in many international transactions in which one of the parties is from the United States. English law is also important to keep in mind. he reasons may be less obvious, but there are several. Aside from the fact that US common law derives from English law, England—and London in particular—retains a central place in much international commerce. London hosts one of the largest inancial markets in the world, if not the

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largest. (London and New York are constantly competing for bragging rights.) London is also the seat of prestigious and respected legal, judicial, and arbitral markets. Even when no party is English, the parties may well choose English law and may well choose dispute resolution, whether in court or in arbitration, in London. It also bears noticing that London is located within the European Union, and Europe, like the United States, wields tremendous economic power. Finally, although we here step into speculation, we suspect that English law and a London forum is attractive to many parties seeking a neutral and reliable venue where English is spoken. English has become the ordinary language for much international business. We might note that a US party that does not succeed in negotiating for its own hometown forum is likely to ind London an attractive alternative, both in terms of law and venue, that is not too scary. Moving to the other side of the Atlantic, a bit of explanation is in order with respect to American law. Understanding US law is tricky for those who are unfamiliar with the fractured and untidy US legal system. Contract law in the United States has been, and continues to be, largely a matter of state law, not federal law. his may have resulted from several factors, including earlier views of the limited power of the federal government and the relative inaccessibility of federal courts. he Constitution gives Congress many powers, but not plenary power. he federal government was supposed to be a government of enumerated powers, not general power. Although one of those powers is “[t]o regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes,” US Const. art. I, § 8, cl. 3, until the New Deal (in the 1930s) courts took a restrictive view of what constituted interstate commerce subject to federal power. By long tradition, then, contract law has largely been a matter of state law. Some exceptions now exist. he most important for current purposes is that for international sales of goods, the federal government adopted the CISG, as will be discussed below. Outside the international realm, however, federal intervention into general contract law has been surprisingly small in scale and limited in scope. Accordingly, domestic US contract law remains largely the province of state law. Fortunately, this book does not take up all of contract law; it concentrates on sales transactions, and the US law with respect to sales is unusually uniied. Almost every state has adopted Article 2 of the Uniform Commercial Code (UCC). he lone exception is Louisiana, which because of its French and Spanish heritage generally follows the civil law with respect to sales. Not every state has the same version of UCC Article 2, but the variations for our purposes are for the most part minor. American sales law generally means UCC Article 2. Because there are some variations, however, and because of the way the US legal system works, best practice in choosing law in a contract would include a designation of a particular state. A choice of law clause designating the law of New York and not the CISG might read: “his Agreement shall be governed by the law of the State of New York, without regard to the CISG.” hat contract would be governed by the New York version of UCC Article 2. he New York version of UCC Article 2 is not much diferent from, say, the Nevada version of UCC Article 2, but for reasons that will become clearer later, the parties will usually want to designate a state with which their transaction bears a reasonable relation. Even at this basic level, a few qualiications need to be noted. To say that the contract just mentioned is governed by the New York UCC is not to say it is governed only by the

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New York UCC. As we will see in Chapter 2, if one party commits a tort related to the contract, it may be governed by tort law, not sales law. Second, as mentioned above, various public law rules may apply; these may come from US federal law or from international law or from the law of another country. A New York choice-of-law clause will not allow the parties to evade restrictions on importing certain goods into, say, South Korea. Finally, unlike Continental codes and their progeny, the UCC does not attempt to be comprehensive. Indeed, the UCC expressly preserves the preexisting case law unless the case law is “displaced” by the Code. UCC § 1-103(b) (2001). For instance, the Code does not attempt to state rules on capacity to contract, see id., so that issue will be governed by the common law. Some issues the Code governs in part, but the draters expected the case law to remain relevant to “supplement” the statutory provisions. So UCC Article 2 is not all there is to US sales law. Still, it does much of the work, and it will generally suice for the purposes of gaining a basic understanding. Returning now to the European side of the water: the other leading legal system is the civil law. he civil law is deined as being based on Roman law. Virtually all civil law jurisdictions have now codiied their laws, and the civil law is oten associated with comprehensively codiied law enacted by a legislature. his is true, and important for understanding the civil law method, but it is not the deining characteristic. he deining characteristic is a basis in Roman law. he civil law is followed in virtually every country that is not either English or formerly English. Usually the civil law is summarized with reference to two leading jurisdictions: France, which codiied its law in 1804, and Germany, whose codiication went into efect in 1900. Continental Europe followed the civil law for centuries, and certainly well before codiication, but now, both in Europe and elsewhere, civil law systems can ordinarily be classiied, if only generally, as belonging either to the French family or the German family. hose two codiications proved to be enormously inluential, as was the monumental scholarly work that preceded the codiications. If you wanted to see the basic private law of France, you would pick up the Civil Code (or the Code civil, in French). If you get a version that does not have a lot of notes, it is a small book and would probably it in your coat pocket. It consists of a series of short, simple statements of legal principles. To cite a particularly relevant example: “A sale is a contract in which one party obliges himself to deliver a thing and the other to pay for it,” declares article 1582. Article 1583 continues: “It is perfected between the parties, and ownership is acquired by the buyer with respect to the seller, as soon as the thing and the price are agreed, even if the thing is not yet delivered and the price not yet paid.” he small size of the book and lapidary simplicity of each article make the French Civil Code very attractive for a developing country that is looking for a well-developed, carefully researched, and clearly stated law to adopt, or to use as a model. he German Civil Code (oten referred to as the BGB, its German initials) is similar. Modern times have thus seen a great civil law reception as countries in Latin America, Eastern Europe, and Asia have adopted codes or legal systems based on the French or the German, oten with intermediate inluences exerted by a colonizing European power or by a persuasive and recent revision; a country might adopt the law of the European power that was once its colonist, or it might adopt the law of a country that recently and thoughtfully revised its own code. hrough a combination of colonization and voluntary reception, the civil law now holds sway in most—at least two-thirds—of the world.

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he history, method, and culture of the civil law difer signiicantly from the common law. he Romans developed a sophisticated and complex body of law eventually put together under the Roman emperor Justinian into the Corpus Juris Civilis. Ater the fall of the Western Roman Empire, Roman law was lost, but ater its rediscovery, it was systematized during the Middle Ages and further reined during the Enlightenment in the seventeenth and eighteenth centuries. his work, particularly the more recent Enlightenment work, formed the basis to take the next step toward codiication. he French law of contracts and sales is particularly Roman, as the redactors of the Code largely followed Pothier, whose work remained close to Roman law. Some of the other pre-codiication scholars picked up non-Roman inluences, both in France and particularly in Germany. Indeed, there was great debate in Germany about how far the law was Romanistic and how far it expressed the law of the German people. Eventually, though, both countries codiied their laws, and the civil codes of those two countries have been not only monuments but models and inluences. We are oversimplifying, but just as the Constitution holds a nearly sacred place in the minds of US lawyers and even the American people, the Code civil and the BGB hold similar places in France and Germany. his venerated place makes them diicult to revise—daring to come too close to the sacred is a dangerous thing—hence some revised codes (e.g., in Switzerland) have been inluential on jurisdictions looking for more modern statements of the law. At this writing, the French are still considering a revision of the Civil Code. Your authors refuse to predict the fate of the revision, having thought that previous eforts at revision would have been successful years ago. Nevertheless, ater lengthy study and debate, the Germans have enacted a revised law of obligations, and by the time you read this, the French may have done so as well. We will study some of the new sections in this book, along with some venerable articles of the French Civil Code. Along with the idea of being special and extraordinary—not just an ordinary statute— comes the idea that there is a coherence, even perhaps an elegance and a beauty to a civil code. he code purports to state completely the law of its subject, even though that subject may be very broad. he civil code states the law relating to matters between citizens. (You will see that the term “civil” in “civil law” is at least as confusing as the multiple uses of “common law,” mentioned above. “Civil law” can mean (1) legal systems based on Roman law, as obtain in France, Germany, the rest of Continental Europe, and most of the world; (2) law that is not criminal (e.g., “this is a civil matter, not a criminal matter”); (3) law that is secular and not religious (e.g., “the matter is not just for the Church and should be reported to the civil authorities”); (4) as we see now, within a civil law system, a matter that is between citizens, as opposed to involving the government or merchants.) hat is a very large subject, but the redactors set out to state that law. here is other law to be stated too, and a typical civil law jurisdiction would start with ive codes: a civil code; a code of civil procedure; a criminal code; a code of criminal procedure; and a commercial code. he civil code and to some extent the commercial code (which has special rules for merchant transactions) are most relevant to the subject of this book. In later times, further codes have been added, for example, on labor relations or environmental law. But still the notion of comprehensive, careful, authoritative statement remains, particularly in the original codes. his orientation has several practical ramiications for legal method. Because all of the law is supposed to be contained in the code, but because the code contains laconic, even

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elliptical, short statements of principle, much work has been done by scholars to elaborate the meaning of the stated principles and how they should apply to particular facts or to contemporary issues. his scholarly teaching, or doctrine (“doctrine” actually means teaching), is an important source of law in civil law jurisdictions. he scholars who teach in the law schools and who write the treatises and articles that make up the doctrine have an honored and exalted place in the hierarchy of the legal community and in society. If a lawyer wants to know what the law is, the lawyer would probably consult the code and the writings of professors. he code and the doctrine are both primary sources of law, although the doctrine will take account of, construe, and perhaps criticize the case law. In stating their theories of what the law is, the professors will primarily look to the code, to previous doctrinal writers, and to theoretical and ideological commitments, as well as some case law. As is expected both of academic writing and civil law reasoning, the doctrinal work is highly logical, placing great emphasis on the need for coherence and on the necessity that the law as a whole it consistently with itself. he law is an autonomous, logical system, perceived to be susceptible of scientiic exposition. For these reasons, civil law doctrine oten appears highly abstract and theoretical to common law eyes, and oten seems uncannily removed from practical concerns. Nevertheless, the code is the law, as understood and explained by the doctrine. Case law and judges in the civil law system thus have a lower status than their common law counterparts. Cases do not set precedents in the civil law system. If a body of case law has evolved to state consistent principles, then that jurisprudence constante comes to have the force of law. his result comes from the consistency of the results and the reasons, not from the power of the courts to make law. Note that the highest civil law court in France, the Cour de cassation, can vacate a lower court decision and send it back, or send it to another lower court, but it does not have the judicial power to itself reverse the decision of the lower court. And instead of being perceived as a digniied and distinguished igure, a judge is more likely to be seen as a civil servant, or to put it in a less nice way, a bureaucrat. Judges in civil law systems enter the civil service by taking a test. It is a learned job, but not an exalted one. To get some idea of this, consider the situation in Germany: a German law professor is entitled, just by holding the professorial position, to be a judge on the regional appellate court—if the professor is willing to do so. Here endeth the conventional explanation of the common law and the civil law. At this early point in the book, we will not complicate it unduly with qualiications, but the picture drawn above is a caricature. It exaggerates some prominent features and is sketched with simple lines and without shading. For instance, case law in a civil law system holds a more important place than one might suppose. French law libraries must, and do, devote considerable resources to obtaining access to the case law, even though it is oten learned through the prism of notes or articles written by scholars. Similarly, the Cour de cassation, even though it supposedly does not possess the lawmaking power of a common law court, and even though lower courts are not bound by its precedent, now sits near the pinnacle of French law. he political necessity to abolish the power of the judges was born of the French Revolution and its aversion to the ancien régime, the monarchy, and the aristocracy. hat is some time ago! hat political will has dissipated. Its efects are not gone, however. he judge is still a civil servant, or perhaps better, a mandarin. Society may no longer be so averse to a higher status for

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judges, but they have not held that status for a long time, and for the most part, they still do not—except for judges of the highest courts, who (if the authors’ observations are accurate) seem to be treated with great respect, as true VIPs. Similar qualiications are necessary on the other side; treatises in the common law systems may not have status as a “source of law” as in the civil law system. hey have an important practical impact, however. he established and respected treatises are oten cited by the courts and treated as authority by lawyers and judges. he two systems are not as far apart as the caricatures suggest. his should hardly be a surprise. It is true that the civil law and the common law have diferent methods, and diferent ways of thinking. his can become apparent in everyday ways: a lawyer from a common law system may be mystiied by civil law thinking that seems to have so little regard for immediate and practical needs. A lawyer from a civil law country may be shocked by the sheer inconsistency—incoherence—of the common law. More pointedly, rules on particular matters may be diferent, even opposite, between the common law and civil law. he mode of analysis may be entirely divergent. But in the end, cases do not have diferent results very oten. Sometimes they do, but when it happens, it is a surprise. As the great comparatists, like Konrad Zweigert and Hein Kötz, as well as René David, observed, the common law and the civil law are both products of Western European cultures with common ideals of justice. hey are not likely to arrive at widely divergent results very oten, particularly on matters tied to shared intuitions. We suspect that the divergences tend to arise from more technical rules that have less to do with large matters of justice. In the end, then, the results will oten be the same. But not always—not even on major matters. A multibillion dollar case can hinge on a rule that is largely technical. Who gets those billions of dollars, and who loses them, can be determined by what law applies.

C. International Law As should be apparent, the world would be a considerably more comprehensible place, although less interesting, if international transactions could be governed by one uniied international law. he CISG was designed as a step in that direction. he impetus for the CISG is manifold. Typically the buyer will want its law to apply, and the seller will want its law to apply. Without the CISG, it would be impossible in an international transaction for the buyer and the seller both to win. With the CISG—if it is part of the law of each of the parties’ countries—both can win. he CISG would be familiar to the buyer and its lawyers (it is ater all part of their law, even if it applies only to international transactions), and the same would be true for the seller and its lawyers. Neither party would have an advantage with respect to governing law; both would have ready access to information on what the law is. Businesses would not need to invest in inding out about the law of all the countries where they might do business. hey would just have to know the CISG (so far as sales contract issues are concerned). his is the ideal. he reality is of course at some remove from the ideal. he CISG has made the world more interesting, not less. Whether it has made the law of the world more uniform could be questioned: many transactions do use the CISG, but many do not. he parties can exclude the CISG, if they so choose, at will. CISG art. 6. he advent of the CISG—an international law of sales—has added another possible governing law, and thus arguably made the law less

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uniform. No doubt the CISG can and does govern a large number of transactions. A “uniied,” if not exactly a “uniform,” law is available and in widespread, but not exclusive, use. See generally Ulrich G. Schroeter, To Exclude, to Ignore, or to Use? Empirical Evidence on Courts’, Parties’ and Counsels’ Approach to the CISG (with some Remarks on Professional Liability), in The Global Challenge of International Sales (Larry DiMatteo ed., forthcoming 2014) (now available on SSRN). But even so, that uniication is hardly neat. On virtually all matters where there is major divergence between the civil law and the common law, the CISG has forged a compromise. Like compromises in general, the CISG compromises are messy. As you will see in later chapters, these compromises sometimes seem even more messy than usual. So there will be plenty to keep life and law interesting. Most of the compromises will be taken up in later chapters, but one should be mentioned here, although it will come up again later. Article 7 is the provision in the treaty that instructs readers how to interpret the treaty. Take a moment now to read it. Article 7(1) shows the results of compromise on whether to include a duty of good faith. his will be a prominent subject in Chapter 3. Article 7(2) is a bit diferent, and its interpretive issues are oten linked to difering civil law and common law outlooks. (If you are wondering whether you have followed this correctly, do not worry. We have indeed just said that there are interpretive diiculties in interpreting the article that says how to interpret the treaty.) he irst question under article 7(2) is whether a matter is “governed by this Convention” even though the matter is “not expressly settled in [the Convention.]” Our observations suggest that those trained in the civil law are much more likely to believe that a matter is governed by the Convention, even if it is not settled expressly, than those trained in the common law. his casual observation is bolstered by what may be expected based on the theory and experience of the civil law and the common law. A lawyer used to codes that are coherent and comprehensive on their respective subject matters reads the CISG with the implicit expectation that it will govern international sales generally. Such a lawyer will be used to the idea that the enacted law will contain general statements that will have to be extended, stretched, or adapted not only to new situations but to a variety of issues. he civil law reader may not even perceive the operation as an extension or a stretch or an adaptation; it is simply an exercise of legal analysis based on authoritative positive law. It is a familiar part of the technique of the civil law and is therefore unremarkable. he lawyer trained in the common law approaches the treaty from a diferent direction. We do not think it is quite the opposite direction, as it may have been in the olden days of the common law—back when statutory or other legislative incursions were viewed derogatorily and kept within the narrowest bounds possible—but the common lawyer will expect the treaty to be speciic, like most statutes in common law systems are. Such a lawyer will not approach the treaty with a presumption that it occupies the whole ield, like a civil law code would do. Moreover, the lawyer will expect the matters governed by a statute to be addressed speciically, oten deining all the necessary terms. he treaty says what it says, and that is ine, this lawyer will think; other matters may just be beyond its scope, and that is to be expected. he best way to tell whether the treaty governs a matter is to see whether it has any provisions on that matter. Take attorneys’ fees, for instance. here is no provision on attorneys’ fees in the treaty. he issue of allocation of attorneys’ fees is a matter that is

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therefore not governed by the treaty. (You will see this idea in Chapter 8 in Zapata Hermanos Sucesores, S.A. v. Hearthside Baking Co., 313 F.3d 385 (7th Cir. 2002).) A lawyer with a civil law orientation, however, might expect that such a matter would be addressed and would be more likely to see the article 74 provision allowing the plaintif recovery for its “loss” to include attorneys’ fees, even though such fees are not speciically mentioned. (When you get to Chapter 8, you will ind that authorities are not uniied, but you will also see that the issue and the arguments are more complex than we discuss at this point.) he purpose of article 7(2) is to direct which law will decide an issue, so much may be at stake when deciding whether a matter is governed by the treaty. If the matter is governed by the treaty but not expressly settled in it, then the matter is to be decided “in conformity with the general principles on which [the treaty] is based.” What those principles are can sometimes be debatable, but some are expressed in article 7(1): international character, international uniformity, and good faith. Other principles may be gathered from a reading of the substantive articles of the Convention. Many would agree that freedom of contract and assent- or intent-based contractual liability can easily be identiied from various articles on treaty scope and on contract formation, while the expectancy principle appears to underlie the remedial provisions. here are others too, which we leave for discussion in later chapters. Most importantly for now, note that only “in the absence of such principles” should a tribunal decide a matter in accordance with domestic law. Committed internationalists, who emphasize the need for international uniformity and who see a greater role for international law, prefer to avoid resort to domestic law. Internationalists will oten tend to ind a matter to be governed by the treaty—if it is not, then it is necessarily governed by domestic law—and even if the matter is not settled in the treaty, they will prefer to apply the treaty’s underlying principles rather than allow a court to apply domestic law. One inal note on sources of law is in order. A variety of projects attempt to unify the law of sales or the law of contract, more or less unoicially, without formal governmental adoption. Because they are also international in character, they might be a basis for “principles” to be applied under article 7(2). Probably the best known of these eforts is the Unidroit Principles of International Commercial Contracts. It is considerably more ambitious—and larger—than the CISG. It undertakes to state the law of commercial contracts generally. It is not limited to sales law, and it includes various controversial issues that the CISG excludes or does not treat. he Unidroit Principles were adopted by Unidroit (sometimes spelled in all capitals, UNIDROIT, which in any case refers to one law from uni- and droit). Unidroit is a unique institution, the sole surviving vestige of the League of Nations. (he League of Nations was the institutional multi-nation efort ater World War I to try to avoid a World War II.) Unidroit is devoted to unifying private law, not public law, and survived the great failure of the League of Nations (which was eventually supplanted by the United Nations). Appreciate the political economy:  to pass, the Unidroit Principles needed only approval of Unidroit. hey did not need, seek, or gain formal acceptance from any state or nation. Because they are not enacted law, to many they are not law at all. Nevertheless, they can serve not only as an arguable source for international principles under the CISG but also as persuasive authority to courts and arbitrators. hey are also available to be adopted by contract. Indeed, the redactors and promoters of the Unidroit Principles encourage parties to adopt

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them by contract, and a number of parties do so. his enables contracting parties to have international law govern their contract without as many gaps as the CISG. here is a problem, however. Many choice of law rules, although they may allow the parties to choose the law that will govern their contract, require that the chosen law be the law of a “state or nation,” to quote UCC § 1-301(a). his requirement is not unusual, nor is it unique to the United States. he Unidroit Principles, however, are not the law of any state or nation, raising questions about the validity of the parties’ choice of them. For this reason and others, eforts are under way to forge a Common European Sales Law (CESL). his efort joins several others (e.g., the Trento Project, the Lando Principles that led to the Principles of European Contract Law (PECL), and the Common Frame of Reference) to unify the law. At the time of writing, none of them have become enacted law in the conventional sense, but they serve, to a greater or lesser degree, as “sot law.” See generally Maren Heidemann, Does International Trade Need a Specific Doctrine of Transnational Contract Law? (2012). Perhaps soon the Common European Sales Law will achieve enactment; as this book goes to press, it has been approved by the European Parliament but has not yet gone to the Council of Ministers, whose members must adopt it before it becomes law. Not all perspectives are the same, however, even within Western Europe. For the French contribution and response to some of these developments, see European Contract Law: Materials for a Common Frame of Reference: Terminology, Guiding Principles, Model Rules (Bénédicte Fauvarque-Cosson & Denis Mazeaud eds., 2008).1 Life and law will remain as interesting as ever.

V. Public Law Issues As noted above, this book is concerned principally with the private commercial relationships involved in an international sale of goods, rather than the public country-to-country aspects of international trade. Nevertheless, some awareness of the relevant public issues is necessary even for private commercial lawyers dealing with sales transactions. For example, as we shall see in Chapter  5, the standard trading terms in Incoterms 2010® assign responsibility, usually to the buyer, for ensuring that the goods have the necessary clearances to pass through customs in the buyer’s country. Customs law is a surprisingly intricate and esoteric body of law. It is, however, one of the central struts of the General Agreement on Tarifs and Trade (GATT), which is the cornerstone substantive agreement among countries that are members of the World Trade Organization (WTO). Essentially, the countries party to the GATT (155 of them at the time of writing, including the United States) have agreed to use only tarifs (i.e., customs duties, which are essentially taxes imposed as goods cross the border) to regulate or restrict the incoming low of goods from other countries, and to eliminate non-tarif barriers to trade. 1. his version in English captures the highlights of more extensive work in French toward the Common Frame of Reference. For more, see Terminologie Contractuelle Commune (2008) and Principes Contractuels Communs (2008), which are volumes 6 and 7 in the Droit privé comparé et Européen series. For the response to CESL, see Le Droit Commun Européen de la Vente: Examen de la proposition de règlement du 11 octobre 2011 (2012), which is volume 6 in the Collection Trans Europe Experts.

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Obviously, many perfectly legitimate laws may have the efect of restricting the incoming low of goods to a country, so Article XX of the GATT lists a series of measures that can be taken by a country, even though they may incidentally have the efect of acting as a barrier to the free low of trade. For example, a country might want to pass quarantine laws to protect its indigenous lora and fauna from invasive foreign species, or it might want to pass safety laws regulating construction or labeling of products for consumer protection purposes, or it might want to pass laws prohibiting the importation of products made with slave labor. Any one of these laws would have an efect on the free low of imported goods into the country in question and so would constitute what is called a non-tarif trade barrier, the very kind of thing the basic GATT agreement promised to eliminate. Yet countries must obviously remain free to protect their own environment, or the health of their consumers, or to refuse slave labor. hus, Article XX of the GATT permits countries to pass laws of this kind, provided that they are not “a means of arbitrary or unjustiiable discrimination between countries where the same conditions prevail, or a disguised restriction on international trade.” Most of the disputes that are heard by the panels of the Dispute Settlement Body (DSB) of the WTO are complaints that one country has passed a law or regulation for a supposedly benign and permitted purpose but with the surreptitious intention of protecting local industries from the competitive efects of foreign imported goods. To take a famous example, in the Shrimp-Turtle Case (oicially, Appellate Body Report, United States—Import Prohibition of Certain Shrimp and Shrimp Products, WT/DS58, WT/DS61 (adopted Nov. 6, 1998)), the United States banned the importation of shrimp caught by methods that threatened the life of endangered sea turtles, claiming that this was an environmental protection measure. Malaysia, hailand, India, and Pakistan complained to the WTO that the import ban was really designed to protect the US shrimp ishing industry from lower-priced international competition. he United States lost the case before the WTO, mainly because it had acted in a discriminatory fashion, treating shrimp-exporting countries in the Caribbean diferently from those in South and South-East Asia. he details of this dispute and others like it are beyond the scope of this book. he example shows, however, how a private commercial transaction—a contract to import shrimp from another country, for instance—may be afected by larger, more complex issues at a national level: Is an import ban motivated by concern for endangered sea turtles or by concern for US shrimpers? (As you can probably tell, the answer in such cases is usually both. he WTO dispute resolution panels have to choose what was the predominant purpose in relation to a particular measure.) Customs law is the nuts and bolts of the international trade regime. Countries party to the GATT promise to use only (or mainly) customs duties to regulate the low of trade. here are three main issues in relation to the imposition of customs duties when goods cross a country’s border: rate, valuation, and classiication. First, the importing country has to declare at what percentage rate the imported item will be taxed. his is the easy part, a public declaration of a tarif of duties to be charged. Second, the importing country must declare how it will value the product for purposes of imposition of customs duty. he declared percentage rate of duty is a percentage of the value of the product, but, as we shall see later, the value of a product varies greatly from place to place, not least because the value of the product in an

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importing country includes the cost of transporting it from the exporting country, insuring it against risks, and other transaction costs that we will consider in more detail later in this book. hird, the importing country must declare how it classiies imported products for purposes of imposition of customs duty. here are many ways of classifying even a simple object like a pen. If a customs duty of a declared percentage were to be imposed on “pens,” it would apply only to things that could be called a pen. (A ballpoint pen? A fountain pen? A laser pointer?) If the duty were to be imposed on “writing implements,” it would include pens, pencils, and maybe even other objects. (Computers? Chisels?) Countries party to the GATT could easily compromise or undercut their treaty promises by cynical manipulation of their customs duty laws, by the manner in which they classify imported products or by the manner in which they value them for purposes of the customs duty. hus, the countries party to the GATT have also made international agreements about how they will go about the process of classiication (the Harmonized Commodity Description and Coding System, set out in the International Convention on the Harmonized System 1983, overseen by the World Customs Organization) and valuation (the WTO Agreement on Implementation of Article VII of the GATT 1994, or GATT Valuation Code). As noted above, this is a complex and technical area of law, which (thankfully) lies beyond the scope of this book. Our purpose here is again simply to point out that private commercial sales of goods may have larger implications that may trigger public law and country-to-country disputes.

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Governing Law I. Introduction Whenever a contract is made between parties in diferent countries, a choice of law question arises. Which country’s law is to govern such matters as interpretation of the terms of the contract and the remedies available in the event of breach? A written contract, drated by attorneys, should contain a choice of governing law clause—indeed, it might even be regarded as professional negligence for an attorney not to include such a clause when drating a contract with some transnational component. As we shall soon see, in the absence of clear agreement about governing law, the rights and obligations of the parties may be very uncertain and may depend on where the dispute is resolved. hat jurisdiction will have rules on choice of law (as they are called in the United States; they are called rules of private international law outside the United States and in international treaties). hose rules determine which jurisdiction’s “substantive” law will decide the outcome of the dispute. How this process works is the subject of this chapter. If the parties, or more likely their attorneys, do consider choice of governing law when making their contract, which law will they choose? Each contracting party will probably feel some trepidation about submitting to the laws of the other party’s country, simply because they are unfamiliar. In an international sale contract, for example, a Chinese seller is just as likely to be wary of US law as a US buyer would be of Chinese law. he parties could resolve that mutual wariness by choosing the law of a neutral third country, an option that is considered later in this chapter. Other, more creative solutions have occasionally been tried in transnational contracts. For example, in the contract to build the tunnel that runs beneath the strait that the British call the English Channel and the French call La Manche, the governing law provision was as follows (see Channel Tunnel Group Ltd. v. Balfour Beatty Construction Ltd. [1993] A.C. 334 (H.L.) 347): he construction, validity and performance of the contract shall in all respects be governed by and interpreted in accordance with the principles common to both English law and French law, and in the absence of such common principles by such general principles of international trade law as have been applied by national and

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international tribunals. Subject in all cases, with respect to the works to be respectively performed in the French and in the English part of the site, to the respective French or English public policy (ordre public) provisions. Obviously, a solution such as this will not work in all cases. (It did not work very well in the Channel Tunnel contract either.) In most cases, the parties must simply bargain their way to a choice of one governing law, which is then incorporated into their contract. However, many international contracts are not drated by attorneys but are the result of negotiations directly between business people, who generally give little, if any, thought to “lawyers’ questions” like choice of law. his is particularly true of international sales contracts. If a dispute arises in relation to a contract with no express choice of governing law, how is the court to choose which law to apply? he answer will depend on which court, in which country, is considering the question. In contracts drated by lawyers, choice of law and choice of forum are oten addressed in a single clause that stipulates both the law that will govern the contract and the tribunal where disputes will be resolved. hat may be a court in the country of one or other of the parties, or sometimes a third country. Very oten, dispute resolution clauses provide that any disputes should be resolved by arbitration rather than litigation. If the parties themselves have not chosen the forum where their disputes are to be resolved, the answer to the choice of governing law question will depend upon which court is called upon to answer the question. A court in the seller’s country might well take a diferent view about the governing law of a sales contract than a court in the buyer’s country, and many lawyers and scholars have noted a homeward trend in which courts tend to decide that their own law is the law that should govern the contract. Such a situation is undesirable because it adds to the cost of dispute resolution and it leaves the parties uncertain about their obligations to one another as everything could depend on where the litigation is brought. he parties have an incentive to go “forum-shopping” for the court that will apply the law most favorable to their positions. If the rules governing the parties’ obligations were to be the same, no matter what the governing law, uncertainty would be reduced and at least one of the incentives for forum-shopping would be removed. In other words, international uniformity of laws has positive practical consequences. To make sales laws internationally uniform was the purpose underlying the United Nations Convention on Contracts for the International Sale of Goods 1980 (the CISG, sometimes also called the Vienna Convention). he CISG deines the rights and obligations of the parties to a contract for the sale of goods when those parties are in diferent countries. he United States adopted the CISG with efect from January 1, 1988. Many other countries have also adopted the CISG, and the number continues steadily to increase. In February 2000, 57 countries were party to the Convention; not much more than a decade later, in March 2013, 79 countries were party to the Convention, an increase of nearly two countries per year. In efect, 79 countries, including the United States, have exactly the same law governing contracts for the international sale of goods. he CISG is of considerable importance for imports of goods to, and exports of goods from, the United States. In 2012, 10 of the United States’ top 15 trading partners were parties to the CISG, including all of the top ive (Canada, China, Mexico, Japan, and Germany),

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which between them accounted for 53 percent of all US trade.1 Readily available statistics suggest that at least three-quarters of US trade in goods is with countries party to the CISG, where the law governing international sales is the same as the law in the United States. As we shall see in more detail soon, however, the parties to an international sales contract can contract out of the CISG, and many do. A survey of practicing attorneys in the United States, Germany, and China indicated that, on average, about 64.8 percent of them excluded the CISG “principally or preponderantly” when drating contracts: 70.8 percent in the United States, 72.7 percent in Germany, and 44.4 percent in China.2 Another survey found that 55 percent of US practitioners who said that they were familiar with the CISG choose to opt out of its coverage when drating international commercial contracts.3 If the parties opt out of the CISG, they oten opt into the national law of some country. In the United States, the relevant “national” law would be the relevant state enactment of the Uniform Commercial Code (UCC). Also, the UCC may apply by force of law to contracts for international sale of goods involving foreign parties in countries that are not party to the CISG. If we view the statistics cited above in reverse, ive of the United States’ top 15 trading partners are not party to the CISG: the United Kingdom, Brazil,4 Taiwan, India, and Venezuela. Contracts with parties in those countries will be governed by the UCC or the relevant foreign national law. For that reason, this book does not focus solely on the CISG. It considers the CISG, the UCC, and selected foreign national laws, particularly of France and Germany— leading civil law jurisdictions—and of non-CISG countries such as the United Kingdom. As mentioned in Chapter 1, sometimes parties may prefer to follow a source of rules other than national law and other than the CISG. he most obvious choice might be the Unidroit Principles of International Commercial Contracts. Other choices are also possible, such as the Principles of European Contract Law (PECL). hese projects aimed at harmonizing the laws of diferent countries have largely been led by academics and may be perceived as being relatively neutral and technocratic—precisely what some commercial parties may want. he redactors of these principles have enjoyed some success in promoting their adoption in private contracts and their use in some international disputes, and they seem to have gained a signiicant measure of inluence, although not all perspectives are the same, even in Western Europe, as noted in Chapter 1. In any case, adopting such principles may raise an issue for a US party that would otherwise have its transaction governed by the UCC. Although the UCC allows the parties by contract to adopt the law of another “state 1. See Top Trading Partners – December 2012, United States Census Bureau, http://www.census.gov/ foreign-trade/statistics/highlights/top/top1212yr.html (last visited Feb. 26, 2014). 2. See Martin F. Koehler & Guo Yujun, he Acceptance of the Uniied Sales Law (CISG) in Diferent Legal Systems: An International Comparison of hree Surveys on the Exclusion of the CISG’s Application Conducted in the United States, Germany and China, 20 Pace Int’l L. Rev. 45, 47 (2008). 3. See Peter L. Fitzgerald, he International Contracting Practices Survey Project: An Empirical Study of the Value and Utility of the United Nations Convention on the International Sale of Goods (CISG) and the UNIDROIT Principles of International Commercial Contracts to Practitioners, Jurists, and Legal Academics in the United States, 27 J.L. & Com. 1, 14 (2008). 4. Brazil is not a party at the time of writing but will be soon. On October 16, 2012, the Brazilian Senate approved the treaty. he CISG will come into force for Brazil on April 1, 2014. We discuss Brazil in more detail in Section IV.

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or nation” in appropriate circumstances, projects such as the Unidroit Principles and PECL are not the law of another state or nation. See UCC § 1-301 (formerly § 1-105). Courts may ind a way to validate the choice to some degree, but the status of adopting such principles is unclear under US law. Although it is important not to overemphasize the signiicance of the CISG, it is important not to underemphasize it, either. Remember that many, perhaps most, international sales contracts are not drated by attorneys. he traders involved in buying and selling goods are unlikely to give much thought to governing law at all and may well not even have heard of the CISG (which is also true, unfortunately, of many lawyers). he CISG governs contracts unless expressly excluded, so it will govern contracts between parties in CISG countries if the parties do not opt out of its operation. hat is likely to be almost all contracts not drated by attorneys. Section II of this chapter deals with the question of when the CISG applies to international sales contracts. Section III deals with contracting out of the CISG. Section IV deals with the application of the UCC to international sales. Section V deals with opting into neutral domestic systems of law, particularly English law.

Problem 2.1 Levine Windows and Blinds in the United Kingdom agrees to sell a number of pre-assembled window- and door-units to Caslowitz Construction in the United States. heir contract says, “Any dispute under this contract shall be resolved in accordance with the Unidroit Principles of International Commercial Contracts (UPICC) in a court of competent jurisdiction in the State of Rhode Island.” You may assume that Rhode Island has adopted the uniform version of UCC Article 1 and litigation is now pending there because Caslowitz believes the units are defective. Caslowitz’s lawyers think that its claim for damages will fare better under the UCC than under UPICC and they ile a motion before the court for a ruling that the UCC will apply. (a) (b) (c) (d)

What should they argue? What should Levine argue? Would incorporation by reference work? How should the judge rule? Would it make a diference if Levine were in Spain and the choice of law clause said, “Any dispute under this contract shall be resolved in accordance with the Unidroit Principles of International Commercial Contracts (UPICC), not the CISG, UCC, or Spanish sales law, in a court of competent jurisdiction in the State of Rhode Island”? See CISG arts. 1, 6.

II. When Does the CISG Apply? A. he Location of the Parties 1. General CISG article 1(1)(a) provides that the Convention applies to contracts of sale of goods between parties whose places of business are in diferent Contracting States. hus, it is necessary to look at whether the parties are in diferent countries that are party to the CISG, not whether the goods will move from one CISG country to another.

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Problem 2.2 S in California agrees to sell commercial furniture and ittings to B in Maine. he furniture is shipped from S’s supplier in Germany to B’s warehouse in Maine. Germany has adopted the CISG. Does the CISG apply to the sale contract? See CISG art. 1.

PROBLEM 2.3 (a) S, a New York art connoisseur, owns a painting that hangs in the Metropolitan Museum of Art in New York City, on long-term loan to the museum. S sells the painting to B, a French art collector. he painting remains hanging in the same place at the Met. France has adopted the CISG. Does the CISG apply to the sale contract? See CISG art. 1. (b) Does consideration of article 2 afect your answer? Would it matter if the New York connoisseur is also an art dealer? Are there other facts you would need to know? Many businesses have more than one place of business. If an entity has places of business in more than one country, it may become necessary to identify which is the relevant place of business for purposes of CISG article 1(1)(a). CISG article 10(a) provides that for the purposes of the Convention, the place of business that has “the closest relationship to the contract and its performance” is the one to be considered. he drating of this article is a little unhelpful, as it is possible for one place of business to be most closely related to the contract—the head oice where the contract was negotiated, for example—but another place of business to be most closely related to its performance—the factory where the goods are to be produced, for example. Nevertheless, CISG article 10(a) has not posed any problems in practice. Indeed, courts around the world have not oten found it necessary to consider it. he next case is one of the few examples of its operation, and it also discusses the other key case on the issue, Asante Technologies, Inc. v. PMC-Sierra, Inc.

McDowell Valley Vineyards, Inc. v. Sabaté USA Inc. United States District Court for the Northern District of California, Nov. 2, 2005 No. C-04-0708 SC, 2005 WL 2893848 [Plaintiff, a California corporation, produced premium wines in Napa County. It bought from defendants non-agglomerated corks called Altec closures, which were supposed to protect against cork taint. Sabaté S.A.S., which manufactured the corks, was based in France. Sabaté USA Inc., which marketed the corks in North America, had its principal place of business in California. Plaintiff discovered that a high percentage of its wines bottled with Altec closures suffered from cork taint. It sued defendants in state court in California. Defendants removed the action to federal district court on the basis that the claim fell within the court’s federal question jurisdiction because it was based on the CISG. Defendants then moved for summary judgment.] Before Conti, District Judge ...

III. LEGAL STANDARD The federal courts have “original jurisdiction over all civil actions arising under the Constitution, laws or treaties of the United States.” 28 U.S.C. § 1331.

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A Federal Court may examine the question of subject matter jurisdiction sua sponte. See Steel Company v. Citizens for a Better Environment, 523 U.S. 83, 94, 118 S. Ct. 1003, 140 L. Ed. 2d 210 (1998). Federal Courts must normally determine issues of subject matter jurisdiction before considering a case on its merits. Id. When a court lacks jurisdiction, the “only function remaining to the court is that of announcing the fact and dismissing the cause.” Id., quoting Ex parte McCardle, 7 Wall. 506, 514, 19 L. Ed. 264 (1868).

IV. DISCUSSION Defendants contend that this Court has jurisdiction to hear this case under federal question jurisdiction, pursuant to 28 U.S.C. § 1331. Specifically, Defendants contend that The Convention on Contracts for the International Sale of Goods (“CISG”), a federally-adopted treaty, applies wherever the buyer and seller of goods are from different countries, which have adopted CISG, and the parties have not opted out of CISG. Defendant contends that the seller (Sabaté France) is a French company and the buyer (Plaintiff) is a U.S. company and that both countries have adopted CISG. Finally, Plaintiff contends that the parties did not opt out of CISG. Plaintiff contends that Defendants have not demonstrated that CISG applies to this case. . . . This case turns on the determination of Defendants’ place of business. . . . [The court quoted CISG articles 1(1)(a) and 10(a), then continued:] Defendants contend that Sabaté SAS was a French entity, that Sabaté USA had “limited involvement” in the transaction, and never took possession of the Altec closures, which were shipped from France directly to Plaintiff. The crucial question is from where the representations about the product came. The Court took up this issue in Asante Technologies, Inc. v. PMC-Sierra, Inc., 164 F. Supp. 2d 1142 (N.D. Cal. 2001), a case on which Defendants heavily rely. In Asante Technologies, the plaintiff, a Delaware corporation, sued the defendant, a Delaware corporation which conducted the bulk of its business in and from Canada. Id. at 1144–1145. The plaintiff purchased the defendant’s product through the defendant’s authorized and nonexclusive U.S. distributor. Id. at 1145, 1148. The Court in Asante Technologies determined that CISG applied to the sales contracts based on the particular facts of the case. Id. at 1149. The District Court found it significant that (1) the plaintiff did not allege that the U.S. distributor made any representations about the product, (2) the plaintiff did not mention the distributor in its complaint, (3) the plaintiff’s claims concerned breaches of representations by the defendant from Canada, (4) the products were manufactured in Canada, (5) the plaintiff corresponded with the defendant at the defendant’s Canadian address and (6) the plaintiff did not “identif[y] any specific representations or correspondence emanating” from the defendant’s U.S. branch. Id. The Court concluded that the U.S. contacts between the plaintiff and the defendant were “not sufficient to override the fact that most if not all of the defendant’s representations regarding the technical specifications of the products emanated from Canada.” Id. The Court finds that the instant case presents a crucially different set of facts from those discussed in Asante Technologies. Looking at Plaintiff’s exhibits, the Court notes that a letter proposing a sale of Altec closures to Plaintiff is printed on Sabaté USA letterhead, which gives a San Francisco, California address and telephone number. . . .

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The invoice appears on Sabaté USA letterhead and gives a Napa, California address and telephone number. Another letter regarding “your recent order” appears on Sabaté USA letterhead. Finally, some advertising literature, which is printed on Sabaté USA letterhead and gives a San Francisco, California address and telephone number, gives a list of California wineries using Altec closures and at one point states: “For more information and a personal demonstration, call [a San Francisco, California telephone number].” Also, according to Plaintiff, the corks were delivered to “C-Line shipping in the U.S. who maintains a warehouse for Sabaté USA . . . near Sabaté USA’s Napa office.” Finally, according to Plaintiff, “after Sabaté USA was put on notice that McDowell has had [sic] some problems with Altec in 2001, Sabaté USA did in fact take possession of the corks in question” and that “Sabaté USA initiated this latter action and was not directed by Sabaté S.A.S.” The central issue in the instant case, as in Asante Technologies, is from where the representations about the product came. Based on the evidence submitted by the parties, the Court finds that the representations regarding the specifications of the product—both in number and in substance—came largely, if not entirely, from California. Because Defendants’ place of business, taking into account the circumstances known or contemplated by the parties before and at the conclusion of the contract, is in California, the parties are not from different states and therefore CISG does not apply. Because CISG does not apply, there is no federal jurisdiction over the case. Diversity does not exist because Plaintiff and Sabaté USA are citizens of California. Accordingly, the Court will deny the motion for summary judgment and dismiss the case.

Before moving more deeply into these questions, it is helpful to keep in mind a basic framework for analyzing the law applicable to international disputes. here are at least three steps involved in analyzing the legal outcome in international litigation. (1) Determine where the tribunal is. (For example, is it in Australia? the United States? Malaysia?) (2) Apply that tribunal’s choice of law rule. In other words, what is the rule in the place of the tribunal for choosing the law applicable to the dispute? hat “choice of law” rule will determine which law should be used to resolve the dispute itself. (Now you can see why the irst step is determining where the tribunal is.) (3) Apply that rule of “substantive law” (determined in step (2)) to decide the dispute. To take a simple example, suppose there is a dispute between a seller and a buyer, and they are in diferent countries. he buyer brings suit in a court in its own country. hat court does not necessarily apply its own sales law. One party may want the law of the seller’s country to apply, and the other party may prefer the opposite. he court will need irst, then, to apply a choice of law rule to determine which jurisdiction’s sales law should govern the dispute. he court will use its own jurisdiction’s choice of law rule. Suppose that choice of law rule provides that in sales contracts, the law of the seller’s jurisdiction should be applied. (Some treaties do provide this rule.)5 Now the court, even though it is in the buyer’s country, applies the sales law of the seller’s jurisdiction to decide who wins the lawsuit. 5. Article 3(1) of the 1955 Convention on the Law Applicable to International Sales of Goods (sometimes called the 1955 Hague Convention) provides such a rule, subject to some limited exceptions. he so-called Rome Convention of 1980—more oicially, the 1980 Convention on the Law Applicable to Contractual Obligations— includes rules on sales contracts, and although its provision is more opaquely worded (article 4 says to apply the

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With this framework in mind, we can move on to the tricky article 1(1)(b) of the CISG, which can become relevant when only one party has its place of business in a Contracting State. CISG article 1(1)(b) provides that the Convention applies “when the rules of private international law lead to the application of the law of a Contracting State.” For example, if a seller in Australia (a CISG country that has adopted article 1(1)(b)) contracts to sell scrap metal to a buyer in Malaysia (a country that has not adopted the CISG), the court must determine whether the contract is governed by Australian or Malaysian law. If the contract is governed by Australian law, the CISG applies by virtue of CISG article 1(1)(b). If the contract is governed by Malaysian law, then Malaysian sales law applies. See Downs Invs. Pty Ltd. v Perwaja Steel Sdn Bhd [2002] 2 Qd. R. 462 (Austl.) (applying the CISG because the scrap metal contract was governed by Australian law). In no circumstances would the contract in this example be governed by Australia’s domestic sales law. he US delegation in Vienna did not like the fact that the proposed article 1(1)(b) would mean that US domestic sales law (i.e., the UCC) would never apply to international sales contracts involving US parties but that parties whose countries did not sign the treaty might have their own domestic law apply. he operation of article 1(1)(b) seemed both unfair and strategically ill-advised. he concern was that a country might think, “Why sign the treaty? If we don’t sign, either our own law will apply, or the treaty will because of article 1(1)(b), and the other party’s own law will never apply.” he US delegation therefore pressed for the provision to be made optional, and it succeeded. CISG article 95 provides that any “State” (meaning, in the context of international conventions, any country) may declare that it will not be bound by CISG article 1(1)(b). he United States made an article 95 reservation when it ratiied the Convention, so the paragraph does not form part of the CISG so far as the United States is concerned. If the scrap metal contract in the above example were to be between a Californian seller and a Malaysian buyer, the CISG would not apply. A court in the United States would have to choose between Californian domestic sales law (i.e., the UCC) and Malaysian domestic sales law. (As we will see in Section III, the court would probably apply the UCC.) Other countries to have made a CISG article 95 reservation are: China, Czech Republic, Saint Vincent and the Grenadines, Singapore and Slovakia. Germany has declared that it will not apply CISG article 1(1)(b) in respect of any country that has made a CISG article 95 declaration.

PROBLEM 2.4 (a) Seller in Mexico and Buyer in Venezuela have a dispute about a sale of fertilizer and the possibility of litigation is looming. Mexico has adopted the CISG without reservation. Venezuela has not adopted the Convention. Will the CISG apply? (b) What if the the seller were in the United States instead of Mexico?

law where the “characteristic performance” of the sales contract takes place), most believe that delivery of the goods, which characteristically takes place in the seller’s country (as we will learn in Chapter 5), is the characteristic performance. he Rome I Regulation of the European Union moves toward much greater clarity by looking to the law where the seller has its habitual residence. (For a further note on the Rome I Regulation, as it is called, see inra p. 68 [52].) All of these rules, then, have a choice of law rule that points to the seller’s law. hey have only limited applicability to US parties, however.

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2. Hong Kong and Macau, Two Special Cases When the CISG was made in 1980, Hong Kong was a colony of the United Kingdom, which has never become party to the CISG. In 1997, Hong Kong became a Special Administrative Region of the People’s Republic of China, which has been party to the CISG since January 1st, 1988. here is some uncertainty about whether the CISG applies by virtue of CISG article 1(1)(a) when one of the parties has its place of business in Hong Kong. his is not a trivial question, as in 2011 Hong Kong was the world’s twelth largest exporter of merchandised goods and the ninth largest importer.6 CISG article 93(4) provides that the Convention extends to all territorial units of a Contracting State unless that State has made a declaration that the CISG does not apply to one of its territorial units. he People’s Republic of China has not made a formal declaration under CISG article 93 that the CISG does not apply to Hong Kong. However, in 1997, the Chinese government deposited with the Secretary General of the United Nations a declaration announcing the international conventions that should apply to Hong Kong upon its transfer to Chinese rule from British rule. he CISG was not on the list. In both CNA International Inc. v. Guangdon Kelon Electronical Holdings¸ No. 05 C 5734, 2008 WL 8901360 (N.D. Ill. Sept. 3, 2008) and Electrocrat Arkansas, Inc. v. Super Electric Motors Ltd., No. 4:09cv00318 SWW, 2009 WL 5181854 (E.D. Ark. Dec. 23, 2009), it was held that the CISG applied to a contract between a US party and a party in Hong Kong because China has made no formal declaration under CISG article 93(1). In contrast, in Innotex Precision Ltd. v. Horei Image Products, Inc., 679 F. Supp. 2d 1356 (N.D. Ga. 2009) and America’s Collectibles Network, Inc. v. Timlly (HK), 746 F. Supp. 2d 914 (E.D. Tenn. 2010), it was held that the CISG did not apply to a sale of goods contract between a Hong Kong seller and a US buyer because China’s declaration to the United Nations in 1997 was equivalent to a CISG article 93(1) declaration. he Supreme Court of France (the Cour de Cassation) and the Federal Court of Australia have reached the same conclusion as the Innotex court. See Cour de cassation [Cass.] [Supreme Court for Judicial Matters] 1e civ., Apr. 2, 2008, Bull civ. I, No. 96 (Fr.) (Telecommunications Products Case); Hannaford (t/as Torrens Valley Orchards) v. Australian Farmlink Pty Ltd. [2008] FCR 1591 (Austl.). he Electrocrat Arkansas court later invited the parties to address the Innotex Precision case in supplemental pleadings, referring to “the real possibility that the CISG is not in fact the governing law in this action.” Electrocrat Arkansas, Inc. v. Super Electric Motors Ltd., No. 4:09cv00318 SWW, 2010 WL 1381950, at *2 (E.D. Ark. Apr. 2, 2010). he parties responded with a joint statement about choice of law, in which they both accepted that Hong Kong is in a Contracting State and that the CISG therefore applied to their action. he court accepted that conclusion, adopting the reasoning and conclusions of CNA International and inding nothing in Innotex Precision to make it reconsider its earlier decision that Hong Kong is in a Contracting State. See Electrocrat Arkansas, Inc. v. Super Electric Motors Ltd., No. 4:09cv00318 SWW, 2010 WL 1381950 (E.D. Ark. Apr. 2, 2010).

6. International Trade Statistics 2012: World Trade Developments, World Trade Organization, http:// www.wto.org/english/res_e/statis_e/its2012_e/its12_world_trade_dev_e.htm (last viewed Feb. 26, 2014).

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he position is the same in relation to Macau, which was a Portuguese colony until 1999, when it became a Special Administrative Region of the People’s Republic of China. Portugal is not party to the CISG. China has not made a formal CISG article 93 declaration in relation to Macau, but the CISG was not on the list of treaties contained in China’s declaration to the United Nations when it took over Macau in 1999. See Ulrich G. Schroeter, he Status of Hong Kong and Macau under the United Nations Convention on Contracts for the International Sale of Goods, 16 Pace Int’l L. Rev. 307, 323–26 (2004). here are, as yet, no cases about the status of Macau, which is a much less signiicant trading hub than Hong Kong.

B. What Are Goods? 1. Goods in General Rather surprisingly to common law eyes, the CISG does not deine “goods,” although CISG article 2(a)–(f ) list some categories of assets (some of which would ordinarily be considered goods) to which the Convention does not apply: goods bought for personal family or household use; stocks, shares, investment securities, negotiable instruments or money; ships, vessels, hovercrat, or aircrat; and electricity. As we will see in a moment, this civil law drating approach, which states general principles without many speciic deinitions, leaves quite a number of questions unanswered, especially when compared to the UCC. Consider the diference in approach between CISG articles 1 through 3 and UCC §§ 2-105 to -107. he UCC provides a number of basic deinitions—even aside from UCC Article 1, which is largely devoted to deinitions—and rules for distinguishing goods from other assets. he CISG gives very little. Apart from the exclusions listed in CISG article 2, there is general agreement that “goods” includes all kinds of tangible movables. he CISG has been held to apply to sales of propane gas (Oberster Gerichtshof [OGH] [Supreme Court] Feb. 2, 1995, Docket No. 10 Ob 518/95, Zeitschrit für Rechtsvergleichung (ZfRV) [1996] 248 (Austria), CLOUT Case No. 176), live lambs (Rb Arnhem 30 December 1993, NIPR 1994, 268 m.nt. (Nieuwenhoven Viehandel GmbH/Diepeveen-Dirkson B.V.) (Neth.), CLOUT Case No. 100) and circus elephants (Cour d’appel [CA] [Court of Appeal] Paris, Jan. 14, 1998, D. 1998, 288, obs. Bernard Audit, CLOUT Case No. 312), among many other things.

2. Intangible Items and Sotware In contrast, there is considerable uncertainty about whether intangible items are governed by the CISG. he Convention is written in six oicial languages: Arabic, Chinese, English, French, Russian, and Spanish, which are “equally authentic” under the testimonium clause of the treaty (i.e., the penultimate sentence, which is not part of any article and which begins “DONE at Vienna” etc.). Unfortunately, consulting the other oicial languages is inconclusive. Like the English word “goods,” the French word “marchandises” and the Chinese characters “货物” refer to intangibles as well as tangibles. On the other hand, the Spanish word “mercaderías,” the Russian word “товаров” and the Arabic word “‫” "بضائع‬refer only to tangible goods. he fact that sales of electricity are expressly excluded by CISG article 2(f ) lends some support to the view that “goods” includes intangibles. he inference is that

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but for the fact of its exclusion, the Convention would apply to a sale of electricity, which is arguably an intangible. he argument is even stronger with respect to shares and investment securities, some of which have no unique tangible existence at all but which can consist solely of electronic records. Computer sotware poses special problems. Not only is sotware intangible but also it is, in essence, a license to use intellectual property. Even if the sotware is transferred in a physical medium, such as a computer disk, the thing of value that is being bought is the information contained on the disk and, more importantly, the right to use it. See Hiroo Sono, he Applicability and Non-applicability of the CISG to Sotware Transactions, in Sharing International Law across National Boundaries 512, 514 (Camilla B. Andersen & Ulrich G. Schroeter eds., 2008). Information cannot be “goods” for the purposes of the CISG. For example, a German court held that the CISG did not apply to a contract for the sale of a market analysis by a market research institute. See Oberlandesgericht [OLG] Köln [Appellate Court of Cologne] Aug. 26, 1994, Recht der Internationalen Wirtschat (RIW) 970, 1994 (Ger.), CLOUT Case No. 122. he court said that although the report was written on paper, the main concern of the parties was not the transfer of property in the paper on which the report was written but the transfer of the right to use the ideas written on the paper. Much the same could be said of sotware. Nevertheless, several courts, including the Supreme Courts of Germany and Austria, have held that the CISG applies to sales of sotware. See, e.g., Landgericht [LG] München [District Court of Munich] Feb. 8, 1995 (Ger.), CLOUT Case No. 131; Oberlandesgericht [OLG] Koblenz [Appellate Court of Koblenz] Sept. 17, 1993, Recht der Internationalen Wirtschat 934, 1993 (Ger.), CLOUT Case No. 281; Oberster Gerichtshof [OGH] [Supreme Court] June 21, 2005, Docket No. 5 Ob 45/05m (Austria), CLOUT Case No. 749; Bundesgerichtshof [BGH] [Federal Supreme Court] June 27, 2007, X ZR 15/05 (Ger.) (Hardware and Sotware Case). CISG article 3(2) adds another complicating factor. It provides that the Convention does not apply to contracts in which the preponderant part of the obligations of the party providing the goods consists in the supply of labor or other services. hus, if the contract is for the sale of custom sotware to be designed for the buyer’s purposes, it may fall outside the CISG for a diferent reason, namely that the “preponderant part” of the seller’s obligations is the service of designing the sotware for the buyer. In Evolution Online Systems, Inc. v. Koninklijke PTT Nederland N.V., 145 F.3d 505 (2d Cir. 1998), the US Court of Appeals for the Second Circuit applied New York state law to determine whether a contract had been made for a New York sotware producer to design sotware and provide technical expertise for creation of a computer network for a Dutch buyer. Although the Netherlands is party to the CISG, the court did not consider the possibility that the CISG might apply to the question of whether a contract had been made. he case seems unhelpful except to highlight the questions.

Problem 2.5 (a) General Automobile Manufacturers Corp. in Michigan engages Barghava Sotware Design in Edmonton, Alberta, Canada, to design sotware to control the robots for

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production of the GAM Umbria minivan on its assembly lines outside of Detroit. Does the CISG apply? (b) Ontario Steel Inc. in Canada buys from Megasot Corporation in Washington State a suite of standard word procesesing, e-mail, and spreadsheet sotware for use on 500 computers. Does the CISG apply? Explain why this answer should be the same or diferent from part (a) of this problem.

3. Crops, Timber, and Mineral Resources Unlike the UCC, the CISG contains no special provisions relating to things that are to be separated from land, such as crops, minerals, and timber. Commodities such as these raise special questions if the contract to sell them is made while they are still attached to, or in, the land. Should they be treated as goods or as part of the land? If they are to be treated as part of the land, they will be subject to whatever special rules the domestic law of the seller’s country applies to land sales. Also, what would happen if the land owner sells minerals or timber to Buyer 1, and then sells the land itself to Buyer 2 before the minerals are extracted or the timber cut? Would the minerals or timber pass with the land to Buyer 2 or would Buyer 1 be entitled to them, having bought them before the land was sold? UCC § 2-107 deals speciically with “Goods to be Severed from Realty,” such as minerals (including oil and gas), growing crops, or timber to be cut. A contract for the sale of minerals (including oil and gas) is a contract for the sale of goods only if they are to be severed from the land by the seller. See UCC § 2-107(1). A contract for the sale of crops and timber is a contract for the sale of goods whether they are to be severed from the land by the seller or the buyer, provided that they are capable of severance without material harm to the land. See UCC § 2-107(2). he CISG has no provisions that speciically deal with crops, minerals, etc., but CISG article 3(1) provides that contracts for the supply of goods “to be manufactured or produced” are considered sales of goods unless the buyer undertakes to supply a substantial part of the materials necessary for manufacture or production. John Honnold’s inluential commentary suggests that this provision covers “[c]ontracts requiring the seller to extract or sever corporeal objects from land and make them available to the buyer.” John O. Honnold & Harry M. Flechtner, Uniform Law for International Sales under the 1980 United Nations Convention 63 (4th ed. 2009). Honnold’s suggested restriction to extraction by the seller presumably stems from the fact that if the buyer were to extract the objects itself, it would be held to be supplying “a substantial part of the materials necessary for . . . production” for the purposes of CISG article 3(1), which would exclude operation of the CISG. In contrast, Susan Martin-Davidson argues that the failure to include the sale of minerals, timber, crops, and like property prior to severance was not a drating oversight, and counsels lawyers to “play it safe” by treating such items as part of real property if the contract of sale predates severance. See Susan J. Martin-Davidson, Selling Goods Internationally: Scope of the U.N. Convention on Contracts for the International Sale of Goods, 17 Mich. St. J. Int’l L. 657, 679–80 (2009).

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Problem 2.6 You may assume for this problem that the quantity is suiciently determinable for CISG purposes. We will return to the quantity issue in Chapter 3. (a) Farmer Agricultural Corporation in Wyoming gives a “mineral lease” to Royal Belgian Oil Corp. covering the mineral rights to its ranch, which RBOC can explore for oil, natural gas, or other mineral deposits. he parties hope to ind oil in quantities that can be extracted economically and resold. In return, RBOC gives Farmer a lump sum payment of $500,000. RBOC may also extract (and thus own) any minerals it inds for a period of 10 years. RBOC is to pay Farmer 10 percent of the price for which RBOC sells these minerals. Is this a CISG sale of goods? Consider CISG articles 3, 30, and 53. (b) Farmer is growing corn on its land. Farmer agrees to sell for $50 per hundredweight “all corn produced on Farmer’s land this season.” he parties agree that Farmer will use its best eforts to grow the corn, but if the corn is not produced (e.g., because of bad weather or pestilence), the parties will not be liable to each other. (his is called an output contract because it covers all of the corn that the farm produces, i.e., its entire output.) he seller is to put any corn produced on railroad cars at a railroad siding on the farm. Does the CISG apply in the following scenarios? (i) Buyer is Cheyenne Agricultural Co-operative Ass’n in Wyoming. See CISG art. 1; UCC § 2-107(2). (ii) Buyer is Manitoba Produce Corp. in Canada. (iii) Does this analysis inluence the answer to part (a)? (c) Farmer grants a mineral lease under the previous terms to Wyoming Oil Co. Wyoming Oil inds oil, extracts it, and sells it to RBOC for $100 per barrel, with the quantity to be 3000 bbl/month for 10 months. Is the transaction between Wyoming Oil and RBOC a CISG sale? Does it matter whether the contract is made while the oil (or at least some of it) is still in the ground?

4. Hybrid Service Contracts As noted above in relation to custom computer sotware, CISG article 3(2) provides that the Convention does not apply to contracts in which the “preponderant part of the obligations of the party who furnishes the goods consists in the supply of labour or other services.” Commentators typically highlight the diference between the phrase “preponderant part” in CISG article 3(2) and the phrase “substantial part” in CISG art 3(1). “Preponderant part” is generally understood to signify a larger proportion than “substantial part.” A “preponderant part” of what, though? he total economic value of the contract or what is essential for the operation of what is sold? For example, imagine a multimillion dollar piece of machinery that can only become operational once one of the manufacturer’s employees performs a small act of calibration ater installation in the buyer’s premises. he value of the service of calibrating the machine is a small part of the overall economic value of the contract but yet the machine cannot work unless that service is performed. he cases and commentators agree that an “economic value” criterion should be used when determining what is the “preponderant part” for the purposes of CISG article 3(2). See CISG Advisory Council Opinion No. 4, Contracts for the Sale of Goods to Be Manufactured

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or Produced and Mixed Contracts (Article 3 CISG), ¶ 3.3 (2004), available at Pace CISG Database: http://cisgw3.law.pace.edu/cisg/CISG-AC-op4.html.

PROBLEM 2.7 Seller S, in the United States, sold to buyer B, in Mexico, a used warehouse for the price of $500,000, including the cost of dismantling and delivery. he invoice showed the price of the warehouse to be $381,200 and the dismantling and delivery costs to be $118,800. Mexico is party to the CISG. Does the CISG apply to the contract?

pROBLEM 2.8 Would your answer to Question 2.7 be diferent if the invoice showed the price of the warehouse to be $118,800 and the dismantling and delivery costs to be $381,200?

5. Framework and Distributorship Contracts If the buyer and seller of goods intend to establish a long-term relationship to buy and sell goods over a period of years, they oten make an agreement setting out the terms of their relationship. For example, a manufacturer of goods may appoint someone as the exclusive distributor of its goods in a deined territory. Exclusive distribution agreements typically contain a promise by the manufacturer not to sell to anyone other than the distributor, a reciprocal promise by the distributor not to buy from anyone other than the manufacturer, permission for the distributor to use the manufacturer’s trademarks and other intellectual property, restrictions on the manner in which the distributor can advertise the goods for resale, and so on. Such contracts are about the sale of goods, but are they contracts for the sale of goods for the purposes of the CISG?

Amco Ukrservice v. American Meter Co. United States District Court for the Eastern District of Pennsylvania, 2004 312 F. Supp. 2d 681 [Defendant, American Meter Co., was a manufacturer of gas meters. After the collapse of the Soviet Union, it became interested in selling gas meters into the newly independent Ukraine. During the Soviet era, Ukrainian utility companies did not charge on the basis of individual consumption of gas. After independence, the Ukrainian government enacted legislation requiring utilities to shift toward a usage-based billing system, which would require installation of gas meters in millions of Ukrainian homes and businesses. Defendant decided that the best way to exploit this opportunity was to form a joint venture with a local Ukrainian manufacturer. It made two joint venture agreements with Ukrainian manufacturers, creating two Ukrainian corporations, plaintiffs Amco Ukrservice and Prompiladamco. Plaintiffs alleged that defendant had breached the joint venture agreements by failing to supply them with all the meters they could sell. Defendant and Prompiladamco cross-moved for summary judgment.] Before Dalzell, District Judge: Plaintiffs Amco Ukrservice and Prompriladamco are Ukrainian corporations seeking over $200 million in damages for the breach of two joint venture agreements that, they contend, obligated defendant American Meter Company to provide them with all of the gas meters and related piping they could sell in republics of the former Soviet Union.

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After extensive discovery, American Meter and Prompriladamco filed the cross-motions for summary judgment now before us. American Meter asserts that it is entitled to judgment against both plaintiffs as a matter of law because the joint venture agreements are unenforceable under both the United Nations Convention on Contracts for the International Sale of Goods (“CISG”) and Ukrainian commercial law. Prompriladamco claims that its agreement is enforceable, that there is no genuine issue of material fact as to whether American Meter is in breach of that agreement, and that the only remaining issue is the extent of the damages it has sustained. . . .

II. American Meter’s Motion for Summary Judgment American Meter argues that summary judgment is warranted here because the joint venture agreements are invalid under the CISG and Ukrainian law. . . .

A. THE CISG The United States and Ukraine are both signatories to the CISG, which applies to contracts for the sale of goods where the parties have places of business in different nations, the nations are CISG signatories, and the contract does not contain a choice of law provision. Fercus, S.R.L. v. Palazzo, 2000 WL 1118925, at *3 (S.D.N.Y. Aug. 8, 2000). American Meter argues that the CISG governs the plaintiffs’ claims because, at bottom, they seek damages for its refusal to sell them goods and that, under the CISG, the supply provisions of the agreements are invalid because they lack sufficient price and quantity terms. Apart from a handful of exclusions that have no relevance here, the CISG does not define what constitutes a contract for the sale of goods. See CISG art. 2.This lacuna has given rise to the problem of the Convention’s applicability to distributorship agreements, which typically create a framework for future sales of goods but do not lay down precise price and quantity terms. In the few cases examining this issue, courts both here and in Germany have concluded that the CISG does not apply to such contracts. In Helen Kaminski Pty. Ltd. v. Marketing Australian Products, Inc., 1997 WL 414137 (S.D.N.Y. July 23, 1997), the court held that the CISG did not govern the parties’ distributorship agreement, but it suggested in dictum that the CISG would apply to a term in the contract that addressed specified goods. Three years later, Judge DuBois of this Court followed Helen Kaminski and held that the CISG did not govern an exclusive distributorship agreement, an agreement granting the plaintiff a 25% interest in the defendant, or a sales commission agreement. Viva Vino Import Corp. v. Farnese Vini S.r.l., No. 99-6384, 2000 WL 1224903, at *1–2 (E.D. Pa. Aug. 29, 2000) (DuBois, J.). Two German appellate cases have similarly concluded that the CISG does not apply to distributorship agreements, which they termed “framework agreements,” but does govern sales contracts that the parties enter pursuant to those agreements. See OLG Düsseldorf, UNILEX, No. 6 U 152/95 (July 11, 1996), abstract available at http:// cisgw3.law.pace.edu/cases/960711g1.html; OLG Koblenz, UNILEX, No. 2 U 1230/91 (Sept. 17, 1993), text available at http://cisgw3.law.pace.edu/cases/930917g1.html. American Meter argues that this line of cases is inapplicable here because the plaintiffs do not claim damages for breach of what it terms the “relationship” provisions of the joint venture agreements, but instead seek to enforce an obligation to sell goods. In other words, American Meter claims that the supply and credit provisions are severable

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and governed by the CISG, even if the Convention has no bearing on the remainder of the two agreements. There are a number of difficulties with this argument, both in its characterization of the plaintiffs’ claims and its construction of the CISG. To begin with, Prompriladamco and Amco Ukrservice are not seeking damages for American Meter’s refusal to fill particular orders. Instead, they are claiming that American Meter materially breached the joint venture agreements when it refused to sell its products on credit, and as the ad damnum clauses of their complaints make clear, they seek damages for their projected lost profits between 1998 and 2003. American Meter’s construction of the CISG is equally problematic. It is premised on an artificial and untenable distinction between the “relationship” and supply provisions of a distributorship agreement—after all, what could be more central to the parties’ relationship than the products the buyer is expected to distribute? American Meter’s rhetorical view would also render it difficult for parties to create a general framework for their future sales without triggering the CISG’s invalidating provisions. Such a construction of the Convention would be particularly destabilizing, not to mention unjust, in the context of the joint venture agreements at issue here. On American Meter’s reading of the CISG, it could have invoked ordinary breach of contract principles if the plaintiffs had failed to exercise their best efforts to promote demand for its products, all the while reserving the right to escape its obligation to supply those products by invoking Article 14’s price and quantity requirements. The CISG’s provisions on contract formation do not compel such an expectation-defeating result. We therefore join the other courts that have examined this issue and conclude that, although the CISG may have governed discrete contracts for the sale of goods that the parties had entered pursuant to the joint venture agreements, it does not apply to the agreements themselves.

C. What Is a Sale? Just as the CISG does not deine “goods,” it also does not deine “sale.” In most cases, the question of what is a sale will be straightforward: it is an exchange of money for goods. here may, however, be circumstances where the position is not so clear because of the inancing arrangements that the parties have made. For example, in a inance lease arrangement, the seller transfers property in the goods to a inance company (oten part of a bank), which then leases them to the lessee, which uses the goods for the period of the rental term in return for a series of rent payments. At the end of the rental period, the lessee has the option of acquiring ownership of the goods, either simply by paying the last rental payment or by paying an additional amount. UCC § 1-203 sets out criteria for distinguishing between a lease and a security interest of the kind just described. here is no equivalent in the CISG. he underlying purpose of this kind of inancing arrangement is to give the lessee possession and use of the goods and possibly eventual ownership of them. Nevertheless, the usual meaning of “sale” is a contract to transfer property to the buyer outright. here are no cases about whether inance leases of this kind fall within the CISG, perhaps because the inance lease arrangement is usually a domestic one between a lessor and lessee in the same country, even though the goods have been provided by a seller in another country. he Austrian Supreme Court (the Oberster Gerichtshof ) has held that the CISG does not apply to lease contracts, but in that case, the lease contract was entirely domestic. Oberster Gerichtshof

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[OGH] [Supreme Court] July 2, 1993, Docket No. 1 Ob 525-93 (Austria), abstract available at Unilex database: http://www.unilex.info/case.cfm?pid=1&do=case&id=165&step=Abstr act. It is not clear what the position would be if the seller and the lessor were in one CISG counotry and the lessee/buyer in another. here are eforts to internationalize the law in this regard, particularly through the eforts of Unidroit and its Convention on International Financial Leasing (Ottawa 1988), which entered into force in 1995. Although the United States signed the treaty in 1990, the Senate has never ratiied it and it has therefore not entered into force with respect to the United States. It is in force with respect to 10 countries as of August 2013.

D. Applying National Law Even When the CISG Governs 1. Filling the Gaps in the CISG Although the CISG covers a great deal of ground, it is not a comprehensive code of contract law. It has gaps—issues that are not covered or not covered completely. Scholars writing in this ield usually distinguish between “internal gaps” and “external gaps.” See, e.g., Ingeborg Schwenzer & Pascal Hachem, Article 7, in Schlechtriem & Schwenzer, Commentary on the UN Convention on the International Sale of Goods (CISG) 134, ¶ 27 (Ingeborg Schwenzer ed., 3d ed. 2010). “External gaps” are matters that are simply not dealt with by the CISG. hey are governed by the domestic (i.e., national) law indicated by the choice of law rules of the forum. For example, CISG article 4(b) speciically states that the Convention is not concerned with the efect that the contract may have on the property in the goods sold. hus, for example, the efect of a retention of title clause (e.g., “Seller shall remain the owner of the goods until Seller has received full and inal payment for them”) on ownership of the goods sold must be determined by the national law chosen by the forum’s choice of law rules, even when the contract is governed by the CISG. See, e.g., Roder Zelt-Und Hallenkonstruktionen GmbH v. Rosedown Park Pty Ltd. (1995) 57 FCR 216 (Austl.) (applying Australian law to determine efect of retention of clause in contract governed by the CISG). Similarly, CISG article 5 speciically states that the Convention does not apply to the liability of the seller for death or personal injury caused by the goods to any person. hat issue must also be determined by the relevant national law. “Internal gaps” arise when the CISG deals with some matter in general terms but does not expressly provide an answer to the particular issue that has arisen. For example, CISG article 78 provides that if either party fails to pay a sum of money, the other party is entitled to interest on it, but the article does not state at what rate interest should be paid. CISG article 7(2) provides that “internal gaps” of this kind are to be governed irst by “the general principles on which [the Convention] is based” or, in the absence of such principles, “in conformity with the law applicable by virtue of the rules of private international law.” Discerning and applying the general principles underlying a code is a familiar technique for civil lawyers. CISG article 7(2) is quite clear that this is the irst step that must be taken in relation to “internal gaps.” Accordingly, the UNCITRAL Digest of Case Law on the United Nations Convention on the International Sale of Goods at 43 ¶ 6 (2012) contains the following stern admonition about CISG article 7(2): Under article 7(2), gaps in the Convention—i.e. questions the Convention governs but for which it does not expressly provide answers—are illed, if possible, without

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resorting to domestic law, but rather in conformity with the Convention’s general principles. Only where no such general principles can be identiied does article 7(2) permit reference to the applicable national law to solve those questions, an approach to be resorted to only as a last resort. Unfortunately, lawyers trained in the common law tradition are not so adept as their civilian counterparts at discerning general principles underlying a statute. he common law view is generally that if a statute is silent on an issue, the legislature simply did not intend to make any provision for that issue. Accordingly, civil law countries are more likely to ill “internal gaps” by reference to general principles underlying the CISG, common law countries by applying the national law selected by “the rules of private international law.” For example, the CISG says nothing about which party bears the burden of proof. Several courts in civil law countries have illed this “internal gap” by reference to general principles underlying the Convention, holding that those principles suggest that the person who seeks to derive a beneit must prove the existence of the facts that lead to the right to invoke that beneit, and the party seeking to rely on an exception must establish that it is entitled to rely on that exception. See, e.g., Trib. di Vigevano, Italy, 12 luglio 2000, Giuri. it. 2000, 280–290 (It.), CLOUT Case No. 378 (Italian text available at http://www.glo2balsaleslaw.org/content/api/cisg/urteile/493.htm); Oberlandesgericht [OLG] Innsbruck [Appellate Court of Innsbruck] July 1, 1994, Docket No. 4 R 161/94 (Austria), CLOUT Case No. 107 (German text available at http://www.globalsaleslaw.org/content/api/cisg/ urteile/107.htm). In contrast, the US Court of Appeals for the Seventh Circuit dealt with the CISG’s silence about burden of proof as follows in Chicago Prime Packers, Inc. v. Northam Food Trading Co., 408 F.3d 894, 898 (7th Cir. 2005): he CISG does not state expressly whether the seller or buyer bears the burden of proof as to the product’s conformity with the contract. Because there is little case law under the CISG, we interpret its provisions by looking to its language and to “the general principles” upon which it is based. See CISG Art. 7(2); see also Delchi Carrier SpA v. Rotorex Corp., 71 F.3d 1024, 1027–28 (2d Cir. 1995). he CISG is the international analogue to Article 2 of the Uniform Commercial Code (“UCC”). Many provisions of the UCC and the CISG are the same or similar, and “[c]aselaw interpreting analogous provisions of Article 2 of the [UCC], may . . . inform a court where the language of the relevant CISG provision tracks that of the UCC.” Delchi Carrier SpA, 71 F.3d at 1028. “However, UCC caselaw ‘is not per se applicable.’ ” Id. (quoting Orbisphere Corp. v. United States, 726 F. Supp. 1344, 1355 (Ct. Int’l Trade 1989)). A comparison with the UCC reveals that the buyer bears the burden of proving nonconformity under the CISG. Some “internal gaps” plainly cannot be illed by reference to underlying “general principles.” For example, as noted above, CISG article 78 provides for the payment of interest without stating at what rate interest should be paid. It would be impossible to discern the appropriate

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rate of interest by considering the general principles underlying the CISG, so common law courts and civil law courts agree that the solution must be found in domestic law (although which domestic law is a contentious issue, as we will see in Chapter 8). See, e.g., Rb. Breda 16 januari 2009 (Person of Greece/Ed Fruit & Vegetables B.V.) (Neth.) (Dutch original available at http://www.globalsaleslaw.org/content/api/cisg/urteile/1789.pdf ) (applying Greek interest rate in dispute between Greek seller and Dutch buyer of watermelons); San Lucio, S.r.l. v. Import & Storage Services, L.L.C., No. 07-3031 (WJM), 2009 WL 1010981, at *3 (D.N.J. 2009) (“Because there are no ‘general principles’ of the CISG that might shed light on the interest rate to be used, the CISG having deliberately declined to select a speciic rate, private international law must be used.”) Even in the case of interest, however, a faithful internationalist may believe that the expectancy principle underlying the remedies provisions points to acceptable or unacceptable methods of calculating interest. Cf. Karin L. Kiser, Minding the Gap: Determining Interest Rates under the U.N. Convention for the International Sales of Goods, 65 U. Chi. L. Rev. 1279 (1998).

2. he Validity Exception By far the most pervasive and controversial of the “external gaps” is the so-called “validity exception.” CISG article 4(a) provides that the Convention is not concerned with “the validity of the contract or of any of its provisions.” Validity questions must therefore be determined by the domestic (i.e., national) law indicated by the choice of law rules of the forum. hat raises the all-important question of how a court or arbitral tribunal should determine what is a validity question. Should a court or tribunal apply any rule of national law that is concerned with validity? Or should it apply such rules of national law only if the issue truly falls within an “external gap”—that is, if the CISG does not deal with the issue at all? he faithful internationalist view is the latter. According to this view, if the CISG deals with an issue in some way then, by deinition, that issue cannot raise a validity question because CISG article 4(a) says that the Convention is not concerned with validity questions except as otherwise expressly provided. he more skeptical view, one that has proved very attractive to courts in various countries, is the former: national law about the validity of contractual terms should always be applied, regardless of whether the CISG has anything to say about the issue. he diference between these two positions can be quite diicult to see in the abstract, but it is very important in practice. he irst extract below describes the two positions, focusing on the example of an attempt by the seller to disclaim any responsibility for unitness of the goods. he question following the irst extract focuses on the same example. he second extract arguably shows a court taking the skeptical position in relation to that very issue.

Choice of Law for International Sales Issues Not Resolved by the CISG Henry Mather 20 J.L. & Com. 155, 160–62 (2001) CISG article 4(a) states that “except as otherwise expressly provided in this Convention,” the CISG “is not concerned with . . . the validity of the contract or of any of its provisions

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or of any usage.” Validity issues are thus excluded from the scope of the CISG regime and governed by rules selected in a choice-of-law process, except when the CISG is expressly concerned with a validity issue. Two problematic questions are presented. Which issues are “validity” issues? And which CISG rules are “expressly” concerned with these issues? With respect to a number of issues, it is generally agreed that they are validity issues and are not expressly addressed by the CISG rules. A list of such issues includes: (1) incapacity (due to insanity or infancy, for example); (2) lack of agency authority; (3) fraud and misrepresentation; (4) duress; (5) unconscionability (at least when “warranty” disclaimers and limited remedy clauses are not involved); (6) illegality or violation of public policy; and (7) mistake. The status of certain other issues is uncertain. It is not clear whether they are validity issues excluded from the scope of the CISG by article 4(a) and thus subject to a choice-of-law process, or are issues expressly addressed in the CISG and thus controlled by the CISG. Much depends on how the issue is characterized. Perhaps the most important problems involve disclaimers of implied warranties and clauses limiting a buyer’s remedies for breach. Using warranty disclaimers as an example, one can argue that domestic rules like those in the Uniform Commercial Code (UCC) section 2-316 are validity rules. Section 2-316 subsections (2) and (3) clearly provide that disclaimers of implied warranties are ineffective unless certain words or types of words are used. Furthermore, section 2-316, like section 2-302, is primarily concerned with preventing unfair surprise, and it is generally agreed that section 2-302’s unconscionability rule concerns validity. The CISG contains no express rule dealing with this validity issue. (Although the CISG notion of good faith could be relevant, it is merely an underlying principle and not an express rule.). Therefore, the effectiveness of the disclaimer is a validity issue excluded from the scope of the CISG by article 4(a). And if some state’s UCC is the applicable law identified by the forum’s choice-of-law rules, section 2-316 governs the effectiveness of the disclaimer. On the other hand, it can be argued that certain CISG rules expressly deal with the issue, and there is no place for a choice-of-law process. CISG article 35(2) provides that its implied obligations of the seller (similar to the UCC implied warranties of merchantability and fitness for particular purpose) do not come into play when “the parties have agreed otherwise.” CISG article 6 says the same thing in more general terms. Thus the issue is whether the parties have agreed to the warranty disclaimer. This issue is largely governed by CISG article 8(2), which requires that the seller’s disclaimer language be interpreted as a reasonable person in the buyer’s circumstances would interpret it. As for domestic rules like those in UCC section 2-316, they are essentially interpretation rules, rather than validity rules, and must therefore give way to CISG article 8(2).

Question 2.9 A buyer agrees to buy goods from a seller on an “as is” basis, with the seller making no promises about the quality of the goods or their itness for the purpose for which such goods are usually used. CISG article 35(2) provides that the goods do not conform with the contract if they are not it for the purposes for which goods of the same description would ordinarily be used—except “where the parties have agreed otherwise.” he buyer complains that the goods are not it for their usual purpose. he buyer says that by the national law of its country, “as is” agreements are invalid, and it is impossible for a seller to contract out of implied terms relating to itness.

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According to the faithful internationalist position, is there any scope for an argument by the buyer that the validity of the “as is” agreement in the contract must be governed by national law? Is the validity of the “as is” agreement an “external gap,” something not dealt with by the CISG? Or does the CISG deal with that issue? If the CISG does deal with that issue, how can it possibly be a matter for national law, given that CISG article 4(a) says that the Convention is not concerned with validity questions, and that such questions are excluded, except as otherwise provided in the Convention?

Norfolk Southern Ry. Co. v. Power Source Supply, Inc. United States District Court for the Western District of Pennsylvania, July 25, 2008 No. 06-58 J, 2008 WL 28884102 [Defendant, a Canadian corporation based in Alberta, agreed to buy 36 used locomotives from plaintiff, an American railroad company. The purchase price was re-negotiated several times by reference to how many of the locomotives were to have “blue cards,” a certificate issued by the Federal Railroad Administration, which must be obtained before the locomotive may legally be used to haul freight. Defendant on-sold locomotives to another railroad company but did not pay plaintiff the full purchase price. Plaintiff sought to recover the remainder of the agreed purchase price. Defendant counterclaimed for breach of express warranty, breach of implied warranty of fitness for particular purpose, and breach of implied warranty of merchantability. Plaintiff moved for summary judgment.] Before Gibson, District Judge: ... b. Warranties Defendant has alleged that Plaintiff breached both express warranties and the implied warranties of fitness for a particular purpose and merchantability and argues that it is therefore not only not liable for further payments to Plaintiff but that Plaintiff is liable for damages to Defendant. Whether Defendant’s assertions are treated as defenses or counterclaims, Defendant has the burden of showing that the goods Plaintiff delivered did not conform to the terms of the Parties’ agreement. See Chicago Prime Packers, Inc. v. Northam Food Trading Co., 408 F.3d 894, 897–98 (7th Cir. 2005). . . . Regarding the matter of implied warranties, Plaintiff concedes that although the CISG does not specifically include the implied warranties of fitness and merchantability, CISG art. 35 may properly be read to suggest them. The CISG also allows, however, for their disclaimer. CISG art. 35(2); John Edward Murray, Jr., Murray on Contracts § 100, at 633 (4th ed. 2001). The last documents to be executed in the Parties’ transaction were Plaintiff’s bills of sale, which were executed by Defendant on February 14, 2005. They expressly disclaimed all warranties except that of marketable title to the enumerated items with the following language: THE EQUIPMENT BEING SOLD ON AN “AS, WHERE IS” BASIS AND WITH ALL FAULTS. EXCEPT AS SET FORTH HEREIN, THE SELLER MAKES NO REPRESENTATION OR WARRANTY, EITHER EXPRESS OR IMPLIED, AS TO THE CONDITION OF THE EQUIPMENT, INCLUDING WITHOUT LIMITATION ANY IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, AND EXPRESSLY

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DISCLAIMS LIABILITY AND SHALL NOT BE LIABLE FOR LOST PROFITS OR FOR INDIRECT, INCIDENTAL CONSEQUENTIAL OR COMMERCIAL LOSSES OF ANY KIND. The disclaimer was on the second page of each of the two-page documents, in capital letters as above, and in the same font size as the rest of the text. The validity of the disclaimer cannot be determined by reference to the CISG itself. CISG art 4(a). It is therefore necessary to turn to the forum’s choice of law rules. Geneva Pharm. Tech. Corp. v. Barr Labs., 201 F. Supp. 2d 236, 282–83 (S.D.N.Y.2002) rev’d on other grounds, 386 F.3d 485 (2d Cir. 2004); see also Zapata Hermanos Sucesores, S.A. v. Hearthside Baking Co., Inc., 313 F.3d 385 390 (7th Cir. 2002) (using, in a CISG case involving an Illinois firm, “choice of law principles” to determine that the common law of Illinois applied “to any issues . . . not covered in express terms by the Convention”); Pescatore v. Pan Am. World Airways, Inc., 97 F.3d 1, 12–13 (2d Cir. 1996) (applying state choice of law rules to an action brought under the Warsaw Convention). Under Pennsylvania law, the first step in a choice of laws analysis is to determine whether “there is an actual or real conflict between the potentially applicable laws.” Hammersmith v. TIG Ins. Co., 480 F.3d 220, 230 (3d Cir. 2007). Alberta law allows disclaimer of implied terms as follows: Where any right, duty or liability would arise under a contract of sale by implication of law, it may be negatived or varied by express agreement or by the course of dealing between the parties or by usage if the usage is such as to bind both parties to the contract. R.S.A.2000, c. S-2, s. 54. Pennsylvania law requires that the disclaimer be “conspicuous” and, if the warranty of merchantability is being disclaimed or modified, the “mention” of the word “merchantability.” 13 Pa C.S.A. § 2316(b). Whether a disclaimer is conspicuous is a question of law, to be determined by “whether a reasonable person against whom the modification or exclusion is to operate ought to have noticed it.” Hornberger v. Gen. Motors Corp., 929 F. Supp. 884, 889 (E.D. Pa.1996) (citations omitted). Under Pennsylvania law, factors to consider include: “(1) the placement of the clause in the document; (2) the size of the disclaimer’s print; and (3) whether the disclaimer was highlighted or called to the reader’s attention by being in all caps. . . . ” Id. Expressions such as “as is” or “with all faults” are approved by statute as language of exclusion. 13 Pa C.S.A. § 2316(c)(1). After examining the final, executed bills of sale . . . under the standards set forth above, the Court finds the disclaimer to be valid under either the laws of Pennsylvania or Alberta. There is no conflict, and hence no need for a conflict of laws analysis. Hammersmith, 480 F.3d at 230.

Question 2.10 Was there any need for the court to consider either Pennsylvania or Alberta law?

PROBLEM 2.11 Seller, a US company, agrees to sell goods to Buyer, a Polish company. Seller later agrees to accept a reduced price. When Buyer pays the reduced price, Seller claims

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the originally agreed full price, arguing that the modiication to the contract was invalid because Buyer gave no consideration for Seller’s promise to accept a lower price. Look at CISG article 29(1); see also article 11. Should the court apply the US common law doctrine of consideration to determine the validity of the modiied agreement? Is the presence or absence of consideration a validity question for purposes of CISG article 4(a)? Does consideration matter even under US law? See UCC § 2-209(1).

3. Preemption and Domestic/National Law Claims Not Based on Contract In the United States, the general question of “external gaps” is oten cast in terms of the constitutional language of preemption. If the CISG applies to a particular issue, it “preempts” the state law that would otherwise apply. If the CISG does not apply—that is, if there is what CISG theorists would call an “external gap”—there is room for the application of state law. he language of preemption is oten used when considering whether a claim based on tort law or statute is precluded by the CISG or whether it falls within one of the “external gaps.” he next case illustrates.

Electrocraft Arkansas, Inc. v. Super Electric Motors Ltd. United States District Court for the Eastern District of Arkansas, Dec. 23, 2009 No. 4:09cv00318 SWW, 2009 WL 5181854 [Plaintiff Electrocraft Arkansas, based in Arkansas, sued defendant Super Electric, based in Hong Kong, asserting several different claims in connection with allegedly defective refrigerator motors sold by defendant to plaintiff: (1) violation of provisions of the CISG; (2) violations of the UCC Art. 2; (3) breach of express warranty; (4) breach of implied warranty of merchantability; (5) negligence/strict liability; (6) violations of the Arkansas Deceptive Trade Practices Act (ADTPA); (7) tortious interference with business expectancy; (8) unjust enrichment and restitution. Defendant counterclaimed under the CISG.7 Defendant moved to dismiss plaintiff’s claims.] Before WriGht, District Judge: ... Super Electric argues that even if a claim under the CISG has been stated, the CISG preempts Electrocraft’s state law causes of action. Certainly, as a treaty to which the United States is a signatory, the CISG is federal law; thus, under the Supremacy Clause, it preempts inconsistent provisions of state law where it applies. The issue is one of scope. State law causes of action that fall within the scope of federal law are preempted. Conversely, state law causes of action that fall outside the scope of federal law will not be preempted. Thus, the CISG preempts Electrocraft’s state law claims only if such claims fall within the scope of the CISG. Cf. Asante Technologies, Inc. v. PMC-Sierra, Inc., [7]. Both parties proceeded on the basis that the CISG applied. Although the court at first expressed some doubts, stating that there was a “real possibility” that the CISG was not the governing law because defendant was based in Hong Kong, it later held that the CISG did apply. See Electrocraft Arkansas, Inc. v. Super Electric Motors Ltd., No. 4:09cv00318 SWW, 2010 WL 3307461 (E.D. Ark. 2010). See supra Section II.A.2 for a consideration of the special status of Hong Kong and Macau.

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164 F. Supp. 2d 1142, 1151–52 (N.D. Cal. 2001) (the CISG preempted state law contract claim); Miami Valley Paper, LLC v. Lebbing Engineering & Consulting GmbH, No. 1:05-CV00702, 2006 WL 2924779, at *3 (S.D. Ohio Oct.10, 2006) (the CISG did not prevent plaintiff from pleading negligent misrepresentation and fraudulent inducement). [Electrocraft’s claims based on the Arkansas UCC were included only as a fall-back position in case the Court held that the CISG did not govern because Hong Kong does not qualify as a Contracting State. Because the Court found (at least in this opinion) that the CISG did govern the contract, Electrocraft conceded that its UCC claims were preempted.] ... Whether Electrocraft’s negligence/strict liability claim in count four of the complaint falls within the scope of the CISG and is preempted presents a more difficult question given the relationship of tort and contract and their respective remedies. The CISG is exclusively concerned with the contractual relationship between the seller and the buyer. Ingeborg Schwenzer, Pascal Hachem, The CISG-Successes and Pitfalls, 57 Am. J. Comp. L. 457, 470 (2009). However, under most legal systems the mere existence of contractual remedies does not preclude a party from relying on other remedies, particularly those based on tort. Id. In this respect, “[l]iability based on breach of an international sales contract falling under CISG may ‘collide’ or ‘concur’ with liability based on domestic tort law rules.” Schlechtriem, The Borderland of Tort and Contract: Opening a New Frontier?, 21 Cornell Int’l L.J. at 467. Commentators differ on the preemptive effect of the CISG on tort remedies. For example, one pair of commentators argue that “[i]f one seeks to achieve the greatest level of uniformity, it cannot be left to individual states to apply their domestic laws, whether contractual or based on tort” and that the need to promote uniformity as it is laid down in CISG Article 7(1) thus requires that “the CISG displaces any domestic rules if the facts that invoke such rules are the same that invoke the Convention.” Schwenzer, Hachem, The CISG-Successes and Pitfalls, 57 Am. J. Comp. L. at 471. “In other words, wherever concurring domestic remedies are only concerned with the non-conformity of the goods—such as negligence in delivering non-conforming goods, negligent misrepresentation of their qualities, or mistake as to their substance—such remedies must be pre-empted by the CISG.” Id. Another commentator argues that contractual and delictual remedies have coexisted in many jurisdictions for centuries, and a given State’s ratification of the sales Convention does not imply its intention to merge contract with tort. Joseph Lookofsky, In Dubio Pro Conventione? Some Thoughts About Opt-Outs, Computer Programs, and Preemption Under the 1980 Vienna Sales Convention (CISG), 13 Duke J. Comp. & Int’l L. 263, 286 (2003). It is argued that “[t]he possibility that some domestic rules might be allowed to compete with (also applicable) CISG rules represents little threat to the global goal of achieving a uniform Convention interpretation, and the application of domestic rules should not be preempted simply because the operative facts of a given case seem ‘covered’ by a given CISG rule.” Id. at 288. Despite differing viewpoints concerning the preemptive effect of the CISG on tort remedies, there is agreement that concurring state contractual claims are preempted by the CISG. Ingeborg Schwenzer, Buyers’ Remedies in the Case of Non-Conforming Goods: Some Problems in a Core Area of the CISG, 101 Am. Soc’y Int’l L. Proc. 416, 421 (2007). See also Forestal Guarani, S.A. v. Daros International, Inc., Civil Action No. 03-4821(JAG), 2008

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WL 4560701, at *2 n. 4 (D.N.J. Oct. 8, 2008) (the CISG, a treaty of the United States, preempts state contract law and common law, to the extent those causes of action fall within the scope of the CISG). Thus, a tort that is in essence a contract claim and does not involve interests existing independently of contractual obligations (such as goods that cause bodily injury) will fall within the scope of the CISG regardless of the label given to the claim, see Schlechtriem, The Borderland of Tort and Contract: Opening a New Frontier?, 21 Cornell Int’l L.J. at 473, and therefore not require a determination concerning the preemptive effect of the CISG on tort remedies. See also Geneva Pharmaceuticals Tech. Corp. v. Barr Labs., Inc., 201 F. Supp. 2d 236, 286 n. 30 (S.D.N.Y. 2002) (“Just because a party labels a cause of action a ‘tort’ does not mean that it is automatically not pre-empted by the CISG. A tort that is actually a contract claim, or that bridges the gap between contract and tort law may very well be pre-empted”) (citing Schlechtriem, The Borderland of Tort and Contract: Opening a New Frontier?, 21 Cornell Int’l L.J. at 474), aff’d in part, rev’d in part on other grounds, 386 F.3d 485 (2d Cir. 2004). The question for this Court, then, is whether Electrocraft’s negligence/strict liability claim is, as argued by Super Electric, “actually . . . a breach-of-contract claim in masquerade.” The difference between an action in contract and one in tort is not always exact. Bankston v. Pulaski County School Dist., 281 Ark. 476, 479, 665 S.W.2d 859, 862 (1984). “[W]hether an action is based on contract or tort depends on the right sued upon, not the form of the pleading or relief demanded.” Curry v. Thornsberry, 81 Ark. App. 112, 121, 98 S.W.3d 477, 483 (2003). “If based on breach of promise it is contractual; if based on breach of a non-contractual duty it is tortious.” Id. Damages prayed for are a factor to consider in determining whether an action is in contract or tort. Bankston, 281 Ark. at 479, 665 S.W.2d at 862. The purpose of the law of contract is to see that promises are performed, whereas the law of torts provides redress for various injuries. Id. Owing to that distinction, the measure of damages in contract cases differs from that in tort cases. Id. In tort cases, the purposes of the law is to compensate the plaintiff for the injury inflicted even though it may have been unexpected, but in contract cases the special damages must have been in contemplation of the parties when the agreement was made. Id. The Court has considered the matter and determines that Electrocraft’s negligence/ strict liability claim is based on contract. As previously noted, Electrocraft “concedes that its breach of contract and warranty claims are rooted in the CISG,” and “it further concedes that its negligence [and, necessarily, strict liability] claim is based on the same factual allegations: that [Super Electric] had a duty to provide conforming goods to Electrocraft, it failed to do so and such failure caused Electrocraft to sustain damages.” But these are not allegations of wrongdoing that are extra-contractual or otherwise amount to a breach of a duty distinct from or in addition to the breach of contract claim at issue in this action. Rather, the obligation of the seller to deliver goods conforming to the contract and the interests of the buyer to use, consume, or to resell the goods purchased, and therefore to receive them conforming to the contract, as alleged by Electrocraft, are economic interests that are basically contractual and regulated by the CISG and its rules and remedies for international sales. Schlechtriem, The Borderland of Tort and Contract: Opening a New Frontier?, 21 Cornell Int’l L.J. at 473. In addition, Electrocraft seeks identical damages for its negligence/strict liability claim as it seeks for its breach of contract and warranty claims. It is clear, then, that Electrocraft’s negligence/ strict liability claim is based on breach of contract, not breach of a non-contractual duty,

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and Electrocraft’s negligence/strict liability claim in count four of the complaint is thus preempted by and subsumed within the CISG. Electrocraft may, however, assert, consistent with its complaint, all rights and remedies under the CISG, as may Super Electric. [The Court also dismissed Electrocraft’s unjust enrichment and restitution claims for reasons based on concessions by the parties.] ... The Court now turns to Super Electric’s argument that Electrocraft’s ADTPA claim in count five of the complaint is preempted by the CISG and must in any case be dismissed as that Act applies only to actions brought by consumers. The Court rejects both of these arguments. First, the Court finds that the matters for which the ADTPA provides redress do not fall within the scope of the CISG as the CISG does not preempt claims for “misrepresentation, fraud, betrayal and intentional harm to economic interests.” Schlechtriem, The Borderland of Tort and Contract: Opening a New Frontier?, 21 Cornell Int’l L.J. at 474. Accordingly, the CISG does not preempt Electrocraft’s ADTPA claim. The Court additionally finds that the ADTPA is not limited to actions brought by consumers. . . . Finally, Super Electric argues that Electrocraft’s tortious interference with business expectancy claim in count six of the complaint is preempted by the CISG and that Electrocraft in any case cannot plead facts to meet the elements of such a cause of action. The Court disagrees. First, being a tort claim alleging intentional harm to economic interests, the Court concludes that Electrocraft’s tortious interference with business expectancy claim is not preempted by the CISG, which only concerns the sales of goods between merchants in different countries. Viva Vino Import Corp. v. Farnese Vini S.r.I, No. CIV.A. 99-6384, 2000 WL 1224903, at *1 (E.D. Pa. Aug. 29, 2000) (CISG inapplicable to plaintiff’s claim of tortious interference with business relations). See also Schlechtriem, The Borderland of Tort and Contract: Opening a New Frontier?, 21 Cornell Int’l L.J. at 474 (CISG does not preempt claims for intentional harm to economic interests).

III. Contracting Out of the CISG CISG article 6 provides that the parties may exclude the application of the Convention or derogate from or vary the efect of any of its provisions. If the CISG would otherwise apply to the contract, the parties must clearly and unequivocally exclude its operation. A simple choice of governing law clause is insuicient, as the next case shows.

BP Oil International, Ltd. v. Empresa Estatal Petroleos de Ecuador United States Court of Appeals for the Fifth Circuit, 2003 332 F.3d 333 [BP Oil International Ltd (“BP”) agreed to sell Empresa Estatal Petroleos de Ecuador (“PetroEcuador”) 140,000 barrels of unleaded gasoline. The sale contract was governed by Ecuadorian law. PetroEcuador moved for summary judgment, relying on principles of Ecuadorian domestic law, which it proved by means of expert testimony. (The merits

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of the case are considered in greater detail in Chapter 5.) The district court accepted PetroEcuador’s argument and granted summary judgment for PetroEcuador. BP appealed.] Before smith and barksDale, Circuit Judges, and FitzWater, District Judge (sitting by designation) smith, Circuit Judge. ... The CISG, ratified by the Senate in 1986, creates a private right of action in federal court. Delchi Carrier v. Rotorex Corp., 71 F.3d 1024, 1027–28 (2d Cir. 1995). The treaty applies to “contracts of sale of goods between parties whose places of business are in different States . . . [w]hen the States are Contracting States.” CISG art. 1(1)(a). BP, an American corporation, and PetroEcuador, an Ecuadorian company, contracted for the sale of gasoline; the United States and Ecuador have ratified the CISG. As incorporated federal law, the CISG governs the dispute so long as the parties have not elected to exclude its application. CISG art. 6. PetroEcuador argues that the choice of law provision demonstrates the parties’ intent to apply Ecuadorian domestic law instead of the CISG. We disagree. A signatory’s assent to the CISG necessarily incorporates the treaty as part of that nation’s domestic law. BP’s expert witness as to Ecuadorian law, Xavier Rosales-Kuri, observed that “the following source of Ecuadorian law would be applicable to the present case: (i) United Nations Convention on the International Sale of Goods. . . . ” PetroEcuador’s expert did not disagree with this assessment. Given that the CISG is Ecuadorian law, a choice of law provision designating Ecuadorian law merely confirms that the treaty governs the transaction. Where parties seek to apply a signatory’s domestic law in lieu of the CISG, they must affirmatively opt-out of the CISG. In Asante Techs., Inc. v. PMC-Sierra, Inc., 164 F. Supp. 2d 1142, 1150 (N.D. Cal. 2001), the court held that a choice-of-law provision selecting British Columbia law did not, without more, “evince a clear intent to opt out of the CISG. . . . Defendant’s choice of applicable law adopts the law of British Columbia, and it is undisputed that the CISG is the law of British Columbia.”8

Question 2.12 What words would have been efective to exclude the application of the CISG to the contract between BP and PetroEcuador? CISG article 6 allows the parties to exclude the application of the Convention altogether or to “derogate from or vary the efect of any of its provisions.” he parties’ contract may “derogate from” the provisions of the Convention simply by agreeing on something different from, and inconsistent with, the provisions of the Convention.

[8]. See also Ajax Tool Works, Inc. v. Can-Eng Mfg. Ltd., 2003 WL 223187, 2003 U.S. Dist. LEXIS 1306, at *8 (N.D. Ill. Jan. 30, 2003) (“The parties’ contract states that the ‘agreement shall be governed by the laws of the Province of Ontario, Canada.’ Obviously, this clause does not exclude the CISG.”); St. Paul Guardian Ins., 2002 WL 465312, at *2, 2002 U.S. Dist. LEXIS 5096, at *8 (stating that the CISG applies “[w]here parties, as here, designate a choice of law clause in their contract-selecting the law of a Contracting State without expressly excluding application of the CISG. . . . To hold otherwise would undermine the objectives of the Convention which Germany has agreed to uphold.”).

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For example, CISG, Part III, Chapter IV contains provisions dealing with “Passing of Risk.” In Chapter 1, we saw that Incoterms are a set of deinitions of standard trading terms published by the International Chamber of Commerce (the ICC). As we will see in more detail in Chapter 5, each one of the Incoterms contains provisions about the passing of risk. As a result, if the contract uses one of the trade terms deined in Incoterms, the parties have made an agreement on where and how risk will pass from the seller to the buyer. he parties have to that extent “derogate[d] from” the provisions of the CISG by agreeing to something diferent from what appears in Chapter IV. A court should then apply the CISG except Chapter IV, because the passing of risk is governed by the parties’ agreement, not by the CISG, which gives way on that issue by operation of CISG article 6: see, e.g., BP Oil Int’l Ltd. v. Empresa Estatal Petroleos de Ecuador, 332 F.3d 333 (5th Cir. 2003), the relevant part of which is reproduced in Chapter 5. In other words, the CISG provides default or “gap-illing” rules that govern only when the parties’ contract is silent on an issue dealt with by the Convention. (“he CISG is a ‘default’ sales law regime”). It is also important to remember that the CISG does not ill all of the gaps let by the parties’ contract. It, too, leaves gaps that must be illed by domestic national law, as we saw above in Section II.D.1. hus the hierarchy in relation to the parties’ contract is as follows: • irst, the terms of the agreement between the parties; • second, the terms of the CISG, which ill the gaps let by the parties’ agreement; • third (at least in theory or in civil law jurisdictions), the general principles on which the CISG is based, which ill “internal gaps” of matters governed by, but not expressly settled in, the CISG: see CISG art. 7(2); • fourth, the rules of the national law chosen by the forum’s choice of law rules, which ill “internal gaps” if there are no applicable general principles: see CISG art. 7(2). his is the hierarchy of norms afecting the parties’ contract. Remember that claims based on tort or local statute may fall outside the scope of the contract (and thus the CISG) altogether.

IV. Application of the UCC to International Sales If one of the parties to a contract for the sale of goods has its place of business in the United States and the other has its place of business in a country that is not party to the CISG, the CISG does not govern the contract, so far as US law is concerned, because CISG article 1(1) (a) is not satisied. A court in the United States would apply the choice of law rule in UCC § 1-301(a) to determine the governing law. hat paragraph provides that when a sales transaction bears a “reasonable relation” to another state or nation, the parties may agree “that the law either of this state or of such other state or nation shall govern their rights and duties.” hat would mean that the parties could choose either the law of the relevant American state or the law of the other country as the governing law of their contract.

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Where the parties have not agreed on a governing law, UCC § 1-301(b) provides that the UCC governs transactions “bearing an appropriate relation” to the enacting state. hus, the question is whether the presence of one of the parties in the enacting US state is enough to constitute “an appropriate relation” to that state.

MWL Brasil Rodas & Eixos Ltda v. K-IV Enterprises LLC United States District Court for the Southern District of New York, 2009 661 F. Supp. 2d 419 [Plaintiff (MWL), a Brazilian manufacturer of train wheels, sued defendant (K-IV), its exclusive distributor for the United States. The exclusive distribution agreement was governed by Brazilian law. Individual sales pursuant to the agreement were made under purchase orders sent from K-IV to MWL. (Remember the distinction considered in Section II.B.5 between the “framework contract” and the individual sales pursuant to it.) MWL claimed that, in violation of UCC § 2-709(1), K-IV had not paid for wheels that had been delivered to K-IV and on-sold by K-IV to its customer, the New York City Transit Authority (NYCTA).] Before marrero, District Judge: ... K-IV asserts that the Complaint fails to state a claim under NYUCC § 2-709(1)(a) because the transaction the claim is based upon is not a New York transaction. NYUCC § 2-102 (McKinney’s 2001). K-IV argues that MWL is trying to “piggyback” its sale to K-IV onto the later sale of the wheels by K-IV to NYCTA. K-IV claims that the application of the NYUCC to the transaction must be based on the parties’ dealings with one another and not with third parties. The NYUCC states that in “transaction[s] [that] bear a reasonable relation to [New York] and also to another state or nation,” parties may agree that the law of New York or of that other state or nation will apply. NYUCC § 1-105(1). “Failing such agreement this Act applies to transactions bearing an appropriate relation to this state.” Id. The question of what constitutes an appropriate relation to New York “is left to judicial decision.” Id. (Official Comment ¶ 3). “Federal courts interpreting this phrase in New York and other states have taken into account the residences of the parties, the locations of the negotiations, the place of purchase of the goods, and the physical location of the goods at issue.” Zhong Ya Chem. (USA) Ltd. v. Industrial Chem. Trading, Inc., No. 99 Civ. 12174, 2001 WL 69438, at *3 (S.D.N.Y. Jan. 26, 2001) (citing Hadar v. Concordia Yacht Builders, Inc., No. 92 Civ. 3768, 1995 WL 301752, at *8 (S.D.N.Y. Apr. 13, 1995)). MWL’s NYUCC claims are based on the purchase orders and not on the Sales Agreement. The purchase orders do not have a choice-of-law provision, and therefore the inquiry is whether the transaction between MWL and K-IV had an “appropriate relation” to New York such that the NYUCC applies. The goods at issue were ordered and produced for NYCTA. They were delivered to New York and were presumably used on New York City subway cars. The parties both participated in negotiations with NYCTA in New York. Therefore, the Court finds that the transaction bears an appropriate relation to New York and that MWL has stated a claim under the NYUCC.

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If K-IV were to have sued MWL in Brazil, perhaps alleging some defect in the train wheels, the Brazilian court would have applied its own choice of law rules to determine the law governing the contract. Brazilian courts tend to apply Brazilian law to cases of international contracts, even when there is a foreign choice of law clause in the contract, so it is very unlikely that a Brazilian court considering this case would have applied the UCC to the K-IV/MWL sale contracts, even if the purchase orders expressly selected New York’s UCC.9 (Note, however, that as of April 1, 2014, Brazil will be a Contracting State to the CISG, which would now mean that both US courts and Brazilian courts would be required to apply the CISG if the facts of this case were to occur again.) his is an example of the homeward trend mentioned earlier and illustrates the point made in the Introduction to this chapter, that the choice of governing law may depend on the forum making the choice. hat is, of course, one of the very reasons for wanting international uniformity of the kind the CISG is designed to produce. It is also a reason to include a forum selection clause in the contract, as will be discussed below. If the seller of the train wheels had been British, not Brazilian, the CISG would still not apply, because the United Kingdom is not party to the CISG. A court in the United Kingdom would have to apply the choice of law rule in EC Regulation No. 593/2008 on the Law Applicable to Contractual Obligations (known as the Rome I Regulation because it succeeds the Rome Convention of 1980). Where the parties have not chosen the governing law of their contract, the Rome I Regulation article 4(1)(a) provides that the governing law shall be the law of the country where the seller has its habitual residence. hus, a UK court would apply English sales law if the seller were British and the UCC if the seller were American. As the extract from the MWL case indicates, a US court would probably apply the UCC in either situation.

V. Neutral hird Country Law he parties to an international sale contract may choose to have their contract governed by the law of a third country, in which neither of them lives or operates, because that third country’s laws are regarded as fair, well developed and evenly balanced between buyer and seller. English law is oten chosen for this reason and oten indirectly, by the parties’ decision to use a standard form contract that provides for English law. For example, standard form contracts prepared by the Grain and Feed Trade Association (GAFTA) are oten used for international sales of grain, and similar standard form contracts prepared by the Federation of Oils, Seeds and Fats Associations Ltd (FOSFA) are oten used for the international sales of legumes, groundnuts, and vegetable and mineral oils. hese contracts, widely used in the international trade in these commodities, all provide that they are governed by English law, that dispute resolution shall be by arbitration under the relevant organization’s rules, and, speciically,

9. See Dana Stringer, Note, Choice of Law and Choice of Forum in Brazilian International Commercial Contracts: Party Autonomy, International Jurisdiction, and the Emerging hird Way, 44 Colum. J. Transnat’l L. 959 (2006); Ingeborg Schwenzer & Pascal Hachem, he CISG—Successes and Pitfalls, 57 Am. J. Comp. L. 457, 464 (2009).

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that the CISG does not apply to the contract. See, e.g., GAFTA Contract No. 100, cls. 26, 27, 28(b) (CIF terms bulk grain); GAFTA Contract No. 119, cls. 25, 26, 27(b) (FOB terms bag or bulk grain): FOSFA Contract No. 24, cls. 26, 27(b), 28 (CIF terms US soyabeans); FOSFA Contract No. 53, cls. 27, 28(b), 29 (FOB terms bulk vegetable and mineral oil), reproduced in Michael Bridge, The International Sale of Goods, Appendices 1–4 (2d ed. 2007).10 If a US seller and an Iraqi buyer were to agree that their contract for the sale of wheat should be governed by one of the GAFTA standard form contracts, they would simultaneously be contracting out of the CISG, which would otherwise apply to the contract by operation of CISG article 1(1)(a), and into English law. Technically, one might question whether it would be permissible for them to contract for English law, given the terms of UCC § 1-301(a), which provide that the parties may only choose the law of a country having a “reasonable relation” to the contract. A sale of wheat from the United States to Iraq has no relation at all to the United Kingdom except for the parties’ choice of English law. When Revised UCC § 1-301 was irst promulgated by the American Law Institute (ALI) in 2001, it attempted to give commercial (i.e., non-consumer) parties greater autonomy in their choice of law by allowing them to choose the law of any state or nation, regardless of connection to the contract, subject only to a narrow exception where the parties’ choice would contravene a fundamental policy of the jurisdiction whose law would otherwise apply. his efort was a resounding failure. None of the states that adopted Revised UCC Article 1 adopted the expanded choice of law provision in Revised UCC § 1-301. See Jack M. Graves, Party Autonomy in Choice of Commercial Law: he Failure of Revised UCC § 1-301 and a Proposal for Broader Reform, 36 Seton Hall L. Rev. 59 (2005). he ALI conceded defeat in 2008, promulgating an amended version of Revised UCC § 1-301 that was efectively identical to Former UCC § 1-105(1), with the result that the requirement of “reasonable relation” persists.11 Nevertheless, the choice of English law in our sample contract for the sale of wheat to Iraq would probably be efective. Apart from anything else, if either party were to sue on the contract in a US court seeking to rely on the UCC or the CISG, the action would probably be stayed because of the arbitration agreement in the contract. he Federal Arbitration Act requires the court to stay any proceeding brought in violation of an arbitration agreement. 9 U.S.C. §§ 3, 206. Even if the US court were to hear the case, it would be possible to argue that English law bears a “reasonable relation” to the contract simply because it is so commonly

10. here is a similar North American standard form for grain sales, the NAEGA II Contract, produced by the North American Export Grain Association, Inc. It is available at NAEGA II Contract, North American Export Grain Association, Inc., http://www.naega.org/images/naegacontract.pdf (last visited Feb. 26, 2014). he NAEGA II Contract excludes the operation of the CISG (see cl. 27(b)) and provides that it is governed by the laws of the State of New York (see cl. 28), which would be New York’s version of the UCC. Both the NAEGA II and the GAFTA forms are used for the export of wheat from the United States. See How to Buy, US Wheat Associates, http://www.uswheat.org/howToBuy (last visited Feb 26, 2014). 11. In some states, the provision is still numbered § 1-105. See, e.g., N.Y. UCC § 1-105 (McKinney, 2001). In others, it is now numbered § 1-301 because of the reordering of Revised UCC Art. 1. See, e.g., Okla. Stat. Ann. tit. 12A, § 1-301. Despite the diferent numbers, those provisions are efectively identical. Only the US Virgin Islands have adopted the 2001 version of Revised UCC § 1-301. See V.I. Code Ann. tit. 11A, § 1-301.

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used in the international trade in wheat. Oicial Comment 1 to Revised UCC § 1-301 states, rather cryptically: Ordinarily the law chosen must be that of a jurisdiction where a signiicant enough portion of the making or performance of the contract is to occur or occurs. But an agreement as to choice of law may sometimes take efect as a shorthand expression of the intent of the parties as to matters governed by their agreement, even though the transaction has no signiicant contact with the jurisdiction chosen.

Problem 2.13 (a) A buyer in the United States and a seller in China insert the following clause in their contract: “his contract shall be governed by the Unidroit Principles (2004) and not by the CISG.” What law governs their contract if suit is brought in the United States? See UCC § 1-301 and recall the discussion in the introductory text at the beginning of the chapter. Consider also CISG articles 1(1)(a) and 6. (b) Suppose instead that the contract said, “his contract shall be governed by the law of England.” If suit is brought in the United States, what arguments would you expect the parties to make, assuming that one would prefer the UCC, or alternatively the CISG, while the other would prefer Chinese law, or alternatively, English law? Who should win and why? (c) Suppose now that the contract said, “his contract shall be governed by the law of New York without regard to the CISG. All disputes arising out of or in any way relating to or touching upon this contract shall be litigated in a court of competent jurisdiction in the State and County of New York and the parties hereby consent to the jurisdiction of such a court.” he buyer is located in Gary, Indiana, and the seller is, as before, in China. he contract is for the sale of hot-rolled steel loor plate. he price is $2.5 million, although the dispute is only about a $150,000 underpayment. Consider the following statutes: he parties to any contract, agreement or undertaking, contingent or otherwise, in consideration of, or relating to any obligation arising out of a transaction covering in the aggregate not less than two hundred ity thousand dollars, including a transaction otherwise covered by subsection one of section 1-105 of the uniform commercial code [now number § 1-301 in many states, as noted above], may agree that the law of this state shall govern their rights and duties in whole or in part, whether or not such contract, agreement or undertaking bears a reasonable relation to this state. his section shall not apply to any contract, agreement or undertaking (a) for labor or personal services, (b) relating to any transaction for personal, family or household services . . . . N.Y. Gen. Oblig. § 5-1401.1. Notwithstanding any act which limits or afects the right of a person to maintain an action or proceeding . . ., any person may maintain an action or proceeding against

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a foreign corporation, non-resident, or foreign state where the action or proceeding arises out of or relates to any contract, agreement or undertaking for which a choice of New York law has been made in whole or in part pursuant to section 5-1401 and which (a) is a contract, agreement or undertaking, contingent or otherwise, in consideration of, or relating to any obligation arising out of a transaction covering in the aggregate, not less than one million dollars, and (b) which contains a provision or provisions whereby such foreign corporation or non-resident agrees to submit to the jurisdiction of the courts of this state. Id. § 1402.1. (d) What if the contract did not contain the second sentence above (i.e., included the New York choice of law but not the New York choice of forum)? As we have now seen several times, a choice of forum clause can be a crucial adjunct to a choice of law clause. If the case is brought in a forum whose law does not respect the choice of law clause, then the choice of law has done no good. In some cases, particularly given the current US rule in UCC § 1-301, choosing a forum outside the United States may be necessary to give full efect to a choice of law clause. Alternatively, the parties may need to choose a US jurisdiction like New York where a special statutory exception may take the transaction out of the usual constraints of the UCC. Also, as mentioned before the problem, an arbitration clause may serve the same function. A choice of forum clause or an arbitration clause has its own purposes, aside from its use as an adjunct to a choice of law. Parties may well prefer a particular forum for reasons of reputation and trust or convenience and comfort. London is popular for this reason, particularly for Anglophones. Paris and Geneva are other popular options. Or the parties may prefer conidentiality or other attributes unique to arbitration. hese are all matters worthy of consideration, planning, and drating. Ordinarily, the questions of what law will govern and what tribunal will resolve a dispute are, and should be, considered together.

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Negotiation, Formation, Terms, and Interpretation I. Introduction Many legal ideas are rolled into this chapter because they all spring from a single set of facts:  the negotiation and making of the contract for sale. he ideas are separate juristically—whether there is a contract, what the terms of the contract are, how those terms can be understood by a tribunal, and whether liability attaches to conduct that occurred before the making of the contract. All of these issues are governed by diferent doctrines and have diverse consequences. Yet we treat them together because they are uniied by the one set of facts that, when the law is applied, implicates these various doctrines and generates these various results. Let us take each idea individually irst. he terms are simply the elements that together make up the contract. he contract is the parties’ agreement, assuming that their agreement is something the law recognizes as binding. Whether the law will do so is one of the topics that is addressed in this chapter; as we will see, pretty much all contracts are agreements, but not all agreements are contracts. Formation may refer to the process of making the contract, or formation may refer to the point (instead of the process) when the parties reach a binding contract. You can perhaps see now that an agreement is a matter of fact: a lay fact-inder could decide whether the parties agreed. Whether a contract exists is a matter of law, not fact: a contract is an agreement that the law recognizes as binding, so to say, “here is a contract,” is to state a legal conclusion because the law does not recognize all agreements as binding. In a surprising number of cases, the process of formation not only determines whether there is a contract but also what the contract is, including which terms are recognized by the law. Formation and terms, then, are intimately linked legally, as well as factually. Interpretation is simply discerning the meaning of the agreement, or more minutely, the terms of the agreement. Negotiation, of course, is the process that typically precedes and leads to the agreement, and thus to the contract and its terms. Sometimes the parties are found to have made mini-contracts or otherwise incurred liability to each other during the negotiation phase (e.g., in the common law world sometimes parties make a contract to negotiate with each other in good faith). When a party incurs such an obligation during the negotiation stage,

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it is oten called precontractual liability, although this term is not entirely accurate, as will be apparent shortly. We will proceed as chronologically as possible, beginning with the parties’ eforts to reach an agreement.

II. Negotiation Of course not all contracts are negotiated, so these issues will not always arise. hey come up oten, however, and the negotiated contract is the paradigm on which the law has been built. he paradigm goes something like this, as a common law practitioner might relate it: the parties negotiate, and if they are successful, at some point there is a contract. By deinition “preliminary negotiations,” to use the phrase of Restatement (Second) of Contracts § 26 (1981), are not contractual: they do not generate any contractual liability. he moment a contract is formed, preliminary negotiations are over. At the point of contract formation, the parties become legally obligated to each other; before that point, they have no more duties to each other than to anyone else in the world. Further, as will be discussed below with respect to merger clauses and the parol evidence rule, many written agreements seek to make the negotiations irrelevant to decisions about what the agreement is and what it means, since the negotiations preceded the written contract, and the parties want to be free to explore, push, and prod, without fear of liability for what they do or say during negotiations. Negotiation, then, is typically (which is not to say always) an entirely diferent sphere from the contract itself. his legal border has great importance, even though the border might not be apparent to the parties on the ground. Its importance relects the adversarial conception of the parties and the aleatory view of negotiations, as Lord Ackner observed (not without controversy) in the English House of Lords as recently as 1992.1 Or as US judges and scholars sometimes put it, negotiations would be “chilled” if the parties had to be on their guard during negotiations lest they be held to an obligation they were only considering and in the end did not want. hey should be able to talk and test without fear: he policy is to encourage freewheeling negotiation to discover potentially beneicial economic relations, and these explorations would be constrained or dampened (“chilled”), perhaps even prevented, if the parties had to be concerned about being held liable when they were only exploring possibilities. his chilling efect, the policy holds, would lead to fewer beneicial deals being discovered because the parties could not range so freely in their talks. he common law thus keeps negotiations free from liability, which attaches only at the point of contract formation. (his is an oversimpliication, as you will see soon, but it is not a bad starting point.) Civil law traditions are diferent and relect a diferent moral attitude and legal culture, which are important to keep in mind when making and understanding international contracts. Although the common law systems generally recognize no duty to negotiate in good faith—unless the parties contract themselves into such a duty—the civil law systems do. his might be put in terms of an obligation of good faith or, perhaps more traditionally, a negative obligation not to abuse the right to break of negotiations. he doctrine is oten called by its French name, abus de droit. he abuse of a right leading to liability may seem almost 1. Walford v. Miles, [1992] 2 A.C. (H.L.) 128, 138.

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nonsensical to a common lawyer, as a right denotes the power to take an action without liability for doing so. he French lawyer, though, may see the action as wrongful, that is, as a delict or tort. One may generally exercise rights, but not in a way that injures someone else. Surely the common lawyer must understand this, the French lawyer might think, perhaps referring to the classic Blackstone formulation sic utere tuo ut neminem laedas (rephrasing the civil law maxim unusquisque debet facere in suo quod non oiciat alieno)—one should use one’s own property without injuring others. his principle holds just as much for breaking of negotiations as for using land or driving on a public road. One has the right to do it, but not to injure someone else while doing so with fault. Similarly, German law has long recognized liability for fault in contracting, a doctrine known generally by its Latin name, culpa in contrahendo. In both France and Germany these doctrinal developments occurred outside the civil codes, pinned at most to abstract provisions in the codes (like good faith, Bürgerliches Gesetzbuch [BGB] § 242). he 2001 revision to the obligations articles of the BGB now includes culpa in contrahendo explicitly, though. he doctrine appears in BGB § 311, although the heart of the obligation is picked up from § 241(2), and § 242 should be noted too.

German Civil Code (BGB) Translations from Bundesministerium der Justiz (Langenscheidt Translation Serv. & Neil Musset, trans.) http://www.gesetze-im-internet.de/englisch_bgb/englisch_bgb. html#p0430 Section 241 Duties arising from an obligation ... (2) An obligation may also, depending on its contents, oblige each party to take account of the rights, legal interests and other interests of the other party.

Section 242 Performance in good faith The obligor has a duty to perform according to the requirements of good faith, taking customary practice into consideration.

Section 311 Obligations created by legal transaction and obligations similar to legal transactions (1) In order to create an obligation by legal transaction and to alter the contents of an obligation, a contract between the parties is necessary, unless otherwise provided by statute. (2) An obligation with duties under section 241(2) also comes into existence by 1. the commencement of contractual negotiations, 2. the initiation of a contract where one party, with regard to a potential contractual relationship, gives the other party the possibility of affecting his rights, legal interests and other interests, or entrusts these to him, or 3. similar business contacts. (3) An obligation with duties under section 241(2)  may also come into existence in relation to persons who are not themselves intended to be parties to the contract. Such

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an obligation comes into existence in particular if the third party, by laying claim to being given a particularly high degree of trust, substantially inluences the pre-contract negotiations or the entering into of the contract.

Likewise, some of the work on a new civil code for France included the obligation of good faith in negotiations quite speciically. Although this particular text comes from an early proposal for reform (now superseded in the revision efort), it can probably be taken as a fair representation of current law in France as understood by leading scholars and as enforced by the courts.

Avant-projet de réforme du droit des obligations et de la prescription by Pierre Cattala and colleagues, in RefoRming the fRenCh Law of obLigations (John Cartwright & Simon Whittaker, trans.; John Cartwright, Stefan Vogenauer & Simon Whittaker eds., 2009) Art. 1104 The parties are free to begin, continue and break off negotiations, but these must satisfy the requirements of good faith. A break-down in negotiations can give rise to liability only if it is attributable to the bad faith or fault of one of the parties. Art. 1104-1 The parties may, by an agreement in principle, undertake to negotiate at a later date a contract whose elements are still to be settled, and to work in good faith towards settling them. Art. 1104-2 The rules governing agreements which are intended to provide for the conduct or breaking-off of negotiations are subject to the provisions of this sub-title [on Contracts and Obligations Created by Agreement in General].

All of this means that when French or German law applies, liability can easily be attached to something that happens (or fails to happen) during the negotiation stage. In principle, this approach is startling, if not horrifying, to the common lawyer. As is oten true, however, common law is not so far of once a more than supericial understanding of the law is acquired. he basic principle against attaching liability to precontractual negotiations has been subject to serious inroads. A number of US cases will award limited damages to compensate for a disappointed party’s reliance, although not typically damages to enforce a bargain that was never reached. (he diference in damages can be signiicant: reliance damages reimburse expenses incurred, which is typically a much smaller amount than the value of the contract as a whole. French law is currently similar, according to recent case law.)2 his is not to say that the US

2. Cour de cassation [Cass.] [Supreme Court for Judicial Matters] com., Nov. 26, 2003 (Fr.), D 2004, 869 note A-S Dupré Dallemagne, JCP G 2004 I 163 obs G Viney; JCP E 2004, 738 obs Ph Stofel-Munck; RDC 2004, 257 obs D Mazeaud; RTD civ 2004, 80 obs J Mestre and B Fages, as is in accord with the even more recent decision of the third civil chamber of the Cour de cassation [Cass.] [Supreme Court for Judicial Matters] 3e civ, June 28, 2006 (Fr.), JCP 2006 II 10130 obs O Deshayes; D 2006, 2963 note D Mazeaud.

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approach is the same as the French and German, as it seems fair to say that precontractual liability is more the exception than the rule in US law, but the systems are closer than a irst glance might disclose. he following excerpts are, irst, the now-classic explanation of US law by the late great Professor Farnsworth, and then the more recent consideration of American law from scholars who are relatively skeptical about inding precontractual liability.

PRECONTRACTUAL LIABILITY AND PRELIMINARY AGREEMENTS: FAIR DEALING AND FAILED NEGOTIATIONS E. Allan Farnsworth 87 CoLum. L. Rev. 217, 219-222, 239-243 (1987) [I]f the negotiations fail and no documents are signed and exchanged, a number of questions may arise that the classic rules of offer and acceptance do not address: May a disappointed party have a claim against the other party for having failed to conform to a standard of fair dealing? If so, what is the meaning of fair dealing in this context? And may the disappointed party get restitution? Be reimbursed for out-of-pocket expenses? Recover for lost opportunities? As the paradigmatic deal has become larger and more complex, and the typical negotiation has become more complicated and prolonged, these questions have been reaching the courts in increasing numbers. Some observers have concluded that existing contract doctrines are not adequate to the task of protecting the parties. I argue that, on the contrary, those doctrines, imaginatively applied, are both all that are needed and all that are desirable. The resolution of disputes occasioned by the failure of negotiations depends in any particular case on the legal “regime” under which the parties ind themselves as they proceed through the negotiation process to ultimate agreement. In this Article, I identify and sketch the contours of four regimes and consider the requirement of fair dealing in each: the two polar regimes, negotiation and ultimate agreement, and the two intermediate regimes that may result from preliminary agreements, agreement with open terms and agreement to negotiate. The two polar regimes [are] negotiation and ultimate agreement . . . . Under the regime of negotiation, established bases of liability, if creatively used by litigants and liberally applied by courts, afford the parties suficient protection. The stunted development of these bases in connection with negotiations is not due to any shortcomings in the bases themselves, but rather to the failure of litigants to exploit them fully, including a failure to seek damages for lost opportunities in appropriate cases. And if negotiating parties choose to move quickly to the regime of ultimate agreement in order to avoid the risks to which they are exposed under the regime of negotiation, existing contract law, with its tolerance of conditions, goes far in honoring their choice. Parties who do not wish to rush to ultimate agreement are free instead to make a preliminary agreement to allocate the risks of their continuing negotiations. . . . I contend that existing contract law is fully capable of recognizing and enforcing such preliminary agreements [in particular agreements with open terms and agreements to negotiate], and that the refusal by some courts to enforce preliminary agreements to negotiate is not a justiiable restriction of party autonomy under existing contract law. [Later, the Article] discusses the content of the duty of fair dealing when it is imposed under an agreement to negotiate.

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A. Negotiation 1. The Traditional View: “Freedom of Negotiation.”—Courts have traditionally accorded parties the freedom to negotiate without risk of precontractual liability. Under the classic rules of offer and acceptance, there is no contractual liability until a contract is made by the acceptance of an offer; prior to acceptance, the offerer is free to back out by revoking the offer. This “freedom from contract” is enhanced by a judicial reluctance to read a proposal as an offer in the irst place. Furthermore, courts traditionally take a view of this precontractual period that relieves the parties of the risk of any liability, whether contractual or not, and that results in a broad “freedom of negotiation.” As a general rule, a party to precontractual negotiations may break them off without liability at any time and for any reason—a change of heart, a change of circumstances, a better deal—or for no reason at all. The only cost of doing so is the loss of that party’s own investment in the negotiations in terms of time, effort, and expense. At the root of this view of the precontractual period is what I call the common law’s “aleatory view” of negotiations: a party that enters negotiations in the hope of the gain that will result from ultimate agreement bears the risk of whatever loss results if the other party breaks off the negotiations. That loss includes out-of-pocket costs the disappointed party has incurred, any worsening of its situation, and any opportunities that it has lost as a result of the negotiations. All is hazarded on a successful outcome of the negotiations; all is lost on failure. As an English judge expressed it, “he undertakes this work as a gamble, and its cost is part of the overhead expenses of his business which he hopes will be met out of the proits of such contracts as are made. . . . ”3 This aleatory view of negotiations rests upon a concern that limiting the freedom of negotiation might discourage parties from entering negotiations. If the negotiations succeed and result in ultimate agreement, a party that has behaved improperly can be deprived of the bargain on the ground of misrepresentation, duress, undue inluence, or unconscionability. But if the negotiations fail because of similar behavior, courts traditionally have been reluctant to impose precontractual liability. Although a duty of fair dealing is now generally imposed on the parties to a contract, that duty is not formulated so as to extend to precontractual negotiations. The past several decades, however, have seen inroads into this traditional freedom of negotiation. ... In recent decades, courts have shown increasing willingness to impose precontractual liability. I shall group the possible grounds under four headings. The irst three, unjust enrichment resulting from the negotiations, misrepresentation made during the negotiations, and speciic promise during the negotiations, have been recognized by courts in the United States; the fourth, general obligation arising out of the negotiations themselves, has not. . . . ... 6. General Obligation as a Basis of Liability.—Some scholarly writers have generalized from the cases decided on the grounds of misrepresentation [a tort] and speciic promise [promissory estoppel] to argue that a general obligation of fair dealing may arise out of

[3]. William Lacey (Hounslow) Ltd. v. Davis, [1957] 1 W.L.R. 932, 934 (Q.B.).

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the negotiations themselves, at least if the disappointed party has been led to believe that success is in prospect. . . . American courts, however, have been unreceptive to these arguments and have declined to ind a general obligation that would preclude a party from breaking off negotiations, even when success was in prospect.4 Their reluctance to do so is supported by the formulation of a general duty of good faith and fair dealing in both the Uniform Commercial Code and the Restatement (Second) of Contracts that, at least by negative implication, does not extend to negotiations.5 European courts have been more willing than American ones to accept scholarly proposals for precontractual liability based on a general obligation of fair dealing. But even in Europe it is dificult to ind cases that actually impose precontractual liability where an American court would clearly not do so on other grounds. . . . There is ample justiication for judicial reluctance to impose a general obligation of fair dealing on parties to precontractual negotiations. The common law’s aleatory view of negotiations well suits a society that does not regard itself as having an interest in the outcome of the negotiations. The negotiation of an ordinary contract differs in this way from the negotiation of a collective bargaining agreement [between a company and a labor union], in which society sees itself as having an interest in preventing labor strife. Although it is in society’s interest to provide a regime under which the parties are free to negotiate ordinary contracts, the outcome of any particular negotiation is a matter of indifference. There is no reason to believe that imposition of a general obligation of fair dealing would improve the regime under which such negotiations take place. The dificulty of determining a point in the negotiations at which the obligation of fair dealing arises would create uncertainty. An obligation of fair dealing might have an undesirable chilling effect, discouraging parties from entering into negotiations if chances of success were slight. The obligation might also have an undesirable accelerating effect, increasing the pressure on parties to bring negotiations to a inal if hasty conclusion. With no clear advantages to counter these disadvantages there is little reason to abandon the present aleatory view. ...

PRECONTRACTUAL LIABILITY AND PRELIMINARY AGREEMENTS Alan Schwartz and Robert E. Scott 120 haRv. L. Rev. 661, 668 (2007) The conventional wisdom among contemporary scholars is that courts will sometimes impose liability for reliance investments undertaken before any agreement between the

[4]. But cf. Werner v. Xerox Corp. 732 F.2d 580, 582 (7th Cir. 1984) (afirming an award of damages in promissory estoppel action where representative of Xerox had “ ‘painted a rosy picture’ ” of plaintiff’s future as a supplier (quoting unreported district court opinion)). . . . [5]. U.C.C. § 1-203 (1978) (“obligation of good faith in . . . performance or enforcement”); Restatement (Second) of Contracts § 205 (1981) (“duty of good faith and fair dealing in . . . performance and enforcement”). There is no such negative implication as to liability based on either misrepresentation or speciic promise. See U.C.C. § 1-103; see also § 2-721 (“Remedies for material misrepresentation or fraud include all remedies available . . . for non-fraudulent breach.”).

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parties. Commentators identify as grounds for such enforcement the existence of unjust enrichment, misrepresentations made during negotiation, a speciic promise made and relied upon during the negotiation process, and a “general obligation arising out of the negotiations themselves.” But even a casual survey of contemporary case law casts signiicant doubt on the accuracy of this conventional view. Courts actually make some form of agreement a necessary condition to a promisee’s recovery. For courts, the real issues are when an agreement will be found and how the nature of the agreement will determine the type of damages a promisee can recover. Much of the confusion can be traced to the frequently taught case of Hoffman v. Red Owl Stores, Inc.6 . . . The court held as a matter of law that the parties never reached agreement on essential factors necessary to establish a contract. For example, they had not agreed on any of the details concerning Red Owl’s investment, such as the size, cost, design, and layout of the store, nor had the parties agreed on the terms of the lease, including rent, maintenance, renewal, and franchisee purchase options. . . . Nevertheless, the court permitted Hoffman to recover sunk costs based on the doctrine of promissory estoppel. The court held that under this doctrine, a promise—here Red Owl’s assurances that $18,000 was a suficient investment—need not be as deinite in its terms as a promise that is the basis of a traditional bargain contract. There is scant support in the law of contracts for this legal analysis. To the contrary, the Restatement of Contracts has only one deinition of a promise, and that deinition applies equally to a promise that is the product of a bargained-for exchange and a promise for which enforcement is sought on the grounds of induced reliance. Thus, if Hoffman stands for the proposition that a commitment can be binding under a theory of promissory estoppel even though it lacks the clarity and certainty required of a bargained-for promise, the case is wrong as a matter of doctrine. More importantly, it is an outlier: the case has not been followed in its own or other jurisdictions. . . . In order to evaluate systematically how contemporary American courts treat reliance investments made before the parties have written a complete contract, we analyzed a sample of 105 cases litigated between 1999 and 2003 that directly presented the issue of recovery for precontractual reliance. . . . The cases in our sample fell into four patterns, each of which produced a different legal outcome. Thirty cases raised the issue of reliance in the absence of any agreement by the parties regarding terms. These cases thus posed the question whether the plaintiff could recover reliance costs even though the parties had not reached any agreement. The courts did not ind liability, whether based on promissory estoppel or quantum meruit, in twenty-six, or approximately 87%, of the thirty preliminary negotiation cases. The case data thus show that, absent misrepresentation or deceit, there generally is no liability for inducing reliance investments during the negotiation process. In twenty-seven cases, the parties had agreed on some material terms, but the court nonetheless denied recovery for breach of contract because the parties had also indicated, either expressly or by implication, that they did not intend to be legally bound. Thirty-six cases turned on whether preliminary agreements were suficiently complete to be binding contracts, even though they contemplated a further memorialization, because the evidence showed that the formal writing may not have been essential. The courts treated these agreements as [6]. 133 N.W.2d 267 (Wis. 1965).

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fully binding contracts. Finally, and most interestingly, twelve cases turned on whether there was a preliminary agreement to negotiate further in good faith. In sum, the sample shows that courts consistently have denied recovery for precontractual reliance unless the parties, by agreeing on something signiicant, indicated their intention to be bound. The key issues thus involve reliance behavior that follows the conclusion of an agreement that is incomplete in some respects. Litigation results because the agreement does not represent the inal stage in the contracting process. . . .

Question 3.1 Given our statement that US law does not generally recognize a duty to negotiate in good faith, what is the meaning of Professors Schwartz and Scott’s assertion that some cases “turn[] on whether there was a preliminary agreement to negotiate further in good faith”?

Question 3.2 What is the diference, in real and practical terms (as opposed to theoretical ones) between precontractual liability in the common law and in the civil law? In what category or categories of cases will this diference most likely matter? When will it not matter? We have given more than passing attention to the question of precontractual liability in leading domestic legal systems because the CISG, like the (unrevised) French Civil Code, shines by its silence on the issue, to paraphrase one prominent French scholar.7 (Unlike the projet for reform quoted above, even a revised French Civil Code, if revision follows the current proposal, will remain quiet on this subject, relying on the obligation of good faith.) Most scholars believe that the CISG does not govern these matters, and that they are let to domestic law. It is a complex and controversial matter, however, as you will see from the next excerpt. A fair amount of complication is omitted from this excerpt—in particular, the debate about whether the gap on precontractual liability is an external gap or an internal gap, a question similar to the one we discuss in Chapter 2 with respect to the validity exception. Focus instead on the contest over good faith. he issue arises in a number of contexts. Precontractual liability is among the most important, but you will ind that we will return numerous times to the debate over good faith as classic issues, and particular compromises, come up throughout the succeeding chapters. Before starting the excerpt, take a moment and read CISG article 7(1), noting what it does—and does not—say.

OPENING PANDORA’S BOX: GOOD FAITH AND PRECONTRACTUAL LIABILITY IN THE CISG Lisa Spagnolo 21 temp. int’L & Comp. L.J. 261, 267–305 (2008) . . . Whether or not precontractual liability is governed by the CISG or domestic law is often linked to the history behind Article 7(1), which contains the CISG’s only reference to good faith.

7. Bénédicte Fauvarque-Cosson, Negotiation and Renegotiation: A French Perpsective, in Reforming the French Law of Obligations:  Comparative Reflections on the Avant-projet de réforme du droit des obligations et de la prescription (“The Avant-Projet Catala”) 33, 34 (John Cartwright et al., eds., 2009).

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II. Legislative History of Article 7 No convention possessing such wide acceptance across so many legal traditions could have been achieved without compromise. UNCITRAL was painfully aware of the failure of the CISG’s predecessors in attaining widespread acceptance; as a result, it established drafting committees comprised of representatives from various legal systems and geographic regions. This made broader acceptance of the end product more likely, but also made compromise much more dificult to achieve. Drafters sometimes dealt with this dificulty by excluding more controversial issues from the CISG’s scope. The clearest indication of this strategy is in the modest ield of CISG application found in Articles 1–6. The express exclusion of certain “hot potatoes,” such as property and validity under Article 4 and the numerous reservations made available to Contracting States, exemplify the drafters’ strategy. Good faith also became a lash point for disagreement. This was hardly surprising since, even today, the creation of a inal contract is considered a more dramatic legal event in common law than in civil law systems. Common law traditionally takes an aleatory view— parties generally enter negotiations at their own risk and bear any consequent losses. A different philosophy prevails in civil systems, where the focus is on the relationship between parties; consequentially, courts are more inclined to consider the parties legally bound at an earlier stage of the negotiation process. General principles of precontractual liability still generate suspicion in common law countries, relecting the absence of a general doctrine of good faith in bargaining. Although the starkness of this contrast has been ameliorated more recently by common law developments in estoppel and unjust enrichment, many of these developments were still in their infancy at the time that the CISG was drafted. Against this backdrop, the CISG debates approached the application of good faith in three stages.

A. Stage One Good faith irst appeared in the following form tabled at the eighth session of the Working Group: I. In the course of the formation of the contract the parties must observe the principles of fair dealing and act in good faith. [Conduct violating these principles is devoid of any legal protection.] II. The exclusion of liability for damage caused intentionally or with gross negligence is void. III. In case a party violates the duties of care customary in the preparation and formation of a contract of sale, the other party may claim compensation for the costs borne by it. During the ninth session, the second and third paragraphs were rejected. It was feared that the wider acceptability of the CISG would be jeopardized by the vagueness of these paragraphs as well as by the ban on exemption clauses, given that in the commercial arena merchants might agree to exemptions in exchange for price reductions. An amended version of the irst paragraph found the support of a slim majority and later became draft Article 5: “In the course of the formation of the contract the parties must observe the principles of fair dealing and act in good faith.”

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B. Stage Two What followed has been described as a “ierce counterattack.” At the eleventh session of the Commission in 1978, many argued for deleting any reference to good faith on grounds that it was too vague; that it would decrease uniformity by tempting reference to domestic good faith concepts; that it would increase uncertainty; and that it was implicit in all business laws and thus superluous. Some pointed to the lack of speciic sanctions and argued that it would be more appropriately included in a separate convention dealing with validity. Supporters argued that good faith was universally recognized as a fundamental principle of public international law—consequently omitting it might send the wrong signal to parties involved in international trade. Good faith, they argued, would afford lexibility by allowing courts to fashion individually-tailored sanctions, encourage high standards of behavior, and reduce discriminatory or undesirable trade practices. They further argued that the concept of good faith would be incrementally clariied through case law. Some supporters cautioned that the reference to “fair dealing” might elevate current international business practices to the status of law despite the perception that these were often unfair to developing countries. Thus, the reference was replaced with “international cooperation.” A Working Group was set up to ind a solution to the stalemate. It considered three compromises. Placement of good faith within the preamble was rejected as was its inclusion in a provision on interpretation of statements and conduct. Finally, in a move that led most involved to believe the “clause was dead,” the Working Group decided to include good faith as an interpretive concept. After minor amendments, the newly numbered draft Article 6 was adopted by the Commission in the following form: In the interpretation and application of the provisions of this Convention, regard is to be had to its international character and to the need to promote uniformity and the observance of good faith in international trade. This “uneasy compromise” is essentially the same as the eventual Article 7(1) of the CISG.

C. Stage Three The last ditch onslaught was at the 1980 Diplomatic Conference, convened by the U.N. General Assembly to work on the draft Convention. Canada proposed that good faith be made non-excludable unless the CISG itself was completely excluded. A proposal from Norway attempted to link good faith to contract interpretation rather than to interpretation of the CISG by moving it to draft Article 7(3), within the provision on the parties’ intent which ultimately became Article 8. Italy proposed a new article that would make good faith apply to formation, interpretation, and performance of the contract. An intriguing proposal was suggested by one of the co-founders of good faith within the CISG, the German Democratic Republic [the former East Germany], which sought the following form of precontractual liability: Where in the course of the preliminary negotiations or the formation of a contract a party fails in his duty to take reasonable care, the other party is entitled to claim compensation for his expenses.

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The failure of these proposals after only minor debate relected the feeling that the compromise had been “hard-won.” Reopening the “awkward,” “strange,” and even “mysterious” solution to the rift between common and civil law lawyers in the shape of Article 7(1) could potentially unravel the nascent CISG. It was better to keep such mischief shut tight within the Pandora’s box that was Article 7(1). Arguably, the compromise sought to contain the impact of good faith. Had either the third paragraph of the eighth session’s original proposal or the inal East German proposal succeeded, then the CISG would have contained express provisions imposing a substantive precontractual good faith obligation, including a duty to negotiate in good faith. Like Articles 1–6, however, a potentially larger scope for good faith was abandoned to ensure more widespread acceptability among participants. The end result is an apparent trade-off: a reduced area of formal uniformity for the sake of the ultimate success of the entire project. Arguably, a narrow scope for good faith is simply part of the historical bargain struck by Contracting States. How has this shaky compromise fared since the deal was done? Far from being dead, most authors favor an “expansive role for good faith.” Interestingly, when the good faith compromise in Article 7(1) was struck, a gap-illing provision had not yet been envisaged. Article 7(2) was only inserted during the latest stage of drafting. Perhaps this temporal mismatch has contributed to good faith’s phoenix-like quality. The revival, however, can largely be attributed to a phenomenon observed by Professor Eörsi—that the hard-won compromise on good faith has always masked continuing disagreement amongst drafters. With vague wording capable of multiple meanings, Article 7(1) was an attempt to please everyone with the result that this Pandora’s box gave the mere illusion of compromise. The nature of good faith in the CISG and the extent of its precontractual application therefore remained debatable.

III. The Role of Good Faith in the CISG A range of arguments claim that good faith in the CISG is: 1. 2. 3. 4. 5. 6.

an aid to interpreting the CISG itself; a general principle to assist in gap-illing; a direct, positive obligation imposed upon parties; a collective term denoting derivative general principles for gap-illing; a product of international usages or practices established by the parties; or an independent source of rights and obligations which may contradict or extend the CISG.

Of course, it should be noted that most of these arguments are not mutually exclusive, and supporters of one view will often support one or two of the others. The irst view is unanimously supported. Some writers, however, go further. Garnering support from the legislative history and a literal stance on the wording of Article 7(1), they conine good faith to this role alone, restricting it to an interpretive tool to be used only in cases of textual ambiguity. Ironically, this interpretation restricts a provision said to promote lexibility. Only a minority of commentators and cases support this restrictive take on the irst view.

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The second is the most widely accepted of the arguments. Drawn either from numerous provisions8 or less commonly from Article 7(1) itself, good faith is stated to be a general principle of the CISG, sometimes manifested in derivative principles such as reasonableness. This view argues that good faith can be used for gap-illing pursuant to Article 7(2) in addition to aiding interpretion, although these roles may overlap. . . . Diametrically opposed is the third view, which considers good faith to be a positive and substantive duty imposed directly on the parties by Article 7(1). Proponents argue conduct and contracts must be interpreted in accordance with good faith, either because the CISG forms an integral part of the contract or because Article 7(1) is addressed to parties as well as tribunals and courts. Critics point out that this is inconsistent with the rejection of legislative proposals to impose direct good faith obligations on the contracting parties. The fourth view argues that good faith is simply a collective term without real legal impact and is held by those who highlight the amorphous nature of good faith in a manner reminiscent of the legislative debates. They argue that at such high levels of abstraction, good faith has so many meanings that it becomes meaningless. Professors Michael Bridge, John Klein, and [Disa] Sim argue that more speciic principles derived from good faith—such as a duty to communicate, a duty to facilitate rather than frustrate performance, and estoppel—are better suited to both gap-illing and interpretation than a broader, vaguer, general principle of good faith. Sim concludes that CISG good faith is a convenient, non-legal, collective term for these principles and conines it to a mere theoretical “unifying thread.” The ifth view looks beyond Article 7 to the practices and usages of the international parties as potential sources of good faith duties. Admittedly, this view looks to the potential source of good faith rather than its role. If applicable, however, practices and usages not expressly excluded by the parties would impose overriding substantive duties directly upon the parties in accordance with Article 9(1) & (2); such duties could involve good faith notions. This bears some similarity to the third view, albeit the direct duties in each case are derived from different sources. Ultimately the argument draws little support. Sim concludes that Article 9 is an “unsafe” foundation for good faith obligations. The sixth view argues that good faith can act as an independent source of rights and obligations that may contradict or extend the CISG. This view could arguably arise from good faith as a gap-iller or more readily as a direct general obligation. Based on a supposed “common core” of domestic good faith, this approach has both supporters and detractors but receives only peripheral attention. In practice, good faith’s different roles within the CISG are not entirely clear. Good faith tends to cut across deined roles even in domestic settings; some argue that this is due to its inherently reductionist character. One theory suggests that civil law good faith, in truth, acts as a mask for the judge’s role in interpreting, supplementing, and correcting abstract rules that are not susceptible to short-term legislative alteration. Good faith has

[8]. See Secretariat Commentary on the 1978 Draft, C.7, U.N. Doc. A/CONF.97/5 (Mar. 14, 1979), reprinted in John o. honnolD, DoCumentary history oF the uniForm laW For international sales 408 (1989) (interpreting good faith to be a general principle present in articles throughout the draft Convention). The draft articles referred to by the Secretariat Commentary later became Articles 16(2)(b), 21(2), 29(2), 37, 38, 40, 49(2), 64(2), 82, and 85–88.

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allowed courts, faced with all-encompassing yet aging codes, to supplement or even override their texts and thereby create new law. Through rationalization and objectiication, good faith is said to make this process more palatable, particularly since civil tradition holds that courts do not create, but only apply the law. The manner in which good faith responds to “weak spots” in a rigid legal system has been likened to ius honorarium in Roman law and the early development of equity in England in response to the rigidities and dificulties in common law forms of action and procedure. In their domestic settings, good faith and equity can both act as mechanisms for law reform. At the very least, a number of observations can be made about the inability to irmly assign a particular view to CISG good faith. To the extent that good faith negatively qualiies any exercise of CISG rights, it necessarily overrides express provisions granting those rights. Many of those who take the irst or second view but reject direct duties of good faith still concede that positive obligations are at least indirectly imposed by good faith’s role in interpretation or gap-illing, since the outcome of these processes inevitably requires parties to act in good faith. Likewise, as has been previously pointed out, it is dificult to completely separate CISG interpretation from contractual interpretation. Thus, substantive obligations are likely to arise through even the most conservative views, albeit indirectly, and “the distinction . . . is likely to prove more apparent than real.” One can only conclude that the role of good faith in the CISG remains inconclusive at best. While the historically conservative position on good faith—as a strictly interpretive mechanism—no longer dominates, it remains open as to whether good faith can now reach into the precontractual period either through general principles or directly imposed obligations. ...

V. Methodology of Scholarship on CISG Precontractual Liability While opinion weighs against the idea that precontractual issues fall within the CISG’s scope, a minority believe otherwise. This is not surprising, given the historical illusion of compromise on good faith; the range of views on the role of good faith; and the underlying tensions inherent in the trade-offs within the “eficiency dilemma” between substantive and formal uniformity, historical idelity and evolutionary development, and ex ante eficiencies versus ex post fairness. ...

Question 3.3 Under the majority view, what law should a tribunal apply to a claim that a negotiating party violated the duty of good faith in negotiating a deal that never reached fruition? What about the minority view? Is there a duty to negotiate in good faith toward a contract for the international sale of goods? Does your answer change if the parties get far enough along that an ofer is made?

Question 3.4 Which view do you ind most convincing? Why? How would you make the trade-of between “ex ante eiciency” (i.e., making it easy and inexpensive for parties to know, ahead of time, what their liabilities will be—which tends to favor clear rules and to disfavor vague principles) and “ex post fairness” (i.e., the ability of tribunals to look at the facts

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aterward and devise a solution, perhaps based on very general principles like good faith, to reach a fair result)? Does it matter whether the case involves merchants or consumers? Does the compromise reached by the draters afect what the law is now?

Problem 3.5 Nick, a German environmental engineer who did part of his training in the United States, regularly attends a conference held each year in the United States where state oicials, activists, environmental cleanup irms, and similar folk meet to talk about the latest technology, laws, and regulations. Not coincidentally, representatives of equipment manufacturers attend too. Nick works for a company that makes machines that clean soil. he machines are very large (oten about 70 feet, although they vary), and they each cost several million euros. Nick meets Kim, someone he knew in college, at the conference. She works for Clean Solutions Corporation (CSC), a large irm that does environmental cleanup in the United States and Canada. She says that her irm is looking to buy a number of machines. CSC will probably buy about 15, she says, partly to replace existing equipment and partly to prepare for a project that CSC has just won from the state government in Michigan. Given the needs, Nick thinks the total price tag will wind up between €50 and €100 million. Kim says she will check on the details and get back to Nick. A week later, Kim e-mails speciications for three diferent kinds of soil remediation equipment, and she asks for a quote. he speciications do not entirely it with how Nick’s company (Schulenberg AG) conigures its machines. Nick replies by e-mail, notes the “slight mismatch,” and suggests that he ly to CSC headquarters in Detroit to work out speciications and prepare for a bid. “hat would be great,” Kim says, “but we need to do it soon. I’m not sure when this new project will need to start.” Nick is on a plane the next day. It is a long trip to Detroit, but not too long, and it is considerably easier in business class, which is how Nick generally lies on international trips. Kim meets Nick; they reminisce about college, and they work out new specs. Nick e-mails them to Schulenberg in Germany, where he has a team working overtime to “cost out” the specs and work on pricing. In considering your responses to the following questions, consider what law would apply, how the results might vary under diferent laws, and how you would determine what law would apply. (a) he next day, Kim tells Nick that her boss has decided that a contract should have a published RFQ (request for quotations), somewhat revised from the speciications from which Nick has been working, to encourage multiple bids. he RFQ, she says, will be published in about two weeks, with bids due one month later. She assures Nick that if Schulenberg bids, CSC will carefully consider the proposal. Disgusted, Schulenberg declines to bid and prepares to sue. What result? (b) Now consider a diferent scenario: instead of the public bidding requirement, the next day Kim’s boss says he thinks Nick’s bid is a good start but needs more work. He asks Nick to stay a week. Nick decides to do so. He was planning to spend that week bidding on several smaller local deals (€1 to €3 million each) in Germany, but they are dwarfed by the CSC prospect, which he decides to pursue. Kim, her boss, and Nick work for several

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days changing quantities (and thus changing prices) as well as speciications. he team in Germany continues to work overtime as they go back and forth. hen, ater a little over a week in Detroit, Kim’s boss says that CSC has decided not to go forward with the purchase. he big project Kim had mentioned did not come through: their customer exercised its right to cancel within thirty days of signing the contract upon paying a $25,000 termination fee. (c) Would it make a diference if CSC had mentioned that its contract with its customer was subject to cancellation? What if there had been no cancellation but instead of nixing the purchase, CSC had decided to go for a public bid ater Nick’s extended stay? Or spoke to other vendors, eventually deciding on one of the others? (d) Would any of your responses change if Nick, on the second day of his visit and before anything untoward had occurred, gave to CSC a quotation that under the CISG could be considered an ofer? Should this fact change the legal regime?

Problem 3.6 Hearing the litigation threats, CSC resumes negotiations. For a while, they seem to be making progress. “One last thing,” Kim says. “We need technical drawings so that our team leaders can make sure these will work with their operating practices.” Schulenberg makes the technical drawings, which takes a week and a half and involves a further investment of about €40,000. he team leaders, although they like the machines, reject them because the technical drawings show that several hundred thousand dollars of retraining would be necessary for the crews to use the Schulenberg machines. (a) Does CSC have any liability? (b) Would Schulenberg have any liability to CSC, which itself has invested tens of thousands of dollars in this process, if Schulenberg never really intended to bring litigation?

Problem 3.7 Kippasee County Power Co. in the United States puts out an RFQ for several turbines and other equipment for a new generating plant. It is a contract worth hundreds of millions of dollars for the winning bidder. Stein Industries in Canada is one of the companies that responds. As is common, Stein spends lavishly, both in working on its bid (again, putting together the proposal, meeting speciications, making technical drawings, and so on costs many thousands of dollars) and in entertaining the people from Kippasee while making sales pitches. Kippasee decides not to go forward. Does Kippasee have any liability to Stein? To the other bidders who are in a similar situation? Does it matter if Kippasee did not have the money when it put out the RFQ and was just hoping to get it? What if the RFQ said Kippasee would accept the lowest best bid?

Question 3.8 Take an alternative scenario now and consider the following excerpt from a letter typical of an intermediate stage of many large transactions: “Kippasee Power Co. (“Buyer”) and Stein Industries Corp. (“Seller”) agree in principle that Buyer will buy and Seller will sell the equipment as speciied in Schedule A attached to this letter. he time of delivery and the terms of credit and payment are listed in the terms sheet attached to this letter as Schedule B.

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“When this letter is signed by the chief executive oicer of Buyer and the chief executive oicer of Seller, this letter shall constitute an agreement in principle. he inal terms of the transaction shall be as speciied in an Agreement to Purchase and Sell to be negotiated and executed by the parties.” Such letters are sometimes couched in diferent but similar terms. Rather than saying it is an agreement in principle, it might say that it is a “gentlemen’s agreement” or a “memorandum of understanding” or something along those lines. You might also note (and be amused by) the following insightful observation (incidentally, from a case involving a former client of one of your coauthors). How does this quotation capture the business interactions and postures that are so likely to lead to litigation? “A gentleman’s agreement is 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.” Chemco Leasing S.p.a. v. Redifusion plc [1983] (Eng. Q.B. Comm’l Ct. ) (unreported) (Mr. Justice Vaisey) (citing Sir Robert Edgar Megarry); af ’d [1987] 1 FTLR 201. Can this letter result in liability? If you wanted to make sure there would be no liability, what would you advise your client? What if you wanted to maximize the possibility of liability (to try to tie down the other party, who your client fears might escape)?

Question 3.9 It is too soon to give full consideration to this problem—knowledge of possible damages limitations is necessary—but for now consider briely how the following clauses, if inserted into the letter above, would afect your analysis. (a) “Either party may terminate this transaction upon payment of $150,000 by electronic funds transfer to the other party. Upon the exercise of this right, neither party shall have further liability to the other.” (his is sometimes called a “breakup fee.”) (b) “Until notice to the contrary is given by one party to the other, neither party shall discuss a similar transaction with any other party.” (his is sometimes called a “no shop” clause.)

III. Formation With our arrival at formation, there is something of a feeling of having arrived, inally—and perhaps surprisingly late—at the heart of the matter. here is some justice in this feeling, as the rules on formation will determine not only whether a contract of sale is formed but what the terms of the contract are, and thus what performance is required, what constitutes breach, and what the appropriate remedies are. In a sense, then, all lows from formation, and all returns to formation, and surely that is the heart of the matter. A qualiication may be in order, though, to emphasize that what has come before was more than prelude, not because formation is not the heart but because the matter may well be diferent from the sales contract. Liability may stem from something other than the contract for sale (from a breach of an agreement to negotiate in good faith, for instance, or from a misrepresentation), or the threshold analysis may lead to application of a wholly diferent body of formation rules from those found in the CISG or the UCC because the issues may arise from a precontractual setting that (according to most) is not governed by the CISG and certainly

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not by the UCC. Whichever rules they are, though, formation will now take our attention for some time.

A. Reaching Agreement through Ofer and Acceptance he classic analysis of contract formation devolves into an analysis of the process of making an agreement. Surprisingly enough for a normal human being—but not for a law student or a lawyer—the mode of that analysis is dominated by ofer and acceptance. he legal idea is that someone sooner or later makes a proposal that includes suiciently deinite terms and that is accompanied by requisite indications of intent. hat is the ofer. Someone else accepts that proposal, thus forming an agreement, which is sometimes called a meeting of the minds or mutual assent—or consent or consensus ad idem—all of which verbiage obscures the fact that the law is looking simply to an agreement, or at least an appearance of one. Now all of this may seem perfectly familiar from your earlier legal studies, but do not lose track of the surprise inherent in this analysis. You made plenty of agreements, and probably even contracts, before you arrived in your irst class in law school. Did you typically, or ever, think about them in terms of ofer and acceptance? he common sense you had before law school is worth recovering because it provides insight into the situations that arise in practice and into the limits of the legal rules. To state the obvious, then: the rules of ofer and acceptance assume a pattern of reaching agreement that oten is not characteristic of current business practice. Reality is oten more complicated and less clear than the law assumes. Realize that the last section on “precontractual” liability addressed an issue that in many common-law legal systems would be analyzed in the irst instance as a question of whether an “ofer” had been made and accepted. Few think that the ofer-and-acceptance analysis naturally captures the nuances of making a twenty-irst century business deal. However that may be, though, the reality of business sooner or later meets the reality of law, which is slow to change its hoary concepts. he law’s reality, both in the civil law and common law, puts much emphasis on the ofer.

1. he Ofer here is a good reason for this emphasis. An ofer, once acceptance is made, is the contract. As we will see before long, an acceptance cannot add anything to the ofer—the perfect acceptance says nothing beyond “I accept.” hat means the contents of the contract that is formed are in the ofer, supplemented only by context and by supplementary terms provided by law. he ofer, therefore, has to have the essential terms of the contract; it has to be suiciently deinite so the parties, and if necessary a tribunal, can tell what the contract is. Before applying these concepts, and particularly the rules of article 14, you should note what the CISG does not require. “A contract of sale need not be concluded in or evidenced by writing and is not subject to any other requirement as to form. It may be proved by any means, including witnesses.” CISG art. 11. his rule is in stark contrast to some domestic systems. For instance, US law requires sales contracts for $500 or more to be in writing, with some exceptions. UCC § 2-201. We will return to matters of form later in the chapter, but these basic points will serve well enough for now.

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Question 3.10 (a) Under CISG article 14, what are the requirements for an ofer? Hint: many would say that there are ive in article 14(1). But note the next question. (b) Can you see, just from reading the text of the article and supplying a bit of imagination, how the parties might argue about whether there are any particular requirements under article 14?

Problem 3.11 Mercko Motors, known for its well-engineered luxury cars, maintains a website that includes pictures of diferent models and marketing and technical information on each, as well as prices. In addition, authorized dealers, distributors, and mechanics can click on a link at the bottom that leads to a password-protected site that lists Mercko parts for all models, including quantities available for order (e.g., some smaller parts must be ordered in quantities of 100, others by the dozen, and others singly) and prices. By clicking on an icon, an authorized user can place an order by going through several steps ater accessing the protected portion of the site. he site says prominently “PRICES SUBJECT TO CHANGE WITHOUT NOTICE,” both on the publicly available part and the password-protected one. Is the website an ofer if your client is McCarty Auto Sales Co. of Bethesda, Maryland, and (a) the website is that of Mercko Motors (USA) Inc.? (b) the website is that of Mercko Motors AG of Germany? Does it matter which portion of the website is involved? You may assume that McCarty has the password and is an authorized user of that part of the site. (c) What if there was no price-change clause on the protected portion of the site? In your answers, please consider UCC § 2-204 and CISG art. 14; see also CISG arts. 18(1), 55; UCC § 2-305.

Question 3.12 (a) What if a Canadian seller of lumber, Wolhaus Corp., puts a banner on its website saying, “he irst ive new customers to place an order of at least CAN$10,000 under our posted prices will receive a 20% discount on the order. hat’s right! If your company is one of the ive, you can get $10,000 worth of lumber for $8000 . . . or even $100,000 worth of lumber for $80,000! Or more! his ofer is only for new customers and only for in-stock lumber. And if you’re late, don’t worry. We think you’ll still be impressed with our low list prices.” Clicking the underlined words brings up a price list. Your US client, Barnes Builders, placed an order for $400,000 worth of lumber, expecting it to cost $320,000, but Barnes has received an e-mail from the seller: “hank you for your order. We are very pleased to have your new business, and you are the third new customer so you qualify for a 20% discount. We can only honor that discount for the irst $100,000, so your order total will be $380,000, not $320,000.” Can Wolhaus do this under CISG article 14? (b) What if the banner were not limited to the irst ive new customers? See also CISG art. 8.

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Problem 3.13 (a) Salvatore and Betty have been attending a trade fair for businesses in the building industry. Sal’s company (in Italy) manufactures, among many other things, ridged steel rods that can be used for reinforcing concrete. hey are called “rebar,” short for reinforcing bar, and they come in a variety of sizes, strengths, and other variations. Betty represents a bridge construction company, and bridges require specially coated rebar because of the exposure to water and the use of salt in winter. She and Sal visit at Sal’s booth for about 15 minutes, and Betty discovers that Sal can provide what she needs. Ater she leaves the convention center, she checks with her home oice and inds that Sal’s prices (posted on his website) are better than domestic prices, even taking shipping into account. As it happens, she runs into Sal at the hotel restaurant that night. No tables are available at the moment, however. “Can I buy you a drink?” Betty asks. “Of course,” answers Sal. “But let me buy the drink. I’m hoping you’ll buy some rebar from me.” “I’ll buy the drink and the rebar, I  think,” Betty responds. “You can get me the fusion-bonded epoxy coated #4 for $1365 a ton, right?” “Yes. I’ll stick by that, FOB Shanghai.” (he “FOB” is a shipping term, as we will learn in Chapter 5.) “And it’s the 12 OC, top and bottom, each way, right?” (hese are typical US speciications for rebar.) “Right.” “OK, I’ll buy it. And the drink.” Sal broke into a broad grin. “Excellent. You’ve got a deal.” Sal and Betty shook hands. hen, as an aterthought, Sal asked, “How much do you want?” “Let’s start with ten metric tons—OK?” “Done.” Betty bought the drink. he following week, Sal and Betty conirmed their deal by e-mail. heir messages say no more than what they had already agreed. Two weeks ater that, their respective shipping and purchasing departments followed up with appropriately detailed paper forms. Do the parties have a contract? If so, at what point was the contract formed? Why? Please consider CISG arts. 11, 14, 15, and 18. See also UNCITRAL Model Law on Electronic Commerce arts. 5, 6, and 7. (b) Would your answer change if the transaction were governed by UCC §§ 2-201 (see also comment 4) and 2-206? See also UETA §§ 2(8), 2(13), 7; E-SIGN § 101(a). As you considered the preceding problems, you probably focused on clear legal requirements. What does the law require for an ofer? What does the law require for a contract? Must there be a writing, under the provisions of the applicable law? hese are all good questions, but also a bit of a trap. Looking at the issue of contract formation from a high altitude, you are likely to see at irst only the questions just mentioned: what particular things are required by the law, and have the parties checked those required boxes? It

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can seem like illing out a form online: there are some required ields, and there are others that you might ill in, but you are not required to do so. What this misses is what can sometimes be the key issue in contract formation cases: Have the parties reached the stage at which they intend to make a inal deal and are no longer negotiating, talking, testing, and exploring? Every year sees blockbuster litigation over whether some enormous deal had been made—and thus a contract bound the parties, including the one that is trying to escape—or whether the parties were still in preliminary negotiations, without a contractual obligation to each other. In answering that issue, things such as writings, formalities, part performance, and so on can be relevant without being required. It may well be that no writing is required, as is true under the CISG. And the same may be true with respect to signatures. Nevertheless, if one party is arguing that the parties were still in negotiations, and the other party can point to a writing or an e-mail, the second party has an important piece of evidence about whether the parties had let the stage of negotiations and had reached the point of a contractual tie. he second party will have an even better case if it can point not only to a writing but to a writing that is signed—not because the law necessarily requires a writing per se, but because it defeats the irst party’s argument that the parties were still negotiating. With just a small amount of imagination, you can see how these arguments work in various permutations. Even without a signed writing, we know there can be a contract under the CISG. Without the signed writing, what is the clear point that a contract was formed? A handshake? Perhaps. See Oberlandesgericht [OLG] Innsbruck [Appellate Court of Innsbruck], Austria, Dec. 18, 2007, Docket No. 1 R 273/07t, English translation available at Pace CISG Database:  http://cisgw3.law.pace.edu/cases/071218a3.html (Daniel Nagel, trans.). What about a slap on the back? An e-mail from the CEO? We would pose this as a “Question” for you to answer, as it is indeed one of the elements of an ofer under the CISG. An ofer, says article 14, must “indicate[] the intention of the oferor to be bound.” How does an ofer do this? We consider it unfair to put the question to you as we do not know the answer. Our guess is that when someone in the business thinks, ater hearing or reading the proposal, that he can close the deal by saying—or e-mailing or writing—something like “hat sounds good. It’s a done deal,” then the proposal indicates an intent to be bound. See CISG arts. 8(2), 9(2). Our further guess is that the primary job of this element is to allow a party to make it clear that a proposal is not an ofer. Including a phrase like “Binding only upon acceptance by us,” coupled with the legal requirement that an ofer indicate an intention to be bound, allows a party to make sure it remains on the preliminary negotiations side of the divide until it is ready to be bound by a contract. By emphasizing that evidence like writings and signatures can be relevant but not necessary, we do not mean to de-emphasize the legal requirements for ofer and acceptance. he CISG, as well as all leading domestic systems, address these issues in some detail, although not necessarily with great clarity. hese issues are now ripe for attention. he main question is what terms are necessary for a proposal to be suiciently deinite to be an ofer. You know from your answer to 3.1(a) that many people might say that there are ive requirements for an ofer under CISG article 14. here is not too much controversy over the

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meaning of the irst: an ofer must presumably be addressed to one or more speciic persons (although the ofer may countermand this rule by clearly so indicating under article 14(2)). And we have just discussed the second requirement, that is, that the ofer indicate that the oferor intends to be bound. he third—that the ofer indicate the goods—is straightforward enough. It is hard to conceive of an ofer for a sale of goods that does not indicate the goods. We also know from article 14 that an ofer must be “suiciently deinite.” Here is where the controversy is centered. Is a price required? A quantity? he answer is that there is not much argument over quantity, although there is a little, as we will see later. he real arguments are about price. Must an ofer make provision for determining the price? his is one of the most basic questions of contract formation, both in international sales and in contract law more generally. You may ind yourself unsatisied with the answer, such as it is, but in this area as in others the irst step is to be clear about what is clear and to be just as clear about what is unclear. Let us start with the two polar approaches, each of which is reasonably clear. French Civil Code article 1589 declares, to some fame, that a promise of sale completes the sale as long as the parties agree on the thing and price (La promesse de vente vaut vente, lorsqu’il y a consentement réciproque des deux parties sur la chose et sur le prix). Although this article does not explicitly require a price, its suggestion that a price is required is conirmed in express terms a couple of articles later in article 1591 (Le prix de la vente doit être déterminé et désigné par les parties.), and although the parties are given the freedom to leave determination of the price to a third party, if the price is not set by the third party, there is no sale at all under article 1592 (Il peut cependant être laissé à l’arbitrage d’un tiers; si le tiers ne veut ou ne peut faire l’estimation, il n’y a point de vente.) hese provisions, as far as your coauthors know, are as deinite as any system gets on this subject, but we ind it slightly incredible. If the parties have been negotiating hard about delivery dates, and have not reached agreement on it, but have agreed on the thing and the price, is there really already a sale? We do not think French law goes so far. Under French law a delivery term, in appropriate circumstances, may be essential to contract formation. Even in this most deinite case, then, what terms are essential must be a question of context and intent. We do know from article 1589, however, that the thing and the price are essential terms. What we do not know is what else may be essential—or at least we cannot know it until we know more about the context. We also note that if the revision of the French Civil Code is enacted as proposed, some contracts in which an open price term is necessary will be validated by the Code. Avant-Projet de Réforme du Droit des Obligations art. 71 (Oct. 23, 2013). At the opposite pole from the French is the US system, with a much looser standard. Section 2-204 of the UCC provides the general rules, such as they are, for formation of sales contracts, although calling them rules seems a bit of a stretch. “A contract for sale of goods may be made in any manner suicient to show agreement,” it begins, and goes on to say that this is true “even though the moment of [the contract’s] making is undetermined.” Most important for present purposes, it provides: “Even though one or more terms are let open a contract for sale does not fail for indeiniteness if the parties have intended to make a contract and there is a reasonably certain basis for giving an appropriate remedy.” here are almost no rules, then, but because a contract must be enforceable by a court in order to count as a contract in the common law mind, it can hardly be a contract unless

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a court can ix a remedy. hat requirement plus the parties’ intent are all that are needed. Not even a price is necessary, we gather from § 2-204, and this implication is conirmed explicitly by § 2-305 (which you may now want to read in full, just to conirm in your mind the clear position of the UCC that not even price is required). To give a lavor of that section: “he parties if they so intend can conclude a contract for sale even though the price is not settled. In such a case the price is a reasonable price at the time for delivery. . . . ” Most experts on the UCC believe that the only thing essential, in general, for a contract for sale is a quantity of goods. A reasonable price can be illed in by a court by looking to market prices, for instance, but it is impossible to know what would constitute a reasonable quantity. To be clear about where we are now: it seems that context and intent can always play a role in making any particular term essential in a particular transaction. In more general terms, though, a system might require a term, such as price. France (at the time of writing) seems to require a price. A system can also provide that a price is not required for contract formation (as long as this accords with the parties’ intent). his is the case with the UCC. We now have two polar possibilities before us: “no price, no problem” (the UCC) and “thou shalt have a price” (the unrevised French Civil Code). Aside from price, plus goods and quantity, everything else seems to be contextual. So far as the “everything else” goes—that is, as to everything but price and quantity of goods—the CISG seems to accord with our two current examples of French and US law. Presumably delivery dates might be an essential term and might not be, depending on context and intent. On the core question of price, however, the CISG seems to attempt a compromise, as it so oten does when presented with polar choices. Compromise is unhelpful in furthering clarity, but the draters of the CISG had a number of laudable goals aside from clarity. Now, however, we have to address the result of the attempt to have it both ways. Understanding the CISG position begins with article 14(1): A proposal for concluding a contract addressed to one or more speciic persons constitutes an ofer if it is suiciently deinite and indicates the intention of the oferor to be bound in case of acceptance. A proposal is suiciently deinite if it indicates the goods and expressly or implicitly ixes or makes provision for determining the quantity and the price. To be an ofer, the proposal must be “suiciently deinite.” his is hardly a surprise; the question—perennial question, in fact—is what is suiciently deinite. he second sentence causes a potentially serious interpretive diiculty when it says that the proposal is suiciently deinite if it ixes the quantity and the price or allows them to be determined. his sentence, to some, means that price and quantity must be determinable from the proposal. hese readers understand the sentence to mean that if the proposal does not have a price and a quantity term, it is not suiciently deinite. One might say that this is the negative implication of the second sentence of article 14. In other words, price and quantity are always essential terms, and the CISG follows the French example: thou shalt have a price (and a quantity). Sometimes, they may be all that are necessary in the eyes of a court.

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STANDARD SOFTWARE CASE Landgericht [LG] München [District Court of Munich], Feb. 8, 1995, Case No. 8 HKO 24667/93 (Ger.) Available at Pace CISG Database: http://www.cisg.law.pace.edu/cases/950208g4.html (Peter Feuerstein, trans.; Todd J. Fox, trans. ed.) (Mar. 12, 2007) Facts The [French plaintiff seller] is a manufacturer of computer software, particularly a programme called Graphiplus, and is the sole legal owner of that software programme. With an order placed in writing, dated 26 February 1993, the [buyer] ordered the Graphiplus programme from the [seller] in a network version for ive additional workplaces for a total price of 31,500 DM [Deutsche Mark]. Earlier, namely since 23 November 1992, the [seller] had delivered the programme to the [buyer] for testing purposes. In exchange, the [buyer] had given a bank guaranty to the [seller]. The inal installation of the programme at the [buyer’s] location was due on 28 April 1993. In the ensuing time, negotiations took place between the parties over the conclusion of a detailed contract concerning the use of the programme. In a letter dated 8 July 1993, which according to the [buyer’s] pleadings was only sent to the [seller] after 30 July 1993, the [buyer] stated that the draft contract sent to the [buyer] by the [seller] was unacceptable to the [buyer]. Furthermore, [buyer] had decided not to use the [seller’s] programme. At the same time, the programme was sent back to [seller]. The [seller] had invoiced the programme to the [buyer] on 22 April 1993, for 31,500 DM. The present litigation concerns the payment of this invoice to the [seller]. ...

Grounds for the decision The [seller’s] claim is admissible and successful. The adjudicated main amount is owed to the [seller] as the contractually agreed upon price for the sale and use of the Graphiplus software programme. Additionally, the [seller] is entitled to the requested interest on the amount after the date of maturity (Art. 78 CISG, § 352 HGB). The [buyer]’s objections are unsuccessful. 1. As the [seller] has already correctly pointed out in its claim, the provisions of the CISG apply to this contractual relationship since the parties have their places of business in different Contracting States to the Convention. The fact that the transaction at issue concerns a computer software programme does not hinder the application of the CISG. According to the opinion of the Court, the sale of standard software for an agreed price is a “contract of sale of goods” within the meaning of Art. 1 CISG. Schlechtriem/Huber (CISG, 1990, Annotation 21 to Art. 1) also agree on the classiication of computer software as goods under the CISG. 2. With the mutual signing of the order—containing an agreement on the name of the programme and its price—an effective contract came into existence between the parties under Arts. 18, 23 CISG. The circumstance that the parties perhaps intended to conclude a more detailed contract about the use of the programme does not hinder the effective

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conclusion of the “sales contract.” Decisive is the fact that the parties had agreed on the necessary minimum content that they were looking to agree upon (cf. Schlechtriem/ Huber, op. cit., Annotation 10 prior to Art. 14 CISG).

Others (including your coauthors) do not read article 14 to require a price. If the proposal contains a way to determine the quantity and the price, then it is suiciently deinite. hat is what the disputed sentence in article 14 says, but that is all that it says. For example, what if the proposal contains a quantity term but does not contain a price term? We believe the CISG is silent on this point. If the proposal had the price term as well as quantity, then it would certainly be suiciently deinite under the second sentence of article 14. Without the price, it is not necessarily suiciently deinite. But it is not necessarily too indeinite to be an ofer either. Whether it is or not is a matter on which article 14 does not give an answer. In other words, we read the second sentence to create a “safe harbor.” If a proposal includes a price and a quantity, it generally cannot be attacked for indeiniteness: it is within the safe harbor. (Note the Munich Standard Sotware Case.) If the proposal is missing the price term, though, it may not be suiciently deinite; it is not in the safe harbor. But it is not necessarily sunk. Whether it is an ofer will have to depend on intent and context. We are not alone in this view, although because one prominent adherent (Professor Harry Flechtner)9 is also American, we do wonder if it is a particularly American sort of reading, where safe harbors are a common statutory drating device. Certainly important scholars disagree. Before going further, another point needs to be noted. If the price is implicit from the context (as from a trade usage or an established practice), then the price is not lacking. he diference of opinion is not about what to do when the price is clear from the parties’ previous dealings, for instance. If they have done 10 deals for the same price for the goods, and ater the fourth or ith they sometimes mention the price and sometimes do not, then when they do not in the eleventh deal, no one thinks the price term is missing. Under CISG article 9, we believe everyone would understand the same price to be part of the contract, even though a proposal did not state it, because “the parties are bound . . . by any practices which they have established between themselves.” he controversy is over whether parties may bind themselves without a price at all. Would this ever happen? We believe so, as with a rush order from a well-reputed dealer, or a long-term contract where the parties cannot predict price changes, or in a well-established relationship. Article 55 of the CISG, we believe, was introduced into the treaty because these situations can arise. Article 55 provides: Where a contract has been validly concluded but does not expressly or implicitly ix or make provision for determining the price, the parties are considered, in the absence of any indication to the contrary, to have impliedly made reference to the price generally charged at the time of the conclusion of the contract for such goods sold under comparable circumstances in the trade concerned. 9. John O. Honnold, Uniform Law for International Sales under the 1980 United Nations Convention § 137.6, at 210 (4th ed. 2009, Harry Flechtner, ed.).

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his article, in our view, would hardly be necessary if a contract could not be validly concluded without a price term. his provision is a gapiller; it ills the gap for price by instructing a tribunal to look to the price generally charged. Some might argue that the predicate must be satisied irst—the contract must be validly concluded before the gapiller can do its work. We do not see how this argument helps their position (recall that their position is that price is necessary). If a contract can never be validly concluded without a price term, then all of the words of the article ater the irst comma are wasted; they are “mere surplusage” in the traditional phrase. he widely accepted canon of construction instructs readers to avoid a construction that will leave words of the statute without meaning or function. Why would they be in the law if they were not going to mean anything or do any work? Rather, we believe that the predicate will sometimes be met and sometimes not: sometimes a proposal without a price will not be an ofer, but sometimes it will. On this point, you might consider the airplane problem below. hose whose opinions difer from ours respond to these arguments in various ways. hey contend that the parties may have excluded article 14 (recall that the parties may derogate from all of the CISG or almost any of its provisions under article 6), or that the parties may make a contract without ofer and acceptance and thus article 14 does not apply (here they see a gap in the CISG, as the treaty contains no rules on how to form a contract without ofer and acceptance), or that articles 14 and 55 conlict and create a gap in the CISG. We view these arguments as unpersuasive because they are unnecessary and unproductive. Almost all of them lead to the same conclusion: that the parties may conclude a valid contract for sale in some cases even though there is no proposal containing a price. In appropriate cases, all seem to agree that this bottom line is sensible, and it seems to us best to interpret articles 14 and 55 to allow this result in a straightforward way (and a way consonant with the text of the treaty.)10 he predicate of article 55 may arguably have another function too. Recall the validity exception of article 4: in general, the CISG does not govern matters of validity. hus article 55, when it says, “Where a contract has been validly concluded but does not expressly or implicitly ix or make provision for determining the price,” may be referring to a question of domestic law. If the rules of private international law dictate that French law governs 10. Case law on this issue is largely inconclusive and unhelpful. he issue has arisen tangentially or in dicta in a few cases, and the proponents of diferent positions can usually cite some case authority. For instance, one case states clearly: a sales contract can be validly concluded without any reference to the price (express or implicit) by the parties; the price is then objectively determined by reference to a medium price: this is the price generally charged at the time of the conclusion of the contract for such goods sold under comparable circumstances in the country of the seller. his provision protects the buyer from paying too much; and it does not permit the buyer to beneit from a very advantageous price. Tribunal Cantonal [Appellate Court] Valais, Apr. 27, 2007, Oven Case, Docket No. C1 06 95, ¶ 4.a (Switz.), available at Pace CISG Database: http://cisgw3.law.pace.edu/cases/070427s1.html (Nathalie Hofmann, trans.). Still, the digest of cases observes that “[m]ost decisions have declined to apply Article 55” on the particular facts presented to them, for example, because the tribunal found there was no market price or that the parties had decided that they did not want article 55 to apply. See UNCITRAL Digest of Case Law on the United Nations Convention on Contracts for the International Sale of Goods 92 ¶ 15 (2012 ed.).

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matters of validity, then such a contract for sale probably cannot be validly concluded under the unrevised Civil Code, as discussed above. In such a case, article 55 would have no operation. If, however, the rules of private international law led validity issues to be governed by US law, then such a contract would be valid. Rather than leaving determination of the price (a non-validity matter) to domestic law, the CISG pulls the issue back into the scope of the treaty. So the predicate of article 55 may be read to say: “Go to domestic law to decide whether a sale contract without a price is valid. If it is not, then there is no contract. See article 4. If it is, then the price is determined by this article and is the price generally charged.”

Question 3.14 If you were an arbitrator, which view would you hold as to whether a sale contract needs a price? Why?

Problem 3.15 HAL Hungarian Air Lines is buying about ive new jets—an investment of many millions of dollars. he airplanes themselves and the jet engines are typically bought separately, but they need to be coordinated so the engines work with the planes. Spearhead Jetworks from the United States and AeroTrain from France are both actively bidding on the engine contracts; McConnell Flight from the United States and Kramer AG from Germany are actively bidding on the airplane contracts. As each of the bidders stands to win a multimillion-dollar contract, they have spent considerable sums traveling to Hungary; meeting with the buyers; and crating speciications, prices, and proposals. he quantities, speciications, and prices all depend on what the company ultimately decides it will purchase: which planes and how many, what kind of long-term maintenance contract it will buy (e.g., for how many years and for how much service), and so on. What the company decides is largely dependent on negotiations with the Hungarian Ministry of Transport, which will provide much of the funding—and indeed that is a key question, as the amount of government subsidy is still under negotiation between the airline and its government. You represent McConnell Flight. Although not entirely indiferent, as the proit margins vary, McConnell does not care much about the details. Assuming that some contract goes through, as seems likely, McConnell will be happy to get it regardless of the details. How can it crat a proposal that will be an ofer under the CISG given these circumstances? Your client is in a rush: “I don’t care how you do it,” the CEO has told you. “Just give me something so that if I get them to sign, they’ll be bound.” What do you do?

Problem 3.16 he Rochester Clinic, a large and prestigious medical center in the Upper Midwest of the United States, is running very low on a number of sterile supplies (surgical masks, gowns, gloves, drapes—literally dozens of items). Ordinarily well managed by an inventory tracking system, a technology transition resulted in a glitch that has let it with only a two-day supply. It can get more within a few hours from a nearby supplier in Wisconsin, but US prices are very high. Generally the clinic orders these supplies from China, but there is no time for that. here are several good sources in Canada, where prices are generally much lower than in the United States even though foreign suppliers of such items are registered

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with and subject to regulation by the US Food and Drug Administration. Although price is important, particularly given the large quantities involved, availability and speed are more so. Few suppliers will have enough stock on hand to ill an order immediately, and immediacy is what the clinic needs. he procurement oicer calls the largest of the Canadian suppliers, which is FDA registered and compliant with FDA regulations. He asks, in detail, about whether it can supply the necessary amounts. It can. “Send me an e-mail putting all of this in black and white so I can be sure to get you what you need,” the supplier says. “Will do. he main thing is to get them on a truck and get them here as soon as possible.” “We can do it. Get me the e-mail. I’ll have the stuf on trucks and on their way within a few hours of that. You will have them tomorrow morning.” “OK. hanks a million.” He hangs up and sends the e-mail, which arrives almost immediately. (a) Do the parties have a contract? Why or why not? If so, what is the price term? (b) Suppose that the conversation had continued. he buyer asked, “Can you give me a price?” “On an order like this, it would take me hours if not days to get it igured out. You know the prices change based on quantity. I’d have to look up a lot of this, igure it out, and I don’t even begin to know what the transportation will be on this kind of schedule. I can igure out the price if you want, but I can’t tell you until tomorrow. You can let me know then if you want to do it.” “hat’s OK,” replies the man from the clinic. “I don’t want to run it that close. Just get me the stuf.” “You got it,” the seller agreed. Do the parties have a contract? Why or why not? If so, what is the price? (c) What if the parties had done business before and the price was always that stipulated in the price list that the supplier had posted on its website: Do the parties have a contract? Why or why not? If so, what is the price? See CISG art. 9.

Problem 3.17 (a) he buyer is Friendly Flights, an airline located in the Southwest United States, and most of its major hubs are there. It agrees with Paciic Oil Corp., a US oil company, that Paciic will supply all of the jet fuel for its planes for the next year. he quantities are variable, depending on customer demand, which determines light schedules, and so on. Friendly has had great success because of its nimble footing as well as its informal but efective service. his contract (called a “requirements contract” because it is for as much as the buyer requires, i.e., needs, for its business) is part of Friendly’s strategy. Is this a valid and binding contract for sale? See UCC § 2-306(1) and Eastern Air Lines v. Gulf Oil Corp., excerpted below. (b) What if the seller were PemEx, the Mexican oil company? See CISG art. 14, as well as the Secretariat commentary (as reproduced below).

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Eastern Air Lines, Inc. v. Gulf Oil Corp. United States District Court for the Southern District of Florida, 1975 415 F. Supp. 429 kinG, District Judge. Eastern Air Lines, Inc., hereafter Eastern, and Gulf Oil Corporation, hereafter Gulf, have enjoyed a mutually advantageous business relationship involving the sale and purchase of aviation fuel for several decades. This controversy involves the threatened disruption of that historic relationship and the attempt, by Eastern, to enforce the most recent contract between the parties. On March 8, 1974 the correspondence and telex communications between the corporate entities culminated in a demand by Gulf that Eastern must meet its demand for a price increase or Gulf would shut off Eastern’s supply of jet fuel within ifteen days. Eastern responded by iling its complaint with this court, alleging that Gulf had breached its contract and requesting preliminary and permanent mandatory injunctions requiring Gulf to perform the contract in accordance with its terms. . . . Gulf answered Eastern’s complaint, alleging that the contract was not a binding requirements contract, was void for want of mutuality, and, furthermore, was “commercially impracticable.” . . .

THE CONTRACT On June 27, 1972, an agreement was signed by the parties which, as amended, was to provide the basis upon which Gulf was to furnish jet fuel to Eastern at certain speciic cities in the Eastern system. Said agreement supplemented an existing contract between Gulf and Eastern which, on June 27, 1972, had approximately one year remaining prior to its expiration. The contract is Gulf’s standard form aviation fuel contract and is identical in all material particulars with the irst contract for jet fuel, dated 1959, between Eastern and Gulf and, indeed, with aviation fuel contracts antedating the jet age. It is similar to contracts in general use in the aviation fuel trade. The contract was drafted by Gulf after substantial arm’s length negotiation between the parties. Gulf approached Eastern more than a year before the expiration of the then-existing contracts between Gulf and Eastern, seeking to preserve its historic relationship with Eastern. Following several months of negotiation, the contract, consolidating and extending the terms of several existing contracts, was executed by the parties in June, 1972, to expire January 31, 1977. The parties agreed that this contract, as its predecessor, should provide a reference to relect changes in the price of the raw material from which jet fuel is processed, i.e., crude oil, in direct proportion to the cost per gallon of jet fuel. Both parties regarded the instant agreement as favorable, Eastern, in part, because it offered immediate savings in projected escalations under the existing agreement through reduced base prices at the contract cities; while Gulf found a long term outlet for a capacity of jet fuel coming on stream from a newly completed reinery, as well as a means to relate anticipated increased cost of raw material (crude oil) directly to the price of the reined product sold. . . .

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I. THE “REQUIREMENTS” CONTRACT Gulf has taken the position in this case that the contract between it and Eastern is not a valid document in that it lacks mutuality of obligation; it is vague and indeinite; and that it renders Gulf subject to Eastern’s whims respecting the volume of jet fuel Gulf would be required to deliver to the purchaser Eastern. The contract talks in terms of fuel “requirements.”11 The parties have interpreted this provision to mean that any aviation fuel purchased by Eastern at one of the cities covered by the contract, must be bought from Gulf. Conversely, Gulf must make the necessary arrangements to supply Eastern’s reasonable good faith demands at those same locations. This is the construction the parties themselves have placed on the contract and it has governed their conduct over many years and several contracts. In early cases, requirements contracts were found invalid for want of the requisite deiniteness, or on the grounds of lack of mutuality . . . [but] there developed rather quickly in the law the view that a requirements contract could be binding where the purchaser had an operating business. The “lack of mutuality” and “indeiniteness” were resolved since the court could determine the volume of goods provided for under the contract by reference to objective evidence of the volume of goods required to operate the speciied business. Therefore, well prior to the adoption of the Uniform Commercial Code, case law generally held requirements contracts binding. The Uniform Commercial Code, adopted in Florida in 1965, speciically approves requirements contracts in F.S. 672.306 (U.C.C. § 2-306(1)). (1) A term which measures the quantity by the output of the seller or the requirements of the buyer means such actual output or requirements as may occur in good faith, except that no quantity unreasonably disproportionate to any stated estimate or in the absence of a stated estimate to any normal or otherwise comparable prior output or requirements may be tendered or demanded. The Uniform Commercial Code Oficial Comment interprets § 2-306(1) as follows: 2. Under this Article, a contract for output or requirements is not too indeinite since it is held to mean the actual good faith output or requirements of the particular party. Nor does such a contract lack mutuality of obligation since, under this section, the party who will determine quantity is required to operate his plant or conduct his business in good faith and according to commercial standards of fair dealing in the trade so that his output or requirements will approximate a reasonably foreseeable igure. Reasonable elasticity in the requirements is expressly envisaged by this section and good faith variations from prior requirements are permitted even when the variation may be such as to result in discontinuance. A shut-down by a requirements buyer for lack of orders might be permissible when a shut-down merely to curtail losses would not. The essential test is whether the party is acting in good faith. Similarly, a sudden expansion of the plant by which

[11]. “Gulf agrees to sell and deliver to Eastern, and Eastern agrees to purchase, receive and pay for their requirements of Gulf Jet A and Gulf Jet A–1 at the locations listed. . . . ”

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requirements are to be measured would not be included within the scope of the contract as made but normal expansion undertaken in good faith would be within the scope of this section. One of the factors in an expansion situation would be whether the market price has risen greatly in a case in which the requirements contract contained a ixed price. Reasonable variation of an extreme sort is exempliied in Southwest Natural Gas Co. v. Oklahoma Portland Cement Co., 102 F.2d 630 (C.C.A. 10, 1939). Some of the prior Gulf-Eastern contracts have included the estimated fuel requirements for some cities covered by the contract while others have none. The particular contract contains an estimate for Gainesville, Florida requirement. The parties have consistently over the years relied upon each other to act in good faith in the purchase and sale of the required quantities of aviation fuel speciied in the contract. During the course of the contract, various estimates have been exchanged from time to time, and, since the advent of the petroleum allocations programs, discussions of estimated requirements have been on a monthly (or more frequent) basis. The court concludes that the document is a binding and enforceable requirements contract. [The discussion of commercial impracticability and other issues is omitted.]

he following is an excerpt from the Secretariat Commentary to drat article 12, which eventually became article 14 of the CISG: Quantity of the goods, paragraph (1) 11. Although, according to article 12, the proposal for concluding a contract will be suiciently deinite to constitute an ofer if it expressly or implicitly ixes or makes provision for the quantity of goods, the means by which the quantity is to be determined is let to the entire discretion of the parties. It is even possible that the formula used by the parties may permit the parties to determine the exact quantity to be delivered under the contract only during the course of performance. 12. For example, an ofer to sell to the buyer “all I have available” or an ofer to buy from the seller “all my requirements” during a certain period would be suicient to determine the quantity of goods to be delivered. Such a formula should be understood to mean the actual amount available to the seller or the actual amount required by the buyer in good faith. 13. It appears that most, if not all, legal systems recognize the legal efect of a contract by which one party agrees to purchase, for example, all of the ore produced from a mine or to supply, for example, all of the supplies of petroleum products which will be needed for resale by the owner of a service station. In some countries such contracts are considered to be contracts of sale. In other countries such contracts are denominated as concession agreements or otherwise, with the provisions in respect of the supply of the goods considered to be ancillary provisions. Article 12 makes it clear that such a contract is enforceable even if it is denominated by the legal system as a contract of sale rather than as a concession agreement.

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Problem 3.18 Your client, based in Florida, has come to you with the exciting news that it has settled a long-term supply problem that it has faced for many years. To run its rubber processing plant, it needs reliable access to TEPB, a chemical compound used in its process. It can be hard to secure an assured source of TEPB as its components come from a part of the world not known for its political stability. TEPB is not terribly expensive, but its price does luctuate some. Given these commercial dynamics, your client tells you that it has inally found a supplier who appears to be able to stay in business despite the predictable political vicissitudes. he parties would like to sign a contract for 500 kg to be supplied monthly for the next 10 years. hey have agreed on the price for the irst year and also that they will set the price for subsequent years in November of the preceding year. You have told your client that you are not sure that a court would ind the contract valid for 10 years under these circumstances. What do you advise? What if the seller will not agree to a choice of US law?

2. Firm Ofers he idea of an ofer assumes the possibility of an acceptance. Acceptances will be the next topic, but irst, the permissible timing for the acceptance must be determined, and that determination is made by a combination of the ofer itself and the legal system that governs it. here would not be all that much to say if the parties were giving ofers and acceptances orally to each other. When the parties are in each other’s presence, or speaking on the phone, the expectations and the rules are straightforward. he legal systems of which we are aware, and the treaty, take the same position: unless a contrary intention is indicated, an ofer must be accepted immediately. If it is not, then it lapses. he CISG sums up in article 18(2): “An oral ofer must be accepted immediately unless the circumstances indicate otherwise.” When the parties are not speaking to each other, however, the expectations are more variable, as are the governing rules. In contract formation inter absentes, to use the old-fashioned phrase, is the ofer revocable before acceptance? What if the oferor says that the ofer will not be revoked, perhaps for a particular period, but later changes its mind and attempts to revoke anyway before the oferee accepts? Having seen the result of the CISG compromise between the “no price, no problem” approach of the UCC and the “thou shalt have a price” rule of the (unrevised) French Civil Code, we are well prepared for the messiness of the next compromise in the formation rules of the treaty. hat compromise tries to ind a middle ground on whether ofers are revocable or irrevocable and on the ability of the oferor to make its ofer one or the other, as it chooses. In this context we begin to see a tension in the diferent philosophical underpinnings of the civil law and common law systems. his diference in the systems is deep-seated, which means both that it is generally not apparent on the surface and that it can have wide implications. We see the diference here in the issue over irm ofers. It will arise again later, most markedly in relation to remedies for breach of contract (Chapter 8). As usual, it is simplest to start with the two polar positions, common law on one side and civil law on the other. Ater noting the stark traditional notions, we will give each position a bit of nuance to bring our understanding beyond the entirely supericial, and then we will see the CISG attempt to ind a middle ground. To begin: the traditional common law rule has been that ofers are revocable at the oferor’s will by giving notice to the oferee of

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revocation. Indeed, if the oferee inds out about the revocation, that is enough to kill the ofer, as one of the classic cases held, even where the oferor had earlier promised that the ofer would remain open for longer. Dickinson v. Dodds, [1876] 2 Ch.D. 463 (Eng. Ct. App.). hus at common law ofers are revocable, even if the oferor initially wants it to be irrevocable and expresses this desire in the ofer. his results from the common-law doctrine of consideration. No legal system takes such an extravagant view that it treats every agreement or promise as binding. Something beyond agreement is required; at common law, that extra element beyond the parties’ consent is consideration. “Consideration” is deined, in technical terms, as a “bargained-for exchange.” In this context, “bargained for” is a term of art. It does not have its common meaning of back-and-forth negotiation. Rather, the idea combines the “exchange” element with inducement. In an exchange, each party must do something, or promise to do something. hus an exchange involves either a performance or a promise from each party. Further—and this is a separate element of consideration, aside from the exchange—each party’s promise or performance must be what induces the other party to do its performance or make its promise. hat is really all there is to the doctrine of consideration, but it has strange and far-reaching implications, few of which are evident at irst. A course in common-law contracts would devote at least a unit to the subject, but this book does not need such extended treatment. A basic idea is enough. In a typical sale, the consideration requirement is easily met: the buyer’s promise of money induces the seller’s promise to deliver goods, and vice versa. For this reason, consideration does not play much practical role in the contract for sale: the consideration requirement is always met. Consideration can, however, come up in two other contexts: the situation before the sale, where we ind ourselves now (concerned with the ofer for a sale). We will see it again before long in the discussion of what happens ater the contract of sale when the parties wish to modify their contract. A basic idea is enough because we can see the problem of irrevocable ofers from the fundamental notion. If I say to you, “I ofer to sell you 10,000 barrels of West Texas Sour crude oil for $100 a barrel, and this ofer will remain open for two weeks,” I am actually saying two diferent things: (1) I am ofering you a certain amount of a certain good at a certain price, and (2) I am promising to leave the ofer open for two weeks. But we have already noted that the common law will not enforce a promise unless there is consideration, and there is no consideration for my promise to keep the ofer open for two weeks. You did not give me anything or promise me anything to induce me to make that promise. Without that consideration, the common law does not take cognizance of my promise to leave the ofer open for two weeks. So if I tell you tomorrow that my ofer is revoked, then it is revoked (assuming you have not accepted in the meantime—for if you accept, then a contract is formed, and there is now both consent and consideration, the consideration being your promise of money for my promise of oil). In holding my ofer revocable despite what I have said, the court may make disparaging comments about my moral character, and may even call me a promise-breaker, but I am not legally liable to you. his results from the view that the law cannot become involved in all promises and agreements, and that the line is drawn between agreements where someone has performed or promised something in order to get the promise, on the one hand, and on the other hand, agreements and promises where no one has.

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he further implication of this doctrine is that although I cannot make my ofer irrevocable, you and I together could do so by adding consideration. If you give me something or promise me something to get me to agree to keep my ofer open for two weeks, and I accept your proposal, then we have formed a special preliminary kind of contract called an option contract. We have agreed that the ofer will be held open for two weeks, and that agreement is supported by consideration. here is not a contract for the sale of oil: rather, there is a contract that prevents me from revoking my ofer for two weeks. hat contract gives you the option to watch the markets for two weeks and decide whether to accept my ofer for the oil (which you will do if West Texas Sour is trading for more than $100 per barrel) or to let it lapse (which you will do if the price remains below $100 per barrel). hese kinds of options are bought and sold on the commodities markets countless times a day. As you can imagine, they can be very valuable, and although it may at irst seem startling that the law is so insistent that there be consideration, with this real commercial context in mind, the legal position is more understandable. Why would the law take seriously a promise that allows an option—a valuable economic right—for free? It seems unlikely that such a thing should be taken seriously and should consume valuable public resources in enforcing such things. However this may be, the civil law takes a decidedly diferent approach. Rather than stress the commercial impact, the civil law hews to a more philosophical or moral approach and emphasizes the notion of consent and the individual will. In a positive sense, a declaration of will deserves respect (you might think here of the work of the great Enlightenment philosopher Immanuel Kant). In a negative sense, breaking promises is bad morally, and at least in some religions and some contexts, it is not good for the soul. he law can help: it can enforce promises—which are serious declarations of the individual will—and can respect the individual autonomy that those declarations represent. he law can improve morals by preventing breaches of promise and perhaps remove the soul from an immediate danger. When an oferor says that an ofer will be kept open for a certain time, then it will be. To hold otherwise would disrespect the oferor’s stated intent and autonomy and would condone breaking a promise—breaching faith. Much more can be said about all of this, and countless volumes have been devoted to such subjects, but even without deep learning we can see that the CISG faced here (as it would in other areas) a doctrinal dilemma where the two great systems enunciated opposite rules because of their diferent orientations. We must be skeptical, though, of any proposition that the systems generate opposite results in the same situation very oten. Recall the observation of the great German and French comparatists that diferent results would be unlikely to occur very oten in societies with a common vision of justice. hat insight leads us to some of the qualiications and exceptions of the polar rules—many of which would eventually ind their way into the treaty. On the civil law side, the rules even at a supericial level need to be separated into the French approach and the German approach. In German law, ofers are literally irrevocable unless they say otherwise: they cannot be revoked for the period stated, or if no period is stated, for a reasonable time. If the oferor attempts to revoke the ofer, the attempt at revocation fails. his could hardly be more straightforward. he implication: if the oferee accepts an ofer that the oferor tried to revoke, a contract is formed. If the oferor does not perform, then the oferor will be liable for breach of that contract. he remedy for breach, as we will see

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more fully in Chapter 8, is either performance (the breacher is ordered to perform as it was supposed to do) or expectancy damages (the breacher pays to put the aggrieved party where it would be had the contract been kept). he importance of the analysis is in the remedial implication, which is diferent in French law. We will explain the French position as we think the French would explain it, even though it is hard for common law lawyers to understand it in these terms. Ofers are revocable. his means that if an oferor revokes an ofer, the ofer is revoked. his is true even if the oferor said the ofer would be held open. So far, this should sound just like the common law position. In French law, however, unlike the traditional common law view, the oferor may owe damages for a wrongful revocation. A wrongful revocation is a tort. Further, a court may see a revocation as wrongful even where no particular period was stated for acceptance if the ofer is revoked before a reasonable time has elapsed. he most obvious justiication for this view, although not universally agreed among French jurists, is the famous general tort article of the French Civil Code. It provides that any act that causes damage must be repaired by the one whose fault caused the damage. Code civil [C. civ.] art. 1382 (Fr.) (Tout fait quelconque de l’homme, qui cause à autrui un dommage, oblige celui par la faute duquel il est arrivé à le réparer.). If a court inds that revocation of an ofer was done with fault and caused damage to the oferee, then the oferor must pay compensation. To repair this injury, the wrongfully revoking oferor will have to pay the expenses the oferee incurred in relying on the ofer. his measure of damages represents the reliance interest. It does not put the aggrieved party where it would be had the contract been kept; rather, it restores the aggrieved party to where it was before the (wrongfully revoked) ofer was made. he reason is that the injury is being repaired. he oferee cannot expect a full contractual remedy (either expectancy damages or actual performance) because no contract was formed. In French law, unlike German law, the ofer was efectively revoked. he currently proposed revision of the French Civil Code could change French law to allow expectancy damages if the court found a promesse unilatérale under article 24 of the Avant-Projet de Réforme du Droit des Obligations (Oct. 23, 2013), but this change is limited to such promesses unilatérales and enactment remains uncertain. In summary, in French law the oferor has the power but not the right to revoke; in German law, the oferor has neither the power nor the right to revoke. he traditional view at common law, you will recall, is that the oferor had both the power and the right to revoke, even if he said he would not do so. United States law tempered this position during the twentieth century with the advent of a new doctrine called promissory estoppel. A promise that the promisor should expect to be relied on imposes liability for any such reasonable reliance in order to prevent injustice. See Restatement (Second) of Contracts §§ 87(2), 90(1) (1981). his doctrine is employed widely in subcontractor bid cases, many of which involve sales of goods. Typically, a general contractor will wish to submit a bid to a landowner for a construction project. To put together its bid, the general (“prime”) contractor will need to know how much it will have to pay to its various subcontractors (e.g., a plumbing subcontractor, an electrical subcontractor). he prime will solicit bids; it will choose the lowest best ones to use in putting together its own bid to the owner. It can be expected to, and will, rely on the bids of the subcontractors. For example, a prime may put in a bid to build a public building for, say, $123 million. In calculating the price for its bid, the prime used the bids of many subcontractors including,

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perhaps, a $2 million bid from a subcontractor who would supply the tile looring for all of the building. What if the tile subcontractor discovers it has made a mistake: can the subcontractor revoke its bid? Under the traditional common law rule, enforced at least as late as the 1930s in a famous decision by Judge Learned Hand, the answer was yes. Ofers are revocable, even if this meant that the prime contractor, if it won the general contract, would have to ind another tile subcontractor to do the work for, say, $3 million. What of the extra million dollars? he traditional common law view was that the prime contractor could not complain. If it had wanted to bind the subcontractor, the prime could have and should have made a contract with the tile supplier, conditional upon award of the general contract to the general contractor. James Baird Co. v. Gimbel Bros., 64 F.2d 344 (2d Cir. 1933). A generation later, however, promissory estoppel was used to rescue a prime contractor in a similar position. In a landmark decision by Justice Traynor, the court noted that there was every expectation that the prime would rely on the subcontractor’s bid, and in such a situation, the subcontractor could not revoke its bid to the injury of the prime contractor. Given this reliance, the subcontractor would be estopped from breaking a promise, explicit or implicit, not to revoke the bid. Drennan v. Star Paving Co., 333 P.2d 757 (Cal. 1958). he Second Restatement of Contracts in § 87(2) goes one step further by eliminating the requirement of a promise of an irrevocable ofer, although it retains a requirement that the oferor should expect reasonable reliance by the oferee. Case law in the United States has now sided with the Drennan approach, using promissory estoppel as an exception to the usual consideration rules when a promisee (in these cases, oferees) foreseeably and reasonably relies to its injury on the promise. Because this is a justice-based exception, though, the courts in modern cases generally limit damages to the reliance interest. In some cases, the reliance interest and the expectancy interest may be the same, but not generally. his would seem to align US case law with French jurisprudence. To put their common rule in as neutral terms as possible, a revoking oferor may have to compensate a relying oferee for its reliance interest. If there is no reliance, it would appear that there is nothing to stop revocation with impunity, whether under the US analysis that the oferor has that power and right, or the French analysis that even if wrongful, there would be no injury for which compensation would be necessary. We have treated the rules of these systems at some length for two reasons. First, once more than a simple understanding is attained, the rules do not lead to diferent results as much as they would seem to do at irst. Second, nearly all of these rules are in the CISG, even though they are not entirely consistent. Before reaching the CISG, though, one more brief note on US law is in order. As you will have gathered from the discussion so far, there has been increasing commercial pressure to recognize that when someone says an ofer cannot be revoked, then it cannot be revoked—legally, as well as morally and ethically. his commercial pressure was felt during the drating of the Uniform Commercial Code. Although the revocability of ofers is a matter for the law of contract in general, rules for sales of goods have been treated in common law systems as a matter of commercial law, and thus closer to merchant practice, rather than general contract law. Furthermore, because England and the United States have adopted statutes governing sales of goods, modernizing rules could be adopted immediately by legislation without awaiting the long process of case law development. So when the states adopted the UCC during the 1960s, they all adopted a UCC rule that makes a limited exception to the

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traditional common law rule. A signed writing (which now includes an authenticated electronic record) from a merchant that says it will be held open cannot be revoked for the time stated, or if no time is stated, for a reasonable time, despite the consideration rules. he period of irrevocability under this rule cannot exceed three months. UCC § 2-205. Such an ofer is called a irm ofer and is much the same as an option contract. he CISG, as just mentioned, seems to have tried to adopt all of the leading rules. Article 16 provides, (1) Until a contract is concluded an ofer may be revoked if the revocation reaches the oferee before he has dispatched an acceptance. (2) However, an ofer cannot be revoked: (a) if it indicates, whether by stating a ixed time for acceptance or otherwise, that it is irrevocable; or (b) if it was reasonable for the oferee to rely on the ofer as being irrevocable and the oferee has acted in reliance on the ofer. Aside from appearing to have the rule in all ways, the most remarkable aspect of article 16, for better and worse, is a chameleon-like quality. To the eyes of a common law student, the CISG appears to say (1) ofers are revocable (the common law rule), unless (2)(a) the ofer says it will be held open (the UCC rule, minus the formal requirements since the CISG has nixed all formal requirements under article 11) or (2)(b) the promissory estoppel exception applies (as in modern US case law). hus article 16 appears unobjectionable, and much in line with current US law except for the dispensation with formal requirements for a irm ofer. To a German scholar, article 16 looks like an inelegant statement of German law. he irst paragraph is a sop to the common law that is thankfully meaningless as it is swallowed by the second paragraph. Konrad Zweigert & Hein Kötz, Introduction to Comparative Law 364 (Tony Weir trans., 3d rev. ed. 1998). To a French lawyer, it would presumably look much the same as French law. Although article 16(1) starts from the old principle that ofers can be revoked, in the only cases where it matters (i.e., where the oferee has relied to its detriment), the oferee is protected by article 16(2)(b). And for that matter, article 16(2)(a) goes a long way to stating that ofers are not revocable ater all, especially if one keeps in mind the rules of interpretation whereby terms (including irrevocability for a reasonable time) may be implied through the practices of the parties or the industry, or even a reasonable person. (We will take up the rules of interpretation at the end of this chapter.) So CISG article 16 made everyone happy, at least at irst. he concern is that it seems to mean all things to all people, so it might not work very well to generate a clear and singular result in diicult cases. his is particularly true under article 16(2)(a) because it turns out the phrase “stating a ixed time for acceptance” is itself particularly susceptible of diferent readings, we think largely dependent on the training and expectations of the reader (i.e., civil law or common law). What if an ofer says it “lapses on Friday at noon”? Does that mean that it is certainly no good at 12:01 p.m. on Friday, and may be revoked sooner? Or does it mean that it will not be revoked before noon on Friday? We have found that students from civil

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law countries usually think the latter, and students from common law countries usually think the former. Amazing. Before taking on the problems, let us make a technical note. he discussion so far has been about revocation of ofers that have been made. here is another possibility, if the oferor moves fast enough. “An ofer, even if it is irrevocable, may be withdrawn if the withdrawal reaches the oferee before or at the same time as the ofer.” CISG art. 15(2).

Problem 3.19 St. Louis Midwestern Railway, a freight line, needs some new rolling stock. It looks at the websites of possible suppliers of boxcars at home in the United States and also in Canada and Mexico. It then solicits bids from a supplier in each of the three countries. he speciications and prices vary slightly among the ofers, and the railway executives are meeting to decide how best to proceed. You are in-house counsel and are participating in the meeting. You are asked how long the ofers will remain good and whether they can be revoked. Assume for purposes of this problem that Canada follows the common law rules (not including the UCC but including promissory estoppel) and that Mexico follows the French rule. (a) Answer your client’s questions. (b) What if each bid said, “his bid shall be governed by the law of the seller’s country without regard to the CISG”? (c) What if each bid included both the previous clause and the following: “his bid will remain open until the end of this month”? What if it contained only this phrase? (d) What if each bid included both the clause in part b and the following: “his bid will expire at 11:59 p.m. on the last day of this month”?

Problem 3.20 Redland is a suburb of Seattle in Washington State and is growing by leaps and bounds. he local authorities requested bids for the building of eight new elementary schools, two new middle schools, and a new high school. O’Malley Construction Corp. is a large general contractor and very interested in this big new project. It solicits bids for the supply of the necessary lighting and electrical ixtures for the schools. McKenzie Fixtures and Lighting, Inc. in Canada submits a bid to O’Malley ofering to supply the listed necessary ixtures for $800,000. he next lowest bid is $1.4 million. Most of the bids are between $1.4  million and $1.6  million, but McKenzie has an excellent reputation worldwide and sometimes has access to extraordinary pricing because of volume opportunities and other economies of scale. O’Malley uses the McKenzie bid in its own bid to the Redland School Board. he O’Malley bid is $75 million. Under Washington State law, you should assume, bidders for public works projects such as this one must submit, with their bids, a bond for 10 percent of the contract price to guarantee that if the bid is accepted, the work will be done. If the work is not done according to the contract, the bond is forfeited. Ater submitting its bid and its bond, O’Malley receives a message that the $800,000 bid was the result of a miscalculation and that the ofer is withdrawn. O’Malley replies with an e-mail insisting that McKenzie stick by its original bid. While the parties are exchanging increasingly heated

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messages, O’Malley receives notiication that it is the lucky winner and that the contract has been awarded to it. (a) What result under the CISG? (b) What if the operative documents all stated that they would be governed by the law of Washington State without regard to the CISG? (c) What if McKenzie is located in Quebec and that the governing law is the same as in France? (d) What if the amount of the bond to be forfeited were $500,000, not $7.5 million?

3. Acceptance here is a bit of anticlimax in discussing acceptance. It would seem that the acceptance is the climactic moment, for the acceptance forms the contract, both in domestic systems and under the CISG. Once this dramatic moment is noted, though, there is not very much to be said about acceptance. All an acceptance needs to do, and all it can do, is to indicate assent to the ofer. his assent may be by a statement or by conduct. CISG art. 18(1); see also id. art. 19. Silence or inactivity is not enough under CISG article 18(1), although a couple of times courts have found that a course of dealing between the parties may obligate an oferee to be clear if it is not accepting when the oferor obviously thinks that a deal has been made.12 here is more to say, though. he main rule-based points are technical, having to do with time and place rules, and cases can hinge on these rules because they afect matters such as revocability or lapse as well as governing law. he cases tend to deal more with the question of what constitutes acceptance. his section addresses all of these issues. he timing rules appear to complement the rules on revocability in each legal system. Ofers are fragile at common law because they are freely revocable. To mitigate the potentially harsh efects on the oferee, the common law uses what students usually call the mailbox rule. As soon as the oferee dispatches an acceptance—traditionally by putting it into the mailbox—the acceptance is efective. When an acceptance takes efect, as just mentioned, it forms the contract. At the moment the acceptance goes into the mailbox and the mailbox bangs shut, there is no longer an ofer to be revoked: there is a contract, and of course contracts are not revocable by one party without the consent of the other. (It takes a contract to undo a contract.) So as soon as the oferee decides it wants a binding contract, it can have one by sending of the acceptance. he common law thus has little worry about the oferee, reasoning that as long as the oferee can think about whether to accept (i.e., speculate at the oferor’s expense), the oferor ought to be able to think about it too. hen, the moment the oferee takes the action to bind itself, the oferor is bound too. 12. See Cour d’appel [CA] [Court of Appeal] Grenoble, Oct. 21, 1999, Case No. 97/03974, CLOUT Case No. 313 (Fr.), English translation available at http://cisgw3.law.pace.edu/cases/991021f1.html (Pierre Cardin Shoes from Spain Case); inra, Filanto, S.p.A. v. Chilewich Int’l Corp., 789 F. Supp. 1229 (S.D.N.Y. 1992). Cf. Rechtbanken van Koophandel (Kh.) [Commercial Court] Veurne, Mar. 19, 2003 (Belg.), English translation available at http://cisgw3.law.pace.edu/cases/030319b1.html#ce (suggesting that an agreement, usage, or practice might have allowed silence to be acceptance, but that seller failed to prove any, even though it had sent a letter stating that it would construe silence as acceptance).

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Other systems, not having the general rule allowing free revocability of ofers, do not use the mailbox rule. Instead, because oferors are presumed not to have the right to revoke the ofer at will, the oferee is required to make sure the acceptance reaches the oferee before the contract is formed. his complementary approach in each system can be seen most clearly by taking the exceptional case in the common law: where the parties have made an option contract (which, as you will recall, is an ofer that is irrevocable because the oferee has paid for the oferor’s promise not to revoke), the common law does not use the mailbox rule either. To accept an option contract, the option holder must get the acceptance to the oferor in order to exercise the option and form the contract of sale (although as always this outcome is subject to change if the option says otherwise). As the CISG does not have a single clear rule on the revocability of ofers, it does not have a single clear complement to govern when an acceptance takes efect. he general rule follows the civil law approach, per article 18(2): “An acceptance of an ofer becomes efective at the moment the indication of assent reaches the oferor.” his is confusing and does not at irst seem to work with the common law approach of the general CISG rule that ofers are revocable. hat rule, which appears in the irst part of CISG article 16(1), is tempered by the second part of article 16(1): “Until a contract is concluded an ofer may be revoked if the revocation reaches the oferee before he has dispatched an acceptance.” Once all of article 16(1) is unpacked, the complement of the compromise becomes clearer. Under the CISG, ofers are revocable (assuming none of the exceptions in article 16(2) apply). he ofer becomes irrevocable the moment the oferee dispatches the acceptance under article 16(1). his is kind of like the mailbox rule, but not quite: the acceptance is not efective to form the sales contract until it reaches the oferor, per article 18(1). Just as the CISG compromises on the revocability of ofers, it compromises on the mailbox rule. his is the CISG approach. Recall, though, that the oferor can change any of these rules by so stipulating in the ofer. For instance, an oferor is perfectly free to say, “We must receive your acceptance at our home oice.” Time of acceptance matters primarily for three reasons. First, the ofer may lapse ater a certain period. If an ofer must be accepted by noon on Friday, then an ofer that is efective when it is delivered by mail at 2:00 p.m. on Friday will be too late (unless the oferor that receives the late acceptance says that it agrees to the contract anyway, or unless another unusual circumstance arises, see CISG art. 21). Second, up until the moment the acceptance is efective, the oferee may withdraw the acceptance and prevent contract formation. CISG art. 22. Once the acceptance is efective, both parties are bound, and the oferee cannot prevent contract formation any more than the oferor can. And third, timing can matter for purposes of revocability of the ofer, as discussed above. In the case of the CISG, the trigger for irrevocability is dispatch because of the compromised mailbox rule. Although it may sound like physics or philosophy, there is also the practical point, at least in some situations, that time and place are linked. By providing that an acceptance becomes efective when it “reaches the oferor,” the treaty is providing a rule not only on time but also on place of acceptance. Under article 23, which says that the contract is formed when the acceptance takes efect, the place of acceptance will be the place of contract formation. Under the general rule, that is where the oferor receives the acceptance.

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his may matter under the rules of private international law, or conlicts of law as they are known in the United States. Sometimes, under the traditional versions of these rules, the place the contract was made is the place whose law governs the contract. his is called the rule of lex loci contractus: the law of the place of the contract. Where is the place of the contract? Where it was made. Where was it made? Under article 23, the contract was made where the acceptance became efective. his is more likely to be relevant when the CISG does not govern the contract—when the CISG governs, which domestic law would govern is not generally material—so the CISG rules on contract formation may seem not to matter. Recall from Chapter  2, though, that the CISG does not govern all issues even when the CISG does apply. And the CISG itself can make these rules matter under article 7(2) (“Questions concerning matters governed by this Convention which are not expressly settled in it are to be settled in conformity with the general principles on which it is based or, in the absence of such principles, in conformity with the law applicable by virtue of the rules of private international law.”). Current rules of private international law do not generally still use the rule of lex loci contractus by itself. Still, about a dozen US jurisdictions still follow it; they prefer the hard, clear rules of the Restatement (First) of Conlict of Laws (1934), which states this rule in § 332. he Second Restatement rejects the old rule in favor of the more lexible, but less predictable, “most signiicant relationship” rule. Restatement (Second) of Conlict of Laws § 188 (1971). About half of the US states use this test. Still, what constitutes the most signiicant relationship, or in a similar test used by prominent jurisdictions (including New York),13 where the “center of gravity” of the contract is located, will consider the place of contracting as well as the locations of negotiation, performance, subject matter, domicile, and place of business. Where the contract is formed does not have the signiicance it used to have, but it can still be determinative in some cases and relevant in many others. A qualiication is necessary with respect to pinpointing the place the contract is made. As mentioned at the beginning of this section, acceptance may occur through conduct. We do not know for certain, but we suspect that this mode of contract formation is quite common, particularly in established relationships between buyers and sellers. When the buyer and seller know each other, the buyer may place an order, perhaps ater referring to the seller’s website, catalog, or price list. As we know from article 16(1), this information from the seller probably is not an ofer. Rather, the buyer’s order is an ofer. Particularly in situations where the order needs to arrive quickly, which is typical in many situations because of “just in time” inventory management, the seller may simply ship the goods. hat shipment will constitute acceptance under the CISG (just as it would constitute unilateral contract formation at common law and under UCC § 2-206). In addition, such operations and contracts of sale may occur under distribution agreements or framework agreements. In these cases, the “conduct” (here performance) forms the contract under CISG article 18(3) (where the oferee may accept by an act such as sending the goods or paying the price without notice to the oferor, “acceptance is efective at the moment the act is performed”). So the contract will be formed in the oferee’s country, not in the oferor’s as under article 18(1). 13. E.g., Lazard Freres & Co. v. Protective Life Ins., 108 F.3d 1531, 1539 (2d Cir. 1997).

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Whether a particular act constitutes acceptance, of course, may not be as clear as in the preceding example. he same is true for purported acceptances that are expressed in words rather than through an act. Acceptance is thus a matter of interpretation, and just as a tribunal may have to decide whether a proposal constitutes an ofer, it may have to decide whether a response constitutes an acceptance. he rules of interpretation can again come into play, but there is also a more particular article governing what constitutes acceptance. Under article 19, an acceptance cannot contain any material additions to, limitations on, or modiications of the ofer, and virtually everything is considered material. his rule is classic, but its retention in the CISG causes a variety of problems, as it does in the classic cases in domestic systems. Some of these problems are the subject of the next section of this chapter, but one of them should be explained here. To understand the issue, keep in mind a terminological point that has the potential for conceptual confusion. his section has discussed the acceptance of an ofer. here is another idea that uses the same term: acceptance of the goods. In the prototype on which the law has been based, the buyer and the seller form their contract by one of them making an ofer and the other accepting it. Later, the seller tenders the goods to the buyer. he buyer then either accepts the goods or rejects them if they fail, in a material way, to conform to the contract. We will take up these matters in Chapter 8 on Remedies. For present purposes, note not only the potential for confusion between acceptance of an ofer and acceptance of the goods, but also the possibly even more confusing point that although at irst they seem not to have anything to do with each other, acceptance of the goods in some cases might constitute acceptance of an ofer, or even a counterofer. Suppose the buyer orders 3240 pairs of shoes. he seller ships 2700, perhaps with some paperwork noting that 2700 have been shipped. he shipment might be construed as a counterofer under article 19. Although the oferee can accept by conduct, including shipment, this shipment is not even close to being in conformity with the ofer. As it changes the quantity term, it might be considered a rejection and a counterofer under CISG article 19. Given that the quantity is so diferent, this interpretation seems right; it might have been a closer question if the seller shipped close to 3240 pairs, for then it would appear that the seller meant to accept, was signaling its acceptance by shipment, and was also breaching the contract by sending too few (unless of course the seller made it clear that this was not an acceptance). See UCC § 2-206. So when the seller’s conduct is examined in light of the circumstances and the rules of the treaty, it appears that the seller has rejected the ofer (which terminates the ofer under article 17), and made a counterofer to sell 2700 pairs of shoes. he buyer need not accept that ofer, but if it accepts the shoes (accepting the goods), its conduct should be interpreted as accepting the seller’s counterofer. So held a German provincial court of appeal in the Italian Shoes Case. Oberlandesgericht [OLG] Frankfurt a.M. (Appellate Court of Frankfurt), May 25, 1995, Docket No. 5 U 209/94, CLOUT Case No. 291 (Ger.). Another case exempliies how a nonconforming shipment may nevertheless constitute acceptance. he buyer in France orders from an Italian seller 3500 pairs of brassiere cups for use in the swimsuits that the buyer manufactures. he seller sends the cups, which are made on standard cones according to the buyer’s speciications. he buyer ships the cups to a factory in Tunis where the cups are sewn into the swimsuits. he covering on the cups, however, fails to

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adhere to the illing in the cups. his means that the cups fail to conform to the contract, as it is presumed under CISG article 35 that the goods sold will work the way they are supposed to work. (Need we say that the covering is not supposed to come of of the illing?) As to the law, these obligations of the seller will be discussed at length in the next chapter. On the reasoning of the Italian Shoes Case in the preceding paragraph, it might have been open to the seller to argue that while the buyer made an ofer for cups that would work (under article 35), shipping goods that would not work constituted a rejection and a counterofer to supply cups that would not work. he buyer, the seller might then say, accepted the goods—at the latest—by shipping them to Tunis and sewing them in the swimsuits. hus a contract for unworkable cups was formed. his kind of argument, although not clearly unsound logically, is obviously unsound sensibly: it does not make sense to hold that the buyer meant to form a contract for faulty brassiere cups. To avoid this result, the rule is that the seller’s shipment of nonconforming goods in such a case constitutes both acceptance, thus forming the contract, and at the same time a breach of that very contract. he possibility of simultaneous acceptance, contract formation, and breach is startling to the uninitiated but is sensible. For a good explanation, see oicial comment 4 to UCC § 2-206. Although there is no place in the CISG for it to be explained, the result is clear enough from cases such as the Italian Brassiere Cups Case, Cour d’appel [CA] [Court of Appeal] Rennes, May 27, 2008, CLOUT Case No. 1029 (Fr.), English translation available at http://cisgw3.law.pace.edu/cases/080527f1.html.

Question 3.21 How should a tribunal decide whether to follow the Italian Shoes Case or the Italian Brassiere Cups Case?

Problem 3.22 Freddone is an environmentally friendly, post-Freon cooling chemical manufactured in Italy by Buongiorno S.A. according to a formula protected by patent. Buongiorno has ofered to sell 100 barrels of it to Hudson Heating & Cooling Corp. at $1200 per barrel for a total price of $120,000. Which of the following would constitute acceptance of Buongiorno’s ofer? (a) Buongiorno sends an invoice, and Hudson pays it. (b) Instead of outright paying the invoice, Hudson has a letter of credit issued in favor of Buongiorno. Buongiorno receives the letter of credit and says nothing.

Problem 3.23 What if the ofer came from Hudson, the buyer? (a) Buongiorno sends an invoice to Hudson. (b) Buongiorno ships the goods. (c) Buongiorno cashes Hudson’s check.

Problem 3.24 (a) he buyer, Bay Area Watchmakers, is a charmingly fusty watch repair business in San Francisco specializing in old-fashioned Swiss watches. Seller, Douzals AG, is a parts supplier in Switzerland. he buyer considers this seller the most reliable and the one best

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able to supply old parts, which can be diicult to obtain. he seller keeps its website pretty well updated with available parts and their prices. On May 5, Buyer makes an order by mail (this is an old-fashioned place, ater all, with a proprietor and clientele interested in old-fashioned ways) for various parts, some of which are available and some of which are not, and asks that parts in stock be sent promptly at the list prices and that the others be shipped as they become available, ofering to pay for them at list prices as they are shipped. he order arrives May 11. Seller responds by mail (see previous comment), stating, “hank you for your order. In-stock parts will be mailed within one week. An invoice for them is enclosed herewith. As you requested, we will ship the other parts, with appropriate invoices, as they become available.” he letter is mailed in Bienne, Switzerland, on May 13. On May 18, the seller ships the goods. he letter arrives in San Francisco on May 19. he goods arrive on May 21. When was the contract of sale formed? Why did you reach your answers? (b) On May 15, Douzals receives a fax from L’Horlogerie de la Madeleine, a deluxe watch shop near the Ritz in Paris. It ofers to pay a premium for several particular parts, not in stock, but that it would like to receive as soon as possible. Bay Area Watchmakers has requested the same parts. he premium is substantial, but Douzals is worried about what it said in its letter to the buyer in San Francisco. Douzals wants to know if it can send a fax to rescind what it said in its letter, which has not yet arrived. Assume that today is May 15. If the answer is yes, what must Douzals do and how fast must Douzals do it? See CISG arts. 18, 22–23. (c) Now consider a more modern scenario. Douzals has an ordering function enabled on its website. It can be used by anyone. On June 6, John Webster at Empire State Clock & Watch in New York City uses the Douzals website to order various parts at prices listed on the website. He uses a company credit card for payment. Ater clicking on the button that says, “Submit Your Order,” John sees the following message: “You will receive a conirmation at the e-mail address you gave in your order. Orders are not inal until conirmed by us.” On June 7, Douzals processes the order and sends the conirmation e-mail. he subject is “ORDER CONFIRMATION,” and it is blocked by Postarolo, the buyer’s spam iltering service. Empire State Clock & Watch signed up for the Postarolo service a few months beforehand ater getting hit with a nasty computer virus. he advantage of Postarolo, John thought, was that it stops spam and viruses before they ever reached his computer. He can look at the blocked messages on the Web, which he does every week or two; occasionally he inds some good messages that got blocked as spam. He inds the message from Douzals when he checks his Postarolo account on June 16. He then designates it for delivery to his inbox, and it arrives a couple minutes later. When was the contract formed? How long would Douzals have to change its mind if something happened like in the last problem? See UNCITRAL Model Law on Electronic Commerce art. 15(2). As mentioned in the beginning of our discussion of ofers, the ideal acceptance says nothing more than “I accept” or the like. his rule, called the mirror image rule and used in traditional legal analysis across many systems, including the civil law, the common law, and the CISG, is based on a sense of how bargaining and contract-making work. Someone, sooner or later, makes

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an ofer. he oferee may then accept it. If so, then there is perfect consent, and the contract is made. CISG art. 23. If the oferee instead suggests something diferent, then there is not yet agreement, and there is no contract yet. If Sam ofers to sell Betty a book for $10, and she says, “I accept,” then there is a contract. If she says, “Yes, I’ll take it for $9,” then there is not. he parties have not yet agreed, and the law sees Betty’s response as evidence that there is no consent, that she thereby has rejected Sam’s ofer, which terminates his ofer, CISG art. 17, and that she has made a counterofer. Sam is now the counteroferee, and he can say, “I accept,” or make a counterofer himself, or do nothing and let the counterofer lapse. his works very neatly in the paradigm. It does not work at all neatly in reality. Suppose that, in response to Sam’s $10 ofer, Betty said, “Sure, that’s ine, I’ll take it—drop it of at my apartment tomorrow.” he classical common law view was that Betty has made a rejection and counterofer because she has added a term (delivery time and place). he classical version of the mirror image rule said that a purported acceptance that varied or added to the ofer was not an acceptance; it was a rejection and counterofer. Ater all, what if Sam can’t get it to Betty’s apartment tomorrow? He never agreed to that delivery term. How can we say that the parties have a contract with that delivery term? On the other side of the equation, we cannot say that Betty agreed without the delivery term. She may not be prepared to take the book now, and she may need it tomorrow. If she cannot get this delivery term, she may prefer to get the book from someone else. So the law saw no contract. (We use the past tense in describing the common law position as the traditional mirror image rule has been modiied to deal with the problems being raised here and in the next section.) he civil law would probably take the same view, assuming the delivery term is material to the contract. he CISG certainly takes this view in article 19. A purported rejection that “contains additions, limitations or other modiications is a rejection of the ofer and constitutes a counterofer.” CISG art. 19(1); see also BGB § 150(2). his is the traditional mirror image rule. Although it appears to be tempered by a materiality rule in article 19(2)—it seems to say that only material changes make a purported acceptance into a rejection—article 19(3) destroys any hope that materiality can come to the rescue. Article 19(3) deines nearly everything as being material. And there may even be clauses that are material that are not covered in article 19(3). (Farnsworth mentioned merger clauses, discussed at the end of the chapter, as a possibility.)14 As it is written, CISG article 19 is very close to the traditional common law mirror image rule. So in reality, do Sam and Betty have a contract? In reality, we think, Sam and Betty have been talking to each other. With oral communication, we hope they will identify any problems and resolve them. And in reality, we will in no event have litigation over a $10 book. In reality, the problem is that a litigated case will be about thousands or millions of dollars worth of goods, the communication will have been in writing, and the parties will not have read the details of the writings. hey will remain blissfully unaware of the disagreement until ater one party performs in a way that, according to the other party, is a breach. And then, in reality, either the parties will resolve their misunderstanding, or there will be a ight and a mess, and the lawyers will be called, making necessary the next section. 14. E. Allan Farnsworth, Comments on Article 19 CISG [Modiied Acceptance of Ofer], in C.M. Bianca & M.J. Bonell, Commentary on the International Sales Law 175, 181–82 (1987).

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B. Beyond Ofer and Acceptance Because the making of modern commercial contracts does not necessarily hew to the traditional paradigm, contract formation has to be considered in light of business practice as well as legal rules. We irst consider how the CISG and other legal systems address the famous problem of the “battle of the forms.” At the end of this section, we also mention the doctrine, prevalent mainly in German-based systems, of commercial conirmation letters.

1. Battle of the Forms As observed in the previous section, the traditional rules of ofer and acceptance work well enough in the paradigm for which they were made. he parties bargain, making ofers and counterofers, back and forth, and when a proposal is acceptable, the counteroferee accepts it. hat acceptance may come as a promise in the traditional form, such as, “We write to accept your proposal of January 17,” or it may come by simple performance: seeing an acceptable counterofer that allows acceptance by performance, the counteroferee may just perform, signifying its agreement and thus forming and performing the contract at the same time. he latest counterofer states the terms of the contract; those terms have been accepted, so they are the terms of the contract. If the bargaining were described in the common warfare metaphor, the parties have been doing battle over what the terms of the contract will be. In a battle, the winning side is the one that ires the last shot, with no one on the other side able or willing to ire back. In contract formation it is the same: the sender of the latest counterofer before acceptance wins. In a typical battle-of-the-forms case, the parties send each other standard forms. Each party will have drated its form with its own interests in mind, so the parties’ forms will not match exactly, although the most important terms (e.g., price and quantity) will typically match ine because they are negotiated terms and are indicated by illing in blanks rather than being stated in preprinted clauses. Because the forms do not match perfectly—they are not mirror images of each other—they are not ofer and acceptance. he irst one is an ofer; the next from the other party is a rejection and counterofer; the next from the irst party will be a rejection of the counterofer and will be another counterofer, and so on. he parties will probably pay attention only to the negotiated terms (the goods, the quantity, the price), and once they see agreement there, they will perform. In the typical cases—and when US parties are involved, there are many of them—no one notices or pays attention to the lack of agreement on the “ine print” points until ater something has gone wrong. Something goes wrong only well ater both parties have performed enough to make it quite clear that they thought there was a contract. In the traditional analysis, both in common law and civil law, this will mean that the last shot rule will govern. Of course, the law does not have an actual “last shot rule.” he phrase “last shot” is a metaphor for the practical result of the mirror image rule (which itself has a metaphorical name), and there is, at least traditionally, a mirror image rule in the law. Codes do not use the metaphorical name, but the description is accurate. A rule such as the ones in CISG art. 19(1) or BGB § 150(2), which say that a purported acceptance is not an acceptance if it varies from the ofer but is instead a rejection and a counterofer, is indeed providing a mirror image rule. hat is why a simple statement such as “I accept your ofer” is the clearest acceptance: the terms of the acceptance are precisely those of the ofer; they are the metaphorical mirror image of the ofer. When put into operation in real transactions, this rule means that

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the exchanged preprinted forms cannot form a contract. Each form proposal is killed of by the next one, which always—in practice—has diferent or additional terms in the ine print. he last form before the other party performs is the only form let standing, and it is implicitly accepted by the performance. he terms in that last form are the contract. hey win. hat is how the rule of CISG article 19(1) leads to a “last shot rule” result. No one sees this as good. Although the rule of article 19(1) appears reasonable and makes sense on the paradigm where the parties each read the successive forms and perform only when they are satisied, in many situations the parties do not read any of the ine print. In such a case, whose terms should govern? To say that it is the party who sent the last form is arbitrary; it is no better than a rule saying that the party who sent the irst form should win, and neither rule is any better than saying that the court should lip a coin. he result of the rule has no relation to the agreement of the parties. In general, it means the seller will win. Although at irst that result may seem appealing (shouldn’t the seller be able to set the terms on which it will part with its own property?)—it has no good answer to the converse question (shouldn’t the buyer be able to stipulate what it requires before it will part with its own money?). his is why we have been a bit mystiied that article 19(1) retained the mirror image rule and failed to temper it meaningfully in article 19(2) and (3). he leading domestic systems have all moved away from such strict mirror image rules in the context of a battle of the forms. To be sure, no clear consensus has arisen as to how to solve the conundrum. And conundrum it is, inevitably, for all of the systems of contract law are based on some form of consensualism, and in cases involving battling forms, there has been no consent on some terms but (as we will see in a moment) the conclusion that there can therefore be no contract is manifestly false because both parties have performed. Given the conundrum and the lack of clear consensus, perhaps we should not be surprised that the CISG simply legislated the traditional rule and let the world to igure out how to get around it, as US, French, and German law have all done to one degree or another with respect to their own versions of the mirror image rule. In understanding US, French, and German law, we begin with the mirror image rule. It appears, as we have noted, in German BGB § 150(2), as well as US law, see Restatement (Second) of Contracts §§ 58–59 (1981). It does not appear clearly in the French Civil Code, but the doctrine deduced it from the principles in the Code, particularly in articles 1101 and 1108 (requiring consent to be bound to a contract). An earlier projet for reform of the French Civil Code would have stated the rule explicitly. See Travaux de la Commission de Réforme du Code Civil:1948–1949 705 (1950). So all three systems traditionally have had the rule, and it was ine for paradigmatic transactions. In battle-of-the-forms sorts of scenarios, US law has made dramatic but not entirely successful changes. German law and French law seem to have sotened their mirror image rules in order to avoid last shot results, at least sometimes. And the CISG is unclear, although a number of theories have been ofered on how to avoid the last shot rule. French law is least troubled by scenarios involving a battle of the forms. We wonder if French businesses do not use forms in the way they are used in some other countries. here is little case law, or even doctrinal writing, about the battle of the forms in French law. A small piece of linguistic anthropology: there is no standard way to translate “battle of the forms” into French. As they have no word or phrase to describe the problem, we

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wonder if they have largely escaped it. As the law in France is much the same as in Germany and the United States, we deduce that the escape may be linked to business practice rather than legal rules. But we do not know, and there is another possible explanation. he problem is not entirely unknown to French law. When a battle-of-the-forms case arises, there are two possible solutions. One is the last shot rule. Although ordinarily silence by itself is not acceptance, the Cour de cassation has held that a lower court, in exercising its sovereign power to determine the intention of the parties, may decide that circumstances coupled with silence can indicate acceptance. See Cour de cassation [Cass.] [Supreme Court for Judicial Matters], 1e civ., May 24, 2005, Bull. civ. I, No. 223 (Fr.). his accords with the mandate under Civil Code article 1156 that the lower court determine the intent of the parties. his may be another explanation for why so little legal writing exists in France on the battle of the forms. he issue may be too tightly bound up in intensely factual determinations of lower courts. his kind of factual analysis may not be susceptible of generalization into legal rules, as each case turns on its own facts and the lower court determinations in such cases may not be noticed except by the parties to the case. he other possible solution to a battle of the forms in French law shows how the mirror image rule has been sotened. French law has come to distinguish between essential terms and others. In a contract of sale, the thing sold and the price are objectively essential because of the mandate of Civil Code article 1583. In addition, the parties may make other terms subjectively essential—for instance, if they have been negotiating closely over delivery dates and the court can see that they would not be bound without agreement on those dates. Without agreement on objectively and subjectively essential terms, there is no consent on which to ind a contract. But if they have agreed on the essential terms, and their performance shows that disagreement on other terms was not important enough to stop them from going forward—in other words, consent was not conditional on agreement to those terms—then the court can ind a contract even without agreement on those terms.15 If events turn out to make those terms important, then the court can supply those terms. his solution avoids the last shot rule. he terms of the contract are the essential terms, on which the parties have agreed, plus terms supplied by the court—not whatever terms were in the last form before acceptance. German law has reached a result similar to this second French solution. he analysis begins with three key articles:

German Civil Code (BGB) Translations from Bundesministerium der Justiz (Langenscheidt Translation Serv. & Neil Musset, trans.) http://www.gesetze-im-internet.de/englisch_bgb/englisch_bgb. html#p0430 Section 150 Late and altered acceptance ... 15. he inluential case helping to establish this approach, to be sure, does not involve a battle of the forms: it involved the sale of a racehorse when the seller did not press a particular demand until ater the buyer had indicated his acceptance. See Cour de cassation [Cass.] [Supreme Court for Judicial Matters], 1e civ., Jan. 15, 1963, Gaz.

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(2) An acceptance with expansions, restrictions or other alterations is deemed to be a rejection combined with a new offer.

Section 154 Overt lack of agreement; lack of notarial recording (1) As long as the parties have not yet agreed on all points of a contract on which an agreement was required to be reached according to the declaration even of only one party, the contract is, in case of doubt, not entered into. An agreement on individual points is not legally binding even if they have been recorded. ...

Section 155 Hidden lack of agreement If the parties to a contract which they consider to have been entered into have, in fact, not agreed on a point on which an agreement was required to be reached, whatever is agreed is applicable if it is to be assumed that the contract would have been entered into even without a provision concerning this point.

Section 154 seems to require agreement on all essential points, and it includes the rule that in cases of doubt, there is no contract. Section 155, though, shades how the rules of § 154 are understood. Although it is not explicitly about a battle of the forms, it is well suited for use in resolving such disputes, and German courts have used all three articles to reach a resolution of those issues. he evolution away from a last shot rule began in 1973 when the Bundesgerichtshof (the BGH, or Federal Supreme Court) observed that the seller would generally have the last shot, but the seller could hardly contend in good faith (recall BGB § 242 on good faith) that the buyer had accepted all of the seller’s terms simply by performing. Bundesgerichtshof [BGH] [Federal Supreme Court], Sept. 26, 1973, BGHZ 61, 282 (Ger.). his is most obviously true when the buyer’s form contradicts the seller’s. See id. hus there was no agreement to the seller’s terms in its last shot, and the last shot result would not accord with the consent of the parties. Nor would it accord with their consent to hold under § 154 that there was no contract at all. Id. If the parties have performed, they obviously thought there was a contract. Here § 155 helps. he court concluded that the parties’ conduct showed that they did not intend disagreement on the disputed point to nullify their contract. As the case law has further developed, the courts have continued to hold that in battle-of-the-forms situations, the contract is formed despite disagreement between the parties’ terms. he courts can supply the missing terms. See Oberlandesgericht [OLG] Köln [Appellate Court of Cologne], Mar. 19, 1980, Case No. 2 U 95/79  (Ger.); see also Bundesgerichtshof [BGH] [Federal Supreme Court] Mar. 30, 1985, NJW 1838, 1985 (Ger.). German courts, once they see that the parties have considered that they had a deal, can ind a contract and, instead of using the terms from the last shot, can use the background law to supply the necessary terms.16 Pal. 1963 9–12. Although it is not certain, we believe that if the currently proposed revision of the French Civil Code is enacted, the result we explain in the text will become clearer still. Avant-Projet de Réforme du Droit des Obligations art. 21 (Oct. 23, 2013). 16. We should note that this theory is not stated as clearly in German law as we state it here; the cases and their results are more variable, and the reasoning more nuanced, sometimes based on ideas that we do not attempt to

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he law in the United States sometimes reaches a similar result and sometimes does not. Despite an early willingness to grapple with the issue and resolve it, the solution, although dramatic, has not been entirely successful. he rules for a battle of the forms in a sale of goods are contained in the now-infamous § 2-207 of the UCC. It has generated countless cases and scholarly articles, and the innumerable points of controversy are mind-boggling. Even its basic structure is frequently misunderstood. We will attempt a simpliication so at least the architecture of the approach will be apparent. As you read the explanation, you may wish to match our exposition to the words of the statute. he irst part of the rule, § 2-207(1), is about contract formation. As you may have noticed by now, battle-of-the-forms cases are very rarely fought over the issue of whether a contract was formed. he parties have generally (nearly always?) performed, so obviously a contract was formed. he question in the cases, then, is not whether a contract was formed but what the terms of the contract are. It would be nice, then, to get away from analyzing contract formation. he UCC made some attempt at that in § 2-204 (conduct may establish a contract, even if the moment of formation is unknown, and even if terms are let open). Unfortunately, § 2-207 does not smoothly continue along that path. Instead, it makes the terms of the contract—which is what the ight is all about—turn on how the contract was formed. Section 2-207(1) gives a rule on contract formation that can be used in battle-ofthe-forms cases, and what it mainly, sort of, does is kill the mirror image rule. A purported acceptance is an acceptance “even though it states terms additional to or diferent from those ofered,” it says. his is the opposite of everything else:  CISG article 19(1), the common law mirror image rule, BGB § 150(2), and the older rules of French and German law. hat means that the acceptance that contains additional or diferent terms is not a rejection and counterofer but, as § 2-207 says, an acceptance. So it forms the contract. You may think that is all very well, but then the obvious question is what to do about the additional or diferent terms. Are they part of the contract that has now been formed? Part of the point of the mirror image rule, ater all, was that an acceptance could not contain additional or diferent terms because then no one would know whether they were part of the contract. What to do under § 2-207? It depends. he answer is that you have to keep reading, and § 2-207(2) answers the question, sort of. It says that the “additional terms” (but not the “diferent” ones referred to in subsection 1)17 “are to be construed as proposals for addition to the contract.” To become part of the contract, they therefore have to be accepted. Current case law does not generally construe performance as acceptance of such terms because judges now understand that such a holding would return the law to the last shot rule, and the point of § 2-207 is to avoid that result. So without some kind of acceptance, aside from simple summarize here. See generally Basil Markesinis, Hannes Unberath & Angus Johnston, The German Law of Contract: A Comparative Treatise 79–81 (2d ed. 2006). 17. Note that additional and diferent are not the same. A diferent term means that the acceptance addresses a matter in a diferent way than the ofer. In other words, it contradicts the ofer. An additional term, on the other hand, appears in the acceptance and says something that does not contradict the ofer but that adds to it. For example, if the ofer says that disputes will be litigated in a court in Washington State and the acceptance says that disputes will be arbitrated in Paris, there are diferent terms on dispute resolution. On the other hand, if the ofer says nothing about delivery and the acceptance says that deliveries must be made before 2:00 p.m., then the delivery term in the acceptance is an additional term, not a diferent one.

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performance, those terms wither and die, unless the transaction is between merchants. In this book, the transaction is nearly always between merchants, and in such cases, a diferent rule applies: the additional terms automatically become part of the contract unless (1) the ofer expressly says that acceptance must be on its terms, or (2) the additional terms are a material alteration of the ofer, or (3) the other party gives notice of its objection, either beforehand or aterward. You will not be surprised to learn that a fair amount of case law is devoted to deciding what constitutes a material alteration. To summarize:  a purported acceptance is generally an acceptance. It forms the contract. he additional terms, between merchants, become part of the contract except in the three stated cases. Diferent terms, however, do not become part of the contract. hey are not mentioned in the text of § 2-207(2),18 so they are not proposals for addition or otherwise addressed. Diferent terms thus knock each other out. In addition, diferent terms are knocked out under § 2-207(2)(c) because courts presume that parties object to contradictory terms. Scholars frequently note that § 2-207 does not state a knockout rule explicitly, but it is easy enough to infer, and in any case the courts seem quite fond of the rule. And it’s got a memorable name. hose are the irst-line rules for a battle of the forms. But this is not a brief and glorious battle conined to only a irst-line engagement. Look back at § 2-207(1). Ater it appears to kill of the mirror image rule, there is an “unless” clause. he purported acceptance is an acceptance, despite stating additional or diferent terms, “unless” it says “expressly” that acceptance is conditioned on its terms. If the purported acceptance does say that expressly, then it is not an acceptance ater all. It is a rejection and a counterofer. he mirror image rule turns out not to be dead, but merely wounded. his concession to a party’s expressly stated wishes aligns well with consensual theories of contract—what the party says ought to be respected—but it is not very practical. When a party states such an express condition, there are two possibilities. One is that if it is the last form before performance, then its terms will be deemed accepted by the implied consent signiied by the other party’s performance. hat result, however, would revive not only the mirror image rule but the dreaded last shot rule, which § 2-207 was supposed to kill. Some early cases reached this result, but the most prominent has been overruled,19 thankfully. More current cases tend to do one of two things. Some hold that performance is not acceptance of the terms. Others are very demanding about what an “express” condition is. By applying such a strict standard these cases hold that the “unless” clause of § 2-207(1) has not been invoked. With the latter analysis—an extremely strict standard for inding an express condition—the purported acceptance is still an acceptance because the “unless” clause has not been invoked, the acceptance forms the contract, and the terms are still determined under § 2-207(2). With the former analysis, the “unless” clause is invoked, so the purported acceptance is not an acceptance and neither is performance, and thus no contract is formed.

18. Unfortunately, they are mentioned in comment 3, which muddies the result that we state with such conidence in the text. 19. Roto-Lith, Ltd. v.  F.P. Bartlett & Co., 297 F.2d 497 (1st Cir. 1962), overruled by Ionics, Inc. v.  Elmwood Sensors, 110 F.3d 184 (1st Cir. 1997).

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here is an ofer, there is a purported acceptance that is not an acceptance but that is a rejection and counterofer, and there is performance. But as there is still no acceptance, there is still no contract, so far as the writings disclose. As mentioned above, though, there is no doubt that there is a contract somehow or another, as the parties have performed and were hardly making gits to each other. Here is where § 2-207(3) comes into the picture. “Conduct by both parties which recognizes the existence of a contract is suicient to establish a contract,” it says sensibly, “although the writings of the parties do not otherwise establish a contract.” hat is precisely our situation when one party successfully invokes the “unless” clause of § 2-207(1) and expressly makes acceptance conditional on its terms. he writings of the parties do not establish a contract because there is no acceptance. he parties’ conduct—performance in the typical cases—establishes the contract. What, then, are the terms? “In such case,” the statute says, the terms are those on which the parties’ writings agree, with all other terms to be supplied by the gapilling articles elsewhere in UCC Article 2. Everyone loves § 2-207(3) (which is much the same as in current German case law and in one of the current French solutions—the solution that is not the last shot rule). Section 2-207(3) gives a simple, clear rule for determining the terms, and that is the issue over which the parties are ighting. It is like a really big knockout rule. Under the usual knockout rule of § 2-207(2), contradictory terms knock each other out. Under the really big knockout rule of § 2-207(3), the statute knocks out all terms except those on which the parties have agreed. Nice! And there does not appear to be any complex statutory interpretation involved. But beware. Although it is true that nothing too complex is involved in § 2-207(3), it is easy to skip over some crucial words: “[i]n such case.” he § 2-207(3) rule for determining the terms of the contract applies only “[i]n such case.” What case? When the parties’ conduct establishes a contract but their writings do not, according to the irst sentence of § 2-207(3) (quoted in the previous paragraph). hat means that § 2-207(3) applies only when there is not an acceptance either under § 2-207(1) or otherwise. Put a diferent way: you must determine irst whether there is ofer and acceptance through the parties’ writings. To make that determination, you need to use § 2-207(1). hat is the irst step. If the writings of the parties do form a contract, then the terms are determined by § 2-207(2). Only if the writings of the parties do not form a contract are the terms determined by § 2-207(3). Two other points are necessary to round out a basic picture of § 2-207. First, § 2-207(1) also refers to a “written conirmation.” he draters of § 2-207 had at least two diferent commercial situations in mind when constructing the section. One, as discussed above, is the battle of the forms where the parties have not yet formed their contract at the time the forms are sent. In those cases, contract formation will either have to be from inding ofer and acceptance in the forms or from inding contract formation through conduct. he other is the situation where the parties have reached their deal orally—in person or over the telephone, for instance—and then send standard forms to conirm their deal. hese standard forms may well state additional or diferent terms. Although the statute hardly says so very clearly, the idea seems to be that additional or diferent terms in such a written conirmation should be analyzed under § 2-207(2), just like additional or diferent terms in an acceptance. he second point is related to the irst: again, although the statute does not say so very clearly

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anywhere in particular, the courts have no trouble giving binding force to any terms on which the parties have actually agreed, even if the terms do not appear in the writings.20 Although it may seem lengthy, this explanation should give you the basic layout of US, French, and German approaches to battles of the forms and similar problems. And we introduced this section with the basic take on the CISG. his basic understanding of the CISG— as incorporating the mirror image rule, which can lead to a last shot rule—can be seen from the following case. When reading the case, you should note that the court discusses not only the CISG but also the “Arbitration Convention,” generally called the New York Convention, but more formally the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958), codiied at 9 U.S.C. Ch. 2.

Filanto, S.p.A. v. Chilewich International Corp. United States District Court for the Southern District of New York, 1992 789 F. Supp. 1229 brieant, Chief Judge. ... This case is a striking example of how a lawsuit involving a relatively straightforward international commercial transaction can raise an array of complex questions. Accordingly, the Court will recount the factual background of the case, derived from both parties’ memoranda of law and supporting afidavits, in some detail. Plaintiff Filanto is an Italian corporation engaged in the manufacture and sale of footwear. Defendant Chilewich is an export-import irm incorporated in the state of New York with its principal place of business in White Plains. On February 28, 1989, Chilewich’s agent in the United Kingdom, Byerly Johnson, Ltd., signed a contract with Raznoexport, the Soviet Foreign Economic Association, which obligated Byerly Johnson to supply footwear to Raznoexport. Section 10 of this contract—the “Russian Contract”—is an arbitration clause. . . . This contract was signed by Byerly Johnson and by Raznoexport, and is sometimes referred to as “Contract No. 32–03/93085.” The irst exchange of correspondence between the parties to this lawsuit is a letter dated July 27, 1989 from Mr. Melvin Chilewich of Chilewich International to Mr. Antonio Filograna, chief executive oficer of Filanto. This letter refers to a recent visit by Chilewich and Byerly Johnson personnel to Filanto’s factories in Italy, presumably to negotiate a purchase to fulill the Russian Contract, and then states as follows: “Attached please ind our contract to cover our purchase from you. Same is governed by the conditions which are enumerated in the standard contract in effect with the Soviet buyers [the Russian contract], copy of which is also enclosed.” The next item in the record is a letter from Filanto to Chilewich dated September 2, 1989. This letter refers to a letter from Chilewich to Filanto of August 11, 1989, which 20. Admittedly, there could be a problem with an orally agreed quantity because of the statute of frauds (§ 2-201). his is too ine a point to address in this basic overview, however.

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“you [Chilewich] sent me with the contracts n 10001–10002–10003.” These numbers do not correspond to the contract sued on here, but refer instead to other, similar contracts between the parties. . . . The last paragraph of the September 2, 1989 letter from Filanto to Chilewich states as follows: “Returning back the enclosed contracts n 10001–10002–10003 signed for acceptance, we communicate, if we do not misunderstood, the Soviet’s contract that you sent us together with your above mentioned contract, that of this contract we have to respect only the following points of it: – n 5 Packing and marking – n 6 Way of Shipment – n 7 Delivery—Acceptance of Goods We ask for your acceptance by return of post.” [SIC] The intent of this paragraph, clearly, was to exclude from incorporation by reference inter alia section 10 of the Russian contract, which provides for arbitration. Chilewich, for its part, claims never to have received this September 2 letter. In any event, it relates only to prior course of conduct. It is apparent from the record that further negotiations occurred in early 1990, but the content of those negotiations is unclear; it is, however, clear that deliveries of boots from Filanto to Chilewich were occurring at this time, pursuant to other contracts, since there is a reference to a shipment occurring between April 23, 1990 and June 11, 1990. The next document in this case, and the focal point of the parties’ dispute regarding whether an arbitration agreement exists, is a Memorandum Agreement dated March 13, 1990. This Memorandum Agreement, number 9003002, is a standard merchant’s memo prepared by Chilewich for signature by both parties conirming that Filanto will deliver 100,000 pairs of boots to Chilewich at the Italian/Yugoslav border on September 15, 1990, with the balance of 150,000 pairs to be delivered on November 1, 1990. Chilewich’s obligations were to open a Letter of Credit in Filanto’s favor prior to the September 15 delivery, and another letter prior to the November delivery. This Memorandum includes the following provision: “It is understood between Buyer and Seller that USSR Contract No. 32–03/93085 [the Russian Contract] is hereby incorporated in this contract as far as practicable, and speciically that any arbitration shall be in accordance with that Contract.” Chilewich signed this Memorandum Agreement, and sent it to Filanto. Filanto at that time did not sign or return the document. Nevertheless, on May 7, 1990, Chilewich opened a Letter of Credit in Filanto’s favor in the sum of $2,595,600.00. The Letter of Credit itself mentions the Russian Contract, but only insofar as concerns packing and labelling. Again, on July 23, 1990, Filanto sent another letter to Chilewich, Ex. D to October 23 Filograna Afidavit, which reads in relevant part as follows: “We refer to Point 3, Special Conditions, to point out that: returning back the above-mentioned contract, signed for acceptance, from Soviet Contract 32–03/93085 we have to respect only the following points of it: – No. 5—Packing and Marking – No. 6—Way of Shipment – No. 7—Delivery—Acceptance of Goods”

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It should be noted that the contract referred to in this letter is apparently another contract between the parties, as the letter refers to “Sub. Contract No. 32–03/03122,” while the contract sued on in the present action is No. 32–03/03123. This letter caused some concern on the part of Chilewich and its agents: a July 30, 1990 fax from Byerly Johnson, Chilewich’s agent, to Chilewich, mentions Filanto’s July 23 letter, asserts that it “very neatly dodges” certain issues, other than arbitration, covered by the Russian Contract, and states that Johnson would “take it up” with Filanto during a visit to Filanto’s ofices the next week. Then, on August 7, 1990, Filanto returned the Memorandum Agreement, sued on here, that Chilewich had signed and sent to it in March; though Filanto had signed the Memorandum Agreement, it once again appended a covering letter, purporting to exclude all but three sections of the Russian Contract. There is also in the record an August 7, 1990 telex from Chilewich to Byerly Johnson, stating that Chilewich would not open the second Letter of Credit unless it received from Filanto a signed copy of the contract without any exclusions. In order to resolve this issue, Byerly Johnson on August 29, 1990 sent a fax to Italian Trading SRL, an intermediary, reading in relevant part: “We have checked back through our records for last year, and can ind no exclusions by Filanto from the Soviet Master Contract and, in the event, we do not believe that this has caused any dificulties between us. We would, therefore, ask you to amend your letters of the 23rd July 1990 and the 7th August 1990, so that you accept all points of the Soviet Master Contract No. 32–03/93085 as far as practicable. You will note that this is speciied in our Special Condition No. 3 of our contracts Nos. 9003001 and 9003[illegible]”. Filanto later conirmed to Italian Trading that it received this fax. As the date speciied in the Memorandum Agreement for delivery of the irst shipment of boots—September 15, 1990—was approaching, the parties evidently decided to make further efforts to resolve this issue: what actually happened, though, is a matter of some dispute. Mr. Filograna, the CEO of Filanto, asserts that the following occurred: “Moreover, when I was in Moscow from September 2 through September 5, 1990, to inspect Soviet factories on an unrelated business matter, I met with Simon Chilewich. Simon Chilewich, then and there, abandoned his request of August 29, 1990, and agreed with me that the Filanto–Chilewich Contract would incorporate only the packing, shipment and delivery terms of the Anglo–Soviet Contract. Also present at this meeting were Sergio Squilloni of Italian Trading (Chilewich’s agent), Kathy Farley, and Max Flaxman of Chilewich and Antonio Sergio of Filanto.” Mr. Simon Chilewich, in his sworn afidavit, does not refer to this incident, but does state the following: “In fact, subsequent to the communications and correspondence described above, I met with Mr. Filograna face to face in Paris during the weekend of September 14, 1990. During that meeting, I expressly stated to him that we would have no

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deal if Filanto now insisted on deleting provisions of the Russian Contract from our agreement. Mr. Filograna, on behalf of Filanto, stated that he would accede to our position, in order to keep Chilewich’s business.” Plaintiff does not address or deny defendant’s version of the Paris meeting. Filanto’s Complaint in this action alleges that it delivered the irst shipment of boots on September 15, and drew down on the Letter of Credit. On September 27, 1990, Mr. Filograna faxed a letter to Chilewich. This letter refers to “assurances during our meeting in Paris,” and complains that Chilewich had not yet opened the second Letter of Credit for the second delivery, which it had supposedly promised to do by September 25. Mr. Chilewich responded by fax on the same day; his fax states that he is “totally cognizant of the contractual obligations which exist,” but goes on to say that Chilewich had encountered dificulties with the Russian buyers, that Chilewich needed to “reduce the rate of shipments,” and denies that Chilewich promised to open the Letter of Credit by September 25. According to the Complaint, what ultimately happened was that Chilewich bought and paid for 60,000 pairs of boots in January 1991, but never purchased the 90,000 pairs of boots that comprise the balance of Chilewich’s original order. It is Chilewich’s failure to do so that forms the basis of this lawsuit, commenced by Filanto on May 14, 1991. There is in the record, however, one document that post-dates the iling of the Complaint: a letter from Filanto to Chilewich dated June 21, 1991. This letter is in response to claims by Byerly Johnson that some of the boots that had been supplied by Filanto were defective. The letter expressly relies on a section of the Russian contract which Filanto had earlier purported to exclude—Section 9 regarding claims procedures—and states that “The April Shipment and the September Shipment are governed by the Master Purchase Contract of February 28, 1989, n 32–03/93085 (the “Master Purchase Contract”).” This letter must be regarded as an admission in law by Filanto, the party to be charged. A litigant may not blow hot and cold in a lawsuit. The letter of June 21, 1991 clearly shows that when Filanto thought it desirable to do so, it recognized that it was bound by the incorporation by reference of portions of the Russian Contract, which, prior to the Paris meeting, it had purported to exclude. This letter shows that Filanto regarded itself as the beneiciary of the claims adjustment provisions of the Russian Contract. This legal position is entirely inconsistent with the position which Filanto had professed prior to the Paris meeting, and is inconsistent with its present position. Consistent with the position of the defendant in this action, Filanto admits that the other relevant clauses of the Russian Contract were incorporated by agreement of the parties, and made a part of the bargain. Of necessity, this must include the agreement to arbitrate in Moscow. In the June 21, 1991 letter, Mr. Filograna writes: “The April Shipment and the September Shipment are governed by the Master Purchase Contract of February 28, 1989 N. 32–03–93085 (the “Master Purchase Contract”) The Master Purchase Contract provides that claims for inferior quality must be made within six months of the arrival of the goods at the USSR port”. Against this background based almost entirely on documents, defendant Chilewich on July 24, 1991 moved to stay this action pending arbitration, while plaintiff Filanto on August 22, 1992 moved to enjoin arbitration, or, alternatively, for an order directing that

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arbitration be held in the Southern District of New York rather than Moscow, because of unsettled political conditions in Russia. Jurisdiction/Applicable Law ... Courts confronted by cases governed by the Arbitration Convention must conduct a limited, four-part inquiry: “1) Is there an agreement in writing to arbitrate the subject of the dispute. 2) Does the agreement provide for arbitration in the territory of a signatory country? 3) Does the agreement arise out of a legal relationship, whether contractual or not, which is considered as commercial? 4) Is a party to the contract not an American citizen, or does the commercial relationship have some reasonable relation with one or more foreign states?” Ledee v. Ceramiche Ragno, 684 F.2d 184, 186–87 (1st Cir. 1982). In this case, the second, third and fourth criteria are clearly satisied, as the purported agreement provides for arbitration in Moscow, the Chilewich–Filanto relationship is a “commercial” relationship, and Filanto is an Italian corporation. The central disputed issue, therefore, is whether the correspondence between the parties, viewed in light of their business relationship, constitutes an “agreement in writing.” Courts interpreting this “agreement in writing” requirement have generally started their analysis with the plain language of the Convention, which requires “an arbitral clause in a contract or an arbitration agreement, signed by the parties or contained in an exchange of letters or telegrams,” Article I(1), and have then applied that language in light of federal law, which consists of generally accepted principles of contract law, including the Uniform Commercial Code. However, as plaintiff correctly notes, the “general principles of contract law” relevant to this action, do not include the Uniform Commercial Code; rather, the “federal law of contracts” to be applied in this case is found in the United Nations Convention on Contracts for the International Sale of Goods (the “Sale of Goods Convention”), codiied at 15 U.S.C. Appendix (West Supp.1991). This Convention, ratiied by the Senate in 1986, is a self-executing agreement which entered into force between the United States and other signatories, including Italy, on January 1, 1988. Although there is as yet virtually no U.S. case law interpreting the Sale of Goods Convention, it may safely be predicted that this will change: absent a choice-of-law provision, and with certain exclusions not here relevant, the Convention governs all contracts between parties with places of business in different nations, so long as both nations are signatories to the Convention. Sale of Goods Convention Article 1(1)(a). Since the contract alleged in this case most certainly was formed, if at all, after January 1, 1988, and since both the United States and Italy are signatories to the Convention, the Court will interpret the “agreement in writing” requirement of the Arbitration Convention in light of, and with reference to, the substantive international law of contracts embodied in the Sale of Goods Convention. Not surprisingly, the parties offer varying interpretations of the numerous letters and documents exchanged between them. The Court will briely summarize their respective contentions. Defendant Chilewich contends that the Memorandum Agreement dated March 13 which it signed and sent to Filanto was an offer. It then argues that Filanto’s retention of

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the letter, along with its subsequent acceptance of Chilewich’s performance under the Agreement—the furnishing of the May 11 letter of credit—estops it from denying its acceptance of the contract. Although phrased as an estoppel argument, this contention is better viewed as an acceptance by conduct argument, e.g., that in light of the parties’ course of dealing, Filanto had a duty timely to inform Chilewich that it objected to the incorporation by reference of all the terms of the Russian contract. Under this view, the return of the Memorandum Agreement, signed by Filanto, on August 7, 1990, along with the covering letter purporting to exclude parts of the Russian Contract, was ineffective as a matter of law as a rejection of the March 13 offer, because this occurred some ive months after Filanto received the Memorandum Agreement and two months after Chilewich furnished the Letter of Credit. Instead, in Chilewich’s view, this action was a proposal for modiication of the March 13 Agreement. Chilewich rejected this proposal, by its letter of August 7 to Byerly Johnson, and the August 29 fax by Johnson to Italian Trading SRL, which communication Filanto acknowledges receiving. Accordingly, Filanto under this interpretation is bound by the written terms of the March 13 Memorandum Agreement; since that agreement incorporates by reference the Russian Contract containing the arbitration provision, Filanto is bound to arbitrate. Plaintiff Filanto’s interpretation of the evidence is rather different. While Filanto apparently agrees that the March 13 Memorandum Agreement was indeed an offer, it characterizes its August 7 return of the signed Memorandum Agreement with the covering letter as a counteroffer. While defendant contends that under Uniform Commercial Code § 2–207 this action would be viewed as an acceptance with a proposal for a material modiication, the Uniform Commercial Code, as previously noted does not apply to this case, because the State Department undertook to ix something that was not broken by helping to create the Sale of Goods Convention which varies from the Uniform Commercial Code in many signiicant ways. Instead, under this analysis, Article 19(1) of the Sale of Goods Convention would apply. That section, as the Commentary to the Sale of Goods Convention notes, reverses the rule of Uniform Commercial Code § 2–207, and reverts to the common law rule that “A reply to an offer which purports to be an acceptance but contains additions, limitations or other modiications is a rejection of the offer and constitutes a counter-offer.” Sale of Goods Convention Article 19(1). Although the Convention, like the Uniform Commercial Code, does state that non-material terms do become part of the contract unless objected to, Sale of Goods Convention Article 19(2), the Convention treats inclusion (or deletion) of an arbitration provision as “material,” Sale of Goods Convention Article 19(3).21 The August 7 letter, therefore, was a counteroffer which, according to Filanto, Chilewich accepted by its letter dated September 27, 1990. Though that letter refers to and acknowledges the “contractual obligations” between the parties, it is doubtful whether it can be characterized as an acceptance. More generally, both parties seem to have lost sight of the narrow scope of the inquiry required by the Arbitration Convention. All that this Court need do is to determine if a suficient “agreement in writing” to arbitrate disputes exists between these parties. Although that inquiry is informed by the provisions of the Sale of Goods Convention, the

[21]. It should also be noted that, in provisions potentially relevant to this motion, the Convention essentially rejects both the Statute of Frauds and the parol evidence rule. Sale of Goods Convention Art. 11, 8(3).

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Court lacks the authority on this motion to resolve all outstanding issues between the parties. Indeed, contracts and the arbitration clauses included therein are considered to be “severable,” a rule that the Sale of Goods Convention itself adopts with respect to avoidance of contracts generally. Sale of Goods Convention Article 81(1). There is therefore authority for the proposition that issues relating to existence of the contract, as opposed to the existence of the arbitration clause, are issues for the arbitrators. . . . Since the issue of whether and how a contract between these parties was formed is obviously related to the issue of whether Chilewich breached any contractual obligations, the Court will direct its analysis to whether there was objective conduct evidencing an intent to be bound with respect to the arbitration provision. The Court is satisied on this record that there was indeed an agreement to arbitrate between these parties. There is simply no satisfactory explanation as to why Filanto failed to object to the incorporation by reference of the Russian Contract in a timely fashion. As noted above, Chilewich had in the meantime commenced its performance under the Agreement, and the Letter of Credit it furnished Filanto on May 11 itself mentioned the Russian Contract. An offeree who, knowing that the offeror has commenced performance, fails to notify the offeror of its objection to the terms of the contract within a reasonable time will, under certain circumstances, be deemed to have assented to those terms. Restatement (Second) of Contracts § 69 (1981); Graniteville v. Star Knits of California, Inc., 680 F. Supp. 587, 589–90 (S.D.N.Y. 1988) (compelling arbitration since party who failed timely to object to salesnote containing arbitration clause deemed to have accepted its terms); Imptex International Corp. v. Lorprint, Inc., 625 F. Supp. 1572, 1572 (S.D.N.Y. 1986) (Weinfeld, J.) (party who failed to object to inclusion of arbitration clause in sales conirmation agreement bound to arbitrate). The Sale of Goods Convention itself recognizes this rule: Article 18(1) provides that “A statement made by or other conduct of the offeree indicating assent to an offer is an acceptance.” Although mere “silence or inactivity” does not constitute acceptance, Sale of Goods Convention Article 18(1), the Court may consider previous relations between the parties in assessing whether a party’s conduct constituted acceptance, Sale of Goods Convention Article 8(3). In this case, in light of the extensive course of prior dealing between these parties, Filanto was certainly under a duty to alert Chilewich in timely fashion to its objections to the terms of the March 13 Memorandum Agreement—particularly since Chilewich had repeatedly referred it to the Russian Contract and Filanto had had a copy of that document for some time. There are three other convincing manifestations of Filanto’s true understanding of the terms of this agreement. First, Filanto’s Complaint in this action, as well as afidavits subsequently submitted to the Court by Mr. Filograna, refer to the March 13 contract: the Complaint, for example, states that “On or about March 13, 1990, Filanto entered into a contract with Chilewich. . . . ” These statements clearly belie Filanto’s post hoc assertion that the contract was actually formed at some point after that date. Indeed, Filanto inds itself in an awkward position: it has sued on a contract whose terms it must now question, in light of the defendant’s assertion that the contract contains an arbitration provision. . . . Second, Filanto did sign the March 13 Memorandum Agreement. That Agreement, as noted above, speciically referred to the incorporation by reference of the arbitration provision in the Russian Contract; although Filanto, in its August 7 letter, did purport

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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” (emphasis added). 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. Third, and most important, Filanto, in a letter to Byerly Johnson dated June 21, 1991, explicitly stated that “[t]he April Shipment and the September shipment are governed by the Master Purchase Contract of February 28, 1989 [the Russian Contract].” Furthermore, the letter, which responds to claims by Johnson that some of the boots that were supplied were defective, expressly relies on section 9 of the Russian Contract—another section which Filanto had in its earlier correspondence purported to exclude. The Sale of Goods Convention speciically directs that “[i]n 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. In light of these factors, and heeding the presumption in favor of arbitration, which is even stronger in the context of international commercial transactions, the Court holds that Filanto is bound by the terms of the March 13 Memorandum Agreement, and so must arbitrate its dispute in Moscow. . . .

Question 3.25 What does this case suggest about how a traditional battle of the forms should be resolved under the CISG? Does the court ind the mirror image rule in the CISG? Does the last shot before performance win?

Question 3.26 Does the court ind an acceptance? Is there one? Might a contract be formed without an acceptance under this court’s reading of the CISG? Does this court respect the provision in the CISG that silence cannot be acceptance? In this regard, consider also CLOUT Case No. 1017 Hof van Beroep [HvB] [Appellate Court] Gent, May 15, 2002, Case No. 2001/AR/0180 (Belg.), English translation available at http://cisgw3.law.pace. edu/cases/020515b1.html (Benoit Samyn, trans.; halia Kruger, trans. ed.) (stating, with respect to cancellation of an order, that “to make a smooth (international) trade possible, a trader is undoubtedly obliged to protest immediately, or within a reasonable period of time, if he receives a letter/communication to which he cannot agree. his obligation simply is the consequence of the positive meaning attached in trade to silence when receiving all kinds of documents, correspondence and so on”).22

Question 3.27 How does conduct subsequent to alleged contract formation illuminate whether a contract was formed? Is there any conduct before or at the time of contract 22. A brief aside: although not the center of our inquiry, Professor Peter Winship has pointed out that the court does some violence to the plain meaning of the arbitration rules. Where is the agreement in writing, or exchange of letters and telegrams? A more textually inclined judge may have held that without written evidence of the agreement to arbitrate, Filanto could not be forced to do so. Peter Winship, he U.N. Sales Convention and the Emerging Caselaw, in Emptio-Venditio Inter Nationes 227–37 (1997).

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formation that shows Filanto’s intent to incorporate the Russian contract, including the arbitration clause? As noted in the earlier discussion, no one likes the last shot rule. It is arbitrary. It is like lipping a coin, although perhaps worse in that it tends to favor one side over the other. And it does not even have the beneit of a very clear arbitrary rule. At least if the rule were, “Sellers always win,” then buyers would have a better chance of understanding the need to protect themselves, whether through explicit bargaining, reduced prices, or some other means. We believe sellers win on typical facts, but more complex transactions may work out diferently, as in Filanto v. Chilewich (where the buyer won). In the context of a battle of the forms, we are unaware of anyone who mounts a serious defense of the last shot rule. With these sentiments, a split in thinking is predictable. Some authority goes with the last shot rule. Filanto v. Chilewich may be an example; there are some authorities that are even clearer. Like it or not, this authority suggests, the mirror image rule is in the treaty, it is clear, and it will be followed by courts.23 A less plain, more attractive rule is a sort of knockout rule (Restgültigkeitstheorie). Consider the following case:

Powdered Milk Case Bundesgerichtshof [BGH] [Federal Supreme Court], Jan. 9, 2002, Case No. VIII ZR 304/00 (Ger.), available at Pace CISG Database:  http://cisgw3.law.pace.edu/cases/020109g1.html (Alston & Bird LLP, trans.; William M. Barron, Esq. & Birgit Kurtz, Esq., eds.) (Apr. 13, 2009) Facts The plaintiff [buyer 1] and the assignor [buyer 2], both located in the Netherlands and trading in dairy products, purchased a total of 2,557.5 tons of powdered milk in the irst half of 1998, based on a number of contracts, from defendant [seller 1], which is headquartered in Germany, and its major shareholder [seller 1A]. Of this powdered milk, [buyer 1] and [buyer 2] sold 7.5 tons to the Dutch company I. and 2,550 tons to the Algerian company G.I., owned by P.L. S.p.A. (hereinafter G. S.p.A.), formerly known as O.R. S.p.A. The contents of the telephonic orders were recorded by [buyer 1] and [buyer 2] and/or by [seller 1] and [seller 1A] in written conirmations. The letters of conirmation of delivery of [seller 1] and [seller 1A] (whose production facility in L. [seller 1] acquired in the beginning of 1998 with all existing contractual relationships) each contained in the footer the following text: We sell exclusively pursuant to our general terms and conditions. Contrary statutory conditions or contrary general terms and conditions of the buyer are expressly not acknowledged and are therefore not part of the contract. 23. Oberlandesgericht [OLG] [Appellate Court] Hamm, Sept. 22, 1992, Case No. 19 U 97/91 (Ger.), English translation available at http://cisgw3.law.pace.edu/cases/020109g1.html.

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The terms and conditions at issue contain the following warranty clause:

VI. Warranty and Notiication of Defects The buyer must inspect the goods immediately upon delivery and note any complaints on the delivery note . . . Defects that are not noticeable at the time of delivery can only be claimed before the printed expiration date . . . The buyer must make available the goods at issue or enough samples of the goods at issue; if he does not do so, the buyer cannot make any warranty claims. Condition No. 8 in the so-called M.P.C. conditions referred to by [buyer 1] provides:

Section 10. Sampling and Complaints Notwithstanding any duty of the seller to pay back the purchase price, or a part thereof, the liability of the seller for damages suffered (and/or to be suffered) is at all times limited to the invoiced amount for the delivered goods. The powdered milk, which was packaged and delivered by [seller  1], was inspected through spot-checks by [buyer 1] and/or [buyer 2] with the assistance of “I.S. Nederland B.V.” (hereinafter “I.S.”) without any special results, then it was newly palletized in the harbor of Antwerp and thereafter shipped to Algeria and, to the extent it was sold to I., to Aruba/Netherland Antilles. After local subsidiaries of G S.p.A. processed the powdered milk delivered to Algeria, some of the produced milk had a rancid taste. Thereupon, G.  S.p.A.  complained to [buyer 1] and [buyer 2] about a total of 207.6 tons of powdered milk as well as part of the powdered milk that had already been processed into 10,000 liters of milk. On June 24 and August 19, 1998, representatives of G. S.p.A., of [buyer 1], of [buyer 2] and of [seller 1] had several meetings in A. to clarify the question of the compensation for G. S.p.A. The result of these negotiations, during which [buyer 1] and [buyer 2] each promised certain compensation to G. S.p.A., was recorded in four “minutes of amicable settlement”; these documents were also signed by the representative of [seller 1]. By letter dated August 24, 1998, the legal department of [seller 1A], which was entrusted by [seller 1] with the resolution of the matter, informed [buyer 1] and [buyer 2] of the following, among other things: We acknowledge that a partial quantity of 177 tons of the total quantity of 3,495 tons of powdered milk, delivered pursuant to the letters of conirmation of delivery dated . . . did not meet the contractual requirements. We do not deny that you have warranty claims because of the quality deviation, but the following two aspects must be considered: 1. . . . 2. All letters of conirmation of delivery mentioned above refer to our general terms and conditions, which must therefore govern our legal relationship. Thus, S. AG does not have to deal with any warranty or damages claims raised by company G. . . . We expressly emphasize here that we are willing to rescind the contractual relationship with you and/or company A. because of the 177 tons of inadequate

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powdered milk. Further claims that company G. may raise against you or company A. are not substantively justiied and will not be accepted by us. By letter dated September 1, 1998, [buyer 2] claimed damages from [seller 1] in the amount of $198,150.36; it assigned this claim to [buyer 1] on November 30, 1998. ...

Grounds for the decision ... II. These elaborations do not withstand legal scrutiny on all points. Because of the current status of the facts and the dispute, it cannot be ruled out that the defects in the powdered milk are based on causes for which [seller 1] is not liable under Arts. 36, 45, 74 CISG. 1. The Court of Appeals, however, correctly assumed that the compensation rules of the CISG for the claims of [buyer  1] are not excluded by its General Terms and Conditions (“M.P.C. conditions”), which provide considerable limitations of liability for the seller, inter alia, by restricting any compensation to the amount invoiced for the delivered goods. a) The Court of Appeals correctly assumed that the 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 Art. 19(1) and (3) CISG because of the lack of a consensus (dissent). His judicial 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 Art. 19 CISG, cannot be legally challenged and is expressly accepted by the appeal. b) The Court of Appeals further correctly stated that the warranty clauses in the M.P.C. conditions used by [buyer 1], which are beneicial to [seller 1], were replaced by the rejection clause of [seller 1]. The objections raised by the appeal in this regard are not persuasive. 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 (so-called “rest validity theory”; e.g., Achilles, Komm. zum UN-Kaufrechtsübereinkommen [Commentary to the CISG], Art. 19 ¶ 5; Schlechtriem/Schlechtriem, CISG (3d ed.), Art. 19 ¶ 20, esp. p. 226; Staudinger/ Magnus, CISG (1999), Art. 19 ¶ 23). 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. . . . As the Court of Appeals has correctly determined, the Dutch M.P.C.  conditions contain substantial deviations from the CISG’s warranty rules—which would essentially remain applicable based on the General Terms and Conditions of [seller 1]—and it cannot be assumed that [buyer 1] wanted to have the M.P.C. conditions, which are internally balanced, apply to it insofar as they are noticeably more detrimental than the statutory provisions without

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having the beneit of the clauses that are favorable to it. Vice versa, there is nothing to show that [seller 1] wanted those clauses of the M.P.C. conditions that are unfavorable to it apply to the contracts. The result is no different if one follows the contrary opinion (“Last shot” doctrine [Theorie des letzten Wortes]; re. the current status of opinions and the concerns against the application of this theory where the CISG applies, compare Schlechtriem/Schlechtriem, supra, ¶ 20 and fn. 62). Certainly under the point of view of good faith and fair dealing (Art. 7(1) CISG), [seller 1] should not have assumed that the question whether certain provisions of the opposing terms and conditions contradicted its own (even insofar as it served its Terms and Conditions last) could be answered in isolation for individual clauses with the consequence that the individual provisions that were beneicial to it would apply.

... he Powdered Milk Case is inluential because it comes from an inluential court, even though the court referred to the last shot rule as well as the knockout rule (which it called the “rest validity theory” in the penultimate paragraph of the excerpt). he knockout rule has practical attraction, but using it under the CISG requires an acrobatic approach to interpreting the treaty and the parties’ own expressions of assent (which, ater all, include their forms). Perhaps this is why the court felt obligated to say that the result would be the same under the “last shot doctrine,” which is more textually sound. here is some irony here; in the end the convoluted interpretive analysis required to justify a knockout rule (which hardly appears very plainly in the treaty) arrives at a result that seems closest to common sense. he treaty, however, does not legislate common sense, so you need to be aware of the legal maneuvers necessary to arrive there. To paraphrase the justiication put forward by Schlechtriem—perhaps the most prominent advocate of the theory: despite divergent forms, the parties’ conduct, including their performance, can show their assent to a contract. hus a contract is formed, despite those scholars (including the eminent Farnsworth) who suggest that these transactions are performed “even though there is no contract.”24 Even preparation for performance can be interpreted as assent to a contract. See CISG art. 8. hese manifestations of assent through conduct, such as performance, show that the parties intend to exclude the problematic CISG article 19 (mirror image rule) from their transaction. hey have implicitly agreed, in other words, that the mirror image rule will not apply. hey are allowed to derogate from the treaty in this way under article 6. heir conduct may even show that they have agreed to waive the conditions in their own standard forms. Ater all, those conditions will oten insist on particular terms, but performance of the transaction shows that the parties do not really insist. Ultimately, the performance shows not assent to the other parties’ terms but assent to get rid of problematic parts of the treaty and problematic parts of the forms. hey are all knocked out. At that point, it is easy enough to hold that the terms of the contract are whatever is agreed. he remaining terms are determined through the treaty rules of interpretation (e.g., with respect to usages and practices) or suppletive rules (oten called gapillers).

24. Peter Schlechtriem & Ingeborg Schwenzer, Commentary on the U.N. Convention on the International Sale of Goods (CISG), Article 19 ¶ 20, at 243 (2d Eng. ed. 2005).

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he following problems use this fact pattern with a number of variations:

Problem 3.28 Glynn Fabrics is in need of dyes and has heard good things about the products and service at Marsden Dye Co. Glynn consults the website of Marsden, inds the dyes it needs, and uses a tool on the website to place an inquiry about particular colors, quantities, and prices. he website automatically generates a response that Glynn receives. It says that Marsden will respond to the inquiry shortly, and at the bottom it states a number of standard terms and conditions. One of the boilerplate terms limits damages to a refund of the purchase price. Another is an arbitration clause. A couple of hours later, Glynn receives an e-mail response from Wendy at Marsden. his response says, “We can propose the following products on the following terms.” It then lists the colors, quantities, and prices, and the same boilerplate standard terms that appeared in the automated response. “If you are interested,” the e-mail closes, “please let me know.” At the bottom is Wendy’s contact information. Everything is as Glynn expected based on its review of the Marsden website. Glynn prepares one of its standard purchase orders. Glynn has paper versions that it uses with some suppliers but also has an electronic version that can be sent by e-mail. Charles at Glynn prepares the form, illing in the colors and appropriate item numbers, quantities, and prices, and e-mails it to Wendy. Glynn’s form states its own boilerplate terms, including a requirement of a full warranty and full compensation for any breach of that warranty. A day later, Glynn receives an e-mail “Order Conirmation” from Marsden, repeating the Marsden terms as well as the appropriate information on colors, quantities, and prices. It also includes a shipping date two days later. Shipping and delivery had not been mentioned in any of the boilerplate. Charles iles the conirmation and awaits delivery. Consider each of the following under French law, German law, US law, and the CISG: (a) Glynn discovers it can get a much better price elsewhere. May it cancel its order before the goods are shipped? (Although most cases in this section arise ater both parties have performed, sometimes disputes and litigation erupt before shipment. See, e.g., Hanwha Corp. v. Cedar Petrochemicals, Inc., 760 F. Supp. 2d 426, 429 (S.D.N.Y. 2011).) What if Glynn discovers the better price just before the goods arrive, and when they do arrive, Glynn refuses to accept them. Now what? (b) Disregard the previous question. Instead, Marsden discovers that it can receive a premium for a quick shipment to an established customer. Fulilling that order will prevent it from fully fulilling Glynn’s order. May Marsden cancel? (c) Disregard the previous questions. Instead, Marsden discovers that it does not have as much of some of the dyes as it thought. May it delay shipping beyond the date mentioned in its Order Conirmation?

Problem 3.29 (a) Disregard the previous questions. he goods arrive, they appear ine, and Glynn pays for them by electronic funds transfer. Ater using the dyes, though, Glynn inds that two of them ruin the fabric. On further investigation, Glynn discovers that this was caused by a defect in the dyes. Hundreds of thousands of dollars of fabric has been ruined, and

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Glynn demands compensation from Marsden. Marsden acknowledges the defect but ofers only a refund of the purchase price as compensation. What result? (b) Will the dispute be subject to arbitration because of the Marsden arbitration clause? (c) Would there be a diferent result if, instead of paying by electronic funds transfer, Glynn had paid by check, and on receipt of the check, Marsden indorsed it and deposited the check into its bank account?

Question 3.30 Your client asks how it can win a battle of the forms. What do you advise? Is there a practical solution? Does the payment by check suggest a possibility? Does it matter whether you advise the buyer or the seller? If you are advising a buyer, does the idea of the check add anything? Would Web-based ordering (instead of exchanged forms or e-mails) make a diference? How would you advise a client to set up Web-based ordering, if at all?

2. Commercial Letters of Conirmation In the preceding fact pattern, the seller sent a document labeled “order conirmation.” It truly was seeking to conirm an order, and it was part of an exchange of written correspondence (or the electronic equivalent of written, anyway). It should not be confused with an order conirmation (Autragsbestätigung) under German law, nor with another German institution, commercial letters of conirmation or more simply conirmation letters (kaufmännische Bestätigungsshreiben). An order conirmation, as the term is used in German law, is labeled by the oferee as a conirmation and legally is either an acceptance or a rejection and counterofer, depending on its terms and how it its with the ofer. Conirmation letters, on the other hand, are something entirely diferent. hey are oten sent ater an oral agreement. heir function is to summarize and conirm the oral agreement and to state the terms of the contract. Sometimes they simply state the oral agreement and thus are evidence of that agreement. But sometimes they can be more: sometimes the parties have not reached agreement yet, or alternatively, the conirmation letter may state terms that had not been agreed. German courts have long held that such a letter is the contract if the receiving party does not state an objection. If the contract had not yet been concluded, then the receiving party—assuming it is a merchant or a professional—should state its objection or else be bound. In this way, under German law, silence can be acceptance: the conirmation letter plus silence concludes (or changes) the contract. French law has a related idea in silence circonstancié, although it is not as robust a theory as in German law,25 so we conine our discussion to German law. We note that on this issue Denmark, Poland, and Switzerland are (for our purposes) the same as German law, while Austria and Italy, although they have similar doctrines, depart from German law in some signiicant ways.26 You will recall that silence cannot be acceptance under CISG article 18. his was a deliberate choice. he delegates had discussed the German law on conirmation letters and 25. Michael Esser, Commercial Letters of Conirmation in International Trade:  Austrian, French, German and Swiss Law and Uniform Law under the 1980 Sales Convention, 18 Ga. J. Int’l & Comp. L. 427, 439 (1988). For the proposed revision of the French Civil Code on the efect of silence, see Avant-Projet de Réforme du Droit des Obligations art. 21 (Oct. 23, 2013). 26. See Schlechtriem & Schwenzer, Commentary on the UN Convention on the International Sale of Goods (CISG) 152 (2d ed. 2005).

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decided not to adopt a conirmation letter rule in the CISG.27 Nevertheless, the German rule on conirmation letters may apply to a particular transaction if it accords with the practices of the parties or the international usages of the relevant countries under CISG article 9. his idea requires a more detailed discussion of the rules of interpretation, which we will take up shortly, and we will then return to the analysis of conirmation letters. First, though, we will address another way a conirmation letter could become the contract: if the other party agrees to it by accepting it, then it will either form a contract under the usual rules of ofer and acceptance (mainly articles 14, 18, and 23) or will modify the contract that had been earlier agreed. Accordingly, we now address modiications.

IV. Modiications of the Sales Contract Modiications to contracts can serve two diferent functions. he most evident is that the parties may discover that changing the contract would help them both (or at least one of them, and the other is willing to go along). he desirability of a change in the contract may become apparent when circumstances change or the parties’ relationship develops or multiple occasions for performance (as in installment contracts) show a potential for improvement. All contracts involve relationships; some are highly relational, stretching over long periods with both deep and changing expectations; some are more discrete, focused on one particular deal. his relational theory of contract, cogently put forward by the late US scholar Ian Macneil,28 has not had a great impact on what the legal rules are, but it has afected how the law understands what contracts mean and thus what the rules mean. he parties certainly know they are in a relationship; the law has begun to take cognizance of that fact as well. he law’s response to contract modiications is imbued with these ideas. But the law is also aware that the reason parties enter into a contract is to tie down the other party. If the parties did not need to tie things down, they would not need a contract. So the law is also cognizant that a contractual knot should not be too easy to untie. he other function of contract modiications is more a result of the legal rules than practical necessities. As discussed in the preceding section, the legal rules on contract formation may hold that a contract is formed (e.g., over the phone) and then modiied very shortly thereater (e.g., by the sending of a form that includes additional or diferent terms and that is accepted by the other party). In keeping with our focus on the facts, we treated

27. See id. at 180. 28. To add some international color and conceivably relevant background, we note that the late Professor Macneil was also a Scottish nobleman, splitting his time between the United States and Scotland. He was from 1970 until his death in 2010 the forty-sixth Chief of Clan MacNeil and as such, proprietor of the Isle of Barra in the Outer Hebrides, including Kisimul Castle in Castle Bay—until 2004, when he donated the castle and estate to Scotland and, more particularly, to the inhabitants of Barra. He had ofered to donate the estate earlier, in 1981, but the inhabitants demurred because they preferred to keep him as landlord. He was the scion of one of Scotland’s oldest clans, descended from Niall of the Nine Hostages, king of Ireland from 379 to 405. His Irish forebears moved to Barra in the eleventh century and built the castle then. We can only speculate as to whether this extraordinary background inluenced Macneil’s views as a contracts scholar; he was certainly part of a very long-term multigenerational relationship. he current Chief of Clan MacNeil is, of course, his son. Iain MacNeil, The Telegraph (Feb. 23, 2010), http://www.telegraph.co.uk/news/obituaries/law-obituaries/7301080/Iain-MacNeil.html.

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those kinds of modiications above as part of the contract formation process. Sometimes something (legally) similar can happen (factually) later. he parties may form their contract, and be set. hen one party later sends a form or invoice or another communication. Usually sellers send these with the goods; buyers could sometimes send them with payment. he party sending the communication may then claim that it was a proposal for a modiication and was accepted by accepting the goods or the payment or by other conduct. his may not be a part of a battle of forms; it may be the only form. We thus consider these kinds of modiications again in this section. First, we address the classic kind of modiication, and the lines the law has sometimes drawn between permissible and impermissible modiications. A contract, to state the obvious, is legally binding. Changing it therefore requires something that has legal efect. he usual way to change a contract is with another contract; such contracts are called modiications. Because they are contracts, they must have all of the requisites of a contract. Although all of this may seem painfully obvious, these bland statements have at least one implication that is not readily apparent. One of the requisites of a contract at common law is consideration, as discussed earlier in this chapter. Consideration can serve a useful purpose in this context. A typical reason that parties make contracts is to bind the other party so the irst party can start relying. Suppose the buyer and the seller make a contract. he buyer now knows the seller is bound to perform, so the buyer invests in equipment to process the products it will obtain from the seller. he buyer also makes contracts to sell the newly manufactured goods to others. he buyer made its contract with the seller so it could rest assured that its investment would not be wasted and it would be able to perform with its own buyers. But suppose the seller sees what the buyer has done. he evil seller might now say, “I will not perform unless you pay me twice the price we previously agreed. You and I both know that you can sue me if I do not perform, but we also both know that a lawsuit is long, diicult, expensive, and uncertain. So pay me more!” his situation, usually called the holdup problem, is common enough; it can be found in the cases and in a mountain of economic literature. he buyer might well feel compelled to agree to this coerced modiication. It might promise to pay the higher price. he seller’s ofer of on-time delivery in return for a higher price has now been accepted. here appears to be mutual assent. he traditional response of the common law was to hold the modiication invalid not for want of assent—which ater all appears to be present—but for want of consideration. his is one of the functions of consideration: to prevent coerced modiications. In this situation, it would work. he seller has not promised or done anything to induce the buyer to agree to the higher price. To be sure, the seller is saying that it will deliver on time if and only if it gets the higher price, but delivery (or anything else) required by the earlier contract cannot count as an inducement for the buyer’s promise to pay the new price. he buyer promised the original price for the seller’s promise to deliver. he buyer already had the seller’s promise of on-time delivery in exchange for the original price. he buyer is getting nothing that it did not already have in return for the promise to pay more. (Put from the other side, the seller has an already preexisting duty to deliver on time, so the seller cannot ofer on-time delivery as an inducement to the buyer to pay a higher price.) here is no bargained-for exchange to support the

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new agreement for the higher price. here is no consideration, and there is no valid modiication. his is called the preexisting duty rule and prevents the coerced modiication. he problem is that the preexisting duty rule does not do a very good job. It worked in this paradigm case, but in many cases it does not. What if the seller, having good legal advice, said it would deliver not at all (the threat), or would instead deliver a day early in return for the higher price? he earlier delivery date could arguably be consideration for the higher price, and if so, then the modiication would stand. In many other cases, the preexisting duty rule invalidates perfectly good modiications. Suppose the good but unlucky seller sufered a 20 percent increase in costs ater it made the contract. It asks if the buyer would agree to a 10 percent price increase. he buyer, who will still have an unusually cheap price, agrees, particularly as it would like to maintain good relations with this seller. he modiication is not coerced, but there is no consideration for it, and it is invalid. For this reason, the preexisting duty rule has few defenders. Although it remains part of the general law of contracts in the United States, it is no longer part of the US law of sales of goods under UCC § 2-209(1) (“An agreement modifying a contract within this Article [on Sales] needs no consideration to be binding.”). Although US law should therefore present no such problems for international sales, other common law jurisdictions might, and if so, it would be a rule of validity that could strike down a modiication otherwise governed by the CISG. To prevent this result, the CISG has a rule on modiications similar to § 2-209: “A contract may be modiied or terminated by the mere agreement of the parties.” CISG art. 29(1). he word “mere” appears to “expressly provide[]” that consideration is not required for validity and thus preempts any contrary domestic law under article 4. Consideration has presented infamous problems for contract modiications for generations, if not for centuries. It should not continue to plague modiications for sales contracts related to the United States, however, either domestically because of UCC § 2-209(1) or internationally because of CISG article 29(1). A US court has recognized this. Shuttle Packaging Systems v. Jacob Tsonakis, 2001 US Dist. LEXIS 21630, at *21 (W.D. Mich. Dec. 17, 2001). Because confusion is possible,29 however, the point requires emphasis:  even if consideration is a matter of validity still subject to domestic law under article 4—which we do not believe to be true, at least with respect to modiications—domestic US law has not required consideration for modiications to contracts for the sale of goods since the general enactment of the UCC during the 1960s. Coerced modiications must be policed with the help of other doctrines, such as fraud or duress. here is general agreement that doctrines like fraud and duress are matters of validity not addressed by the CISG, and we leave their treatment to books devoted to contract law or comparative law more generally. he second way that modiications can come into play follows from the last point, that is, that simple agreement is enough to efect a modiication, without any requirement of consideration or form or anything else beyond the agreement of the parties. As very little is required for a modiication of a sales contract, a party can easily argue that a modiication has been efected through use of a standard form. his may involve battling forms or may involve 29. Cf. Geneva Pharm. Tech. Corp. v. Barr Labs, Inc., 201 F. Supp. 2d 236, 282–83 (S.D.N.Y. 2002) (requiring consideration under article 4).

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just one form. Suppose a contract is made and the terms are thus set, whether through a battle of the forms or otherwise. At some point later, a party sends a form that states additional or diferent terms. he other party performs, and the party that sent the form argues that the performance indicates acceptance of the new term. At common law the consideration doctrine would have precluded this argument, but that rule no longer works in a sales contract. A requirement of formal assent (e.g., in writing) could work, as under UCC § 2-209(3) (requiring written evidence of certain modiications involving contracts of $500 or more). As mentioned above, and as we will see further below, the CISG generally abolished formal requirements in article 11, so as a general matter writing requirements will not work to foreclose the modiication argument. he parties are free, however, to add such a formal requirement for modiications to international sales contracts under CISG article 29(2). Such clauses are common, typically saying something like: “his contract can only be modiied in a writing signed by an authorized representative of each party.” hey are usually called no oral modiication or NOM clauses, although they bar implied modiications as well as oral ones. Although such clauses were not valid at common law, UCC § 2-209(2) and CISG article 29(2) reverse the old common law result. Both rules, however, except oral modiications on which the other party has relied. Where there is reliance, the objecting party may not defeat the modiication by invoking the writing requirement. See CISG art. 29(2); UCC § 2-209(4). Absent reliance, the parties’ own requirement of the writing should prevent a inding of an implied modiication. If there is no NOM clause in the contract, what should be the result under current law?

Chateau des Charmes Wines Ltd. v. Sabaté USA Inc. United States Court of Appeals for the Ninth Circuit, 2003 328 F.3d 528 Before B. FletCher, kozinski, and Trott, Circuit Judges. Per Curiam. Chateau des Charmes Wines, Ltd. (“Chateau des Charmes”), a Canadian company, appeals the dismissal of its action for breach of contract and related claims arising out of its purchase of wine corks from Sabaté, S.A. (“Sabaté France”), a French company, and Sabaté USA, Inc. (“Sabaté USA”), a wholly owned California subsidiary. The district court held that forum selection clauses in the invoices that Sabaté France sent to Chateau des Charmes were part of the contract between the parties and dismissed the case in favor of adjudication in France. Because we conclude that the forum selection clauses in question were not part of any agreement between the parties, we reverse.

FACTUAL BACKGROUND AND PROCEDURAL HISTORY The material facts pertinent to this appeal are not disputed. Sabaté France manufactures and sells special wine corks that it claims will not cause wines to be spoiled by “cork taint,” a distasteful lavor that some corks produce. It sells these corks through a wholly owned California subsidiary, Sabaté USA. In February 2000, after some preliminary discussions about the characteristics of Sabaté’s corks, Chateau des Charmes, a winery from Ontario, Canada, agreed by telephone with Sabaté

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USA to purchase a certain number of corks at a speciic price. The parties agreed on payment and shipping terms. No other terms were discussed, nor did the parties have any history of prior dealings. Later that year, Chateau des Charmes placed a second telephone order for corks on the same terms. In total, Chateau des Charmes ordered 1.2 million corks. Sabaté France shipped the corks to Canada in eleven shipments. For each shipment, Sabaté France also sent an invoice. Some of the invoices arrived before the shipments, some with the shipments, and some after the shipments. On the face of each invoice was a paragraph in French that speciied that “Any dispute arising under the present contract is under the sole jurisdiction of the Court of Commerce of the City of Perpignan.” On the back of each invoice a number of provisions were printed in French, including a clause that speciied that “any disputes arising out of this agreement shall be brought before the court with jurisdiction to try the matter in the judicial district where Seller’s registered ofice is located.” Chateau des Charmes duly took delivery and paid for each shipment of corks. The corks were then used to bottle Chateau des Charmes’ wines. Chateau des Charmes claims that, in 2001, it noticed that the wine bottled with Sabaté’s corks was tainted by cork lavors. Chateau des Charmes iled suit in federal district court in California against Sabaté France and Sabaté USA alleging claims for breach of contract, strict liability, breach of warranty, false advertising, and unfair competition. Sabaté France and Sabaté USA iled a motion to dismiss based on the forum selection clauses. The district court held that the forum selection clauses were valid and enforceable and dismissed the action. This appeal ensued. ...

II. Under the C.I.S.G., it is plain that the forum selection clauses were not part of any agreement between the parties. The Convention sets out a clear regime for analyzing international contracts for the sale of goods: “A contract of sale need not be concluded in or evidenced by writing and is not subject to any other requirement as to form.” C.I.S.G., art. 11. A proposal is an offer if it is suficiently deinite to “indicate[] the goods and expressly or implicitly ix[] or make[] provision for determining the quantity and the price,” id., art. 14, and it demonstrates an intention by the offeror to be bound if the proposal is accepted. Id. In turn, an offer is accepted if the offeree makes a “statement . . . or other conduct . . . indicating assent to an offer.” Id., art. 18. Further, “A contract is concluded at the moment when an acceptance of an offer becomes effective.” Id., art. 23. Within such a framework, the oral agreements between Sabaté USA and Chateau des Charmes as to the kind of cork, the quantity, and the price were suficient to create complete and binding contracts.30 The terms of those agreements did not include any forum selection clause. Indeed, Sabaté France and Sabaté USA do not contend that a forum selection clause was part of their oral agreements, but merely that the clauses in the invoices became part of a binding agreement. The logic of this contention is defective. Under the Convention, a “contract may be modiied or terminated by the mere agreement of the parties.” Id.,

[30]. In this respect, the regime of the C.I.S.G. differs from that of the Uniform Commercial Code, which would require a contract for the sale of corks for the value involved here to be evidenced by a writing. See U.C.C. § 2-201.

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art. 29(1). However, the Convention clearly states that “[a]dditional or different terms relating, among other things, to . . . the settlement of disputes are considered to alter the terms of the offer materially.” Id., art. 19(3). There is no indication that Chateau des Charmes conducted itself in a manner that evidenced any afirmative assent to the forum selection clauses in the invoices. Rather, Chateau des Charmes merely performed its obligations under the oral contract. 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. Cf. C.I.S.G., art. 8(3) (“In determining the intent of a party or the understanding a reasonable person would have had, due consideration is to be given to all relevant circumstances of the case including the negotiations, any practices which the parties have established between themselves, usages and any subsequent conduct of the parties.”). Here, no circumstances exist to conclude that Chateau des Charmes’s conduct evidenced an “agreement.” We reject the contention that because Sabaté France sent multiple invoices it created an agreement as to the proper forum with Chateau des Charmes. The parties agreed in two telephone calls to a purchase of corks to be shipped in eleven batches. In such circumstances, a party’s multiple attempts to alter an agreement unilaterally do not so effect.

CONCLUSION Because the contract for the sale of corks did not contain the forum selection clauses in Sabaté France’s invoices, there was nothing for the district court to enforce, and its dismissal of this action was an abuse of discretion. The action is reinstated. REVERSED and REMANDED.

Question 3.31 Does Chateau des Charmes hold that in a battle of the forms, performance is not acceptance? Question 3.32 What does Chateau des Charmes say about the requirements of formalities in international sales transactions?

Question 3.33 If a party foresees such arguments and does not want to rely on a court ruling the same way as Chateau des Charmes, what can it do?

Problem 3.34 Hofman Designs in the United States agrees to sell 20 gross of necklaces to McCarty Jewellery in Canada for $40 per necklace. (A gross is a dozen dozen, i.e., 144.) Instead of delivering 20 gross (i.e., 2880), though, Hofman delivers 3000. It ships the 3000 necklaces with a packing list stating the quantity to be 3000 necklaces as well as an invoice stating a quantity of 3000 and a price of $42.50 per necklace. Before signing to accept the delivery from the trucking company, McCarty sees the packing list and checks to verify that it has received boxes appearing to contain 3000 necklaces. Later, when it unpacks the goods, it inds the invoice. It puts all of the necklaces in its stockrooms and ships them to its own buyers as it receives orders. Is McCarty obligated to pay for all 3000 necklaces? How much must it pay?

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V. Formal Matters A. Writing Requirements (or Not): he (Anti) Statute of Frauds he discussion of modiications naturally leads to the rules on formalities. As has come up a couple of times already, the CISG dispenses with any formal requirements in article 11. his rule receives clear judicial recognition in Chateau des Charmes, as it should, even though US domestic law is diferent. Under UCC § 2-201(1), contracts for sales of goods must be evidenced by a writing if the price is $500 or more. his writing requirement is named for the original law that stated basic contractual writing requirements in England over 300 years ago: it is called the statute of rauds.31 he purpose of the original statute, which actually had a slightly longer name, was to prevent fraud and perjury. he idea was that a writing requirement would prevent a bad man from falsely claiming to have made large oral contracts with innocent victims. If he had a contract, he would have to show a writing to prove it. he statute of frauds thus serves an evidentiary function to prevent such false claims, that is, frauds or perjuries. A statute of frauds can also serve a cautionary function in that a person might think more carefully before signing something than before agreeing to something orally. he writing requirement cautions him. It also signals a movement from the ordinary realm of social obligations into the realm of legal obligations, so the writing is said to serve a signaling or channeling function as well. (hese diferent functions of formalities were articulated in the twentieth century by the great contracts scholar and legal philosopher Lon Fuller.)32 For these reasons and perhaps others, many jurisdictions have writing requirements of various sorts. Abolishing such requirements for international sales may have seemed like a bold step. It was not as audacious as it may seem. England, from which the United States received the statute of frauds, abolished the writing requirement for sales of goods in the Law Reform (Enforcement of Contracts) Act 1954. here was a move to do something similar in the United States during the attempt to revise UCC Article 2. Many observers thought (and still think) that the statute of frauds does more harm than good. In their eyes, the bigger problem is people who make real oral contracts and try to get out of them in bad faith—and succeed in doing so by requiring the other party to come up with a writing that does not exist. On this view, the statute of frauds was being used by bad actors to get out of legitimate contracts: the typical fraud being perpetrated is not evil men fabricating nonexistent contracts, as feared in the seventeenth century, but bad actors escaping real oral contracts for which there is oten plenty of proof, albeit not in writing. Many saw a modern trend against such formalities, presaged by the creation of numerous exceptions to the statute of frauds. In the United States, however, this view did not win the day. During the brief time that the Article 2 revision drats rejected the statute of frauds there was much gnashing of teeth and pulling of hair, and one of us thought there might be commercial lawyers rioting in the streets. he vaunted reform proved to be a political nonstarter. he United States still has the old UCC § 2-201 statute

31. 29 Car. II, c. 3 (1677). 32. Lon L. Fuller, Consideration and Form, 41 Colum. L. Rev. 799, 800–02 (1941).

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of frauds, riddled by its various exceptions, some of which are stated in the statute and some of which appear only in the case law. Perhaps fearing similar reactions, the draters of the CISG allowed countries to opt out of the rules (primarily articles 11 and 29)  that reject writing requirements for contracts or modiications. To opt out, a country must make a declaration under article 96. he United States has not made such a declaration, so domestic US sales law and international sales law difer dramatically. A contract for sale of cedar shakes between a buyer and seller in Washington State and Oregon requires a writing if more than $500 is involved, but if one party is in Oregon and the other in British Columbia (Canada), no writing is necessary. In one stunning case in the relatively early days of the treaty this diference in the law went unnoticed until too late,33 but such a misstep should not recur now. A number of other countries have made declarations, however. Russia, Argentina, and Chile are examples; in all, about a dozen countries have stated such a reservation.34 When a country states a reservation, a CISG rule “that allows a contract of sale or its modiication or termination by agreement or any ofer, acceptance or other indication of intention to be made in any form other than in writing does not apply where any party has his place of business in [the declaring] Contracting State.” CISG art. 12. he basic principle is straightforward. How it should apply in a variety of concrete scenarios, however, is much debated.

Forestal Guarani S.A. v. Daros International, Inc. United States Court of Appeals for the Third Circuit, 2010 613 F.3d 395 Fisher, Circuit Judge. At issue in this appeal is the interpretation of the United Nations Convention on Contracts for the International Sale of Goods as it relates to a contract dispute between two corporations, one based in the United States and the other in Argentina. The Convention contains a provision allowing a contract to be proved even if it is not in writing but also authorizes a signatory state to make a declaration opting out of that and related provisions. The United States has not made such a declaration; Argentina has. The District Court concluded that Argentina’s declaration imposed a writing requirement and that the absence of a written contract in this case precluded the plaintiff’s claim. We disagree with that approach. We conclude that where, as here, one party’s country of incorporation has made a declaration while the other’s has not, a court must irst decide, based on the forum state’s choice-of-law rules, which forum’s law applies, and then apply the law of the forum designated by the choice-of-law analysis. We cannot decide on this record whether New Jersey or Argentine law applies here. Furthermore, because the parties have not briefed the issue and the District Court did not address it, we are reluctant to determine whether the claim asserted here would survive 33. GPL Treatment, Ltd. v. Louisiana-Paciic Corp., 894 P.2d 470, 477 n.4 (Or. Ct. App. 1995) (Leeson, J., dissenting), af ’d, 914 P.2d 682 (Or. 1996). 34. he list of reservations may be found at http://www.uncitral.org/uncitral/en/uncitral_texts/sale_ goods/1980CISG_status.html.

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under either jurisdiction’s laws. Accordingly, we will vacate the District Court’s grant of summary judgment for the defendant and remand for further proceedings.

I. Forestal Guarani S.A.  is an Argentina-based manufacturer of various lumber products, including wooden inger-joints. Daros International, Inc., is a New Jersey-based import-export corporation. In 1999, Forestal and Daros entered into an oral agreement whereby Daros agreed to sell Forestal’s wooden inger-joints to third parties in the United States. Pursuant to that agreement, Forestal sent Daros inger-joints worth $1,857,766.06. Daros paid Forestal a total of $1,458,212.35. Forestal demanded the balance due but Daros declined to pay. . . . In June 2005, Daros moved for summary judgment, arguing that the parties lacked a written agreement in violation of the United Nations Convention on Contracts for the International Sale of Goods, (“CISG”), and that Forestal could not otherwise substantiate its damages claim with credible evidence. The District Court summarily denied the motion, concluding that genuine questions of material fact existed. The Court later held a conference with the parties and ordered brieing on several speciic questions regarding the applicability of the CISG. Both parties complied and agreed that the CISG governed Forestal’s claim. In October 2008, the District Court granted Daros’ summary judgment motion, concluding that the CISG governed the parties’ dispute and barred Forestal’s claim because the parties’ agreement was not in writing. The Court also found that Forestal had not adduced any other evidence of its alleged agreement with Daros. Forestal has timely appealed the District Court’s ruling.35 ...

III. The parties do not dispute that the CISG governs their dispute. While Daros does not deny that it had a contract with Forestal, the thrust of Daros’ argument is that the parties do not have a written contract and that, under the CISG, the absence of a writing precludes Forestal’s claim. While conceding that the CISG applies generally, Forestal contests the District Court’s ruling on the ground that the lack of a writing, in its view, is inconsequential in light of the parties’ course of dealing, as evidenced by Forestal’s delivery of inger-joints to Daros and Daros’ remittance of payments to Forestal, as well as an accountant’s report and invoices Forestal claims show that Daros owes it money. ... “The CISG strives to promote certainty among contracting parties and simplicity in judicial understanding by (1) reducing forum shopping, (2) reducing the need to resort to rules of private international law, and (3) establishing a law of sales appropriate for international transactions.” A.E. Butler, A Practical Guide to the CISG: Negotiations through

[35]. After this appeal was docketed, Daros’ counsel moved to withdraw from its representation of Daros. The Clerk of this Court granted that motion. Daros has not obtained new counsel and has not submitted an appellate brief. Its former counsel has indicated that Daros rests on its ilings with the District Court to support its position in this appeal.

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Litigation § 1.08, at 1–15 (2007 Supp.) (footnote omitted). These goals are explicitly enshrined in the CISG. Article 7 directs a court, in interpreting the CISG, to be mindful of “its international character and . . . the need to promote uniformity in its application and the observance of good faith in international trade.” 15 U.S.C.App., Art. 7(1). In furtherance of these principles, as relevant here, the CISG dispenses with certain formalities associated with proving the existence of a contract. Speciically, Article 11 instructs that “[a] contract of sale need not be concluded in or evidenced by writing and is not subject to any other requirement as to form. It may be proved by any means, including witnesses.” Id., Art. 11. Similarly, Article 29 permits a contract modiication to be proved even if it is not in writing. Id., Art. 29. And Part II of the CISG, titled “Formation of the Contract,” outlines requirements governing offer and acceptance but does not impose a writing requirement. Article 11’s elimination of formal writing requirements does not apply in all instances in which the CISG governs. Article 96 of the CISG carves out an exception to Article 11, Article 29 and Part II. It says that [a] Contracting State whose legislation requires contracts of sale to be concluded in or evidenced by writing may at any time make a declaration in accordance with article 12 that any provision of article 11, article 29, or Part II of this Convention, that allows a contract of sale or its modiication or termination by agreement or any offer, acceptance, or other indication of intention to be made in any form other than in writing, does not apply where any party has his place of business in that State. Id., Art. 96. Article 12, to which Article 96 refers, states that [a]ny provision of article 11, article 29 or Part II of this Convention that allows a contract of sale . . . to be made in any form other than in writing does not apply where any party has his place of business in a Contracting State which has made a declaration under article 96 of this Convention. The parties may not derogate from or vary the effect of this article. Id., Art. 12. The United States has not made an Article 96 declaration, so Article 11 governs contract formation in cases involving a United States-based litigant and a litigant based in another non-declaring signatory state. Argentina, however, has made a declaration under Article 96, thereby opting out of Article 11, Article 29 and Part II.36

[36]. Argentina’s declaration reads as follows: In accordance with Articles 96 and 12 of the United Nations Convention on Contracts for the International Sale of Goods, any provisions of [A]rticle 11, Article 29 or Part II of the Convention that allows a contract of sale . . . to be made in any form other than in writing does not apply where any party has his place of business in the Argentine Republic. 15 U.S.C. App. at 390 n. 1.

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Our research has turned up almost no case law from courts in the United States informing how to address a case, such as this one, in which one state has made an Article 96 declaration and the other has not.37 Courts in foreign jurisdictions and commentators alike are divided over how to proceed in such a scenario. See UNCITRAL Digest of Case Law on the United Nations Convention on the International Sale of Goods 46, 48 (2008) (outlining the conlict). According to one school of thought, a court must at the outset conduct a choice-of-law analysis based on private international law principles to determine which state’s law governs contract formation, and then apply that law to a party’s claim. See, e.g., Henry Mather, Choice of Law for International Sales Issues Not Resolved by the CISG, 20 J.L. & Com. 155, 167 (2001) (citing various commentators and a decision by a Hungarian court). Our study of the available sources on the subject establishes this position as the clear majority view.38 In contrast, under what appears to be the minority view, a court should simply require the existence of a writing without reference to either state’s law, though it is unclear what form such a writing would have to take to be considered suficient. See, e.g., Louis F. Del Duca, Implementation of Contract Formation Statute of Frauds, Parol Evidence, and Battle of Forms CISG Provisions in Civil and Common Law Countries, 25 J.L. & Com. 133, 138–39 (2005) (citing decisions by courts in Russia and Belgium).39

[37]. The only decision from a court in the United States directly on point that we have unearthed is by a magistrate judge in the Southern District of Florida. See Zhejiang Shaoxing Yongli Printing & Dyeing Co. v. Microlock Textile Group Corp., No. 06–22608, 2008 WL 2098062, 2008 U.S. Dist. LEXIS 40418 (S.D. Fla. May 19, 2008). The District Court in this case relied on Zhejiang to support its conclusion. [38]. See 15 U.S.C.App. at 372 (reproducing an August 30, 1983, letter from the Secretary of State to the President accompanied by a Department of State legal analysis supporting the choice-of-law approach); C.M. Bianca & M.J. Bonell, Commentary on the International Sales Law: The 1980 Vienna Sales Convention 126–27 (1987); Franco Ferrari, Writing Requirements:  Article 11–13, in the DraFt unCitral DiGest anD beyonD:  Cases, analysis anD unresolveD issues in the u.n. sales Convention 213–14 (Franco Ferrari et  al. eds., 2005); John o.  honnolD, uniForm laW For international sales unDer the 1980 uniteD nations Convention 186–91 (4th ed. 2009); albert h. kritzer, GuiDe to PraCtiCal aPPliCations oF the uniteD nations Convention on ContraCts For the international sale oF GooDs 143 (1989); JosePh lookoFsky, unDerstanDinG the CisG: a ComPaCt GuiDe to the 1980 uniteD nations Convention on ContraCts For the international sale oF GooDs 174–75 (3d ed. 2008); Peter sChleChtriem & inGeborG sChWenzer, Commentary on the un Convention on the international sale oF GooDs (CisG) 169–70 (2d ed. 2005); Harry M. Flechtner, The Several Texts of the CISG in a Decentralized System: Observations on Translations, Reservations and Other Challenges to the Uniformity Principle in Article 7(1), 17 J.L. & Com. 187, 196–97 (1998); Mather, 20 J.L. & Com. at 166–67 (describing this position as the “prevailing view”); Larry A. DiMatteo et al., The Interpretive Turn in International Sales Law: An Analysis of Fifteen Years of CISG Jurisprudence, 24 NW. J. Int’l L. & Bus. 299, 323–24, 327–28 (2004). [39]. Without saying so explicitly, the District Court here adopted the minority view, reasoning that where, as here, a country has opted out of Article 11 a contract must be in writing and that because Forestal had not produced a writing, its claim failed as a matter of law. In a footnote, the Court noted alternatively that a choice-of-law analysis would produce the same result, explaining that New Jersey’s statute of frauds imposes a writing requirement and that Argentina’s decision itself to opt out of Article 11 signiied that country’s writing requirement. The District Court did not conduct a choice-of-law analysis and did not explicitly consider the respective form requirements, or exceptions to those requirements, of either New Jersey or Argentine law. Instead, the District Court evidently presumed that a country’s Article 96 declaration automatically translates into a requirement that a contract be in writing. But, as we explain below, the CISG does not say as much. It says only that its freedom-from-form requirements do not apply where a country has made an Article 96 declaration. Indeed, if the District Court’s approach were correct, courts would have a hard time determining what precisely constitutes an adequate “writing” under these circumstances. Is it a professionally drafted document with paragraph symbols, signed and dated by both parties? Is it a scribbling on the back of a napkin? Where, as here, an Article 96 declaration makes Articles 11 and 29 and Part II of the CISG inapplicable, the CISG is silent on this point.

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Although none of the supporters of what we perceive as the majority view have explained their reasoning in any detail, we conclude that the majority has it right. Our conclusion is compelled by the CISG’s plain language. The CISG says that “[q]uestions concerning matters governed by this Convention which are not expressly settled in it are to be settled in conformity with the general principles on which it is based or, in the absence of such principles, in conformity with the law applicable by virtue of the rules of private international law [i.e. choice of law].” 15 U.S.C.App., Art. 7(2). Because Argentina has opted out of Articles 11 and 29 as well as Part II of the CISG, the CISG does not “expressly settle” the question whether a breach-of-contract claim is sustainable in the absence of a written contract. So Article 7(2) tells us to consider the CISG’s “general principles” to ill in the gap. We have already outlined some of the general principles undergirding the CISG, but we fail to see how they inform the question whether Forestal’s contract claim may proceed. Indeed, given the inapplicability in this case of any of the CISG’s provisions relaxing or eliminating writing requirements, we do not believe that we can answer the question presented here based on a pure application of those principles alone. Given that neither the CISG nor its founding principles explicitly or implicitly settle our inquiry, Article 7(2)’s reference to “the rules of private international law” is triggered. In other words, we have to consider the choice-of-law rules of the forum state, in this case New Jersey, to determine whether New Jersey or Argentine form requirements govern Forestal’s claim.40 In making a choice-of-law determination in a breach-of-contract case, New Jersey courts ask which forum has the most signiicant relationship with the parties and the contract. To that end, the New Jersey Supreme Court has adopted the principles set forth in § 188 and § 6 of the Restatement (Second) of Conlicts of Laws. Section 188 directs courts to consider, among other things: (a) the place of contracting, (b) the place of negotiation of the contract, (c) the place of performance, (d) the location of the subject matter of the contract, and (e) the domicile, residence, nationality, place of incorporation and place of business of the parties. Restatement (Second) of Conlicts of Laws § 188(2) (1971). Section 6 lists the following nonexclusive factors relevant to a choice-of-law analysis: (a) the needs of the interstate and international systems, (b) the relevant policies of the forum, (c) the relevant policies of other interested states and the relative interests of those states in the determination of the particular issue, (d) the

[40]. Although the CISG’s plain language obviates the need for resort to its drafting history, we note nonetheless that that history buttresses our conclusion. As one commentator has written, the sole fact that one party has its place of business in a State that made an Article 96 reservation does not necessarily make applicable the form requirements of that State. . . . Rather, the rules of private international [law] of the forum should dictate whether any form requirements have to be met. The legislative history of the Convention appears to corroborate this view, since at the 1980 Vienna Diplomatic Conference a proposal was rejected pursuant to which the form requirements of a State that had made an Article 96 reservation had to be applied. Ferrari, supra, at 213 (footnotes omitted).

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protection of justiied expectations, (e) the basic policies underlying the particular ield of law, (f) certainty, predictability and uniformity of result, and (g) ease in the determination and application of the law to be applied. Id. § 6(2). We ordinarily decline to consider issues not decided by a district court, choosing instead to allow that court to consider them in the irst instance. This case bolsters the rationale behind our reluctance to wade into matters that the parties have not joined and that a district court has not addressed, as the record here sheds practically no light on many, if not most, of the choice-of-law considerations listed above. It is true that we can afirm a district court’s ruling on any ground supported by the record. There is no dispute here that Forestal’s contract with Daros was verbal at best, so we could feasibly skip a choice-of-law analysis and apply both New Jersey and Argentine law to Forestal’s claim to test its viability. New Jersey’s statute of frauds provides that “a contract for the sale of goods for the price of $500 or more is not enforceable by way of action or defense unless there is some writing suficient to indicate that a contract for sale has been made between the parties and signed by the party against whom enforcement is sought. . . . ” N.J. Stat. Ann. § 12A:2– 201(1). While Forestal’s claim might fail under that provision, the statute also makes several exceptions to the general rule. See id. § 12A:2–201(3). The parties have not briefed, and the record in this case prevents us from concluding deinitively, whether any such exception is applicable here. As for Argentine law, we may safely assume that it requires some sort of writing, as Article 96 of the CISG permits a country to opt out of Article 11 only if its domestic law “requires contracts of sale to be concluded in or evidenced by writing. . . . ” We have looked at the Argentine Civil Code; it contains several provisions governing contract formation and ways of proving a contract. Forestal’s offer of proof may or may not sufice under those provisions. In the end, we think it unwise either to venture into this choice-of-law thicket—the outcome of which is determinative of this case—or to engage in a largely speculative exercise about the viability of Forestal’s claim under either jurisdiction’s law without the beneit of either any brieing whatsoever by the parties or any analysis by the District Court on this point. Because these issues deserve a full airing, we conclude that remand is a better course of action. Our conclusion that remand is appropriate is also driven by the posture in which this case reaches us. Forestal is appealing from the District Court’s grant of summary judgment for Daros on Daros’ motion. In other words, although it did not say so explicitly, the District Court determined that Daros had met its initial burden of showing that there remained no genuine questions of material fact and that Daros was entitled to judgment as a matter of law. As we read Daros’ moving papers, we understand Daros to have sought to meet that burden by advancing two main arguments. First, Daros argued that summary judgment was proper because, in its view, the CISG requires a writing in light of Argentina’s Article 96 declaration and Forestal did not produce a formal written contract. We have concluded, however, that such a position is wrong as a matter of law. As we have explained, the resolution of this case requires a choice-of-law analysis to determine whether New Jersey or Argentine form requirements govern as well as an inquiry into whether Forestal’s offer of proof is adequate under whichever forum’s law that analysis designates. In other words, Daros could not have met its initial summary judgment burden

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of showing that it was entitled to judgment as a matter of law when there was, in effect, no law to apply. Second, Daros contended that Forestal had submitted no “credible evidence” of a contract with Daros. The District Court agreed with that contention, concluding that there was no evidence that the parties ever had any contract at all. It is undisputed, however, that Forestal sold wooden inger-joints to Daros and that Daros gave Forestal money in exchange. Indeed, Daros nowhere denies that the parties at the very least had a verbal contract for those sales. Furthermore, Forestal submitted an accountant’s certiication, with supporting documentation, as well as invoices in an effort to substantiate its claim that it is owed money. There is also deposition testimony indicating that the parties had a contract. The District Court did not expressly refer to some of these materials in its opinion, and we do not know why it evidently disregarded them. The Court also rejected Forestal’s reliance on the invoices Forestal submitted, but did so based on New Jersey law alone—that is, with no parallel analysis under Argentine law—without explaining its reference to that state’s law when the Court had already decided that the CISG controlled this case. In short, we cannot say at this stage that there is no genuine question of material fact as to whether the parties had or did not have some sort of contractual relationship and whether Forestal can prove as much under whatever law actually controls this case. As a consequence, we are not persuaded that Daros met its initial summary judgment burden on the record as it now stands.41

IV. For the foregoing reasons, we will vacate the District Court’s grant of summary judgment for Daros and remand for further proceedings. On remand, the District Court may determine, based on New Jersey’s choice-of-law rules, whether New Jersey or Argentine law governs and then apply that forum’s law to this case. . . . CoWen, Circuit Judge, dissenting. I believe that the issues addressed at some length by the Court have not been properly preserved for appellate consideration. With respect to the merits, I have serious doubts as to the validity of the approach actually adopted by the majority. I therefore must respectfully dissent. ... I believe that it would be inappropriate for this Court to consider these CISG and choice-of-law issues at this juncture. In fact, the complexity and outright novelty of the CISG issue clearly weigh in favor of following our usual approach to non-preserved arguments and issues. The majority itself notes that it has uncovered almost no case law indicating how we should address the situation in which one state has made an Article

[41]. Our dissenting colleague does not believe that we should remand this case for a choice-of-law analysis. He would hold that Forestal waived its right to pursue such an analysis by failing to press it in the District Court. To be sure, as we have noted, the parties did not address this issue in the District Court and that court did not reach it. The dissent overlooks, however, that the waiver doctrine is founded on equitable principles and that its enforcement is within our discretion. We think it would be particularly unfair to apply it against a party whose adversary elected not even to participate in this appeal. Moreover, as we have also pointed out, the District Court did not reach this issue in error; that omission does not bar us from considering it.

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96 declaration under the CISG (i.e., Argentina) and the other state has not made an equivalent declaration (i.e., the United States). In turn, it further observes that courts in other countries as well as various commentators are divided over how to proceed in such circumstances and that even the supporters of the position ultimately adopted in the majority opinion have not explained their own reasoning in any real detail. We should be especially reluctant to address a totally novel yet important issue of international law where we do not have the beneit of full and proper brieing by the parties. Finally, considering arguendo the merits of these issues (which the Court should not), I  would still have considerable dificulty agreeing with the majority’s holding that a choice-of-law analysis is required here because such an approach appears to be at odds with the CISG itself. I  acknowledge that the majority has clearly given this novel question a great deal of attention and has thoroughly, fairly, and competently explained its own reasoning. However, it still appears that, given the plain language of this international treaty, its structure, and its purposes, a written contract is required where, as here, one of the relevant countries has exercised its right to make an Article 96 declaration. In turn, because Forrestal has clearly failed to produce the requisite written agreement, its contractual claim must accordingly fail as a matter of law. Nevertheless, I reiterate that we should not reach the merits of this complicated issue at this time.

Question 3.35 Why might an oral contract for over $1 million be valid under § 2-201, as the court suggests?

Question 3.36 If you had taken over for Daros’s lawyer, what would you have argued on appeal to the hird Circuit?

Question 3.37 Is it possible to have highly reliable proof of a large contract without a writing? Can you explain why courts have felt great pressure to draw exceptions to statutes of frauds?

Problem 3.38 Varela Uniform Company in Buenos Aires agrees to buy some manufacturing equipment from Merritt Machine Works in the United States for a price of $675,000. he sale was initiated when a Merritt sales representative was making rounds in Argentina. he deal was inished by telephone between representatives of each company; at that time, they agreed on the inal speciications, quantities of replacement parts and other maintenance items, and a total price. Merritt shipped the equipment to Varela and it duly arrived, but in the meantime Varela found another supplier for the equipment for a much lower price. Varela refuses to accept delivery or to pay for the goods. Each of the company representatives documented the transaction only in a summary e-mail to their respective bosses. (a) Merritt sues Varela in Argentina, which applies its rules of private international law to determine that Argentine law applies where the CISG does not. Argentine law requires this transaction to be in a signed writing, and the summary e-mails do not satisfy this requirement under Argentine law. What result?

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(b) Merritt sues Varela in a US court that has subject matter and personal jurisdiction and that decides that its conlicts rules point to application of the law of the United States. he company representatives signed their names at the bottom of the e-mails, and the summary e-mails thus satisfy UCC § 2-201(1) as altered by E-SIGN and UETA (see below), although you may assume they do not satisfy Argentine law. What result? What if the United States, like certain other jurisdictions, had no applicable statute of frauds at all? (c) Suppose that the representatives had not typed their names at the bottom of the summary e-mails and the court holds that they therefore lack the signature required by UCC § 2-201(1). As you see, some countries emphasize the importance of writings, not only for their domestic transactions but also in international ones. hey are not uncommon, but they are the exception rather than the rule. Indeed, even in domestic transactions, our exemplary jurisdictions other than the United States have little or nothing in the way of formal requirements relevant to commercial sales of goods, which is our subject. Both France and Germany except commercial transactions from their more general requirements of formalities, and countries in the Germanic family, as is now true in England, have no formal requirements for sales of goods.

B. Writings and heir Electronic Equivalents he quaint, concise seriousness of CISG article 13 appears almost comical now; perhaps its ill fate was destined by its article number. “For the purposes of this Convention,” it solemnly declares, “ ‘writing’ includes telegram and telex.” We suspect few practicing lawyers have ever sent or received a telegram, and only the more senior are likely to have seen many telexes. he draters knew, though, that innovations would come and continue to come, so they carefully used the word “includes” to indicate that other electronic means of communication might satisfy the legal requirement. Currently, thoughts along these lines are related to e-mails or Web-based ordering systems. Other electronic data interchange ordering (which sometimes predate the use of the Web) can raise questions on occasion as well. A few observations are in order. During the early days of the Internet boom, there were few governments that did not want to hop on the electronic bandwagon. Accordingly, the late 1990s saw a spate of laws promoting electronic commerce, not least for sales of goods. his phenomenon held true both internationally and domestically, including in the United States. he three main sources of law to consider are (internationally) the UNCITRAL Model Law on Electronic Commerce (1996), the federal E-SIGN Act in the United States (2000), and in almost all of the individual United States, the Uniform Electronic Transactions Act (1999) (UETA).42 he UETA and E-SIGN state principles much the same as those in the UNCITRAL model law, and

42. None of these should be confused with the Uniform Computer Information Transactions Act (UCITA), a highly controversial law that has been enacted in only two of the United States.

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French law is much the same as well.43 hese are the essential principles of the UNCITRAL Model Law, UETA, E-SIGN, and the implementing legislation in France: 1. Where a writing is required, an electronic record will suice. An electronic record is something that can be stored and retrieved. UNCITRAL Model Law art. 6; UETA §§ 2(13), 7; E-SIGN, 15 U.S.C. § 7006(9); C. civ. art. 1316-3 (Fr.). 2. Where a signature is required, an electronic signature is ine. It need not be a fancy “digital signature” that uses advanced technologies such as asymmetric cryptography. What is necessary is that the signature identify the person and be used to show that person’s approval, that is, intent to sign. UNCITRAL Model Law art. 7; UETA §§ 2(8), 7; E-SIGN, 15 U.S.C. § 7006(5); C. civ. art. 1316-1 (Fr.). Note that identiication alone is not enough, so an automatically generated name, for instance, might not be a signature because it may not be used to approve a document; in other words, there may be no intent to sign. Whether there is such a use or intent is a question of fact. 3. With these points in mind, there should be no discrimination against the electronic form. his non-discrimination principle is called medium neutrality. UNCITRAL Model Law art. 5; UETA §7; E-SIGN, 15 U.S.C. § 7001(a). Although Germany, unlike the United States and France, does not follow the Model Law, it does have legislation on electronic form and signatures. BGB § 126a; ZPO § 292a. And in any case, Germany and France are unlikely to have applicable writing or signature requirements for a commercial sale of goods anyway. UNCITRAL took another run at these issues in the United Nations Convention on the Use of Electronic Communications in International Contracts (CUECIC), issued in 2005. It is not currently in force, and we do not venture any predictions as to its fate. he Model Law, however, seems to have worked reasonably well.

C. Consideration As discussed above with respect to irm ofers and option contracts, consideration has long been one of the requirements for a valid contract in the common law, and as has come up more than once, the validity of the contract is a matter that is generally let to domestic law. his suggests that consideration may be required for international sales contracts governed by the CISG if the rules of private international law point to a domestic system that requires consideration. We believe this is true, although a bit complicated, and unlikely to lead to many issues in real cases. Consideration, as explained before, requires a bargained-for exchange. his requirement will be met in all or nearly all contracts of sale (or contracts to sell). Money and the 43. Loi 2000-230 du 13 mars 2000 portant adaptation du droit de la preuve aux technologies de l’information et relative à la signature électronique (1) [Law 2000-230 of March 13, 2000 adapting the law of evidence to information technology and on the electronic signature], Journal Officiel de la République Française [ J.O.] [Official Gazette of France], Mar. 5, 2000 p. 3968, available at http://www.legifrance.gouv.fr/aichTexte. do;jsessionid=AC186422555AF17B26EDEECDCBCFB2A0.tpdjo10v_2?cidTexte=JORFTEXT000000399 095&categorieLien=id. he Civil Code revision drat that is current at the time of writing restates these principles without signiicant change.

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goods will be the consideration: they will be exchanged, and they (or the promises of them) are the inducement for each party. Some may argue that CISG article 23 rejects a consideration requirement because it says “[a] contract is concluded at the moment when an acceptance of an ofer becomes efective.” As it mentions nothing else, perhaps consideration is not required. his strikes us as a question of only scholastic interest: there is consideration in a contract for sale anyway, so whether the requirement is there or not is not without interest but except in rare cases many would leave it to dancing angels to debate. Where consideration can cause problems are in irm ofers or option contracts; the approach to that problem receives full treatment above, with the main point being that CISG article 16(2)(a) probably takes away any requirement of consideration, and article 16(2)(b) relects the US “promissory estoppel” exception to the consideration rule.44 It must be admitted that CISG article 16(2)(a) is not quite as explicit as might be wished with respect to abolishing the consideration requirement. Nevertheless, its unqualiied statement that an ofer cannot be revoked if it “stat[es] a ixed time for acceptance” indicates, in our view, that the treaty has “expressly provided” under article 4(a) that such a promise is valid without regard to domestic law. It also dispenses with the formal requirements for a irm ofer without consideration under UCC § 2-205; this is in line with the article 11 rejection of formalities. In short, consideration should not cause concern for irrevocable ofers under the CISG, although the conclusion is not ironclad. Aside from irm ofers or option contracts, the other place where consideration can become an issue in the context of a sales contract is a modiication. Article 29 is clearer than article 16(2)(a). he phrase “mere agreement” appears to be an explicit reference to consideration and a deinitive statement that mere agreement, without more, is enough for a modiication. his wording shows that the treaty has “expressly provided” for validity under CISG article 4. Furthermore, US law has itself dispensed with consideration for modiications to sales contracts under UCC § 2-209(1), as mentioned above. With all of these points in mind, then, consideration should not present issues for international sales contracts, or modiications of them, under the CISG.

Question 3.39 Do you think that CISG article 16(2) dispenses with any consideration requirement for an irrevocable ofer? Why?

VI. Terms of the Contract and Contract Interpretation Terms of the contract have been an important point of analysis—or point of contention between disputing parties—throughout this chapter. As you can now appreciate far better than when you irst read the idea in the introduction to this chapter, what the terms of the contract are can be bound up intimately, sometimes entirely, with the question of how the contract was formed. hat part of the analysis does not treat all of the issues, however. he 44. English law remains more stringent on consideration in general, but its interplay with the CISG is irrelevant as the United Kingdom is not a party to the treaty.

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remaining ones fall into three categories. As we have so recently discussed writing requirements (or the lack of them), we begin with what evidence can be used to prove the terms of the contract when the parties have committed at least part of their agreement to writing. hese are issues related to the common law parol evidence rule and the CISG response to it. We then turn to the questions that revolve around understanding what the parties have said, whether in writing or orally. hese are oten called questions of contract interpretation, although that term in its technical sense includes many other issues as well. Under this heading we discuss how the parties’ subjective and objective intent determines what the contract means, and we discuss the role of the parties’ practices as well as industry custom in determining this intent. Finally, we discuss briely the rules on illing gaps in the parties’ agreement. For instance, they may not have speciied where delivery is to take place. Sales law generally, and the CISG in particular, includes a number of suppletive rules, oten called gapillers, to ill this and various other gaps in the agreement.

A. he Efect of Writings: he (Anti) Parol Evidence Rule Although article 11 frees the parties from writing requirements, frequently people want the added clarity, precision, certainty, and evidence that come from writings. As we have seen, the CISG permits the parties to require writings or other formalities for modiications of their contracts, and oten the parties will choose a written or equivalent electronic form for their initial contract as well. Under the CISG, the choice to use a writing does not in itself trigger particular evidentiary or interpretive rules. here is no parol evidence rule in the CISG, and it might not be unfair to call article 8—especially article 8(3)—a rejection of the parol evidence rule. It would bemistaken, though, to conclude that parol evidence is always admissible under the CISG.45 Indeed, parol evidence will oten be inadmissible under the CISG sort of like it is under the common law parol evidence rule. he reason is that the admissibility of parol evidence, whether under the common law or under the CISG, is governed by the parties’ intent. he common law has historically had a number of (questionable) presumptions about that intent; these presumptions the CISG largely rejects or displaces. But overstatements on this issue are easy, and a more careful understanding is necessary. If the parties have chosen to write down at least part of their agreement, that writing may indicate the parties’ intent to reduce their agreement to its written form. In other words, the writing may not be simply a note or reminder of the agreement but the parties may intend that writing to be the complete and exclusive statement of their agreement. When the parties so intend, then that writing was traditionally thought at common law to be the agreement, not just evidence of it. heir agreement became merged into that piece of paper, or in other words, integrated into that writing. If that is their intent, then the law—including the CISG, although it does not say so explicitly—generally honors that intent. he result is that no other evidence of the agreement should be admitted because the parties intended the writing to be the agreement. Admitting other evidence of the agreement would both defeat their 45. We are aware of Cedar Petrochemicals, Inc. v.  Dongbu Hannong Chemical Co., 2011 WL 4494602, at *5 (S.D.N.Y. Sept. 28, 2011) (“CISG . . . commands courts to consider extrinisic evidence that illuminates the parties’ intent,” even when the agreement includes a merger clause). Although other readings are possible, we do not read it to hold otherwise; the question, as the court says, is whether the merger clause relects the parties’ intent.

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intent and undermine the very goals of clarity, precision, and certainty that the parties were trying to achieve by choosing the written form. So evidence of any prior agreements would be inadmissible, as would evidence of contemporaneous oral agreements. his is true under the CISG and is—sort of—the same as the parol evidence rule of the common law. Realize that the true common law parol evidence rule (not its sort-of equivalent just mentioned) involves a two-step process. At the irst step, the common law judge decides whether parties have intended integration, and if so, whether the integration is partial or complete. Did the parties intend for the writing to be the inal statement of at least part of their agreement? If so, then the court would hold their agreement integrated as to that part. he writing could not be contradicted by parol evidence of earlier agreements or of oral agreements made at the same time as the writing. Allowing evidence to contradict the writing would go against the parties’ own intent to make the writing the inal statement of that part of their agreement. If there were parts of the agreement that they did not intend to integrate into the writing, then of course parol evidence would be admissible to prove those other parts. hese would be consistent additional terms as opposed to contradictory terms. On the other hand, if the parties intended the writing to be inal not just as to part of their agreement but as to their whole agreement, then no consistent additional terms would be admissible. Ater all, the parties intended the writing to be the complete, inal, and exclusive statement of their agreement. It was their intent that everything that went before, as well as any oral agreement at the same time as the writing, should not count. If that was their intent, that is, if they intended complete integration, then no parol evidence of contradictory terms nor of consistent additional terms would be admissible in evidence. Courts frequently say that the parol evidence rule is not a rule of evidence or procedure but is instead a substantive rule of law. hat is true, and furthermore, it is easiest to think of it not so much as a legal rule but as the law’s respect for the parties’ own intent that only the writing should matter. If that is their intent, then everything else is immaterial. Why waste time and risk distraction by admitting anything else into evidence? Such evidence should be excluded. Among common law jurisdictions there is some controversy over how the judge should decide whether the parties have intended integration. In summary, some courts look to the writing itself, and only the writing, to determine that question. hey look within the four corners of the document only. Having done that, if the judge thinks the document looks like the complete, inal, and exclusive statement of the agreement, then it is. Period. A contract that looks complete is conclusively presumed to be fully integrated. Parol evidence is inadmissible. But if the judge does not think, from looking at the writing, that it is complete and exclusive (e.g., it is a form from one party without a signature from the other party, or it is missing a key term), then it is not integrated, or at least not completely integrated. Parol evidence is admissible, at least to the extent that part of the agreement is not integrated. Other courts reject the four corners method and take a diferent approach. On the integration question the judge, without the jury, will look at the document and will also listen to parol evidence to ind out whether the parties intended the writing to be integrated. To the extent the judge thinks the writing is integrated, he will keep parol evidence from the jury. If it is partially integrated, or not integrated at all, then the jury can hear the parol evidence as to any issue not integrated.

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Assuming that the next stage of proceedings is reached and at least some parol evidence is admitted, realize that the jury does not need to believe the parol evidence:  one of the crucial functions of the jury is to decide whether the parol evidence is credible. But the jury makes that determination only if the evidence is admitted before them in the irst place. If the parol evidence rule excludes the evidence, the jury will never hear it and will never make any determination about it. Indeed, one way to understand the parol evidence rule is as a way not only to respect the parties’ intent and allow them to take the beneits of a writing (along with its costs), but also as a way to reduce jury risk, that is, the chance that laypeople will give in to illegitimate sympathies to let someone out of a clear but harsh deal. Deciding integration was only the irst step; it is the threshold question. If the agreement is not integrated, then the parol evidence rule is not triggered. All parol evidence is admissible. If the agreement is at least partially integrated, however, then the parol evidence rule is triggered, and parol evidence is excluded. he second step is applying the rule, which boils down to deciding what is parol evidence. Although parol etymologically means “word” in the sense of something said or spoken, that is, something verbal or oral (it is related to parliament where laws are debated as well as to being let out of jail on someone’s word, i.e., on parole), parol evidence has a broader meaning. Remember that what is excluded is what the parties intended not to count as their agreement. If the writing is the inal statement of at least part of their agreement, then all agreements that came before—whether oral or written—no longer count. he parties have intended to get rid of them, that is, discharge them. Evidence of them is therefore inadmissible. he parties also intend for what is said at the same time as the writing not to count. Evidence of these contemporaneous oral agreements is therefore inadmissible as well. Parties will sometimes execute more than one document at pretty much the same time (e.g., at a closing, where multiple documents need to be signed for various reasons). hose of course are intended to count. So although all prior agreements and contemporaneous oral agreements are immaterial, contemporaneous written agreements (those other documents from the closing, for example) would be admissible. Contemporaneous means at very close to the same time: they need not be simultaneous, but they should be more than contemporary. hese are the main outlines of the parol evidence rule that are necessary to understanding the response of the CISG to it. Before moving to international law, note a few points briely so the understanding of the rule is reasonably illed out. First, parol evidence does not include evidence of anything that comes ater the writing. he law respects the parties’ intent that the writing represent their agreement from the beginning of the world until the time of the writing. he law traditionally does not respect their attempt to prevent themselves from modifying it later. Parties possess freedom of contract, and traditionally, they could not give it up. hey thus remained free to enter into an oral modiication later. Such a modiication could be prevented only by a relevant statute of frauds (i.e., a law requiring a writing) or by the law of modiications (particularly, the preexisting duty rule, and nowadays, sometimes by the kind of NOM clause discussed above). Second, parol evidence is admissible to show an invalidating cause such as duress or fraud. hird, parol evidence is admissible to show the meaning of an ambiguous term. An ambiguous term is reasonably susceptible of more than one meaning. How this exception is applied is the subject of considerable controversy

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in the common law, but in its simple statement as we have just given it, there is no question. A corollary of this exception, for courts that take a broad view of it, is that parol evidence is admissible to interpret the meaning of a written document. his, in summary form, is the law of the parol evidence rule in the United States. It is preserved for the law of sales in a slightly modiied form in UCC § 2-202. he UCC does not attempt to state all of the relevant law, which remains applicable under UCC § 1-103, but § 2-202 encapsulates the core of the parol evidence rule. he chief diference between the UCC version and the traditional one is that course of performance, course of dealing, and usage of trade—in other words, practices of the parties and custom of the industry—are almost always admissible under the UCC. he parol evidence rule is an institution of the common law. his particular approach to arriving at a judicial understanding of the parties’ intent is not shared with other systems, possibly because they do not have the tradition of the lay jury, which in the old days would be presumed illiterate. Unsurprisingly, the CISG does not pick up the rule. Indeed, it states what appears to be the opposite of the parol evidence rule in article 8(3): “In determining the intent of a party or the understanding a reasonable person would have had, due consideration is to be given to all relevant circumstances of the case including the negotiations, any practices which the parties have established between themselves, usages and any subsequent conduct of the parties.” It makes relevant all the things, such as “negotiations,” that the parol evidence rule would exclude. Just as article 11 looks like an Anti Statute of Frauds, article 8 looks like an Anti Parol Evidence Rule. here is something to that, but of course it is not that easy. Recall that the parol evidence rule is triggered by the parties’ intent. If the parties clearly agree, so that the judge or arbitrator is convinced, that their negotiations were superseded by a later agreement, then surely the tribunal would not enforce an earlier agreement from the negotiation stage. his is not a result of a rule so much as it is a result of the parties’ own agreement, and the CISG gives great force to their consent—even allowing them to derogate from the CISG itself under article 6. heir agreement to integrate (which may be stated in the written document itself through a standard integration clause) can mean that their negotiations are irrelevant, and evidence of them thus should not be admitted, even under article 8. his result is best understood, though, not as the parol evidence rule but as an enforcement of the parties’ agreement. he point is that the result under the CISG may not be so diferent from the result under the parol evidence rule, depending on the parties’ intent. he other point that should be emphasized is that certain parts of the approach of the traditional parol evidence rule are probably preempted by article 8. For instance, traditional courts taking the four-corners approach to the integration question should not do so under the CISG. here is no rule conining the court to the four corners of the document. Indeed, the rule is the opposite: the court should look to all the circumstances until it decides the parties intend otherwise. his may be rather a lot to digest in the abstract. he parol evidence rule is complex, with several motivations. he international response is nuanced. What it means in real cases matters; there are a fair number of CISG cases in US courts having to grapple with the issues. You will see how it works more clearly shortly, but to understand the cases fully, irst you should understand another interpretive aspect of article 8.

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B. Subjective and Objective Intent he whole idea of contract is founded on the notion of consent, or intent. Many volumes over the centuries have been devoted to intent, will, and consent and their relation to contract, law, and force, not to mention morals and religion. hankfully for (almost) all of us, this book is not about the foundation of contract, and a minimalist account can give what is necessary to understand the law. Begin by distinguishing subjective intent from objective intent. Subjective intent is what I am actually thinking. Objective intent is what a reasonable person would think my intent is. Generally a reasonable person will listen to what I say and will read what I write in order to determine what my intent is. Having done that, and interpreted all of that in context, whatever the reasonable person thinks that I think is my objective intent. If I have misspoken or if I have been inarticulate or unclear, there may be a diference between my subjective intent and my objective intent. Usually, one hopes, subjective intent and objective intent are the same. But not always. We now cannot help but advert briely to the Big Question in contract law. Why should the law enforce a contract, if necessary, with the force of the state? Is it not a private matter if I break my word? One answer to this question is that society—through the instrument of the law—respects my dignity and autonomy, and one way of respecting my dignity and autonomy is to enforce the promise I make of my own will. he law enforces my intent; it efectuates my intent. It is one way that society helps me and gives me something that I would not have if I were operating alone in a state of nature. he enforcement of my intent (e.g., to sell wheat to you) is a beneit I receive from society. I can hardly object if the law forces me to do it, for it was my own intent that triggered the legal, enforceable consequence. I might object, however, if the law goes beyond my subjective will, or my subjective intent. hen the law is impinging on my liberty, and forcing me to do something, for no legitimate reason. his, very roughly speaking, is a sort of will theory of contract and seems to require interpretation to be conined to my subjective intent. his approach is most closely associated with the civil law, and probably more with French law than German law. here are other answers to the Big Question. One reason to enforce a contract is that it is useful to society to enforce contracts, especially contracts of the economic variety. Society would be stuck at a primitive level if people could not make enforceable contracts to buy and sell wheat. Because this is economically useful, contracts are enforceable. I need to be able to rely on you to pay me when you say you will, and you need to be able to rely on my delivering the wheat when I say I will. If either of us breaks the promise, and does not ofer adequate compensation, society promises to make the aggrieved party whole. If you know you will be made whole if I breach, then you know you can rely on me. his enables a credit economy; without it, we are stuck with simultaneous hand-to-hand exchanges not much better than barter. his is a beneit of society too. Because the reliability of the market is the motivation, objective intent is what matters most. If I say I will deliver the wheat in June, you can rely on it, even if I subjectively meant July and just misspoke. his approach is most closely associated with the common law. It is generally said to follow the objective theory of assent.

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Such pure positions work less than ideally when they come up against commercial reality, and none of the systems is so pure. For practical reasons jurisdictions that generally follow the will theory make some exceptions (e.g., through writing requirements) that can lead to enforcement of objective intent. Similarly, common law jurisdictions sometimes enforce subjective assent, not just objective assent. See, e.g., Restatement (Second) of Contracts § 201(1) (1981). he bottom line is that many civil law jurisdictions use subjective intent, with some exceptions, while common law jurisdictions use objective intent, with some exceptions. In other words, the common law and the civil law start at opposite ends but both move toward the middle, and they seem to meet at somewhere near the same place: because of the exceptions on both sides, it is not oten, particularly in commercial transactions, that the systems reach diferent results. Article 8(1) and (2)  capture this well. he CISG starts with the civil law in article 8(1): “statements made by and other conduct of a party are to be interpreted according to his intent. . . . ” As “intent” is not qualiied by reference to reasonableness or a reasonable person, the meaning is subjective, actual intent. For obvious practical reasons, however, the article goes on to qualify by saying “where the other party knew or could not have been unaware what that intent was.” It is not unfair to hold you to my actual, subjective intent as long as you know what it is. Indeed, it would be unreasonable of you to try to hold me to objective intent if you knew or should have known that my actual intent was diferent. Although it is not oten noticed, this accords with the common law as well; it is one of the exceptions to the objective theory. See Restatement (Second) of Contracts § 201(2) (1981). Where subjective and objective intent diverge, however, it will not oten be the case that the other party knows (or must know) the irst party’s actual intent. In that case, objective intent governs. his results from article 8(2): “If the preceding paragraph is not applicable,” interpretation is not according to intent but is “according to the understanding that a reasonable person of the same kind as the other party would have had in the same circumstances.” his is the objective theory that is the starting point in the common law analysis. As noted before, the tribunal under article 8(3) is to give “due consideration” to “all relevant circumstances,” including the negotiations, conduct, and practices of the parties and the usages of the relevant trade. In the early days of the treaty, US courts did not always seem suiciently cognizant of the diferences, sometimes subtle and sometimes not, between the CISG, the UCC, and the common law. Fortunately, later cases have grown more sensitive, and the earlier treatment, although not overruled, has been suiciently criticized to now constitute weak and questionable authority. he current leading case on these issues follows.

MCC-Marble Ceramic Center, Inc. v. Ceramica Nuova D’Agostino, S.P.A. United States Court of Appeals for the Eleventh Circuit, 1998 144 F.3d 1384 birCh, Circuit Judge: This case requires us to determine whether a court must consider parol evidence in a contract dispute governed by the United Nations Convention on Contracts for the International

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Sale of Goods (“CISG”). The district court granted summary judgment on behalf of the defendant-appellee, relying on certain terms and provisions that appeared on the reverse of a pre-printed form contract for the sale of ceramic tiles. The plaintiff-appellant sought to rely on a number of afidavits that tended to show both that the parties had arrived at an oral contract before memorializing their agreement in writing and that they subjectively intended not to apply the terms on the reverse of the contract to their agreements. The magistrate judge held that the afidavits did not raise an issue of material fact and recommended that the district court grant summary judgment based on the terms of the contract. The district court agreed with the magistrate judge’s reasoning and entered summary judgment in the defendant-appellee’s favor. We REVERSE.

BACKGROUND The plaintiff-appellant, MCC-Marble Ceramic, Inc. (“MCC”), is a Florida corporation engaged in the retail sale of tiles, and the defendant-appellee, Ceramica Nuova d’Agostino S.p.A. (“D’Agostino”) is an Italian corporation engaged in the manufacture of ceramic tiles. In October 1990, MCC’s president, Juan Carlos [Monzon], met representatives of D’Agostino at a trade fair in Bologna, Italy and negotiated an agreement to purchase ceramic tiles from D’Agostino based on samples he examined at the trade fair. Monzon, who spoke no Italian, communicated with Gianni Silingardi, then D’Agostino’s commercial director, through a translator, Gianfranco Copelli, who was himself an agent of D’Agostino. The parties apparently arrived at an oral agreement on the crucial terms of price, quality, quantity, delivery and payment. The parties then recorded these terms on one of D’Agostino’s standard, pre-printed order forms and Monzon signed the contract on MCC’s behalf. According to MCC, the parties also entered into a requirements contract in February 1991, subject to which D’Agostino agreed to supply MCC with high grade ceramic tile at speciic discounts as long as MCC purchased suficient quantities of tile. MCC completed a number of additional order forms requesting tile deliveries pursuant to that agreement. MCC brought suit against D’Agostino claiming a breach of the February 1991 requirements contract when D’Agostino failed to satisfy orders in April, May, and August of 1991. In addition to other defenses, D’Agostino responded that it was under no obligation to ill MCC’s orders because MCC had defaulted on payment for previous shipments. In support of its position, D’Agostino relied on the pre-printed terms of the contracts that MCC had executed. The executed forms were printed in Italian and contained terms and conditions on both the front and reverse. According to an English translation of the October 1990 contract, the front of the order form contained the following language directly beneath Monzon’s signature: [T]he buyer hereby states that he is aware of the sales conditions stated on the reverse and that he expressly approves of them with special reference to those numbered 1-2-3-4-5-6-7-8. Clause 6(b), printed on the back of the form states: [D]efault or delay in payment within the time agreed upon gives D’Agostino the right to . . . suspend or cancel the contract itself and to cancel possible other pending contracts and the buyer does not have the right to indemniication or damages.

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D’Agostino also brought a number of counterclaims against MCC, seeking damages for MCC’s alleged nonpayment for deliveries of tile that D’Agostino had made between February 28, 1991 and July 4, 1991. MCC responded that the tile it had received was of a lower quality than contracted for, and that, pursuant to the CISG, MCC was entitled to reduce payment in proportion to the defects. D’Agostino, however, noted that clause 4 on the reverse of the contract states, in pertinent part: Possible complaints for defects of the merchandise must be made in writing by means of a certiied letter within and not later than 10 days after receipt of the merchandise. . . . Although there is evidence to support MCC’s claims that it complained about the quality of the deliveries it received, MCC never submitted any written complaints. MCC did not dispute these underlying facts before the district court, but argued that the parties never intended the terms and conditions printed on the reverse of the order form to apply to their agreements. As evidence for this assertion, MCC submitted Monzon’s afidavit, which claims that MCC had no subjective intent to be bound by those terms and that D’Agostino was aware of this intent. MCC also iled afidavits from Silingardi and Copelli, D’Agostino’s representatives at the trade fair, which support Monzon’s claim that the parties subjectively intended not to be bound by the terms on the reverse of the order form. The magistrate judge held that the afidavits, even if true, did not raise an issue of material fact regarding the interpretation or applicability of the terms of the written contracts and the district court accepted his recommendation to award summary judgment in D’Agostino’s favor. MCC then iled this timely appeal.

DISCUSSION ... Article 8 of the CISG governs the interpretation of international contracts for the sale of goods and forms the basis of MCC’s appeal from the district court’s grant of summary judgment in D’Agostino’s favor. MCC argues that the magistrate judge and the district court improperly ignored evidence that MCC submitted regarding the parties’ subjective intent when they memorialized the terms of their agreement on D’Agostino’s pre-printed form contract, and that the magistrate judge erred by applying the parol evidence rule in derogation of the CISG.

I. Subjective Intent Under the CISG Contrary to what is familiar practice in United States courts, the CISG appears to permit a substantial inquiry into the parties’ subjective intent, even if the parties did not engage in any objectively ascertainable means of registering this intent.46 Article 8(1) of the CISG

[46]. In the United States, the legislatures, courts, and the legal academy have voiced a preference for relying on objective manifestations of the parties’ intentions. For example, Article Two of the Uniform Commercial Code, which most states have enacted in some form or another to govern contracts for the sale of goods, is replete with references to standards of commercial reasonableness. See, e.g., U.C.C. §  2-206 (referring to reasonable means of accepting an offer); see also Lucy v.  Zehmer, 196 Va. 493,

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instructs courts to interpret the “statements . . . and other conduct of a party . . . according to his intent” as long as the other party “knew or could not have been unaware” of that intent. The plain language of the Convention, therefore, requires an inquiry into a party’s subjective intent as long as the other party to the contract was aware of that intent. In this case, MCC has submitted three afidavits that discuss the purported subjective intent of the parties to the initial agreement concluded between MCC and D’Agostino in October 1990. All three afidavits discuss the preliminary negotiations and report that the parties arrived at an oral agreement for D’Agostino to supply quantities of a speciic grade of ceramic tile to MCC at an agreed upon price. The afidavits state that the “oral agreement established the essential terms of quality, quantity, description of goods, delivery, price and payment.” The afidavits also note that the parties memorialized the terms of their oral agreement on a standard D’Agostino order form, but all three afiants contend that the parties subjectively intended not to be bound by the terms on the reverse of that form despite a provision directly below the signature line that expressly and speciically incorporated those terms.47 The terms on the reverse of the contract give D’Agostino the right to suspend or cancel all contracts in the event of a buyer’s non-payment and require a buyer to make a written report of all defects within ten days. As the magistrate judge’s report and recommendation makes clear, if these terms applied to the agreements between MCC and D’Agostino, summary judgment would be appropriate because MCC failed to make any written complaints about the quality of tile it received and D’Agostino has established MCC’s non-payment of a number of invoices amounting to $108,389.40 and 102,053,846.00 Italian lira. Article 8(1) of the CISG requires a court to consider this evidence of the parties’ subjective intent. Contrary to the magistrate judge’s report, which the district court endorsed and adopted, article 8(1) does not focus on interpreting the parties’ statements alone. Although we agree with the magistrate judge’s conclusion that no “interpretation” of the contract’s terms could support MCC’s position,48 article 8(1) also requires a court 503, 84 S.E.2d 516, 522 (1954) (“Whether the writing signed . . . was the result of a serious offer . . . and a serious acceptance . . . , or was a serious offer . . . and an acceptance in secret jest . . . , in either event it constituted a binding contract of sale between the parties.”). Justice Holmes expressed the philosophy behind this focus on the objective in forceful terms: “The law has nothing to do with the actual state of the parties’ minds. In contract, as elsewhere, it must go by externals, and judge parties by their conduct.” Oliver W. Holmes, The Common Law 242 (Howe ed. 1963) quoted in John O. Honnold, Uniform Law for International Sales under the 1980 United Nations Convention § 107 at 164 (2d ed.1991) (hereinafter Honnold, Uniform Law). [47]. MCC makes much of the fact that the written order form is entirely in Italian and that Monzon, who signed the contract on MCC’s behalf directly below this provision incorporating the terms on the reverse of the form, neither spoke nor read Italian. This fact is of no assistance to MCC’s position. We ind 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 ind nothing in the CISG that might counsel this type of reckless behavior and nothing that signals any retreat from the proposition that parties who sign contracts will be bound by them regardless of whether they have read them or understood them. See e.g., Samson Plastic Conduit and Pipe Corp. v. Battenfeld Extrusionstechnik GMBH, 718 F. Supp. 886, 890 (M.D. Ala. 1989) (“A good and recurring illustration of the problem . . . involves a person who is . . . unfamiliar with the language in which a contract is written and who has signed a document which was not read to him. There is all but unanimous agreement that he is bound. . . . ”) [48]. The magistrate judge’s report correctly notes that MCC has not sought an interpretation of those terms, but rather to exclude them altogether. We agree that such an approach “would render terms of written contracts virtually meaningless and severely diminish the reliability of commercial contracts.”

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to consider subjective intent while interpreting the conduct of the parties. The CISG’s language, therefore, requires courts to consider evidence of a party’s subjective intent when signing a contract if the other party to the contract was aware of that intent at the time. This is precisely the type of evidence that MCC has provided through the Silingardi, Copelli, and Monzon afidavits, which discuss not only Monzon’s intent as MCC’s representative but also discuss the intent of D’Agostino’s representatives and their knowledge that Monzon did not intend to agree to the terms on the reverse of the form contract. This acknowledgment that D’Agostino’s representatives were aware of Monzon’s subjective intent puts this case squarely within article 8(1) of the CISG, and therefore requires the court to consider MCC’s evidence as it interprets the parties’ conduct.49

II. Parol Evidence and the CISG Given our determination that the magistrate judge and the district court should have considered MCC’s afidavits regarding the parties’ subjective intentions, we must address a question of irst impression in this circuit: whether the parol evidence rule, which bars evidence of an earlier oral contract that contradicts or varies the terms of a subsequent or contemporaneous written contract, plays any role in cases involving the CISG. We begin by observing that the parol evidence rule, contrary to its title, is a substantive rule of law, not a rule of evidence. See II E. Allan Farnsworth, Farnsworth on Contracts, § 7.2 at 194 (1990). The rule does not purport to exclude a particular type of evidence as an “untrustworthy or undesirable” way of proving a fact, but prevents a litigant from attempting to show “the fact itself—the fact that the terms of the agreement are other than those in the writing.” Id. As such, a federal district court cannot simply apply the parol evidence rule as a procedural matter—as it might if excluding a particular type of evidence under the Federal Rules of Evidence, which apply in federal court regardless of the source of the substantive rule of decision. Cf. id. § 7.2 at 196. The CISG itself contains no express statement on the role of parol evidence. See Honnold, Uniform Law § 110 at 170. It is clear, however, that the drafters of the CISG were comfortable with the concept of permitting parties to rely on oral contracts because they eschewed any statutes of fraud provision and expressly provided for the enforcement of oral contracts. Compare CISG, art. 11 (a contract of sale need not be concluded or evidenced in writing) with U.C.C. § 2-201 (precluding the enforcement of oral contracts for the sale of goods involving more than $500). Moreover, article 8(3) of the CISG expressly directs courts to give “due consideration . . . to all relevant circumstances of the case including the negotiations . . . ” to determine the intent of the parties. Given article 8(1)’s directive to use the intent of the parties to interpret their statements and conduct, article 8(3) is a clear instruction to admit and consider parol evidence regarding the negotiations to the extent they reveal the parties’ subjective intent.

[49]. Without this crucial acknowledgment, we would interpret the contract and the parties’ actions according to article 8(2), which directs courts to rely on objective evidence of the parties’ intent. On the facts of this case it seems readily apparent that MCC’s afidavits provide no evidence that Monzon’s actions would have made his alleged subjective intent not to be bound by the terms of the contract known to “the understanding that a reasonable person . . . would have had in the same circumstances.” CISG, art 8(2).

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Despite the CISG’s broad scope, surprisingly few cases have applied the Convention in the United States, and only two reported decisions touch upon the parol evidence rule, both in dicta. One court has concluded, much as we have above, that the parol evidence rule is not viable in CISG cases in light of article 8 of the Convention. In Filanto [S.p.A. v. Chilewich Int’l Corp.], a district court addressed the differences between the UCC and the CISG on the issues of offer and acceptance and the battle of the forms. See 789 F. Supp. [1229,] 1238 [S.D.N.Y. 1992]. After engaging in a thorough analysis of how the CISG applied to the dispute before it, the district court tangentially observed that article 8(3) “essentially rejects . . . the parol evidence rule.” Id. at 1238 n.  7. Another court, however, appears to have arrived at a contrary conclusion. In Beijing Metals & Minerals Import/Export Corp. v. American Bus. Ctr., Inc., 993 F.2d 1178 (5th Cir. 1993), a defendant sought to avoid summary judgment on a contract claim by relying on evidence of contemporaneously negotiated oral terms that the parties had not included in their written agreement. The plaintiff, a Chinese corporation, relied on Texas law in its complaint while the defendant, apparently a Texas corporation, asserted that the CISG governed the dispute. Id. at 1183 n. 9. Without resolving the choice of law question, the Fifth Circuit cited Filanto for the proposition that there have been very few reported cases applying the CISG in the United States, and stated that the parol evidence rule would apply regardless of whether Texas law or the CISG governed the dispute. Beijing Metals, 993 F.2d at 1183 n. 9. The opinion does not acknowledge Filanto’s more applicable dictum that the parol evidence rule does not apply to CISG cases nor does it conduct any analysis of the Convention to support its conclusion. In fact, the Fifth Circuit did not undertake to interpret the CISG in a manner that would arrive at a result consistent with the parol evidence rule but instead explained that it would apply the rule as developed at Texas common law. See id. at 1183 n. 10. As persuasive authority for this court, the Beijing Metals opinion is not particularly persuasive on this point. Our reading of article 8(3) as a rejection of the parol evidence rule, however, is in accordance with the great weight of academic commentary on the issue. As one scholar has explained: [T]he language of Article 8(3) that “due consideration is to be given to all relevant circumstances of the case” seems adequate to override any domestic rule that would bar a tribunal from considering the relevance of other agreements. . . . Article 8(3) relieves tribunals from domestic rules that might bar them from “considering” any evidence between the parties that is relevant. This added lexibility for interpretation is consistent with a growing body of opinion that the “parol evidence rule” has been an embarrassment for the administration of modern transactions. Honnold, Uniform Law § 110 at 170–71. [In a footnote, the court cites many commentators who agree.] Indeed, only one commentator has made any serious attempt to reconcile the parol evidence rule with the CISG. See David H. Moore, Note, The Parol Evidence Rule and the United Nations Convention on Contracts for the International Sale of Goods: Justifying Beijing Metals & Minerals Import/Export Corp. v. American Business Center, Inc., 1995 BYU L. Rev. 1347. Moore argues that the parol evidence rule often permits the admission of evidence discussed in article 8(3), and that the rule could be

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an appropriate way to discern what consideration is “due” under article 8(3) to evidence of a parol nature. Id. at 1361–63. He also argues that the parol evidence rule, by limiting the incentive for perjury and pleading prior understandings in bad faith, promotes good faith and uniformity in the interpretation of contracts and therefore is in harmony with the principles of the CISG, as expressed in article 7. Id. at 1366–70. The answer to both these arguments, however, is the same: although jurisdictions in the United States have found the parol evidence rule helpful to promote good faith and uniformity in contract, as well as an appropriate answer to the question of how much consideration to give parol evidence, a wide number of other States Party to the CISG have rejected the rule in their domestic jurisdictions. One of the primary factors motivating the negotiation and adoption of the CISG was to provide parties to international contracts for the sale of goods with some degree of certainty as to the principles of law that would govern potential disputes and remove the previous doubt regarding which party’s legal system might otherwise apply. See Letter of Transmittal from Ronald Reagan, President of the United States, to the United States Senate, reprinted at 15 U.S.C. app. 70, 71 (1997). Courts applying the CISG cannot, therefore, upset the parties’ reliance on the Convention by substituting familiar principles of domestic law when the Convention requires a different result. We may only achieve the directives of good faith and uniformity in contracts under the CISG by interpreting and applying the plain language of article 8(3) as written and obeying its directive to consider this type of parol evidence. This is not to say that parties to an international contract for the sale of goods cannot depend on written contracts or that parol evidence regarding subjective contractual intent need always prevent a party relying on a written agreement from securing summary judgment. To the contrary, most cases will not present a situation (as exists in this case) in which both parties to the contract acknowledge a subjective intent not to be bound by the terms of a pre-printed writing. In most cases, therefore, article 8(2) of the CISG will apply, and objective evidence will provide the basis for the court’s decision. See Honnold, Uniform Law § 107 at 164–65. Consequently, a party to a contract governed by the CISG will not be able to avoid the terms of a contract and force a jury trial simply by submitting an afidavit which states that he or she did not have the subjective intent to be bound by the contract’s terms. Cf. Klopfenstein v. Pargeter, 597 F.2d 150, 152 (9th Cir.1979) (afirming summary judgment despite the appellant’s submission of his own afidavit regarding his subjective intent: “Undisclosed, subjective intentions are immaterial in [a] commercial transaction, especially when contradicted by objective conduct. Thus, the afidavit has no legal effect even if its averments are accepted as wholly truthful.”). Moreover, to the extent parties wish to avoid parol evidence problems they can do so by including a merger clause in their agreement that extinguishes any and all prior agreements and understandings not expressed in the writing.50

[50]. See Ronald A. Brand & Harry M. Fletchner, Arbitration and Contract Formation in International Trade: First Interpretations of the U.N. Sales Convention, 12 J.L. & Com. 239, 252 (1993) (arguing that article 8(3) of the CISG will not permit the consideration of parol evidence when the parties have expressly excluded oral modiications of the contract pursuant to article 29); see also I  Albert Kritzer, Guide to Practical Applications of the United Nations Convention on Contracts for the International Sale of Goods 125 (1989) (counseling the use of a merger clause to compensate for the absence of a parol evidence rule in the CISG).

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Considering MCC’s afidavits in this case, however, we conclude that the magistrate judge and the district court improperly granted summary judgment in favor of D’Agostino. Although the afidavits are, as D’Agostino observes, relatively conclusory and unsupported by facts that would objectively establish MCC’s intent not to be bound by the conditions on the reverse of the form, article 8(1) requires a court to consider evidence of a party’s subjective intent when the other party was aware of it, and the Silingardi and Copelli afidavits provide that evidence. This is not to say that the afidavits are conclusive proof of what the parties intended. A reasonable inder of fact, for example, could disregard testimony that purportedly sophisticated international merchants signed a contract without intending to be bound as simply too incredible to believe and hold MCC to the conditions printed on the reverse of the contract.51 Nevertheless, the afidavits raise an issue of material fact regarding the parties’ intent to incorporate the provisions on the reverse of the form contract. If the inder of fact determines that the parties did not intend to rely on those provisions, then the more general provisions of the CISG will govern the outcome of the dispute. MCC’s afidavits, however, do not discuss all of the transactions and orders that MCC placed with D’Agostino. Each of the afidavits discusses the parties’ subjective intent surrounding the initial order MCC placed with D’Agostino in October 1990. The Copelli afidavit also discusses a February 1991 requirements contract between the parties and reports that the parties subjectively did not intend the terms on the reverse of the D’Agostino order form to apply to that contract either. D’Agostino, however, submitted the afidavit of its chairman, Vincenzo Maselli, which describes at least three other orders from MCC on form contracts dated January 15, 1991, April 27, 1991, and May 4, 1991, in addition to the October 1990 contract. MCC’s afidavits do not discuss the subjective intent of the parties to be bound by language in those contracts, and D’Agostino, therefore, argues that we should afirm summary judgment to the extent damages can be traced to those order forms. It is unclear from the record, however, whether all of these contracts contained the terms that appeared in the October 1990 contract. Moreover, because article 8 requires a court to consider any “practices which the parties have established between themselves, usages and any subsequent conduct of the parties” in interpreting contracts, CISG, art. 8(3), whether the parties intended to adhere to the ten day limit for complaints, as stated on the reverse of the initial contract, will have an impact on whether MCC was bound to adhere to the limit on subsequent deliveries. Since material issues of fact remain regarding the interpretation of the remaining contracts between MCC and D’Agostino, we cannot afirm any portion of the district court’s summary judgment in D’Agostino’s favor.

Question 3.40 What does this case suggest about the validity of requirements contracts under the CISG?

Question 3.41 Does the CISG follow a subjective or will theory of contract or instead an objective theory of assent? Which theory do you think the law should follow? Why? (Warning: these are trick questions.) [51]. D’Agostino attempts to explain and undermine the afidavit of its representatives during the transaction, by calling Silingardi a “disgruntled” former employee. Appellee’s Br. at 11, 39. Silingardi’s alleged feelings towards his former employer may indeed be relevant to undermine the credibility of his assertions, but that is a matter for the inder of fact, not for this court on summary judgment.

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Question 3.42 (a) What does the court think of the policy of the CISG in seeming to side for a subjective theory and against the parol evidence rule? What about the certainty and reliability of writings? Do the parties have the ability to make the choice in favor of writings? (b) Is it true under the CISG, as at common law, that the secret intent of a party is irrelevant?

Question 3.43 What would be the efect of a clause on the form saying, “he front and back of this form constitute the inal, complete, and exclusive statement of the parties’ agreement”? (his is called a merger clause or an integration clause.) What if the clause were in Italian?

Question 3.44 What if the same people swore out aidavits saying that they did not intend the clause mentioned in the previous question to be part of the agreement, whatever language it was in? As some of the earlier cases have shown (e.g., Chateau des Charmes, and to some extent, Filanto), many disputes are over whether one party has successfully included its standard terms and conditions or other boilerplate clauses (such as an arbitration clause or a choice of forum clause) in the contract. Doctrines that can come into play are the battle of the forms rules and the rules on modiications, as discussed above. he same is true of the parol evidence rule.

ECEM European Chemical Marketing B.V. v. Purolite Co. United States District Court for the Eastern District of Pennsylvania, Jan. 29, 2010 2010 WL 419444 slomsky, District Judge. . . . In Defendant’s three Motions in limine, Defendant seeks to (1)  . . . ; (2) bar the use of a document entitled: “Terms and Conditions of Sale”; and (3) to exclude evidence of prior negotiations leading up to the 2004 contract between the parties, and evidence that the 2004 contract was not accepted and binding. . . .

I. STATEMENT OF FACTS Defendant Purolite is an international company with its principal place of business in the United States. Defendant manufactures ion exchange resins and polymers which are used to remove impurities from water and other liquid and gas media. Styrene Monomer is an essential ingredient used in the manufacture of resins and polymers. Plaintiff ECEM, with its principal place of business in the Netherlands, is a buyer and seller of industrial products such as styrene. Plaintiff purchases styrene directly from a manufacturer and then sells it to an end user such as Defendant. Plaintiff and Defendant engaged in a series of agreements beginning in 2002 through which Plaintiff supplied Defendant with styrene for use in Defendant’s production of resins and polymers. During the relevant time period, Plaintiff supplied the styrene by

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delivery in rail tank cars (“RTC”) from Plaintiff’s supplier in Rotterdam, the Netherlands, to Defendant’s plant in Victoria, Romania. ... This case arises from Defendant’s failure to pay for ive shipments of styrene received in the last quarter of 2004 for which payment was apparently due in late 2004 or the irst quarter of 2005. Plaintiff iled this action in June 2005 seeking payment of principal, interest, and fees and costs stemming from the ive unpaid deliveries. . . . In ¶ 12 of Defendant’s Answer, Defendant raised the afirmative defense that “[ECEM] has breached the agreement and is not entitled to the sum it demands, if any.” . . . Defendant has iled a counterclaim in this matter, asserting that Plaintiff failed to deliver two rail tank cars of styrene until approximately one week after Defendant’s styrene supply had been depleted. Defendant alleges that during this week, it could not produce polymers and resins it had planned to produce on two of its nine production lines and suffered damages. Plaintiff maintains that Defendant did not mention the alleged shut-down in production nor any alleged loss until Defendant iled the counterclaim on February 8, 2006.

II. DISCUSSION ...

D. Defendant’s Motion in Limine to Bar Evidence of ECEM’s “Terms and Conditions of Sale.” Defendant seeks to prevent Plaintiff from offering at trial a document entitled “General Terms and Conditions of Sale” (“GTCS”) on the basis that it is extrinsic parol evidence not part of the 2004 Contract. The document contains fourteen (14) Articles and bears at the top the following language: General Terms and conditions of Sale at ECEM EUROPEAN CHEMICAL MARKETING B.V. (a private company with limited liability, with its registered ofice in Amsterdam) As deposited with the District Court at Amsterdam under No. 105 on May 1st, 1981 As iled with the Chamber of Commerce and Industry in Amsterdam. The GTCS, inter alia, provides Plaintiff with the right to recover statutory interest plus an additional 4% upon Defendant’s failure to pay an invoice, and the GTCS provides recovery of all fees and costs incurred by Plaintiff in pursuing payment.52 Plaintiff claims that the invoices for payment sent to Defendant made reference to the GTCS. Plaintiff also claims that the goods delivered contained the same reference. Although an invoice does not appear in the record, the Court will accept the accuracy of this allegation for the purposes of this argument.

[52]. As noted, the 2004 Contract contained the following provisions, inter alia: (1) all deliveries were to take place “for arrival in Victoria during the 3rd week of the month” and (2) all shipments were designated as “DDU Victoria.” Defendant argues that the GTCS contains terms that contradict these two provisions of the 2004 Contract. The GTCS provides that Plaintiff will not be liable for a delayed delivery except for “intent or gross error,” and that “goods shall in all cases be transported at buyer’s risk,” which contrasts with the general DDU principle that the seller retains the risk of loss until delivery is completed. [Risk of loss and “D” terms such as “DDU” are treated below in Chapter 5.—Eds.]

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1. PAROL EVIDENCE ISSUES. Defendant contends that the 2004 Contract represents the entire agreement between the parties, and the GTCS is inadmissible to vary, alter or modify the terms of the 2004 Contract. Defendant claims that Plaintiff never advised Defendant that the GTCS could modify the terms of the 2004 Contract, nor was the GTCS attached to the 2004 Contract. Instead, according to Defendant, Plaintiff’s Complaint establishes that the 2004 Contract was a complete and inal expression of the parties’ intent: On or about December 16, 2003 Purolite placed on ECEM Purchase Order V07/103 for the delivery of approximately 100 metric tons per month, or 1200 metric tons per year, of styrene monomer at an agreed-upon price. On or about the same date, in writing and through its actions of sale and delivery, ECEM conirmed the order, thus creating a binding and enforceable contract. Plaintiff maintains, however, that the GTCS is a portion of the contract between the two parties. Each shipment of styrene sent to Defendant, beginning in 2002, contained an invoice for payment which expressly incorporated the GTCS. Plaintiff submits that Defendant’s practice was to approve each invoice in writing, and during the three-year relationship between the parties, Defendant consistently accepted the goods and invoices, each of which contained a reference to the GTCS. The United Nations Convention on Contracts for the International Sale of Goods (“CISG”) controls this case. . . . The central dispute in this Motion in limine is whether CISG adopts the American parol evidence rule which prohibits the introduction of extrinsic evidence that varies, alters or modiies the terms and conditions of a subsequent or contemporaneous written document. Hershey Foods Corp. v. Ralph Chapek, Inc., 828 F.2d 989, 994 (3d Cir. 1987) (describing the parol evidence rule); Martin v. Monumental Life Ins. Co., 240 F.3d 223, 233 (3d Cir. 2001) (“If parties have integrated their agreement into a single written memorial, all prior negotiations and agreements in regard to the same subject matter, whether oral or written, are excluded from consideration.”). CISG itself contains no express statement on the role of the parol evidence rule. Plaintiff suggests that the few courts that have addressed this issue have found that CISG requires all relevant evidence of the parties’ intent to be admitted to interpret the terms of the agreement even if the evidence contradicts a written document. Defendant argues, to the contrary, that the 2004 Contract is the only permissible evidence concerning the parties’ intent and that parol evidence is barred. Article 8 of CISG governs the interpretation of international contracts for the sale of goods, and the dispute over the application of this provision is critical to a decision on this Motion. [The court quoted article 8.] Plaintiff contends that Article 8 of CISG requires consideration of the communications and negotiations of the parties when determining their intent and the terms of the agreement. Plaintiff relies heavily on MCC-Marble Ceramic Center, Inc. v. Ceramica Nuova D’Agostino, S.P.A., an Eleventh Circuit case involving a contract dispute governed by CISG, for the proposition that the parol evidence rule does not apply in actions involving CISG. 144 F.3d 1384 (11th Cir. 1998). In that case, the purchaser and seller reached an oral agreement on the terms of price, quality, quantity, delivery and payment. Subsequently, the parties memorialized these terms on one of seller’s standard, pre-printed forms. After

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the buyer initiated a breach of contract claim stemming from the seller’s failure to satisfy orders, seller argued that it had no obligation to ill purchaser’s orders pursuant to the default payment provision listed on the back of the pre-printed form. The buyer asserted that the parties never intended for the terms and conditions printed on the reverse side of the order form to apply to their agreements. The buyer provided afidavits explaining that it had no subjective intent to be bound by the terms even though a provision directly below the signature line expressly incorporated those terms. The court held in MCC that the district court erroneously disregarded the afidavits showing the parties’ subjective intent not to be bound by certain terms and conditions of the contract. The court found that “CISG appears to permit a substantial inquiry into the parties’ subjective intent, even if the parties did not engage in any objectively ascertainable means of registering this intent.” Id. at 1387. This inding was based on the court’s interpretation of Article 8(1) of CISG, which requires an inquiry into a party’s subjective intent “where the other party knew or could not have been unaware what that intent was.” Art. 8(1). Further, Article 8(3) explains that all relevant circumstances must be considered when determining the intent of the parties. Consequently, the interplay between Articles 8(1) and 8(3) suggests that parol evidence that would reveal the subjective intent of the parties must be admitted. Here, Defendant argues that Article 8(1) is not the applicable CISG provision because Defendant was objectively unaware of Plaintiff’s intent to incorporate the GTCS into the 2004 Contract. For this reason, Defendant claims that MCC is factually distinguishable from the present matter. Instead, Defendant asserts that this case is governed by the interplay of Articles 8(2) and 8(3) of CISG, which requires the Court to base its decision on objective, rather than subjective, evidence of the conduct of the parties.53 Regardless of whether Article 8(1) or 8(2) is applicable to this matter, the Court is persuaded that CISG allows all evidence of the parties’ intent to be admitted to interpret the terms of the agreement. In other words, Article 8(3) requires due consideration to be given to all relevant circumstances regardless of whether Article 8(1) or 8(2) applies. See Miami Valley Paper, LLC v. Lebbing Eng’g & Consulting GmbH, No. 05-702, 2009 U.S. Dist. LEXIS 25201, *12 (S.D. Ohio Mar. 26, 2009) (citing Article 8(2) for the proposition that “CISG contains no parol evidence rule, but allows the Court to consider statements or conduct of a contracting party to establish, modify, or alter the terms of a contract”); Calzaturiicio Claudia s.n.c. v. Olivieri Footwear Ltd., No. 96-8058, 1998 U.S. Dist. LEXIS 4586, *18 (S.D.N.Y. Apr. 6, 1998)  (“[C]ontracts governed by the CISG are freed from the limits of the parol evidence rule and there is a wider spectrum of admissible evidence to consider in construing the terms of the parties’ agreement.”); TeeVee Toons, Inc. v. Gerhard Schubert GmbH, No. 00-5189, 2006 U.S. Dist. LEXIS 59455, *22 (S.D.N.Y. Aug. 22, 2006) (inding that unlike American law, the CISG has no parol evidence rule).

[53]. Defendant relies predominantly on Beijing Metals & Minerals Import/Export Corp. v. American Business Center, Inc. for the proposition that the parol evidence rule prohibits a buyer from introducing evidence of alleged oral agreements to alter the terms of the written agreement. 993 F.2d 1178, 1183–84 (5th Cir. 1993). In Beijing Metals, the court ruled in a footnote that the parol evidence rule applies regardless of whether Texas law or CISG governed the dispute. Id. at 1184 n. 9. The court did not employ any analysis of CISG jurisprudence and the relation of the parol evidence rule. Accordingly, the Court does not consider Beijing Metals particularly persuasive on this point.

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“Consequently, the standard UCC inquiry regarding whether a writing is fully or partially integrated has little meaning under the CISG and courts are therefore less constrained by the ‘four corners’ of the instrument in construing the terms of the contract.” Calzaturiicio, 1998 U.S. Dist. LEXIS 4586, at *19. Accordingly, the Court will not preclude extratextual evidence of negotiations or agreements, such as the GTCS and email communications, made prior to the 2004 Contract pertaining to the scope of the parties’ rights and obligations under it.54 Another pertinent provision of CISG is Article 9, which states: “The parties are bound by any usage to which they have agreed and by any practices which they have established between themselves.” Art. 9(1). Consequently, Defendant’s Motion in limine to preclude parol evidence of the GTCS will be denied.

Question 3.45 Will the jury hear evidence that the General Terms and Conditions are part of the contract?

Question 3.46 Are the General Terms and Conditions part of the contract? Question 3.47 Are the General Terms and Conditions an oral agreement?

C. Interpretation: Understanding What the Parties Understand he modern trend in commercial law has been to achieve a legal understanding of the parties’ agreement that comports with the parties’ own understanding, and in particular, to try to capture the commercial meaning of their agreement. he agreement is about a commercial transaction, and its usefulness is in the commercial world. In this context the law acts in aid of commerce, so the judicial meaning of the agreement ought not to be divorced from the commercial meaning. Under the inluence of the Legal Realists—whose philosophy, in part, was to ind and enforce the “bargain of the parties in fact”—the UCC aggressively incorporated industry custom and party practice into the legal deinition of the parties’ agreement. See UCC § 1-201(b)(3). he CISG follows this approach in articles 8 and 9, which make relevant to contract interpretation not only international usages but also the parties’ practices, both before and ater they made the contract. In addition, article 8 requires that the parties’ conduct be considered—not just their well-established practices—and indeed “all relevant circumstances.” hese rules adopt a particular philosophy of interpretation; they may also relect the kind of relational theory of contract to which we alluded above. Everything seems to be fair game, assuming the parties have not excluded it by agreeing that it is superseded by their inal agreement (as with an integration clause). Tribunals have thus looked to circumstances like accepting the goods, paying [54]. Plaintiff also cites to Article 11 of CISG to support the argument that CISG rejects the parol evidence rule outright. Article 11 states as follows: “A contract of sale need not be concluded in or evidenced by writing and is not subject to any other requirement as to form. It may be proved by any means, including witnesses.” See Larry A. Dimatteo, An International Contract Law Formula: The Informality of International Business Transactions Plus the Internationalization Of Contract Law Equals Unexpected Contractual Liability, 23 Syracuse J. Int’l L & Com. 67, at 109 (1997) (“The CISG’s lack of a writing requirement allows all relevant information into evidence even if it contradicts the written documentation.”).

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the price, sending or signing an invoice, or sending a protest (or not), as well as beginning production or even preparing for performance. See Oberlandesgericht [OLG] [Appellate Court] Linz, Mar. 23, 2005, Case No. 6 R 200/04f (Austria), available at http://cisgw3. law.pace.edu/cases/050323a3.html; Rechtbank van Koophandel [Kh.] [Commercial Court] Tongeren, Jan. 25, 2005, Case No. A.R. A/04/01960 (Belg.), available at http:// cisgw3.law.pace.edu/cases/050125b1.html. In sum, the CISG emphasizes a fully contextual method, as contrasted with a strictly formalistic method, of contract interpretation. Each method has its pros and cons, and each has its adherents. he contextual approach appears dominant now, although it should be noted that some judges believe a formalistic method will lead to the parties’ true intent more reliably, and some scholars have put forth vociferous and rigorous objections to the free-ranging inquiries required by current law.55 So far, at least, the neoformalist school has not made substantial inroads into legislation (including the revision of the UCC) or the interpretation of the Convention. Nevertheless, their points show the importance of taking care in applying the rules of the Convention so that custom and conduct are used to understand the parties’ real agreement and not to undermine their intent with orchestrated and sympathetic but irrelevant or illegitimate testimony. his care can manifest itself through judicial insistence that alleged customs be proved, and numerous courts have not only required proof but have correctly assigned the burden of proof to the party claiming an applicable usage or practice. Further, courts have required that “practices . . . established” by the parties under article 9 be reasonably well established:  once or twice over a short period, the cases suggest, is not enough. A dozen examples of the practice over a longer period is more likely necessary. Presumably this might be through a long-term contract involving a number of installments, or through a succession of short-term or single-delivery contracts over which the practice might be established. A perusal of the current Digest of CISG cases decided under article 9 shows a reasonably constant stream of cases along these lines. It also shows that if a practice or usage is proved, it can be powerful, leading to price adjustments, discounts for immediate payment, changes in the credit term, an imposition of formal requirements, and a requirement to take back defective goods. he problems of proof of custom primarily arise under article 9(2), under which the parties are presumed, by implication, to make applicable to their contract “international” customs that are both “widely known to” as well as “regularly observed by” parties to such contracts in the industry. A party invoking a custom under this article will have several elements to prove, and proof may not be either easy or cheap. Oten parties will put in evidence from their own employees, which is something but not much and may lead to an indeterminate

55. One of the more cogent judicial arguments for formalism appears in the opinion of Kozinski, J., in Trident Center v.  Connecticut General Life Ins. Co., 847 F.2d 564 (9th Cir. 1988). he leading scholarly voice is probably Lisa Bernstein’s. See, e.g., Private Commercial Law in the Cotton Industry:  Creating Cooperation through Rules, Norms, and Institutions, 99 Mich. L.  Rev. 1724 (2001); he Questionable Empirical Basis of Article 2’s Incorporation Strategy: A Preliminary Study, 66 U. Chi. L. Rev. 710 (1999). It should be disclosed that one of the coauthors of the present book was an active defender of the UCC approach. See, e.g., David V. Snyder, Language and Formalities in Commercial Contracts: A Defense of Custom and Conduct, 54 SMU L. Rev. 617 (2001).

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“our version versus their version”; sounder proof will come from disinterested experts, who do not generally testify for free. On the other hand, some industry practices may be binding under article 9(1) and relatively easy to prove. hat provision is centered on usages “to which they have agreed” (in addition to practices they have established, as mentioned above). he typical way to show that the parties have agreed is through their incorporation of industry customs by reference. his may happen by incorporation of terms very widely used in international trade across many industries, such as the Incoterms for shipping (discussed in Chapter 5) or the UCP for letters of credit (discussed in Chapter 6), or by incorporation of industry-speciic rules like the General Trade Rules for Wood Pulp (as in Stora Enso Oyj v. Port of Dundee, also in Chapter 5). Aside from the relevance of customs and practices, as well as conduct and other circumstances, recall that the intent of the parties is paramount. he point of contextualizing the agreement with custom, practice, and all relevant circumstances is so the court can understand that intent. he intent that matters irst is the parties’ actual, subjective intent: what they really meant, even what they were really thinking. his will not be discovered from some deep psychological inquiry, much less from a truth serum: their intent can be discovered only through what they have done and said in the context of their own community of discourse. If they have agreed to 10,000 tons, that may mean 10,000 times 2000 pounds to a judge, who has known since elementary school that a ton is 2000 pounds. But to parties in the relevant industry, or to these parties, a ton may be a long ton or a metric ton—neither of which weighs 2000 pounds. What is done in the industry will help show their most likely intent. If it exists, even more relevant would be evidence of what these parties have done without objection in past contracts with each other or past installments of the contract at issue. he point is to arrive at the parties’ intent—preferably, under article 8(1), their true, subjective intent. As mentioned earlier, given the need for reliability, the true subjective intent may not govern if it diverges from objective intent and the other party had no reason to know the subjective intent. In such cases, not only does objective intent govern, but because of the need for reliability the objective intent that matters is the expressed intent of the irst party as it is understood from the standpoint of a reasonable person of the same kind as the other party. See CISG art. 8(2). Because reliability is the policy underlying the legal principle, what matters for reliability is not so much what a reasonable person like the irst party (the speaker or actor) would mean, but how a reasonable person like the other party would understand those statements or actions. So if no subjective intent known to the other party can be proved for purposes of interpreting the agreement, a tribunal is directed to interpret the agreement according to the reasonable understanding that someone like the other party would have. his rule does not mean that the recipient of a communication gets carte blanche. As you saw in MCC-Marble Ceramic Center, courts are not sympathetic to an “other party” who signiies acceptance to a proposal in another language without understanding it. A person in that position might not understand the language, but a reasonable person in that position, courts hold, would make suicient inquiry to ascertain the meaning of the terms or would obtain a reliable translation. his sentiment is not limited to US courts. See, e.g., Landgericht [LG] [District Court] Kassel, Feb. 15, 1996, Case No. 11 O 4187/95 (Ger.), available at http://cisgw3.law.pace.edu/cases/960215g2.html.

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Question 3.48 How can a usage or a practice require the observation of formal requirements given CISG article 11?

Problem 3.49 (a) Seller in the United States makes an ofer in a telephone conversation with Buyer in Germany. Ater they conirm the details, Seller says, “Let me know by Friday.” Buyer responds, “No problem.” May Seller revoke the ofer on hursday? See CISG arts. 8, 16. (b) What if the oferor were in Germany and the oferee were in the United States?

Problem 3.50 Buyer in Mexico orders a Dutchman 120 Loader, a piece of coal mining equipment, from Dutchman Corp., a US dealer in mining equipment. Buyer is a coal mining company that has been in business for over 50 years and has extensive operations in Mexico and Latin America. Buyer needed another loader and found this one, which is 14 years old, available through the Dutchman website. he parties communicated with each other through several e-mails and later telephone calls and agreed that the loader would be delivered “in refurbished condition” to a mine in Mexico, for $600,000. he refurbished loader is delivered in working condition but Buyer refuses to pay, saying that the loader does not meet current expectations as to numerous technical speciications. Seller admits that it does not meet current speciications but notes that it is not a new loader, which would cost over $2.5 million. Buyer responds that it did not expect a new loader but did expect one that is up to current standards. What result?

Problem 3.51 Buyer in Canada orders 12 installments each of 10,000 cases of quart cans of 10W30 oil to be delivered each month from Seller in the United States with payment of $20 per case required within 30 days of delivery. he irst delivery consists of 9978 cases, and there are 10,240 in the second. Deliveries three through seven have quantities that vary between 9623 and 9881 cases. Buyer pays timely for the irst six deliveries and raises no objection to the quantity delivered. Buyer complains, however, ater the seventh delivery of 9733 cases and does not pay. Further, Buyer claims that Seller has breached repeatedly and refuses further deliveries. Seller’s evidence shows that in the United States, delivery tolerances from oil canneries are typically up to 5 percent, sometimes a bit more (so a delivery of 9500 to 10,500 is considered acceptable when the stated quantity is 10,000). Seller does not present evidence as to delivery tolerances in Canada, although Seller does show a signiicant fall in the price of oil roughly a week before the seventh delivery. What result?

Problem 3.52 (a) Buyer in Germany and Seller in Switzerland agree to the sale of a machine used in making industrial fabrics. hey reach their agreement orally while Seller’s representative is making a call at Buyer’s plant. Delivery is to be ive months later. Seller leaves a term sheet with Buyer, keeping a copy for itself; later, Buyer sends a commercial letter of conirmation containing a number of standard terms. Seller does not respond. Are Buyer’s standard terms part of the contract? See CISG articles 9 and 18(1) and the discussion above of commercial letters of conirmation.

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(b) What if Seller were based in France? the United States? Would it matter if the sales representative were based in Germany?

D. Interpretation: Filling True Gaps in the Parties’ Agreement he previous section focused on interpreting the parties’ words and actions, construing those words and actions to give them legal import congruent with the parties’ own meaning, either subjectively or at least objectively. Sometimes when interpreting unclear statements or conduct, it is seen as illing a gap in the agreement. When parties (as in the problem) require delivery of 10,000 cases of quart cans of oil, and thus state a quantity but not a delivery tolerance (±10 percent), in some sense, interpreting the meaning of “10,000” can seem like illing a gap. he court is asked to ill in the missing delivery tolerance. hat is a diferent exercise, however, from illing a true gap. In the example, the parties did state a quantity; the question was what their term meant. By contrast, parties frequently fail to say anything at all about a term. No contract can be complete, and a more nearly complete contract with, say, 500 pages of speciications and contingencies is oten not worth the cost of negotiating it and writing it. Much is let unsaid, therefore, and many gaps are let unilled by the parties. Sometimes the parties have implicit understandings that they did not take the time or expend the resources to express. Sometimes they never thought about the question and had no particular intent to express. Systems of commercial law oten spend much of their energy and bulk in providing suppletive rules or gapillers to take care of these situations. Without such gapillers, the penalty for leaving a gap that turned out to be important would be contractual nullity. Accordingly, much of sales law consists of provisions saying where delivery will take place if the parties have said nothing about it (e.g., CISG art. 31; UCC § 2-308), or who has the risk of loss of the goods at what point (e.g., CISG arts. 67–70; UCC §§ 2-509, 2-510), or even what the price of the goods will be (e.g., CISG art. 55; UCC § 2-305). Because these and other suppletive rules are addressed in the sections of this book related to their respective subjects (delivery and risk of loss are treated in Chapter 5; price is addressed earlier in this chapter), we do not discuss them at length here. he point of mentioning them at this juncture is to emphasize that many terms of the contract—much of what the contract is—may be supplied by background law because the parties have expressed no intent. Because these rules ill gaps, they are oten called default rules, like the default settings on your computer. (Default here means something entirely diferent from the sense pertaining to breach—contrast a default rule with a buyer who defaults on payment and thus defaults under the contract.) Default rules are humble expedients in a way, because they have no applicability if the parties agree otherwise. If the parties set a price in their contract, as they nearly always do, article 55 of the CISG has no work to do; it may as well not exist for the vast majority of cases. But the apparently modest nature of default rules masks their power. Because all contracts are incomplete and because few make any attempt to cover many common items, default rules do apply quite a lot of the time. Indeed, all of the CISG is a default rule: parties can opt out of it in its entirety. Nevertheless, parties allow it—whether by design or by happenstance—to govern many important transactions, and there is no shortage of cases decided under it.

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Default rules have been the subject of a vast literature because how the law sets the defaults can have many consequences, both direct and collateral. Many default rules are not recognized as such. To a large extent if not entirely, parties can specify what is required for the goods and what the remedy will be if they do not conform. hus one of the core provisions of the treaty (article 35, discussed at length in the next chapter), which requires that goods be it for their ordinary purpose and that they be it for the buyer’s purpose if the seller knew about that purpose, will not apply if the parties so agree. he same is true under US law: the warranties of merchantability and itness are both subject to disclaimer. See UCC §§ 2-314 to 2-316. In short, under the law, a seller must deliver goods that work—unless the parties agree otherwise. If the parties do agree otherwise, the seller may deliver goods that do not work, and indeed that the seller does not even own. See CISG art. 41; UCC § 2-312. But that is not the typical case. Generally the law uses majoritarian default rules, that is, the law sets the terms according to what most people would want most of the time, leaving them free to decide otherwise. If the parties do decide otherwise, they have to change the default rules. In this way, default rules are said to be information forcing. he seller is free to depart from the way things are usually done—it may deliver goods that do not work—but to do so the seller must obtain the buyer’s agreement. he efect is twofold. he seller must inform the buyer, “I do not promise that the goods will work,” for example, or to use commercial language typical in the United States, “THE WARRANTY OF MERCHANTABILITY IS HEREBY DISCLAIMED.” Sometimes the law will want to force information disclosure from the party most likely to have the information (or more broadly, the party who can obtain the information at the least cost). With respect to the quality of the goods, that party is usually the seller. Once the buyer knows the information (here, that the goods might not work), the buyer may walk away or, if it still wants the goods, be able to bargain in an informed way about what it is willing to pay for them. Forcing disclosure of the information not only reveals facts but also strengthens the bargaining process. Not all default rules are necessarily majoritarian in nature. Some argue that full expectancy damages, including consequential damages and lost proits, varies from the typical commercial practice. his is an empirical question; we do not know for certain what most parties would want most of the time with respect to damages, and inding this out in a rigorous way would be diicult and expensive. But it may be good policy to set the default rule as it is anyway: by allowing the buyer full damages, including consequentials and lost proits (CISG art. 74; UCC § 2-715), as a default rule, the law requires sellers to disclaim such damages, in the contract, ahead of time, so the buyer goes into the transaction fully aware that it may not receive full compensation if the seller breaches. Some scholars suggest that this rule is a kind of penalty default rule, essentially saying to the seller: you tell the buyer up front what you will and will not be liable for, so you and the buyer can bargain on an appropriate price and the buyer can obtain (and pay for) insurance if necessary. If you fail to do so, you will yourself be liable for everything, in a big way. (As you have probably seen in your own experience, consequential damages disclaimers are quite common.) For practicing lawyers, the most important practical point is that unfriendly default rules have to be changed in the contract. his means that a good lawyer must know the default rules, just as you are learning them throughout this book. Armed with that knowledge,

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appropriate contract provisions can be drated to change the default rules, whether by negotiation in a bespoke contract for a particular transaction or through standard terms used in large numbers of transactions. As we have seen, having those standard terms incorporated into the contract can be a tricky business. It comes up again in the next section.

Question 3.53 Some scholars have argued that the default rules are pro-buyer— particularly the broad warranties or expectations about the goods and the high extent of damages liability for the seller. Is there a reason to put the onus of disclosure on the seller?

VII. Standard Terms (da capo al ine) Such disclaimers are frequently part of the boilerplate, or the standard terms that a party wants as the rules to govern all or virtually all of its transactions. Much litigation, domestically and internationally, consists of disputes over whether one party or the other succeeded in incorporating its own standard terms into the contract. Such disputes have arisen at least four diferent times in this chapter alone: through the battle of the forms (where a party may obtain its standard terms in courts that follow a last shot rule or something similar),56 contract modiications, commercial letters of conirmation, and the (anti) parol evidence rule. But the Ballad of the Standard Terms is a long song. he question is sometimes not about any of those particular doctrines but about the basic question of what terms were agreed on. It is a matter of interpreting the assent to the initial contract itself, that is, the ofer and acceptance, as we have concentrated on in this last section of the chapter. he boilerplate may be contained in an invoice, as we have seen, or the back of the form, as we have also seen, or perhaps even something more current, like an e-mail attachment.

Golden Valley Grape Juice and Wine, LLC v. Centrisys Corp. United States District Court for the Eastern District of California, Jan. 22, 2010 2010 WL 347897 o’neill, District Judge. Third Party Defendant Separator Technology Solutions PTY Ltd. (“STS”) moves for change of venue pursuant to a forum selection clause. . . .

FACTUAL OVERVIEW This dispute arises from a contractual agreement between plaintiff Golden Valley Grape Juice and Wine, LLC (“Golden Valley”) and defendant Centrisys Corporation (“Centrisys”). On April 2, 2008, Golden Valley (a California LLC) purchased a STS200 centrifuge (the “centrifuge”) from Centrisys, a Wisconsin Corporation, for use in Golden Valley’s grape

56. E.g., Oberlandesgericht [OLG] [Appellate Court] Innsbruck, Feb. 1, 2005, Case No. 1 R 253/04x (Austria), available at http://cisgw3.law.pace.edu/cases/050201a3.html.

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juice applications. STS (an Australian business entity) manufactured the centrifuge and sold it under a separate agreement to its then distributor, Centrisys. STS, generally, builds centrifuges and then sells the centrifuges to other businesses for eventual sale in the stream of commerce to end users. After installation of the centrifuge and startup in September 2008, the centrifuge did not perform to speciications. Golden Valley notiied Centrisys of the nonconformity. According to the amended complaint, “[d]efendant and the manufacturer repeatedly assured Plaintiff that the problems would be cured.” Golden Valley eventually iled this action against Centrisys. Centrisys then iled a third party complaint against STS. Centrisys alleges claims against STS for: (1) indemnity, (2) contribution, and (3) declaratory relief. STS argues that pursuant to the parties’ contract, STS and Centrisys agreed to resolve any disputes in Australia. STS submits the “General Conditions” to the STS/Centrisys contract. STS argues that when STS and Centrisys entered into their contract, the “General Conditions” were part of the contract. In pertinent part, the “General Conditions” provide for forum selection in Victoria, Australia. The forum selection clause states in its entirety:  “Any dispute between the parties shall be inally settled in accordance with laws of Victoria (the jurisdiction shall be the State of Victoria) or through arbitration at STS P/L’s option.” Centrisys, however, disputes that the “General Conditions” was part of the parties’ contract. Centrisys offers evidence that the “General Conditions” was neither attached to any correspondence nor agreed to be part of the contract. Thus, Centrisys’ position is that it never agreed to the General Conditions and thereby never agreed to the forum selection clause. In short, Centrisys disputes the validity of the contract’s clause naming Australia as the forum.

ANALYSIS AND DISCUSSION ...

C. The Forum Selection Clause is Part of the Parties’ Agreement The Court must irst determine whether the forum selection clause was part of the contract, pursuant to the CISG, taking into account its articles and any pertinent precedent. Centrisys does not dispute that the parties had a contract for the sale of the centrifuge to Centrisys. Centrisys argues that the General Conditions to the contract was not part of the contract because Centrisys never consented to or approved the General Conditions of Sale. 1. The Offer STS’ offer was contained in the February 29, 2008 sales quote to Thomas Junod, of Centrisys. In an email dated February 29, 2008, STS sent, and Centrisys received, a sales quote for the sale of the STS200 centrifuge to Centrisys. Under the CISG, this sales quote was suficient to constitute an offer. A proposal is an offer if it is suficiently deinite to “indicate[] the goods and expressly or implicitly ix[] or make[] provision for determining the quantity and the price,” CISG, Art. 14. The sales quote identiied the goods for sale, the quantity of goods and the price. Thus, the offer for the sale of the centrifuge was contained in the February 29, 2008 emailed sales quote. Under the CISG, an adequate offer was made.

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The same email to Centrisys included the General Conditions. According to Mr. Whittington, this email “attached” the General Conditions. The February 29, 2008 email consisted of the sales quote, with an attachment for the General Conditions, another attachment for the Warranty and another attachment for banking information. The email to Thomas Junod contained four attachments. Thus, the email to Tom Junod not only included the sales quote to Tom Junod, but also attached the General Conditions in the same email. STS’ offer included, not just the sales quote, but also the attachments to the email because all of the terms were offered at the same time. The General Conditions were part of STS’ offer. 2. The Acceptance Under the CISG, conduct is adequate acceptance. “Conduct of the offeree indicating assent to an offer is an acceptance.” CISG, Art. 18(1). After receiving the sales quote, Centrisys then incorporated the STS quote into its presentation to Golden Valley. In a March 6, 2008 email correspondence between Tom Junod of Centrisys and Gerald Homolka, of Golden Valley, Centrisys proposed the purchase of the centrifuge. Golden Valley ultimately entered into a contract on April 2, 2008 with Centrisys to purchase the centrifuge. Centrisys ordered the centrifuge and it was delivered to Golden Valley. Thus, the terms of STS’ offer were accepted because Centrisys sold the centrifuge to Golden Valley. See CISG, Art. 19 (“the offeree may indicate assent by performing an act, such as one relating to the dispatch of the goods or payment of the price, without notice to the offeror, the acceptance is effective at the moment the act is performed.”) Centrisys argues that the mere receipt of the General Conditions is not enough to accept the conditions. Centrisys argues that it did not “accept” the terms of the General Conditions because it did not afirmatively agree to the General Conditions. Centrisys argues that a unilateral attempt to impose the conditions is insuficient, citing Chateau Des Charmes Wines, Ltd. v.  Whitehall Specialties, Inc. [Sabaté USA], 328 F.3d 528 (9th Cir. 2003). Chateau Des Charmes Wines, however, is distinguishable on its facts. In Chateau Des Charmes Wines, the forum selection clause was not part of the parties’ agreement and the court addressed the issue of whether later invoices containing a forum selection clause modiied an oral sales contract under the CISG. The parties in Chateau Des Charmes Wines had orally agreed to the goods, the quantity and the price, which created a binding contract under the CISG. The facts showed that the parties agreed, in two telephone calls, to a purchase of the goods. The parties agreed on payment and shipping terms, and no other terms were discussed in their telephone calls. Later, when the goods were shipped, the defendant included invoices that contained the forum selection clause. The Defendant argued that the clauses in the invoices became part of the binding agreement. The Ninth Circuit disagreed stating that the terms of the parties’ oral agreement did not include the forum selection clause. “We reject the contention that because Sabaté France sent multiple invoices it created an agreement as to the proper forum with Chateau des Charmes. The parties agreed in two telephone calls to a purchase of corks to be shipped in eleven batches.” Chateau Des Charmes Wines, 328 F.3d at 531. The parties’ contract had been formed in the telephone calls and the court viewed the later invoices as an attempt to modify the contract. The court held that the agreement had not been modiied by the later-sent invoices which contained the forum selection clause. The Ninth Circuit held the

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CISG does not allow for the modiication of a contract by one party failing to object to the other party’s unilateral attempt to modify its terms. Thus, in Chateau Des Charmes Wines, the defendant sought to add, unilaterally, the forum selection clause after the parties had formed their agreement. Similarly, in Solae, LLC v. Hershey Canada, Inc., 557 F. Supp. 2d 452 (D. Del. 2008), also cited by Centrisys, the parties negotiated a contract, but the parties did not mention the seller’s Conditions of Sale during their negotiations. The buyer was allegedly familiar with them from past dealings. Pursuant to the agreement, the buyer faxed the seller a purchase order, and the seller sent an order conirmation before delivery that referred to its Conditions of Sale, but did not contain them. The seller sent the buyer an invoice after shipment that contained its Conditions of Sale, including a forum selection clause. The court held that the parties had formed a completed contract when the companies reached an agreement on the price, quantity, and freight terms. The contract, at formation, did not include a forum selection clause. Here, however, the General Conditions accompanied the sales quote. The General Conditions were attached, contemporaneously, with the sales quote and with other sale information, such as warranty information and banking information, which were included in the email. Unlike Chateau and Solae, the General Conditions were not sought to be imposed after the contract had been formed. The General Conditions were part of the offer. Indeed, it is without dispute that Centrisys reviewed at least one other attachment in the same email—the warranty. Throughout the proceedings in this Court, Centrisys has alerted the Court to the warranty provided by STS as a means of establishing STS’ “minimum contacts” with California. Thus, some of the attachments to the February 29, 2008 email were reviewed by Centrisys. Pursuant to the CISG, acceptance does not require a signature or formalistic adoption of the offered terms. Pursuant to Art. 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 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.

Given the number of cases on standard terms in this chapter alone, it should hardly be a surprise that numerous courts and arbitral tribunals have had to grapple with these issues, and they do not all agree. A recent study ofers this summary.

THE REQUIREMENTS FOR THE INCLUSION OF STANDARD TERMS IN INTERNATIONAL SALES CONTRACTS Sieg Eiselen 14 potChefstRoom eLeCtRoniC L.J. 1, at 3-4 (2011). The CISG does not expressly deal with requirements for the inclusion of standard terms and court’s must therefore rely on the interpretation of the articles dealing with the formation of the contract in general, as well as the provisions of article 7. Based on an

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interpretation of these articles and the general principles underlying the CISG, court’s have developed three distinct but divergent approaches: • a strict approach which has been developed mainly in the German court’s which requires that the standard terms be made available to the other party at the time of contracting;57 • a moderate approach which only requires a clear reference to the inclusion of the standard terms;58 and • a lenient approach which allows the standard terms to be included even after the conclusion of the contract.59

Question 3.54 Your client asks how, practically speaking, it can make sure its standard terms are incorporated into its contracts. What do you advise?

[57]. Germany Supreme Court 2001 http://cisgw3.law.pace.edu/cases/011031g1.html; Germany Appellate Court Celle 2009 http://cisgw3.law.pace.edu/cases/090724g1.html; Germany Supreme Court 2007 http://cisgw3.law.pace.edu/cases/071127g1.html; France Appellate Court Paris 1995 http:// cisgw3.law.pace.edu/cases/951213f1.html; Netherlands District Court Utrecht 2009 http://cisgw3.law. pace.edu/cases/090121n1.html. [58]. Germany District Court Coburg 2006 http://cisgw3.law.pace.edu/cases/061212g1.html; Germany Appellate Court Köln 2005 http://cisgw3.law.pace.edu/cases/051221g1.html; Austria Appellate Court Linz 2005 http://cisgw3.law.pace.edu/cases/050808a3.html. See also Austria Supreme Court 2003 http:// cisgw3.law.pace.edu/cases/031217a3.html; Filanto SpA v Chilewich Intern Corp 789 F Supp 1229, 1240 (SD NY 1992); Austria Supreme Court 2005 http://cisgw3.law.pace.edu/cases/050831a3.html; Austria Appellate Court Linz 2005 http://cisgw3.law.pace.edu/cases/050808a3.html. See also Netherlands District Court Breda 2008 http://cisgw3.law.pace.edu/cases/080227n1.html; Netherlands Court ‘s-Hertogenbosch 2007 http://cisgw3.law.pace.edu/cases/070529n1.html; Austria Supreme Court 1998 http://cisgw3.law. pace.edu/cases/981015a3.html. See also Belgium Commercial Court Brussels 2004 http://cisgw3.law. pace.edu/cases/040324b2.html. [59]. Berry v Ken M Spooner Farms Inc 59 UCC Rep Serv 2d 443 (WD Wash 2006). [sic]

4

he Goods I. Introduction: Four Key Terms about the Goods hemselves Although their importance can be lost in the details of contract formation and international complexity, the goods themselves are the focus of the contract: they are what it’s all about. he terms of the contract determine the parties’ rights and duties with respect to the goods, and our study in Chapter 3 of how the contract is formed was intimately related to deciding what terms were included in the contract. Certain terms, though, deserve separate treatment because they are so central to the buyer’s and seller’s expectations: they govern the ordinary expectations that the goods will live up to what the seller has said about them, that they will work and will be suitable, and that the buyer will become their owner. hese terms also typically receive separate treatment in the law. To begin with the terminology in the United States, they may be considered express warranty, warranty of merchantability, warranty of itness, and warranty of title. Before long, our terminology will move away from the US phrases, which carry baggage that does not travel into international realms. (For instance, breach of a “warranty” is sometimes understood in common law systems to allow a buyer to avoid a contract; in technical terms, a warranty can also be a condition. See, e.g., Howard v. Fed. Crop Ins. Co., 540 F.2d 695, 697 (4th Cir. 1976). his conclusion does not necessarily follow in other systems, especially the CISG, as will be discussed in the section on avoidance in Chapter 8.) he express warranty requires little explanation. he goods should conform to whatever terms the buyer and seller have expressly agreed. To say that a term is express usually denotes that it has been expressed in language, that the parties have stated something about the goods in their contract. Consider a sale of automobiles. If the contract states that they are “new,” the buyer will certainly have legal recourse if they are used. Although there is a bit more to express warranty, as you will see, this basic idea covers most of the concept. It appears in CISG article 35(1), roughly equivalent to UCC § 2-313. he implied warranty of merchantability requires a bit more explanation, although its concept is possibly even more basic: merchantability is a broad legal term that centers on the expectation that the goods will work and will not be defective. Continue with the example of the sale of cars. he buyer will generally expect them to run, so that when the driver

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engages the engine it will propel the car from one place to another. In an ordinary consumer sale, this idea is so basic that no one is likely to say anything about it. Legally, this common sense expectation is relected in CISG article 35(2)(a): unless the parties otherwise agree, the goods must be “it for the purposes for which goods of the same description would ordinarily be used.” he idea is simply that the goods will work: cars will run and will stop when the brakes are applied; interior paint will be liquid enough to apply with a brush or roller and will stick to the walls when dry; shirts will cover the upper body and will not come apart at the seams—at least not too soon. In US law, this idea is covered by the implied warranty of merchantability. See UCC § 2-314. In a diferent but still common scenario, the buyer has a particular need to be met and goes to the seller with the idea that the seller will furnish appropriate goods to meet that need. he supposition is that the buyer is relying on the seller’s expertise to choose the goods for the task, or at least that the seller would not sell the buyer goods that will not work for that task. To return to the sale of automobiles: if the buyer is the Yukon Territorial Police, which tells Ford Motors in Detroit that it needs a leet of police cars for use in cold and snowy conditions, the presumed expectation is that GM will furnish automobiles that not only go from one place to another but that have the appropriate characteristics in terms of size, speed, durability, and handling for police work in a decidedly cold climate. Obviously, the parties to many deals would have no such expectation, as in many purchases the seller would know little or nothing of the buyer’s needs. he opposite situation is common enough, though, that sales law typically provides a rule that if the seller has reason to know that the buyer is looking to the seller to choose the right goods, the seller will not sell the wrong ones to the buyer. CISG article 35(2)(b) provides for such a term in appropriate circumstances. he law in the United States does too, see UCC § 2-315, where it is usually called the implied warranty of itness for a particular purpose, or simply the “itness warranty,” distinguishing it from the “merchantability warranty” mentioned above. One other term is so ingrained in the understanding of sales that many people scarcely think about it: that the buyer will become the owner of the goods. hat idea, ater all, is the whole concept of a sale—something that was the seller’s property will, in exchange for a price, become the buyer’s property. Precisely when the goods become the buyer’s property can be an important and fraught issue, and it is one of the subjects of the next chapter. his chapter takes up the simpler idea that at some point the buyer will own the goods. he seller breaches this term if it does not convey good title, that is, ownership rights, to the goods. he US title warranty appears in UCC § 2-312(1), and although the CISG does not generally govern matters of “property” or title, which are excluded from the Convention under article 4(b), the Convention does include an assurance of title in article 41: “he seller must deliver goods which are free from any right or claim of a third party, unless the buyer agreed to take the goods subject to that right or claim.” As might be guessed, assurances against claims based on intellectual property or industrial property are also included. See CISG art. 42; UCC § 2-312(3). he buyer can thus feel safe that no one will claim that the goods are his, or that they breach her patent, or his copyright, or her trade secret. If someone does show up with such a claim, the buyer may hold the seller responsible.

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Holding someone responsible is the central idea behind these terms. Who is responsible for making sure the goods live up to the seller’s promises—that they will work, that they are appropriate for the buyer, and that the buyer will get good title to the goods without someone else claiming ownership or intellectual property rights in them? hese terms answer those questions. Realize too that this responsibility can be appreciated in a diferent way. Not only do these terms determine who has the duty to make sure the goods are as they should be, but these terms determine who bears the risk if something goes wrong. Risk allocation through contract runs throughout contract law and throughout this book. It may be less obvious when thinking about warranties, but for sophisticated thinkers, including many courts and arbitrators, risk allocation is central. You may have wondered in previous courses about exploding root beer bottles. A multimillion dollar machine that explodes and burns down a factory and the surrounding village raises the same questions. Did the root beer drinker get unlucky, and have to take his lumps (and bear the risk, paying the cost of his own medical bills and sufering without recompense the pain of his injury)? Or does the manufacturer (bearing the risk by paying the medical bills and compensation)? Does the factory-buyer of the machine have to bear the risk of the explosion, or does the manufacturer of the machine? hese terms answer those questions. As you move to greater sophistication, you might also add the likelihood that the case of Factory versus Manufacturer will not be fought primarily by either of them but instead by their insurers. Commercial parties will oten insure against many risks, but this practice hardly makes the issue go away. he insurers will litigate over which one has to pay for the damage: the factory’s insurer or the manufacturer’s. hese terms answer those questions. With this iner understanding, you can well appreciate that sophisticated parties will frequently want to depart from the obligations that the CISG will impose in the absence of agreement. he parties are allowed to agree to diferent obligations, and thus diferent risk allocations, at least to some degree. here is little doubt that in an appropriately designed agreement Factory may bear the risk of the explosion instead of Manufacturer, as would be the case under CISG article 35(2)(a) in the absence of agreement. But the issue can become complex. Variations from implied warranties in US law are treated as disclaimers, and although generally possible, they are controlled and may have to be done according to particular rules. he CISG has no particular rules, which would seem to make disclaimers easy and straightforward, but the lack of particular rules leads to a problem that is familiar from Chapter 3: the validity exception. Domestic law may not enforce certain attempts at disclaimers, that is, the attempted disclaimer may be held invalid. Under CISG article 4, the validity exception may therefore come into play, and the issue may have to be resolved under domestic law. We will return to this issue later in the chapter. his more careful appreciation of the law and its consequences will also help you to see another important point, although its full treatment does not come until we take up remedies in Chapter 8. Intuition might suggest that if there is something wrong with the goods, the buyer can refuse to take them and refuse to pay. In the traditional approach to sales of goods in common law systems, this intuition is generally correct, and it still is largely correct under the UCC. If there is a breach of warranty, the buyer may reject the goods and

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cancel the contract, with a few qualiications, as you will see. Civil law systems generally, and certainly the CISG, do not take this approach. he buyer may reject the goods and cancel the contract, or “avoid” it, only in cases of fundamental breach. Many problems that would constitute breach of warranty and allow rejection under the UCC will fall short of a fundamental breach, though, and this is one of the reasons to try to avoid the freighted term “warranty” when referring to the CISG provisions, even though they otherwise line up quite neatly with the UCC express, merchantability, itness, and title warranties. None of this implies that the CISG condones minor breaches of warranties; it simply limits the remedies for minor breaches to minor remedies instead of the major remedy of calling the whole thing of. A breach of one of these terms, even if it is not a fundamental breach, allows the buyer to claim damages or a reduction of the price. hese rules, including the rules on whether the buyer may avoid the contract entirely, will have to wait, although you will see that they come up frequently in the cases (as in Delchi Carrier SpA v. Rotorex Corp., below). First we need to learn about the terms that govern the quality of the goods themselves.

II. he Express Requirements of the Contract A. he Truly Express Term Article 35(1) of the CISG states the obvious. “he seller must deliver goods which are of the quantity, quality and description required by the contract and which are contained or packaged in the manner required by the contract.” What is less obvious are its implications, for article 35(1) is not limited to the express requirements of the contract, and it therefore picks up the implied terms like merchantability and itness. he express requirements, however, are probably the best place to start. Shortly you will read Delchi Carrier SpA v. Rotorex Corp., which involves the most clearly express terms, that is, written speciications. Before that, though, consider the following problem, also based on a case.

Problem 4.1 In Lugano, Switzerland, the citizens are said to die, when it is their time, of happiness. You should not be surprised that the disputes revolve around goods such as chocolate. he appellate court in that city must consider the following case. Buyer in Italy buys 200 tons of third quality Ghanaian cocoa beans from Seller in Switzerland for the making of chocolate. he contract provides that the beans will have a fat content of 45–48 percent and acidity of no more than 4 percent. Payment was to be by letter of credit issued by the Banca Nazionale del Lavoro and conirmed by the Società di Banca Svizzera di Lugano. he credit required that (among other things) a certiicate from Société Générale de Surveillance show the required fat content and acidity. he goods were to be shipped CIF Genoa. On April 27 Accra Inspection Ltd. in Ghana sampled the goods, which were contained in bags labeled “Cocoa Waste,” and found them conforming. On the strength of this inspection, Seller obtained a certiicate from SGS and presented it, along with the other required

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documents, to the SBS bank in Lugano. It paid, and it was in turn paid by the BNL bank in Italy. he cocoa beans were sealed in containers on May 19 and were shipped from the Port of Tema to the Port of Genoa, where they arrived on June 20. Buyer unsealed the containers, found the bags, and immediately had the cocoa beans tested by Amsterdam Agricultural Laboratories, which found the fat content to be 43 percent and the acidity to be 37 percent. Buyer gave immediate notice to Seller. Amsterdam’s results were later conirmed, and Buyer communicated to Seller its desire to avoid the contract. Assume that even the seller agrees that the sea voyage and shipping process could not have caused the low fat content and high acidity. Who should win? Why? Do not be concerned if the answer seems too simple. Express warranties are usually simple, to begin, and rightly so. hey are usually just the irst step, though, and we will return to this problem to address its harder questions when we are ready for them. If you are curious, here is a taste (admittedly not as good as a taste of chocolate, but probably better than cocoa waste): May Buyer refuse the goods, or has it accepted them by paying under the letter of credit? If it may refuse the goods, may Buyer recover the purchase price? Also, who has the burden of proving the goods were defective? Does it matter whether Buyer or Seller sues? Does it matter where suit is brought? And on another matter, assume that Seller is insolvent and that it is paying claims at 45 percent (i.e., a meritorious claim for CHF 100 would pay CHF 45) from Seller’s liquidator. Should Buyer have known it was taking this risk? Is there a way for Buyer to make itself whole? Does the fact that these questions remain (at this point) unresolved make you question your irst answer about who would “win”? hese questions no doubt suggest the true importance of express warranties. Like all express contract terms, they are the result of planning, agreement, and sometimes negotiation. hey allocate risk. hey also provide a guide to the parties as they perform and an instrument for dispute resolution either between the parties or for a tribunal. For the moment, notice the irst of these functions: planning. In international sales, the opportunity and need for planning are enhanced, but so are its diiculty and cost. Nowhere are these ideas so apparent as in the promised and expected quality of the goods. he buyer in a commercial sale oten will be planning to resell, or to process and resell, meaning that other buyers will eventually be involved, and the original buyer will itself become a seller that, in order to sell the goods, must make promises and meet expectations about their quality. he original buyer will therefore want to assure that the promises it receives from its seller are at least as great as the promises it must make to its buyers.

Problem 4.2 (a) You represent the buyer in an international sale of a condensate crude oil mix known generally as the Rijn blend. he Rijn blend is reined to create a number of other products like naphtha, kerosene, and gas oil. he Rijn blend may itself be resold, or the buyer may resell products reined from it. You are drating the contract. What do you need to ind out from your client? (b) What strategies can you employ to alleviate your client’s risk?

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B. An Assurance through Custom and Practice We saw in Chapter 3 that the terms of the contract include not only what the parties say expressly, in language, but also terms that amount to a custom they ought to know about or a practice they have established. See CISG art. 9. he point for particular attention now is that the usage or practice may give rise to something that you might ordinarily think of as a contract term governing the quality of the goods. “Plate” means one thing when Bloomingdale’s in New York is ordering it from Limoges in France (probably a translucent circular dish used for eating or decoration) and another thing when Opel Auto Manufacturing in Singapore is ordering it from Lee Steelworks in South Korea (probably a lat steel sheet of 2 to 20 mm in thickness). If Bloomingdale’s receives a sheet of steel and Opel receives a pretty dish, they will both have cause—and legal grounds—to complain. Similar terms can arise through the practices the parties themselves have established. Bloomingdale’s may have speciied particular diameters for a dinner plate, a salad plate, and a dessert plate when it irst ordered from a particular Limoges manufacturer. Later in their relationship, and under later contracts, these diameters may not be mentioned. Still, they may be part of the contract, even though they are unsaid, and even though a dinner plate, a salad plate, and a dessert plate in Europe might be a diferent size than speciied by Bloomie’s. hese ideas appear clearly enough in CISG article 9, which is consistent with the manifold and as-always more wordy treatment in the UCC. See UCC §§ 1-303, 2-314(3). You will have a chance to use these rules below in the Giallo Veneziano problem. One other rule bears mention here. Article 35(2)(d) requires that the goods be “contained or packaged in the manner usual for such goods or, where there is no such manner, in a manner adequate to preserve and protect the goods.” In the absence of a speciic provision in the agreement, then, the primary test for the adequacy of packing is the “usual” standard. What is actually adequate to preserve and protect the goods seems to be secondary. he core idea, then, seems something related to ordinary practice in the industry, without having to prove the elements required for a trade usage under article 9. Although the concepts appear to be the same, the treaty suggests a technical distinction between a usage under article 9 and usual packing methods under article 35(2)(d). he UCC, on the other hand, is more cryptic, both in the text and the comment. he goods must be “adequately contained, packaged, and labeled as the agreement may require.” UCC §2-314(2)(e); see also id. cmt. 10.

C. An Assurance by Sample or Model One of the most efective ways to communicate about the goods themselves is to furnish a sample or model. As a matter of linguistics or philosophy, one might say that the characteristics thus communicated have been communicated in a kind of language, and thus are express terms of the contract.1 he UCC seems to take this position when it classiies a warranty by sample or model as an express warranty under § 2-313(c); see also id. cmts. 5–6. Under the law as it stands, the philosophical nicety matters little. he CISG does not distinguish express 1. One of your coauthors has made this argument in David V. Snyder, Language and Formalities in Commercial Contracts: A Defense of Custom and Conduct, 54 SMU L. Rev. 617 (2001). Your coauthor was fending of a possible change in the law, which is what forced him, against his will, into philosophy.

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from implied terms of quality—at least not expressly!—and it states plainly enough that the goods must “possess the qualities of goods which the seller has held out to the buyer as a sample or model.” CISG art. 35(2)(c). he courts have little trouble with this concept. As you read the following case, note that the court relies both on the sample or model and on the written speciications, without particularly distinguishing which constitutes a truly “express” term.

Delchi Carrier SpA v. Rotorex Corporation United States Court of Appeals for the Second Circuit, 1995 71 F.3d 1024 Winter, Circuit Judge: Rotorex Corporation, a New York corporation, appeals from a judgment of $ 1,785,772.44 in damages for lost proits and other consequential damages awarded to Delchi Carrier SpA following a bench trial before Judge Munson. The basis for the award was Rotorex’s delivery of nonconforming compressors to Delchi, an Italian manufacturer of air conditioners. . . .

BACKGROUND In January 1988, Rotorex agreed to sell 10,800 compressors to Delchi for use in Delchi’s “Ariele” line of portable room air conditioners. The air conditioners were scheduled to go on sale in the spring and summer of 1988. Prior to executing the contract, Rotorex sent Delchi a sample compressor and accompanying written performance speciications. The compressors were scheduled to be delivered in three shipments before May 15, 1988. Rotorex sent the irst shipment by sea on March 26. Delchi paid for this shipment, which arrived at its Italian factory on April 20, by letter of credit. Rotorex sent a second shipment of compressors on or about May 9. Delchi also remitted payment for this shipment by letter of credit. While the second shipment was en route, Delchi discovered that the irst lot of compressors did not conform to the sample model and accompanying speciications. On May 13, after a Rotorex representative visited the Delchi factory in Italy, Delchi informed Rotorex that 93 percent of the compressors were rejected in quality control checks because they had lower cooling capacity and consumed more power than the sample model and speciications. After several unsuccessful attempts to cure the defects in the compressors, Delchi asked Rotorex to supply new compressors conforming to the original sample and speciications. Rotorex refused, claiming that the performance speciications were “inadvertently communicated” to Delchi. In a faxed letter dated May 23, 1988, Delchi cancelled the contract. Although it was able to expedite a previously planned order of suitable compressors from Sanyo, another supplier, Delchi was unable to obtain in a timely fashion substitute compressors from other sources and thus suffered a loss in its sales volume of Arieles during the 1988 selling season. Delchi iled the instant action under the United Nations Convention on Contracts for the International Sale of Goods (“CISG” or “the Convention”) for breach of contract and failure to deliver conforming goods. On January 10, 1991, Judge Cholakis granted Delchi’s motion for partial summary judgment, holding Rotorex liable for breach of contract. ... On appeal, Rotorex argues that it did not breach the agreement. . . . Delchi cross-appeals. . . .

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DISCUSSION The district court held, and the parties agree, that the instant matter is governed by the CISG, a self-executing agreement between the United States and other signatories, including Italy. Because there is virtually no caselaw under the Convention, we look to its language and to “the general principles” upon which it is based. See CISG art. 7(2). The Convention directs that its interpretation be informed by its “international character and . . . the need to promote uniformity in its application and the observance of good faith in international trade.” See CISG art. 7(1); see generally John Honnold, Uniform Law for International Sales Under the 1980 United Nations Convention 60–62 (2d ed. 1991) (addressing principles for interpretation of CISG). Caselaw interpreting analogous provisions of Article 2 of the Uniform Commercial Code (“UCC”), may also inform a court where the language of the relevant CISG provisions tracks that of the UCC. However, UCC caselaw “is not per se applicable.” Orbisphere Corp. v. United States, 13 C.I.T. 866, 726 F. Supp. 1344, 1355 (Ct. Int’l Trade 1989). We irst address the liability issue. . . . Under the CISG, “the seller must deliver goods which are of the quantity, quality and description required by the contract,” and “the goods do not conform with the contract unless they . . . possess the qualities of goods which the seller has held out to the buyer as a sample or model.” CISG art. 35. The CISG further states that “the seller is liable in accordance with the contract and this Convention for any lack of conformity.” CISG art. 36. Judge Cholakis held [in the court below] that “there is no question that [Rotorex’s] compressors did not conform to the terms of the contract between the parties” and noted that “there are ample admissions [by Rotorex] to that effect.” We agree. The agreement between Delchi and Rotorex was based upon a sample compressor supplied by Rotorex and upon written speciications regarding cooling capacity and power consumption. After the problems were discovered, Rotorex’s engineering representative, Ernest Gamache, admitted in a May 13, 1988 letter that the speciication sheet was “in error” and that the compressors would actually generate less cooling power and consume more energy than the speciications indicated. Gamache also testiied in a deposition that at least some of the compressors were nonconforming. The president of Rotorex, John McFee, conceded in a May 17, 1988 letter to Delchi that the compressors supplied were less eficient than the sample and did not meet the speciications provided by Rotorex. Finally, in its answer to Delchi’s complaint, Rotorex admitted “that some of the compressors . . . did not conform to the nominal performance information.” There was thus no genuine issue of material fact regarding liability, and summary judgment was proper. Under the CISG, if the breach is “fundamental” the buyer may either require delivery of substitute goods, CISG art. 46, or declare the contract void, CISG art. 49, and seek damages. With regard to what kind of breach is fundamental, Article 25 provides: [the court quoted the article]. In granting summary judgment, the district court held that “there appears to be no question that [Delchi] did not substantially receive that which [it] was entitled to expect” and that “any reasonable person could foresee that shipping non-conforming goods to a buyer would result in the buyer not receiving that which he expected and was entitled to receive.” Because the cooling power and energy consumption of an air conditioner compressor are important determinants of the product’s value,

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the district court’s conclusion that Rotorex was liable for a fundamental breach of contract under the Convention was proper. . . . [Another excerpt from this case appears in Chapter 8 on remedies.]

CONCLUSION We afirm the award of damages. We reverse in part the denial of incidental and consequential damages. We remand for further proceedings in accord with this opinion.

Problem 4.3 Suppose you represent the plaintif, Delchi Carrier SpA. How would your case difer if no written speciications had been furnished but the facts are otherwise the same?

Problem 4.4 An Austrian buyer met with an Italian seller and ordered slabs of Giallo Veneziano granite. By the 1990s, high-end kitchens oten featured granite countertops, which were (and are) considered an important feature of a home. In Italian, Giallo Veneziano means “Venetian Yellow,” and Giallo Veneziano is a popular color for new and remodeled kitchen countertops. It sells for a premium price, above the still fairly expensive colors that are darker or more drab, although not as expensive as, say, white marble. he buyer’s manager presented a sample of Giallo Veneziano granite when he met with the seller in Italy. he sample has a golden-yellow ground color, along with the many lecks typical of granite. he granite slabs that the seller delivered in Austria, however, while containing some yellow, have a pink to brownish tinge when compared with the sample. he buyer complains and withholds part of the price under CISG article 50. he buyer says that the delivered granite cannot be sold to customers in Austria or the United States as Giallo Veneziano and must be sold in the price band for ordinary granite. he buyer says further that the delivered granite does not conform to the sample that the buyer’s manager had shown the seller. he seller responds that the delivered granite is indeed yellow (or in Italian, giallo). You are the judge in Austria. Consider both claims that the buyer makes. Pay careful attention to the exact language of CISG articles 9, 35(1), and 35(2)(c). Consider whether the requirements of the CISG are met and whether the buyer’s claim has any merit under either a particular or a more general theory. On the latter, you might consider article 8. Further, what will the buyer need to prove? Problem 4.5 he French buyer is a design irm interested in sotware to enable computer-assisted design. he buyer contacts the seller in Spain and receives a sample of standard MagnaGraix sotware. he buyer gives a bank guarantee to assure that it will not keep or copy the sotware without paying for it. he buyer tests it on a few of its computers (which are networked), and ater the three-month trial period, decides to go forward. he buyer and the seller both sign an order, which includes the name of the program, the speciication of a networked version for ive computers, and a price, but they contemplate signing a formal document later. he buyer alleges that when the parties signed the order, the buyer said that it needed certain defects in the program to be ixed (these defects had occurred during the

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test period). he buyer further alleges that it did not want to incur legal expenses for a formal contract until all issues had been resolved and did not want to be bound to a contract until then. he seller denies all of these allegations vociferously. he delivered sotware has the same defects as the sotware provided during the test period, including diiculty in getting the sotware to work on more than one computer at a time. he buyer refuses to pay, and the seller sues. (a) What law applies? Does it matter whether the sotware is downloaded via a website or is instead delivered on disk? (b) Have the parties concluded a contract of sale? he answer to this question and the following ones may depend on whom is to be believed; consider the answer both if the seller is correct and if the buyer is. (c) Does the sotware conform to the contract? (d) Who should win?

III. Suitability of the Goods A. he Basic Concept: Fitness for the Ordinary Purpose In many ways, the implied assurance in article 35(2)(a) is the most basic characteristic of a typical sale of goods. he goods must be “it for the purposes for which goods of the same description would ordinarily be used.” CISG art. 35(2)(a). Oten referred to as merchantability in common law systems, as in UCC § 2-314, the multisyllabic name most directly conjures the mercantile idea that the goods are suitable for sale in the ordinary course of trade by responsible merchants. In less technical and economic terms, the manifold and important meanings of merchantability boil down to the need for the goods themselves to be okay—a colloquial, non-legal term we have chosen precisely because of its vagueness, its suggestion that the goods are good enough, and its connotation that the goods might not be excellent. If it can be said, “he goods are okay; they’re ine,” then they are probably merchantable. If the answer to the question, “Are the goods okay?” is “No,” or “Well, sort of, but . . . ,” then merchantability is likely to be an issue. To be okay, the goods will obviously have to work right. hat much is obvious when measured at the time of delivery. Harder questions arise when the goods work well at irst but break before the buyer thinks they should. he following problem is a much simpliied adaptation of Beijing Light Automobile Co., Ltd. v. Connell Limited Partnership, Arbitration Institute of the Stockholm Chamber of Commerce, June 5, 1998, available at Pace CISG Database: http://cisgw3.law.pace.edu/cases/980605s5.html. We will return to it and consider some of its more complex (and realistic) questions later in the chapter.

Problem 4.6 Buyer in China bought a 4000-ton rail press from Seller in the United States. he rail press is used for making the metal frames for trucks. Buyer already owned several rail presses, but they were decades old, and it wanted a new one to alleviate the problems with the others. Ater four years, however, the new rail press broke, necessitating extremely expensive repairs. Buyer sues, saying that the rail press is not “it for the purposes for which

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goods of the same description would ordinarily be used,” see CISG art. 35(2)(a), as such goods would be expected not to have any major malfunctions or require any signiicant repairs for more than four years. You are the arbitrator. Buyer also cites article 36. Do you agree with Buyer?

Problem 4.7 Assessing claims for 4000-ton rail presses is diicult for most of us, as it is for most people. Merchantability claims relating to consumer goods, like Italian shoes, might seem less daunting, but such claims have their own complexities. In one case, the buyer in Germany ordered 143 pairs of assorted shoes from the seller in Italy for a total price of 8,411,000 Italian lire. he shoes were to have jewelry ornamentation, and the sale was made with reference to a sample. When the shoes arrived, the buyer complained that the straps were too long (causing the shoes to it poorly and to become distended and unsightly), that the ornamentation was crooked, that the heel strap was stitched too narrowly, and that the sole was not aixed well. (a) Do the shoes comply with the requirements of article 35? (b) he seller says that the sample had exactly the same defects, and the buyer can hardly complain. Does this change your answer to (a)? Does the seller need to prove that the sample became part of the agreement?

B. Marketable, Average or Reasonable Quality? And What about the Buyer’s Purpose? When the CISG says that the goods must be “it for the purposes for which goods of the same description would ordinarily be used,” does it mean that the goods must be of average quality or of reasonable quality? Marketable or merchantable? he questions are insidious, implying that itness for the ordinary purpose must mean one of these. he best answer, perhaps, is that the questions are misguided, as they seek to apply the wrong standard. he treaty chose neither reasonable quality nor average quality, nor marketability or merchantability, but itness for the ordinary purpose. What is it for the ordinary purposes will depend on the facts of particular cases. Is it it for the ordinary purpose? hat is the relevant question. he others are relevant only insofar as they shed light on that central question. Having said that, however, we all have to acknowledge that our intuitive response is to translate CISG standards into the nearest cognate in domestic law. Most of the time this move is probably harmless; oten any diferences will be subtle and of only academic interest. Sometimes, though, millions can ride on those nuances. Of course, itness for the ordinary purpose is not the only relevant question. An independent rule provides that the goods be “it for any particular purpose expressly or impliedly made known to the seller at the time of the conclusion of the contract, except where the circumstances show that the buyer did not rely, or that it was unreasonable for him to rely, on the seller’s skill and judgement.” CISG art. 35(2)(b). In many cases, a seller’s contention that buyer’s demand is beyond the ordinary might be met with a rejoinder that the buyer made its purpose known to the seller in a way that would implicate this separate implied assurance.

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hus these seemingly distinct quality terms can come together. In cases where large amounts of money are involved, or large quantities of goods, one might assume that these implied assurances would matter little and that carefully lawyered contracts would take care of any issues. But then one might be wrong to assume anything too hastily.

CONDENSATE CRUDE OIL MIX CASE Netherlands Arbitration Institute Case No. 2319 Oct. 15, 2002 Available at Pace CISG Database: http://cisgw3.law.pace.edu/ cases/021015n1.html (Nov. 12, 2007) ... [37] [Dutch Sellers] are all active in the exploration of offshore gas ields in the Netherlands continental shelf. They have been granted production licenses for certain blocks. In order to spread risks, exploration and production generally take place in the form of joint venture contracts with one company being the operator responsible for operational and inancial issues. Products are being allocated between the joint venture partners in accordance with their proportionate ownership interest. However, sales are the sole responsibility of each of the companies. [38] [English Buyer] is a major international player in the ield of exploration, production and reining of crude oil and distribution of oil products and gas. [39] Condensate is an associated liquid product derived from the exploration of gas ields after separation from the gas stream by the producer. Condensate from the ields operated by [sellers] and subject of the dispute is referred to as “Rijn Blend.” ... [42] [Buyer] alleges that at the Q. reinery the Rijn Blend is blended with other crude oils to optimise the reining process. Subsequently, the reining process results in the production of LPG, light naphtha, heavy naphtha, kerosene, light gas oil, heavy gas oil and residue. All light naphtha produced at Q. is sold to CH. . . . GmbH, a joint venture between KK. . . . AG and Deutsche . . . AG, a subsidiary of CH. . . . GmbH also has other suppliers for its light naphtha requirements. ... [44] The sale contracts of [sellers] with [buyer] were identical or almost identical. There was no detailed product description and only a few speciications for the product. All contracts provided for application of Dutch law and for NAI arbitration. [45] Apparently, from 1993 or 1994 on and for a long time, there had been no problems regarding the sale contracts between [sellers] and [buyer]. [46] [Buyer] alleges that CH. . . . GmbH was encountering processing problems at its plant as of Spring 1997 resulting in rapid de-activation of catalysts and corrosion (causing operational and environmental concerns) and that as of May 1997, Q.  had been contacted since the light naphtha produced at Q. might have caused the problems. As of November 1997, a possible link was made with mercury levels in the Rijn Blend used at Q. [Buyer] further alleges that the link was established as of May 1998 and that solutions (both long and short term) were envisaged in cooperation with K.  . . . BV. [47] The disputes between [sellers] and [buyer] relate to deliveries as of June 1998. On June 11, 1998, [sellers] were informed by K.  . . . BV that [buyer] had indicated that it

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would not take the next lifting of the Rijn Blend because of levels of mercury in the Rijn Blend, which made it unacceptable for further processing or sales. [48] Because of alleged lack of storage facilities, the Rijn Blend—on June 13, 1998— was loaded onto a vessel chartered for that purpose. Also, it is alleged that storing on a chartered vessel was a cheaper option than shutting down production at the gas ields. Because of the alleged absence of short-term local market opportunities, the Rijn Blend was transported to the United States where it was sold to LL. Petroleum Corp. at a price substantially lower than the price under the contract. In this respect, [sellers] allege that they suffered losses of US $1,100,000. [49] On June 16, 1998, [buyer] informed [sellers] that it would suspend taking delivery of the Rijn Blend until a solution for the mercury problem had been found. [50] Since a solution was not found regarding the mercury problem, [buyer] terminated the contracts or led the contracts to expire in accordance with the contract termination provisions or the contract provisions regarding renewal. In the intermediate period, [sellers] sold the condensate not taken by [buyer] to third parties (such as one further sale to LL. Petroleum Corp., two to M. International AG and all others to H.  . . . BV) at an alleged loss as compared to the contract price. On top of the US $1,100,000 on the June 1998 cover sale, the Arbitral Tribunal gathers from the information provided by [sellers] that other cover sales caused losses alleged to be in excess of US $5 million resulting in an alleged overall loss of US $6,333,178.58.

3. Arguments of [sellers] [51] [Sellers] argue that the Rijn Blend delivered over the life span of the contracts was in accordance with the contracts since no speciic quality requirements had been agreed upon. Furthermore, [sellers] contest that they should be involved in downstream problems and [argue] that [buyer] should have dealt with these problems in its contracts with a downstream customer. Also, they claim that they could not be aware of the purpose for which the Rijn Blend was used by [buyer] and, therefore, had no obligations whatsoever in meeting product requirements further downstream. ...

4. Arguments of [buyer] [55] [Buyer] declined any liability. In its opinion, the goods were not conforming and it was, therefore, entitled to refuse delivery and suspend its obligations. [Buyer] in this respect argued that there were increased levels of mercury in the recent past and that [sellers] knew or should have known that—since Rijn Blend is used in the reinery process—it might cause damages downstream. ...

5. Position of the Arbitral Tribunal ... [60] . . . the parties agree on the following issues: 1) the application of the Convention on International Sale of Goods concluded in Vienna on April 11, 1980 (hereinafter referred to as “CISG”) to the respective contracts; 2) the application of the Dutch statutory interest rate to damages, if any. . . .

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5.1 Issue 1: Conformity of the Rijn Blend [62] Article 35(1) CISG provides that the seller should deliver goods, which are of the quantity, quality and description required by the contract. All twelve contracts do not contain quality speciications but only deine Rijn Blend as a “Mix of . . . condensates and/ or crude oil . . . ,” “ . . . condensates and crude oil” or “condensates” and refer to the blocks from where the Rijn Blend originate. The contracts also refer to the gravity of the Rijn Blend for price calculation purposes but parties agree that this element is of no relevance for the present purposes. Consequently, article 35(1) CISG is not applicable to the conformity issue. [63] [The tribunal paraphrased Articles 35(2)(a) and (b).] ... [67] As to Article 35(2)(b) CISG, the Arbitral Tribunal notes that the particular purpose of the goods must have been made known to the seller at the time of the conclusion of the contract. The question then arises whether [buyer], at that time (i.e., 1993 and 1994) expressly or impliedly indicated to the respective [sellers] the use it intended to make of the Rijn Blend. The Arbitral Tribunal is of the opinion that it did not. First, the sale contracts do not contain a product quality speciication. Absent such a speciication, [buyer] did not indicate expressly the particular purpose it had in mind for the Rijn Blend. Secondly, an implied indication as to a particular purpose made in 1993 and 1994 also has not been proven. There are no elements of evidence that the parties implicitly agreed upon particular requirements for the Rijn Blend. Neither is there evidence that such an implied indication—in accordance with Article 8 CISG—is to be inferred from statements, intentions or conduct of either party. Furthermore, the nature of the product leads more to the opposite conclusion. The Arbitral Tribunal understands that blended condensate such as Rijn Blend is a commodity that can be used in different capacities in reining processes and thus that various reiners may use it in varying degrees and for different purposes. Also, a buyer not necessarily should use all condensate but may resell all or parts of it. In this respect, the Tribunal also has considered that events occurring after 1993 and 1994 are not relevant to determine conformity issues because of the marking point in Article 35(2)(b) at the time of contract formation. In other words, if quality speciications had become important for [buyer] during the lifetime of the contract, the contracts might have been amended accordingly. Finally, although [buyer] is part of the . . . group, which through the joint venture with . . . at Q. also reines at Europoort where the Rijn Blend was to be delivered, the Arbitral Tribunal understands that [buyer]’s activities also include trading. Thus, it should not necessarily have been so that [sellers] under the circumstances had to know that the Rijn Blend was to be reined at Q. and that the condensate was exclusively used by [buyer] to produce light naphtha destined to one single downstream customer. The Arbitral Tribunal is further of the opinion that this conclusion is not changed by the fact that [buyer] did buy all output from the blocks speciied in the contracts in which [sellers] had interests. Consequently, the Arbitral Tribunal rules that, absent contract quality speciications, Article 35(2)(b) CISG is not the proper basis to assess non-conformity issues in international sales of commodities such as Rijn Blend. [68] The Arbitral Tribunal, thus, inds that the dispute between the parties is to be analysed under Article 35(2)(a) CISG which requires that the goods are it for the purposes for which goods of the same description would ordinarily be used. In this respect, three

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interpretations exist. According to a irst line of thought, Article 35(2)(a) requires that the seller delivers goods which are of a merchantable quality. This interpretation goes back to the drafting history of CISG. During the negotiations of CISG, the question arose how the provision of the draft on conformity of goods, absent contract speciication or particular purpose, should be interpreted. At that time, it became clear that the English common law countries favoured merchantable quality whereas the civil law continental European rule was to the effect that average quality is required. In order to clarify the draft, the Canadian delegation proposed to endorse the civil law rule by also including an average quality rule. However, during the negotiations, the Canadian amendment was withdrawn. This background has been mentioned in the German New Zealand Mussels case but was considered not to be relevant there because the mussels were both merchantable and of average quality [the mussels case appears in the next section of this chapter— Eds.]. No case law could be found which inferred from the travaux préparatoires that the continental rule was not to be adopted and that merchantable quality is suficient. [69] The second view is that the average quality rule is to be adopted in relation to CISG cases. [70] Scholarly writings have mentioned the problem but later publications, even among civil law scholars, are divided between merchantable and average quality with a majority of Germanic writers endorsing the average quality rule based upon similar rules in the German, Austrian and Swiss civil codes. Some other authors have taken positions similar to the majority view but with some qualiications based on the concrete circumstances of the case such as a buyer ordering goods from a specialized manufacturer (entitled to above-average quality) or a buyer who under speciic circumstances could not expect average quality (entitled to below-average but still satisfactory quality). Finally, some French authors have speciically stated that the average quality rule of the French Civil Code is not applicable to CISG cases. [71] Finally, a third theory rejects both opinions mentioned above and states that neither merchantability nor average quality it within the CISG system. This theory rather suggests a reasonable quality. One case has endorsed this theory in holding that the buyer’s reasonable expectations are to be taken into account. [72] Contrary to Article 35(2)(b) CISG, Article 35(2)(a) does not require that quality requirements are determined at the time of the conclusion of the contract. Thus, factual elements occurring after the conclusion of the contract may be taken into account to determine quality standards. [73] As to evidence, parties are in disagreement whether the increased mercury levels found at the CH. . . . GmbH plant in Germany can be traced back to increased mercury levels of the Rijn Blend delivered at Q . . . [74] In this respect, the Arbitral Tribunal notes that already on April 21, 1998, it became clear that the problems encountered at CH. . . . GmbH were traced back to Rijn Blend and that minutes of a meeting at which a representative of K.  . . . BV participated contain express and unqualiied statements to that effect whereas on the ile there is no evidence that on the part of K.  . . . BV reservations have been made in tempore non suspecto against these statements. [75] Furthermore, it is surprising that when [buyer] indicated on June 10, 1998, that it was unwilling to off-take further lifting of Rijn Blend (Exhibit 4.1 Statement of Claim), K.  . . . BV invoked legal arguments why such a refusal would violate the contracts but did

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not dispute the accuracy of the mercury problems and the fact that [buyer] attributed these problems to the Rijn Blend. [76] Also, the Tribunal inds that the contents of the July 6, 1998 K.  . . . BV letter is contradicting [sellers]’ argument that the cause of the mercury problem remained unproven. That letter makes clear that it was at least K.  . . . BV’s position that the mercury level was attributable to the Rijn Blend sellers since it envisaged giving [buyer] a price reduction. The letter states explicitly and without a reservation: “With reference to the crude/condensate sales agreement we do agree that as a result of the recent quality (mercury) change of the product received at the receivers point [ . . . ] has the right to negotiate an adjusted price for such an offset quality and K. is receptive into agreeing to such a revised price.” [77] On the basis of these arguments, the Arbitral Tribunal inds that [buyer] has suficiently proven that there is a substantial likelihood that mercury problems at CH. . . . were caused by increasing levels of mercury coming from Rijn Blend. [78] The Arbitral Tribunal has not read in the ile relevant arguments advanced by [sellers], which might indicate that there were no increased levels of mercury in the Rijn Blend. [Sellers] have only given general hypothetical alternative causes for the mercury problems at CH. . . . but not substantiated these alternative causes by concrete evidence indicating that Rijn Blend could not have caused these problems. [79] In this respect, the Arbitral Tribunal gives much more weight to the position of K.  . . . BV in the process of identifying the causes of the increased levels of mercury than to the contradictory expert reports put forward by the parties. [80] The Arbitral Tribunal therefore proceeds on the basis that the Rijn Blend contained increased levels of mercury and, thus, must answer the question whether Rijn Blend with increased levels of mercury still meets the standard of Article 35(2)(a) CISG requiring products to it ordinary purposes of goods of the same description. The Arbitral Tribunal is thus facing the question mentioned above whether merchantable, average or reasonable quality is required. ... [88] As to the standard of merchantability, it should be noted that the primarily Germanic theory of average quality is based on the assumption that in the English common law merchantability implies that goods are conforming if there is a substitute market. It would be the expression of the caveat emptor-rule under which buyers assume the risk of quality problems if they fail to specify quality requirements in their contracts or inspect goods before concluding the contract. This rule was, however, changed in 1910 in the Bristol Tramways Carriage Co. Ltd v. Fiat Motors Ltd. case (1910 2 KB 831) where the test was developed whether a reasonable buyer would have accepted the goods if he had fully examined the goods. As to commodities, the English common law developed the rule that goods conform if a reasonable buyer would have concluded the contract if he had known the quality of the goods without bargaining for a price reduction. [89] Thus, a merchantability test under CISG based on English common law, if any, would raise the question whether a reasonable buyer would have concluded contracts

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for Rijn Blend at similar prices if such a buyer had been aware of the mercury concentrations. In this respect, the substitute cover sales made to LL. Petroleum Corp., M. International AG and H.  . . . BV are relevant. [Sellers] have argued that these cover sales have been contracted on an arm’s length basis. From [Sellers]’ Exhibit 5a to the Statement of Claim, it appears that the cover sale to LL. Petroleum was made at a 31% discount (US $9 as compared to the price of US $13.04 under the contracts). Although the irst sale might have been a distress sale, the subsequent 15 sales were made at discount within a range of 14% (October 1998)  to 44% (February 1999). It is conjectural to what extent these discounts may be attributed to the mercury levels of the Rijn Blend but, in the opinion of the Tribunal, [sellers] suficiently have established that these cover sales were made at discounts and on an arm’s length basis without that evidence being rebutted by [buyer]. For that reason, the Arbitral Tribunal is ready to accept that [sellers] have met their burden of proof that these ranges indicate that there was no market for Rijn Blend with increased mercury levels at prices comparable to the sales contracts when the increased levels were disclosed to prospective alternate buyers. [We believe the tribunal may have transposed “buyer” and “sellers” here—Eds.] [90] From this evidence, the Arbitral Tribunal accepts that the goods were not merchantable as this concept is generally used in common law countries having a law based on English common law. Apparently, other buyers in the market for Rijn Blend were—at times comparable to the June 1998 contemplated lifting—unwilling to pay the price [sellers] had agreed with [buyer]. [91] Consequently, if a merchantability test (as understood in the common law) were to be used for interpreting article 35(2)(a) CISG, it would lead to the conclusion that the delivery of Rijn Blend with increased mercury levels did not conform to the sales contracts. [92] As to average quality, the evidence presented to the Arbitral Tribunal by both parties indicates and—sometimes—emphasizes that quality of condensates such as Rijn Blend may differ from one region to another due to geological or other reasons. The Arbitral Tribunal will thus limit its analysis to the relevant geographical market. As suggested by the evidence presented and the expectations of the parties, the geographical market may be limited to the North Sea market. ... [97] In order to prove that the Rijn Blend in June 1998 did not conform with the contracts, [buyer] would have to prove: 1) the mercury levels in or around June 1998, 2) the above average levels of those levels, and/or an unacceptable increase of those levels over the lifetime of the contract. [98] The mere fact that the Arbitral Tribunal is prepared to accept (see supra Nos. 74–80) that the problems at CH. . . . were caused by increased levels of mercury attributable to Rijn Blend sold by [sellers], does not imply that these levels by logical necessity or on the basis of other considerations are to be held above average or unacceptably high and consequently turning Rijn Blend into a condensate of below average quality. The mere fact that K.  . . . BV investigated the matter and also looked for solutions, does not imply that it accepted that the goods did not conform. K.  . . . ’s attitude may well have been inspired by commercial reasons to keep an important long-term customer.

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[99] [Buyer], thus, under the average quality standard, has the burden of proof to establish that the goods in June 1998 were likely to be below average quality. [100] In the opinion of the Arbitral Tribunal, [buyer] has failed to meet that burden of proof. From the evidence, it is unclear whether there is a common understanding in the reining industry what average quality for blended condensates (such as Rijn Blend) should have been and what levels of mercury are tolerable. Also, it has not been proven what margins from an average standard, if any, are permissible. ... [102] Not having met its burden of proof, [buyer], under an average quality standard, were to be held liable for not accepting delivery of the Rijn Blend in June 1998, provided the Arbitral Tribunal would accept such an average quality standard under Article 35(2) (a) needs to be kept together CISG. [103] The Arbitral Tribunal is thus faced with a choice between merchantable quality and average quality since both tests lead to different conclusions. However, the Tribunal is of the opinion that neither test is to be applied in CISG cases. [104] First, the interpretation of Article 35(2)(a) CISG is to be guided by Article 7(1) CISG which suggests that the international character of the Convention and the need to promote uniformity in its application and the observance of good faith in international trade are to be taken into account in the interpretation process. [105] The need to ensure uniformity would indicate that, since there are no clear-cut cases or uniform scholarly opinions, neither standard at irst sight should prevail. [106] Thus, Article 7(2) CISG may be invoked. Article 7(2) provides that matters governed by CISG but not expressly settled in it, are to be solved in conformity with the general principles on which CISG is based or, in the absence of such principles, in conformity with the law applicable by virtue of the rules of private international law. [107] This provision imposes irst an intro-interpretation with respect to interpretation issues or gaps (i.e., solutions are irst to be sought within the CISG system itself). Absent general principles on which CISG is based, recourse may be had to domestic law indicated by virtue of principles of private international law. [108] This provision would seem to exclude the average quality rule. Although it is embodied in the law of both Germanic and Romanistic legal systems, Heuzé—as referred to above—has rightly indicated that national notions regarding quality of goods are not controlling in CISG cases. For that reason, the average quality standard cannot be accepted. It is a theory, which imports a domestic notion, which is not suficiently universal into the CISG system in violation of Article 7(2) CISG. Furthermore, recent codiications in civil law countries such as in The Netherlands have abolished the average quality rule of Article 1428 old Civil Code in favour of a reliance standard (see Article 7:17 Dutch Civil Code). [109] The same argument against domestic conformity notions, of course, must be used in relation to the merchantability standard of the English common law. Thus, English common law based jurisdictions such as Canada, Australia, New Zealand or Singapore cannot use their merchantability criteria ne varietur in CISG cases. [110] In solving this interpretation issue, attention is also to be paid to Articles 31 and 32 of the Vienna Convention on the Law of Treaties dated May 23, 1969.2

[2]. [The United States signed this treaty but has not ratiied it. – Eds.]

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[111] Article 32 of the 1969 Vienna Treaty permits to resort to the travaux préparatoires of treaties to explain ambiguous or unclear treaty provisions. Article 35(2)(a) CISG may thus be interpreted on the basis of the preparatory work during the negotiations leading to CISG. In this respect, the Canadian proposal is to be recalled which was worded as follows): “For the purposes of paragraph (2)(a), the goods are reasonably it for the purposes for which the goods of the same description would ordinarily be used if, (a) they are of such quality and in such condition as it is reasonable to expect having regard to any description applied to them, the price and all other relevant circumstances; and without limiting the generality of clause (a), (b) if the goods, (i) are such as pass without objection in the trade under the contract description, (ii) in the case of fungible goods, are of fair average quality within the description . . . ” [112] There being no consensus on the Canadian proposal, it was withdrawn. The records of the 15th meeting of the Diplomatic Conference under No. 45 indicate in this respect that the proposal was withdrawn after consultation with several other delegations from common law countries. [113] Two arguments may be advanced in relation to the travaux préparatoires. On the one hand, one may argue that the fact that the proposal was not adopted indicates that CISG chose for the standard of merchantability. [114] The counterargument would be that the non-adoption and withdrawal of the proposal establishes non-consensus regarding the issue and that the drafters of CISG intentionally created an ambiguity or gap without taking a position on it. [115] The latter proposition seems to be more likely. First, the Canadian proposal cannot be interpreted as defending the traditional English law requirement of merchantability but rather attempted to clarify it. In this respect, the text of the Canadian proposed amendment borrowed heavily from the text of § 2-314 of the U.S. Uniform Commercial Code which is not a strict merchantability criterion but more an open-textured provision, referring also to average quality (see infra). One may infer from the text of the Canadian proposal that the strict merchantability criterion was not even proposed and its withdrawal, consequently, cannot endorse the theory of strict merchantability. [116] On the other hand, the Canadian proposal and its withdrawal can also not be invoked for the proposition that CISG adopted a criterion of average quality. At least, it did not exclude it. Thus, the drafting history of CISG does not permit to draw a clear conclusion regarding the intentions of the drafters and, consequently, it does not help to explain the ambiguity of Article 35(2)(a) CISG. [117] On the basis of the arguments above, the Tribunal holds that neither the merchantability test nor the average quality test are to be used in CISG cases and that the reasonable quality standard referred to above (see No. 71) is to be preferred. [118] The choice in favour of a test of reasonable quality is supported by the authors and the case cited above in No. 71 as well as by those scholarly writings that have rejected the average quality test. It is compatible with the travaux préparatoires since the Canadian amendment does not exclude an interpretation in favour of reasonable quality since it provided that under article 35(2)(a) CISG goods are it for their ordinary use if it is reasonable to expect a certain quality having regard to price and all other relevant

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circumstances. Also, any such interpretation complies with article 7(1) CISG imposing to take into account the international character of CISG and its reluctance to rely immediately on notions based on domestic law. Furthermore, the interpretation preferred by the Arbitral Tribunal is consistent with article 7(2) CISG, which primarily refers to the general principles of CISG as possible gap illers. In this respect, it may be noted that CISG often uses open-textured provisions referring to reasonableness. Finally, even if one were to rely on domestic law by virtue of article 7(2) CISG, Dutch law would be applicable and would also impose a standard of reasonable quality. [119] The question then arises whether the Rijn Blend delivered in 1998 did meet the reasonable quality requirement. The Arbitral Tribunal is of the opinion that it did not for at least two reasons: price and the long-term nature of the sales contracts. [120] As to price, it has been suficiently proven (see No. 89)  that the price as determined by the price formula agreed upon by the parties in all likelihood—even taking into account transportation costs—could not [have] been obtained for cover transactions when the mercury levels were disclosed to alternate prospective buyers. This is an objective element to be taken into account when determining the quality of the Rijn Blend. Apparently, Rijn Blend with increased mercury levels has a signiicant lower value than Rijn Blend without increased mercury levels and a discount is to be paid for the buyer’s costs in removing the mercury or a buyer’s alternate use. Consequently, the Arbitral Tribunal inds that [sellers] could well insist upon the performance of the sales contracts if—in relation to the contract price—they had been willing to bear the costs of removing the mercury from the Rijn Blend. Alternatively, the parties could have agreed upon a price reduction to relect the decreased value of the Rijn Blend. Both options apparently have been discussed during negotiations between the parties but no solution could be found. Therefore, it is the opinion of the Arbitral Tribunal that [buyer], based on the price to be paid under the contracts, could insist upon removal of the mercury or price reduction and alternatively could refuse delivery of the Rijn Blend. [121] The long-term nature of the sales relationships between the parties corroborates the indings of the Arbitral Tribunal set forth in the preceding paragraph. Apparently, there have been no quality problems related to the levels of mercury in the Rijn Blend in the initial years of the Contracts as of 1993/1994. At the least, [buyer] has suficiently proven or made it suficiently probable that CH. . . . was its downstream customer over the lifetime of the contracts or the least as of 1995. Over that suficiently long period, a pattern had developed under which—in the opinion of the Arbitral Tribunal—[buyer] could expect that the Rijn Blend met the quality requirements it was or had become used to over the years. In this respect, the Arbitral Tribunal inds that the [buyer] has suficiently proven or at least suficiently has established the probability that the Rijn Blend delivered to it had sudden increased mercury levels. The Arbitral Tribunal has not read in the evidence submitted by [sellers] that there were increased mercury levels well before 1998. Consequently, the Tribunal holds that [buyer] was entitled under the contracts to a constant quality level of the Rijn Blend corresponding to the quality levels that had been obtained during the abovementioned initial period of the Contracts and on which [buyer] and its customers could reasonably rely. . . . Prof. Dr. F. De Ly Mr. E.J. van Sandick Ir. L. Tjioe

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Question 4.8 Why would the parties have agreed before the arbitration panel that the CISG applies? he Netherlands is a Contracting State of the CISG without reservation, but the United Kingdom is not.

Question 4.9 You will recall from Chapter 3 that course of performance has occasioned some debate as a tool of interpretation in US law. See generally UCC §§ 1-303. What does this case say about the role of course of performance under CISG articles 8 and 9? See ¶ 121.

Question 4.10 he tribunal found CISG article 35(2)(b) inapplicable in this case. If it did apply, could it overlap with or give meaning to the assurance under article 35(2)(a)? Or are (a) and (b) mutually exclusive?

Question 4.11 In appropriate circumstances, might the article 35(2)(b) assurance add an undertaking from the seller that the goods will work for something entirely diferent from the ordinary purpose of the goods?

Question 4.12 he tribunal looks to the travaux préparatoires, or preparatory works, to discern the meaning of the CISG. As the arbitrators note, this method of interpretation is endorsed by the Vienna Convention on the Law of Treaties (1969). As you may have learned in other courses, such recourse to legislative history is not without controversy, and it has been famously rejected by Justice Antonin Scalia, who was a noted academic expert on such matters even before he ascended the bench, whence he has forcefully expounded these views further. Opponents of legislative history note several problems: it (especially “intent”) can be indeterminate, especially as diferent legislators may have said or thought diferent things; it oten comes from staf who have no democratic mandate, no vote, and no legitimate lawmaking authority; those who are democractically accountable and authorized may have little knowedge of, or even access to, preparatory work; in sum, the text is what has been democratically approved and is the only legitimate legislative authority for decision. his account is perhaps a bit simplistic, but it tries to capture the strong movement in some quarters toward textualism. he issues arise in this case in particular, but they have general relevance to CISG cases, not just for the usual reasons, but because the CISG was drated recently enough that participants in the drating process are or have been involved in scholarly commentaries, actual arbitrations, and no doubt as paid consultants to parties submitting arguments to tribunals. As such, these participants oten assert with authority some answer that is mandated by their view of what happened in the drating, debate, and adoption of the CISG. Are these reliable sources for decision? Are they authoritative? Legitimate? Are they law?

Question 4.13 Did the tribunal follow the CISG in making its decision? You might consider this question as if you were arguing the case on appeal: How would you argue that the tribunal failed to follow the CISG? If you represented the appellee, how would you say that the tribunal was faithful to the treaty?

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C. Territorial Fitness: Suitable for Use Where? What happens if the goods are suitable for their ordinary use in the seller’s country but not in the buyer’s country? his kind of question typiies issues that arise in the law of international sales. he leading case on the subject is the Mussels case, decided by the equivalent of the German Supreme Court, abstracted below.

THE MUSSELS CASE Bundesgerichtshof [BGH] [Federal Supreme Court] Mar. 8, 1995 (Ger.) Abstract available at Unilex Database: http://www.unilex.info/case.cfm?pid=1&do=case&id=108&step= Abstract A Swiss seller and a German buyer concluded a contract for the sale of New Zealand mussels. The buyer refused to pay the purchase price after the mussels were declared “not completely safe” because of the quantity of cadmium they contained, which quantity was signiicantly greater than the advised cadmium levels published by the German Federal Health Department. The buyer gave notice to the seller of the contamination and asked it to take back the mussels. Six or eight weeks after the delivery of the mussels, the buyer complained about defects of the packaging. The seller commenced an action claiming payment and interest. At irst instance the Court decided in favor of the seller, and the buyer’s subsequent appeals were unsuccessful. The Supreme Court conirmed the decisions of the lower courts, stating that the contract between the parties was governed by CISG according to Art. 1(1)(a) CISG. The Court held that the buyer had to pay the purchase price. It was not entitled to declare the contract avoided under Arts. 25 and 49(1)(a) CISG, since the seller did not commit a fundamental breach of the contract. The Court conirmed the indings of the lower courts, according to which the mussels were conforming to the contract since they were it for the purposes for which goods of the same description would ordinarily be used (Art. 35(2)(a) CISG). The Court did ind that the fact that the mussels contained a greater quantity of cadmium than the advised cadmium levels could well affect the merchantability of the goods, provided that the corresponding public law requirements were relevant. However, like the lower courts, the Supreme Court excluded that the seller can generally be expected to observe special public law requirements of the buyer’s state; it could only be expected to do so: (1) where the same rules also exist in the seller’s country; (2) where the buyer draws the seller’s attention to their existence; (3) or, possibly, where the seller knows or should know of those rules due to “special circumstances,” such as (i)  when the seller has a branch in the buyer’s country, (ii) when the parties are in a longstanding business relationship, (iii) when the seller regularly exports in the buyer’s country, or (iv) when the seller advertises its own products in the buyer’s country. The Court equally conirmed that the buyer was not entitled to avoid the contract because of non-conformity of the packaging (Art. 35(2)(c) CISG). However, in the Court’s opinion the decisive fact was that the buyer did not give notice of the alleged non-conformity of the packaging in time (notice was given approximately two months after delivery), rather than the fact it delayed in declaring the contract avoided.

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he following case shows the persuasiveness of the reasoning of the German Supreme Court and how a US court, in assessing an arbitral award in an international case, approaches these issues.

Medical Marketing International, Inc. v. Internazionale Medico Scientiica, S.R.L. United States District Court for the Eastern District of Louisiana, May 17, 1999 No. CIV. A. 99-0380, 1999 WL 311945 Duval, District Judge: ... Plaintiff [Medical Marketing International, Inc. (“MMI”)] is a Louisiana marketing corporation with its principal place of business in Baton Rouge, Louisiana. Defendant [Internazionale Medico Scientiica, S.r.l. (“IMS”)] is an Italian corporation that manufactures radiology materials with its principal place of business in Bologna, Italy. On January 25, 1993, MMI and IMS entered into a Business Licensing Agreement in which IMS granted exclusive sales rights for Giotto Mammography H.F. Units to MMI. In 1996, the Food and Drug Administration (“FDA”) seized the equipment for non-compliance with administrative procedures, and a dispute arose over who bore the obligation of ensuring that the Giotto equipment complied with the United States Governmental Safety Regulations, speciically the Good Manufacturing Practices (GMP) for Medical Device Regulations. MMI formally demanded mediation on October 28, 1996, pursuant to Article 13 of the agreement. Mediation was unsuccessful, and the parties entered into arbitration, also pursuant to Article 13, whereby each party chose one arbitrator and a third was agreed upon by both. [The arbitrators awarded MMI damages of $357,009 plus interest, which Plaintiff moves to conirm.] ...

ANALYSIS The scope of this court’s review of an arbitration award is “among the narrowest known to law.” Denver & Rio Grande Western Railroad Co. v. Union Paciic Railroad Co., 119 F.3d 847, 849 (10th Cir. 1997). The [Federal Arbitration Act] outlines speciic situations in which an arbitration decision may be overruled: (1) if the award was procured by corruption, fraud or undue means; (2) if there is evidence of partiality or corruption among the arbitrators; (3) if the arbitrators were guilty of misconduct which prejudiced the rights of one of the parties; or (4) if the arbitrators exceeded their powers. Instances in which the arbitrators “exceed their powers” may include violations of public policy or awards based on a “manifest disregard of the law.” See W.R. Grace & Co. v. Local Union 759, 461 U.S. 757, 766, 103 S. Ct. 2177, 2183, 76 L. Ed. 2d 298 (1983). IMS has alleged that the arbitrators’ decision violates public policy of the international global market and that the arbitrators exhibited “manifest disregard of international sales law.” Speciically, IMS argues that the arbitrators misapplied the United Nations Convention on Contracts for the International Sales of Goods, commonly referred to as CISG, and that they refused to follow a German Supreme Court Case interpreting CISG.

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MMI does not dispute that CISG applies to the case at hand. Under CISG, the inder of fact has a duty to regard the “international character” of the convention and to promote uniformity in its application. CISG Article 7. The Convention also provides that in an international contract for goods, goods conform to the contract if they are it for the purpose for which goods of the same description would ordinarily be used or are it for any particular purpose expressly or impliedly made known to the seller and relied upon by the buyer. CISG Article 35(2). To avoid a contract based on the non-conformity of goods, the buyer must allege and prove that the seller’s breach was “fundamental” in nature. CISG Article 49. A breach is fundamental when it results in such detriment to the party that he or she is substantially deprived of what he or she is entitled to expect under the contract, unless the party in breach did not foresee such a result. CISG Article 25. At the arbitration, IMS argued that MMI was not entitled to avoid its contract with IMS based on non-conformity under Article 49, because IMS’s breach was not “fundamental.” IMS argued that CISG did not require that it furnish MMI with equipment that complied with the United States GMP regulations. To support this proposition, IMS cited a German Supreme Court case, which held that under CISG Article 35, a seller is generally not obligated to supply goods that conform to public laws and regulations enforced at the buyer’s place of business. Entscheidungen des Bundesgerichtshofs in Zivilsachen (BGHZ) 129, 75 (1995). In that case, the court held that this general rule carries with it exceptions in three limited circumstances: (1) if the public laws and regulations of the buyer’s state are identical to those enforced in the seller’s state; (2) if the buyer informed the seller about those regulations; or (3) if due to “special circumstances,” such as the existence of a seller’s branch ofice in the buyer’s state, the seller knew or should have known about the regulations at issue. The arbitration panel decided that under the third exception, the general rule did not apply to this case. The arbitrators held that IMS was, or should have been, aware of the GMP regulations prior to entering into the 1993 agreement, and explained their reasoning at length. IMS now argues that the arbitration panel refused to apply CISG and the law as articulated by the German Supreme Court. It is clear from the arbitrators’ written indings, however, that they carefully considered that decision and found that this case it the exception and not the rule as articulated in that decision. The arbitrators’ decision was neither contrary to public policy nor in manifest disregard of international sales law. This court therefore inds that the arbitration panel did not “exceed its powers” in violation of the FAA. Accordingly, IT IS ORDERED that the Application for Order Conirming Arbitral Award is hereby GRANTED.

Question 4.14 Does the US federal court follow the German Supreme Court? Question 4.15 Rather than follow the rules and exceptions announced by the Bundesgerichtshof, however satisfactorily legalistic and certain they seem, should the tribunals instead concentrate on the parties’ likely agreement as to whether the seller or the buyer is responsible?

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Question 4.16 Should a seller be responsible under article 35(2)(a) if the regulations are the same in the buyer’s and seller’s countries? Does the concept of disclosure help in considering this question?

IV. Products Liability Products liability refers to the liability of a seller for harm caused by its products. Contract and sales law typically deal with problems that arise when a copier makes 50 copies per minute instead of the 75 copies per minute that the seller promised, but diferent kinds of questions arise when the copier explodes and catches ire, burns down a building, and injures 50 people. hese kinds of questions fall under the rubric of products liability. Oten these kinds of cases are handled by lawyers diferent from those who handle the commercial aspects of sales of goods, and they are the subject of other books and other courses, which concentrate on countless statutes and cases far outside the scope of the present book. Many law schools have whole courses dedicated solely to products liability. In the United States, this area is most highly associated with tort law, and there is not enough space in this book to give it full treatment. Nevertheless, you should not think that international sales law, as such, has nothing to say about products liability. Generally speaking, at the very least, a copier that explodes is not it for its ordinary purpose, and unless there is a valid disclaimer, the seller will be liable for the property damage under CISG article 35(2)(a). Many diiculties and complexities are hidden in that sentence, however. You may recall that damages are limited to property damage under the CISG only because the “Convention does not apply to the liability of the seller for death or personal injury caused by the goods to any person.” CISG art. 5. he personal injuries are very likely compensable, then, but not under the CISG. (Recall Electrocrat Arkansas v. SuperElectric Motors from Chapter 2: some domestic law may be preempted, but some not.) Much of the law of products liability is outside the scope of the treaty and will be determined under domestic law. On that score, domestic law may also determine whether any attempted disclaimer of liability is valid because of the validity exception of article 4(a), as is discussed later in this chapter. Domestic law will also likely determine whether someone who is not a party to the contract (i.e., not in privity) but who is afected by the goods may nevertheless enforce the contract provisions, say, assuring that the goods will be it for ordinary use. In the United States these issues have been controversial for decades and are much caught up in political upheaval over so-called tort reform. he lack of consensus is relected in UCC § 2-318, the only provision of UCC Article 2 that includes alternatives from which enacting states can choose. It addresses, in part, vertical and horizontal privity problems. Consider light ixtures that are sold but that catch ire. A vertical privity problem occurs when Manufacturer sells to Seller who sells to End User, and End User makes a claim against Manufacturer because the ixture burns down End User’s factory. End User has a contract with Seller but no contract with Manufacturer, hence the problem. A horizontal privity problem occurs when Seller sells to End User and End User’s customer sues Seller because he was burned while visiting End

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User’s store when it caught ire. End User’s customer has no contract with Seller, or with anyone else for that matter, hence the problem. he CISG has no provisions on these issues. As you no doubt realize from the last scenario, even if a contractual theory does not lead to liability, the seller or manufacturer may well be liable in tort, even without any contractual connection to the injured person. he leading source of US law on this subject is probably the Restatement of Torts. he most current version appears below, although many cases use a previous version, which remains inluential, probably signiicantly more inluential so far than the newer text. In addition, the EU Directive on products liability is shaped by the older version of the Restatement. Both versions are reproduced next. he older and more inluential version appears irst. Ater the Restatement provisions are the key articles of the EU Directive.

RESTATEMENT (SECOND) OF TORTS (1965) Section 402A Special Liability of Seller of Product for Physical Harm to User or Consumer (1) One who sells any product in a defective condition unreasonably dangerous to the user or consumer or to his property is subject to liability for physical harm thereby caused to the ultimate user or consumer, or to his property, if (a) the seller is engaged in the business of selling such a product, and (b) it is expected to and does reach the user or consumer without substantial change in the condition in which it is sold. (2) The rule stated in Subsection (1) applies although (a) the seller has exercised all possible care in the preparation and sale of his product, and (b) the user or consumer has not bought the product from or entered into any contractual relation with the seller.

RESTATEMENT (THIRD) OF TORTS: PRODUCTS LIABILITY (1998) Section 1 Liability of Commercial Seller or Distributor for Harm Caused by Defective Products One engaged in the business of selling or otherwise distributing products who sells or distributes a defective product is subject to liability for harm to persons or property caused by the defect.

Section 2 Categories of Product Defect A product is defective when, at the time of sale or distribution, it contains a manufacturing defect, is defective in design, or is defective because of inadequate instructions or warnings. A product: (a) contains a manufacturing defect when the product departs from its intended design even though all possible care was exercised in the preparation and marketing of the product;

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(b) is defective in design when the foreseeable risks of harm posed by the product could have been reduced or avoided by the adoption of a reasonable alternative design by the seller or other distributor, or a predecessor in the commercial chain of distribution, and the omission of the alternative design renders the product not reasonably safe; (c) is defective because of inadequate instructions or warnings when the foreseeable risks of harm posed by the product could have been reduced or avoided by the provision of reasonable instructions or warnings by the seller or other distributor, or a predecessor in the commercial chain of distribution, and the omission of the instructions or warnings renders the product not reasonably safe.

Section 3 Circumstantial Evidence Supporting Inference of Product Defect It may be inferred that the harm sustained by the plaintiff was caused by a product defect existing at the time of sale or distribution, without proof of a speciic defect, when the incident that harmed the plaintiff: (a) was of a kind that ordinarily occurs as a result of product defect; and (b) was not, in the particular case, solely the result of causes other than product defect existing at the time of sale or distribution.

EU PRODUCTS LIABILITY DIRECTIVE of 25 July 1985 (85/374/EED) as amended by 1999/34/EC of 10 May 1999 Article 1 The producer shall be liable for damage caused by a defect in his product. Article 2 For the purpose of this Directive, ‘product’ means all movables even if incorporated into another movable or into an immovable. ‘Product’ includes electricity. Article 3 1. ‘Producer’ means the manufacturer of a inished product, the producer of any raw material or the manufacturer of a component part and any person who, by putting his name, trade mark or other distinguishing feature on the product presents himself as its producer. ... Article 6 1. A product is defective when it does not provide the safety which a person is entitled to expect, taking all circumstances into account, including: (a) the presentation of the product; (b) the use to which it could reasonably be expected that the product would be put; (c) the time when the product was put into circulation. 2. A product shall not be considered defective for the sole reason that a better product is subsequently put into circulation. ...

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Article 12 The liability of the producer arising from this Directive may not, in relation to the injured person, be limited or excluded by a provision limiting his liability or exempting him from liability.

Problem 4.17 (a) Kupperman AG in Solingen, Germany, sells a set of multi-rip saws to Rivers Timber Works in the United States. Rivers uses the saws for two years, but it replaces them in a general retooling and modernization of its works. Rivers sells the used saws, which usually last at least 10 to 15 years, to Trenton Lumbermills. Trenton puts the saws into operation in its factory, where they work ine for a while, but about six months ater the purchase, the machinery causes a large woodblock (weighing hundreds of pounds) to explode. he explosion seriously injures three Trenton employees, and maims Ike Cabreras, an engineer who happened to be in the mill while consulting on an unrelated job. he explosion also causes $350,000 in damage to Trenton’s millworks. Analyze the claims and defenses of the parties. What if Trenton Lumbermills were located in Canada? (b) What if Trenton’s owner, Frank Trenton, and his son Sam, who worked as the plant operations manager, went to see the saw at Rivers Timber Works before agreeing to the sale? hey were not able to observe the saws in operation, but they inspected the saws, and the son did so quite carefully. hey spoke with the Rivers plant manager about their plans for the saws, their mill setup, and the nature of the work. he Rivers manager said he thought it would be a good piece of equipment for Trenton and that he had always been happy with its performance. Do any of these facts afect your answers? Why?

V. Notice of Nonconformity Notice is a simple, fair-minded, practical concept that can quickly become mired in litigated complexity. It leads to frequent disputes, and the outcome of cases can depend on it. For those reasons many policies and arguments are raised, and in any particular factual scenario a tribunal can face daunting complications. If this were not enough, the draters of the CISG were of decidedly diferent views about notice requirements, relecting stark diferences in national law and in perceived sophistication of commercial parties. Some national laws are strict about the timing, content, and form of notice, and harsh in the efect of failure. Other laws are more forgiving. Plus, some countries, especially in the developing world, were concerned about the ability of buyers to identify problems quickly and give notice in a short period. he staunch debaters reached compromise, but as usual, it is messy and involves several rules. We will begin with the simple ideas, trying to keep them separate at irst, and then return to some actual cases to see how the strands become twisted and how tribunals try to unravel them. First, to give notice of a nonconformity, the buyer must inspect the goods, so we begin with article 38(1): “he buyer must examine the goods, or cause them to be examined, within as short a period as is practicable in the circumstances.” When the examination takes place under the default rules of article 38(2) and (3) depends on carriage of the goods and the like

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and is treated further in Chapter 5. his duty of examination, it is generally agreed, is linked only to the duty to give notice. Failure to examine is not a breach by the buyer and gives no remedy to the seller, but it can mean that the buyer will fail to give notice, and failure to give notice (which again is not a breach) may bar the buyer from seeking recourse. As failure to examine or give notice can deprive the buyer of valuable rights to remedy problems with the goods, it is proper to think of examination and notice as duties of the buyer. Article 39(1) contains the penalty just mentioned. “he buyer loses the right to rely on a lack of conformity” if the buyer fails to give proper notice. Under article 39(1), the notice must be given within a reasonable time, and that reasonable time must presumably be measured from the time the buyer should have discovered the nonconformity. If it would have been apparent in a proper examination, that time must begin to run from the time for examination, which as we just observed is “as short a period as is practicable” under article 38(1). You might consider this rule the general rule, but it is subject to a couple of further rules, found in articles 39(2) and 44. Even if it is measured from the end of the short article 38(1) period, a “reasonable time” still leaves much room for argument and uncertainty. Article 39(2) adds an outer limit of two years from the point when “the goods were actually handed over to the buyer.” As you will see in Chapter 5, the actual handing over of the goods to the buyer, which is presumably the latest point for the buyer to carry out the duty to inspect, may well be diferent from the point of delivery. Oten the goods are legally delivered at the seller’s factory or port, well before they make it to the buyer’s country. hese matters will have to wait until the next chapter, but focus on two points for now: that the buyer will likely want to arrange for inspection before the goods are shipped (so-called preshipment inspection, sometimes PSI for short, although that is a terribly ambiguous abbreviation), and that the CISG has no satisfactory provisions for this right so it should be provided in the contract of sale. To return to the matter at hand: the buyer must give notice within a reasonable time, at most two years from getting the goods.

A. Reasonable Notice Obviously a number of factors must be relevant to determining what notice is reasonable. he following cases illustrate.

THE ROTTEN FISH CASE Rb. Zwolle 3 maart 1997 (CME Cooperative Maritime Etaploise S.A.C.V v. Bos Fishproducts URK BV) (Neth.) Abstract available at Unilex Database: http://www.unilex.info/case. cfm?pid=1&do=case&id=332&step=Abstract A French seller delivered ish to a Dutch buyer which transformed it into ish ilets and sold them inter alia to customers in England and Austria. Following customers’ complaints over the quality of the product the buyer refused to pay part of the price and claimed set-off with damages. The seller commenced an action to obtain full payment. The Court held that the buyer had lost the right to rely on a lack of conformity of the goods because it did not give notice to the seller within a reasonable time after it ought

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to have discovered the lack of conformity (Art. 39 CISG). In the case at hand the buyer should have discovered the defects by examining all the goods as soon as practicable (Art. 38 CISG) which under the circumstances was at the time of delivery or shortly afterwards. In reaching this conclusion the Court took into account several factors. Firstly, the seller’s standard terms, applicable to the contract, provided for short terms for notice of defects in frozen products, thereby also abiding to a usage in the ish market (Art. 9(2) CISG). Secondly, a very short term for examination of the goods was necessary in view of the nature of the goods (perishable food products) and of the fact that the goods had to be transformed by the buyer, thus making it impossible for the seller to ascertain whether the goods sold were really defective. Moreover, the Court observed that the buyer had both the opportunity and the duty to examine all the ish and not only a sample of it well before selling the products on to customers, since it could do so at the latest when it started processing each single ish unit into ish ilets, and it could be expected to do so having already discovered and duly notiied a lack of conformity in another type of ish delivered by the seller. Finally, in order to conirm the given interpretation of Arts. 38 and 39 CISG, the Court referred to the duty of good faith and cooperation between the parties which is provided for by French law (the domestic law otherwise applicable to the contract). In this respect the Court observed—in agreement with scholarly writing—that the French notion of good faith is generally understood in a subjective way, and that it does not (yet) go far enough as international conventions (i.e. Art. 7(1) CISG) or as the UNIDROIT Principles for international commercial contracts. In the Court’s opinion, the objective notion of the duty of good faith in the said international instruments gives more weight to the conclusion that in the case at hand the buyer should have examined the ish and discovered the defects before selling its products to foreign customers.

Chicago Prime Packers, Inc. v. Northam Food Trading Co. United States District Court for the Northern District of Illinois, 2004 320 F. Supp. 2d 702, aff’d, 408 F.3d 894 (7th Cir. 2005) broWn, Magistrate Judge. [Northam Food Trading Co. of Ontario, Canada, contracted to buy 40,500 pounds of pork back ribs in 1350 boxes from Chicago Prime Packers, Inc. of Avon, Colorado. Both companies are meat wholesalers. Northam refused to pay for the meat, claiming that the meat was rotten when it arrived. Chicago Prime sued for the contract price of $178,200. Chicago Prime bought the meat for the contract from Brookield Farms. The meat was stored there and at B & B Pullman Cold Storage as well as at Fulton Market Cold Storage. Apparently it all eventually was transferred to B & B, where Northam’s trucker, Brown Brother’s Trucking Co., picked it up on April 24, 2001. Brown delivered the meat to Northam’s customer, Beacon Premium Meats, on April 25. As Chicago Prime and Northam are traders, neither ever actually possessed the ribs. Northam was supposed to pay May 1 but did not. At least one employee of Northam thought the payment had been sent, but the check had not been mailed. On May 2, Chicago Prime inquired about the payment. When Beacon began processing the meat May 4, Beacon discovered that the meat was in an “off condition.”

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Chicago Prime argues, among other things, that Northam failed to conduct an adequate inspection and give timely notice.] ...

2. Northam failed to prove that it examined the ribs, or caused them to be examined, within as short a period as is practicable under the circumstances. Although Chicago Prime’s assertion that Northam was obligated to examine the ribs when Brown Brother’s received them on April 24, 2001 is not supported by the contract or the CISG, Northam has failed to present evidence to carry its burden of demonstrating that it examined the ribs, or caused them to be examined, within as short a period as is practicable under the circumstances. Northam is correct that “there were no contractual [terms] requiring inspection upon delivery.” Although the Invoice stated that “[n]o claim will be allowed unless [Chicago Prime] is notiied upon receipt of product,” the Invoice was never signed by the parties, and Chicago Prime did not fax the Invoice to Northam until after Northam had received the product. Furthermore, the First Bill of Lading speciically states that, at the time of receipt, the “contents and condition of contents of packages [were] unknown.” On the other hand, Ms. Burdon’s testimony that Northam generally requires that claims with regard to the quality or quantity of goods be brought within 10  days of the date of delivery is clearly insuficient to prove that such a term was incorporated in the contract between Chicago Prime and Northam. When an issue is not addressed by the contract, the provisions of the CISG govern. Ajax Tool Works, Inc. v. Can–Eng Mfg. Ltd., No. 01 C 5938, 2003 WL 223187 at *3 (N.D. Ill. Jan. 30, 2003)  (Holderman, J.) (“The CISG does not preempt a private contract between parties; instead, it provides a statutory authority from which contract provisions are interpreted, ills gaps in contract language, and governs issues not addressed by the contract.”). Because the contract at issue did not contain an inspection provision, the requirement under the CISG that the buyer examine the goods, or cause them to be examined, “within as short a period as is practicable in the circumstances” is controlling. CISG, Art. 38(1). Decisions under the CISG indicate that the buyer bears the burden of proving that the goods were inspected within a reasonable time. See, e.g., Fallini Stefano & Co. s.n.c. v. Foodic BV, No. 900336, Arrondissementsrechtbank Roermond, Netherlands (Dec. 19, 1991), UNILEX 1991.12 The determination of what period of time is “practicable” is a factual one and depends on the circumstances of the case. In Shuttle Packaging Sys., L.L.C. v. Tsonakis, No. 01 C 691, 2001 WL 34046276 (W.D. Mich. Dec.17, 2001) (Enslen, J.), the court discussed the practicable period of examination for equipment designed to produce plastic gardening pots. The court observed: The wording of the [CISG] reveals an intent that buyers examine goods promptly and give notice of defects to sellers promptly. However, it is also clear from the statute that on occasion it will not be practicable to require notiication in a matter of a few weeks. For this reason, the outer limit of two years is set for the purpose of barring late notices.

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Id. at *9. While the court did not ultimately conclude what length of time would be practicable, it considered a number of factors, such as the complexity of the machinery, the method of its delivery, the need for training and ongoing repairs with respect to the machinery, and the skill of the plaintiff’s employees. Id. A number of foreign courts have also addressed the question of how much time a buyer has to examine goods or discover defects under the CISG. See Louis F. Del Duca & Patrick Del Duca, Selected Topics under the Convention on International Sale of Goods (CISG), 106 Dick. L.Rev. 205, 220–27 (Summer 2001)  (collecting cases). In one German case, for example, a buyer lost the right to rely on lack of conformity by failing to promptly inspect ham delivered by the seller or give notice of the ham’s nonconformity within a reasonable time. See (Parties not reported), No. 2 C 395/93, Amtsgericht Riedlingen, Germany (Oct. 21, 1994), UNILEX 1994. The court found that because the alleged defect (inadequate seasoning) was easily recognizable, the buyer should have examined the goods within three days of delivery. Id. See also Danielle Alexis Thompson, Translation of Oberlandesgericht Karlsruhe Decision of 25–06–1997 Including Commentary—Buyer Beware: German Interpretation of the CISG has Lead to Results Unfavorable to Buyers, 19 J.L. & Com. 245, 249–50 (Spring 2000) (“The ‘median value’ for this [inspection] time frame for examination according to Article 38(1) of the CISG can, even regarding durable goods, be based on a three to four day time period. This igure can be corrected upward or downward as the particular case requires.”). In a case dealing with insuficient quantity as a defect, another German court held that under Article 38, examination of the quantity of items delivered must be done immediately at the place of performance of the obligation or at the agreed destination. See (Parties not reported), No. 54 O 644/94, Landgericht Landshut, Germany (April 5, 1995), UNILEX 1995. According to the German court, the Swiss buyer of German clothing should have examined or caused the goods to be examined as soon as they arrived at the agreed destination. Id. The court found that examination of the quantity of the items delivered more than a week after delivery was unreasonable under the circumstances. Id. See also Alessandro Rizzieri, Decision of the Tribunal of Vigevano, Italy, July 12, 2000, 20 J.L. & Com. 209, 217 (Spring 2001) (stating that “according to the drafters of the Convention, goods are normally to be examined at the time of receipt, which will usually permit the buyer to determine quickly whether the goods are defective, and thus notice to the seller of any lack of conformity will follow shortly after the goods are delivered”). As mentioned above, Section 3 of Article 38 of the CISG provides that “[i]f the goods are redirected in transit or redispatched by the buyer without a reasonable opportunity for examination by him and at the time of the conclusion of the contract the seller knew or ought to have known of the possibility of such redirection or redispatch, examination may be deferred until after the goods have arrived at the new destination.” CISG, Art. 38(3). In this case, Chicago Prime knew, or ought to have known, that the ribs would be redirected or redispatched after receipt because Chicago Prime knew that Northam was only a “trading company,” which Ron Sills deines as a company that buys and sells meat, but does not own any facilities, brick and mortar, or trucks. (Tr. 146.) Thus, under the CISG, examination of the ribs could have been deferred until after they arrived at Beacon. It is notable, however, that Northam did not present any testimony or evidence as to why the ribs or a portion of the ribs were not and could not have been examined by Northam, Beacon, or someone acting on their behalf when the shipment was delivered

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to Beacon on April 25 or within a few days thereafter. Northam states that “[t]he irst problem with the ribs was noted on Thursday, May 3, 2001, when some of the ribs were removed from the freezer for thawing.” However, there is no evidence that Beacon examined or inspected the ribs on May 3, 2001. Dr.  Maltby’s Report, which Northam cites for support, states only that the product was removed from the freezer and placed on the processing loor on the afternoon of May 3, 2001. Furthermore, the parties have stipulated that Beacon noticed that the meat was “off condition” when its employees “re-inspect[ed]” the meat on May 4, 2001. There is no evidence that an inspection took place at any time prior to the May 4 processing. Northam points out that the ribs were wrapped and shipped in sealed nontransparent cartons or packages that are either white or brown. However, according to Dr.  Maltby, nothing would have precluded a Beacon representative from opening and inspecting the boxes of ribs that were received on April 25, 2001. Similarly, Mr. Gleason testiied: “There is nothing to preclude a customer from receiving our box, opening the box, inspecting the ribs. . . . ” Although Dr. Maltby stated that the USDA would not want Beacon trying to rebox or process the product until someone from the USDA was there to inspect it, there is no evidence that Beacon was waiting for a USDA inspector before opening the meat. Northam simply did not present any evidence indicating why the boxes or at least enough of the boxes to constitute a reasonable inspection could not have been opened and examined when they arrived at Beacon or shortly after arrival. Based on Mr. Moughler’s testimony that most meat products can be inventoried for more than three months, Northam claims that it should not have been required to examine the frozen ribs in the same period of time as other perishables. However, the fact that goods are frozen when delivered does not exempt a buyer from making a timely examination. In Fallini Stefano & Co., supra, the court held that, although the cheese ordered by the buyer had been delivered frozen, the buyer was not exempt from the duty to make a timely examination. According to the court, the buyer could have defrosted a portion of the cheese and discovered the non-conformity. Id. Signiicantly, in this case, according to Dr. Maltby, Northam did not need to defrost the product to see that it was putrid. In his report, Dr. Maltby stated that, even in a frozen state, the product was obviously putrid because it “was green, slimy and had an offensive odor. . . . ” At trial, Dr. Maltby testiied that if an employee of Beacon, on April 25, had opened the boxes and saw, smelled and touched the ribs that he did on May 23, “it would have been very clear and obvious” that they were putrid. Accordingly, Northam has failed to demonstrate that it examined the ribs, or caused them to be examined within as short a period as is practicable under the circumstances.

3. Northam also failed to prove that it gave notice to Chicago Prime of the alleged lack of conformity within a reasonable time after it ought to have discovered the alleged lack of conformity. Article 39 of the CISG states that “[a] buyer loses the right to rely on a lack of conformity of the goods if he does not give notice to the seller specifying the nature of the lack of conformity within a reasonable time after he has discovered it or ought to have discovered it.” CISG, Art. 39. A buyer bears the burden of showing that notice of nonconformity has been given within a reasonable time. (Parties not reported), No. 3/13 O 3/94, Landgericht Frankfurt am Main, Germany (July 13, 1994), UNILEX 1994. The evidence shows that,

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shortly after Beacon discovered the ribs were “off condition” and did not “look good,” both Northam and Chicago Prime were notiied of a potential problem. Chicago Prime therefore received notice within a reasonable time after Northam discovered the problem; however, the question here is whether Chicago Prime was notiied within a reasonable time after Northam should have discovered the problem. A court in Italy found that the reasonableness of the time for a notice of non-conformity provided in Article 39 is strictly related to the duty to examine the goods within as short a period as is practicable in the circumstances set forth in Article 38. See Sport D’Hiver di Genevieve Culet v. Ets Louys et Fils, No. 45/96, Tribunale Civile di Cuneo, Sez. I, Italy (Jan. 31, 1996), UNILEX 1996. The court further noted that when defects are easy to discover by a prompt examination of the goods, the time of notice must be reduced. Id. See also Rizzieri, supra, 20 J.L. & Com. at 215 (“The time when the buyer ought to have discovered the defect should be determined by reference to Article 38, under which ‘[t]he buyer must examine the goods, or cause them to be examined, within as short a period as is practicable in the circumstances. . . . ’ ”). As discussed above, Dr. Maltby reported that the putrid condition of the meat was apparent even in its frozen state. Because this court has found that Northam failed to examine the shipment of ribs in as short a period of time as is practicable, it follows that Northam also failed to give notice within a reasonable time after it should have discovered the alleged non-conformity. In summary, the object of the CISG in requiring inspection in as short a period of time as is practicable, and notice promptly thereafter, is to avoid controversies such as this— where, because of the passage of time, the condition of the goods at the time of transfer cannot be reliably established. When that happens, the burden falls on the buyer, who had the opportunity to inspect the goods, but failed to do so. . . .

Shuttle Packaging Systems v. INA Plastics Corp. United States District Court for the Western District of Michigan, Dec. 17, 2001 No. 1:01-CV-691, 2001 WL 34046276 enslen, District Judge [In this case, the court discussed the CISG inspection and notice requirements in the context of a complicated dispute involving CISG and non-CISG matters. We omit a full summary of the facts; the court refers to the key factual points in its discussion of the legal issues. Briely: the goods sold are complex machines for manufacturing plastic gardening pots. The Plaintiff sues to enforce a non-competition agreement that was part of the contract of sale. The Defendant argues that the Plaintiff, by failing to pay for the equipment, committed a fundamental breach of the contract, which allows Defendant to avoid the contract under the CISG—meaning that the Defendant is no longer bound by the non-competition clause in the avoided contract. Plaintiff responds that it did not pay because the equipment is defective, so it is Defendant who has fundamentally breached, not Plaintiff. Be sure to note in the court’s discussion how inspection and notice, which might be seen as technical requirements, are actually serving important functions in distinguishing meritorious claims from mere excuses.]

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Defendants’ inal argument relating to likelihood of success is that the Plaintiff committed the irst material breach of the contract and, as such, Defendants are no longer bound by the terms of the non-competition agreement. Defendants also make a related argument that because Plaintiff delayed in complaining about the performance of the equipment, it is not entitled to suspend payment of money owed under the purchase agreement. This related argument concerns Articles 38 and 39 of the Convention, which require the buyer to “examine the goods . . . within as short a period as is practicable in the circumstances” and which further state the buyer “loses the right to rely on a lack of conformity of the goods if he does not give notice to the seller specifying the nature of the lack of conformity within a reasonable time. . . . ” Article 39 also provides a two-year time period as the outer limit of time for a buyer to notify the seller of a lack of conformity (unless the goods are subject to a longer contractual period of guarantee). This related argument fails. The wording of the Convention reveals an intent that buyers examine goods promptly and give notice of defects to sellers promptly. However, it is also clear from the statute that on occasion it will not be practicable to require notiication in a matter of a few weeks. For this reason, the outer limit of two years is set for the purpose of barring late notices. In this case, there was ample reason for a delayed notiication. The machinery was complicated, unique, delivered in installments and subject to training and on-going repairs. The Plaintiff’s employees lacked the expertise to inspect the goods and needed to rely on Defendants’ engineers even to use the equipment. It is also wrong to say, in light of this record, that notiication did not occur until July 6, 2001. Long before the July 6 correspondence, there was a steady stream of correspondence between the parties relating to the functioning of the equipment which may have constituted suficient notice of the complaints. The international cases cited by Defendants are not apposite to this discussion because they concern the inspection of simple goods and not complicated machinery like that involved in this case. Nevertheless, the Court does accept Defendants’ contention that the Plaintiff’s non-payment of progress payments on the machinery did constitute a “fundamental breach of contract.” . . . In this case, the buyer has had some legitimate complaints concerning the machinery throughout the delivery and training process. However, on the whole, the Court concludes that the evidence submitted best supports the proposition that these complaints did not constitute either a fundamental or even a substantial breach of the contract by the seller. This is particularly true since the context for this dispute—namely, the machinery has been successfully operated with Defendants’ assistance and Plaintiff is a cash-strapped business raising performance questions only after formal inquiries have been made as to non-payment—tends to show that complaints about performance were opportunistic and not genuine in character. . . .

Assessment of a reasonable time is not the end of the matter. Article 44 sotens the general rule as a result of the compromise in the diplomatic negotiations mentioned above. If the buyer has a “reasonable excuse” for failing to give notice, price reduction under article 50 is still available, or the buyer may even claim damages “except for loss of proit.” (Article 50 is a monetary remedy that the CISG does not designate as damages; it will be discussed in Chapter 8.) Article 44 has a two-edged efect, it would seem. he good news for the buyer

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is that despite the general rule of article 39, the buyer can still rely on the nonconformity despite the lack of notice, although only for limited remedies. Still, those limited remedies could provide quite a substantial recovery in some cases. he bad news, aside from the limiting of the remedies, is that the buyer cannot claim an excuse and escape the article 39(1) penalty altogether. Absent article 44, a buyer with a good excuse might hope that the failure to give notice would be forgiven by the tribunal and that all remedies would be available. With article 44, even with a good excuse, the remedies are limited. he further bad news is that article 44 provides no relief from the absolute two-year maximum of article 39(2). All of these rules boil down to a few basic principles. he buyer should inspect as soon as practicable. he buyer should give notice of nonconformities as soon as practicable. Failure could mean the buyer loses the right to complain. If the buyer has a good excuse, though, some remedies might still be available. he reasons behind these principles are that a seller might cure a problem but may only be able to do so if it receives prompt notice. Absent cure, the seller needs to prepare for negotiations toward resolution, which might require quick action by a seller. If the problem is headed into disputation, the seller will need to preserve evidence, perhaps give its own notice to insurers, consult with counsel, and take other appropriate action (like give notice to its own seller). Two familiar cases demonstrate how these rules can get complicated, and how real situations oten call for a number of the rules to be put together. Occasionally, too, the buyer can invoke CISG article 40, under which the seller cannot complain about the lack of notice if it “could not have been unaware” of the problem already. We see the interplay of this and other rules by returning to a problem you considered earlier.

Beijing Light Automobile Co., Ltd. v. Connell Limited Partnership Arbitration Institute of the Stockholm Chamber of Commerce June 5, 1998 Available at Pace CISG Database: http://cisgw3.law.pace.edu/ cases/980605s5.html (Feb. 16, 2007) thorsten leiJonhielm, Chairman; robert romlöv, arbitrator; Johan GernanDt, arbitrator:

1. Background According to a contract dated February 21, 1990 (the “Contract”), Beijing Light Automobile Co., Ltd. (“BLAC”) agreed to purchase from Connell Limited Partnership (“Connell”), through a division of Connell with the trading name “Danly Machine” (“Danly”), a 4,000 ton rail press (the “Press”) designed to make frame rails to be used by BLAC in the manufacture of light trucks at its factory outside Beijing. . . . The Press was constructed and irst assembled at [seller’s] Chicago plant. In late spring and early summer 1991 the plant was visited by [buyer’s] representatives during the inal stages of construction and assembly. [There were some dificulties with assembly of one part of the apparatus, and the seller told the buyer that they would work on it together the next day. The seller continued to work that evening, though, and dealt with the problem by replacing one piece: a P-52 lockplate was substituted for the A-5750 key retainer.

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This part of the press was already assembled when the buyer arrived the next morning.] In June 1991 inal set-up and veriication tests were made in order to ensure that the Press’ functions then were in accordance with the Contract speciications. After completion and approval of the tests, the Press was disassembled so that it could be transported to China and in July 1991 delivery began and was concluded by shipment from the port of New Orleans on August 16, 1991. The Press arrived in the port of Tianjing in China on October 14, 1991, and reached [buyer’s] plant outside Beijing in March 1992. Assembly of the Press started in spring 1992. Assembly work was performed by [buyer] with the help of another Chinese company, China Mechanical Industry Installation Company (“CMIIC”). [The P-52 lockplate was installed improperly.] When the representatives of [seller] arrived at the plant for the installation supervision provided for in the Contract, at the end of June 1992, the assembly was substantially completed and the [seller] personnel was mainly involved in the subsequent tests and checks leading up to the inal approval on July 23, 1992 by both parties. [Buyer] began to operate the Press on January 10, 1993. For almost three years, [buyer] used the Press continuously without incident. On November 10, 1995, the Press failed (for reasons further discussed below), resulting in damage to the Press. [Buyer] requested that [seller] send technicians to assist in the repair of the Press but the parties failed to agree on the terms for such assistance, and [buyer] had the Press repaired with the help of technicians available in China. The Press returned to operation on August 15, 1996. Shortly after the break-down of the Press, [buyer] asserted that the failure was caused by a deiciency for which [seller] was liable. [Seller] rejected any such liability and some correspondence took place in spring and summer 1996 in an effort to try to settle the matter amicably, however without success. On February, 1997, [buyer] addressed a Request for Arbitration to the Arbitration Institute of the Stockholm Chamber of Commerce, claiming damages from [seller]. ...

6.2 The time bar issue One of [seller’s] grounds for rejecting [buyer’s] claim is that any claim relating to non-conformity is precluded both under the Contract and under CISG. . . . [Buyer] has, at least implicitly, taken the position that neither the Contract nor CISG contains any limitations for notices of the alleged non-conformity. It is alleged that [seller] orally assured [buyer] that the Press would last for at least thirty years, and that this promise was not superseded or excluded by the Contract or CISG. Therefore no limitations for notices under the Contract or CISG are applicable. . . . As for the irst issue, namely [seller]’s claim that the parties have through the Contract derogated from or set aside Article 40 of CISG, this calls for an interpretation both of the Contract and of CISG. Article 40 in CISG reads as follows: “The seller is not entitled to rely on the provisions of Article 38 and 39 if the lack of conformity relates to facts of which he knew or could not have been unaware and which he did not disclose to the buyer.”

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The provisions of Article 38 and 39 of CISG concern the buyer’s examination of goods and his notice of lack of conformity to the seller. Speciically, Article 39(2) sets a cut-off date for any notices of non-conformity from the buyer at two years from the date on which the goods were actually handed over to the buyer, “unless this time-limit is inconsistent with a contractual period of guarantee.” [Seller] claims that Articles 38 and 39 relate only to the warranties in CISG (i.e., in Article 35), and that the parties through the provisions in Clauses 13, 14 and 15 of the Contract have derogated both from CISG’s provisions on warranties in Article 35 and from Articles 38 and 39. Consequently, the parties have also derogated from the provisions in Article 40. The Tribunal cannot share this view. It is true that contracting parties may derogate from almost all provisions of CISG, either explicitly or implicitly. But even assuming that the parties have derogated from the provisions on warranties and notices of CISG (a matter that will be discussed further on), it does not follow that they have thereby implicitly also derogated from the provisions of Article 40. Nor does it follow from the wording of Article 40 that it would only relate to warranties according to CISG. The reference to Article 38 does not say anything more than that the buyer will, if Article 40 is applicable, be excused from his failure to examine the goods within a certain time: if such examination is related to non-conformity according to the Contract or according to CISG is of no relevance. The same applies to Article 39. And even if it was assumed that Article 40, as would follow from its wording, is only concerned with examination and notice of non-conformities according to CISG (as some authors would seem inclined to hold), the provisions of Article 40 would, in the opinion of the Tribunal, still be indirectly applicable to the examination and notices requirements under the Contract, since the rules in Article 7(2) of CISG on the interpretation of CISG provisions lead to the same result as though Article 40 was directly applied. It should be noted that the provision of Article 40 is intended to be a “safety valve” for preserving the buyer’s remedies for non-conformity in cases where the seller has himself forfeited the right of protection, granted by provisions on the buyer’s timely examination and notice, against claims for such remedies. Such “safety valves” exist in the domestic laws of many countries, triggered as a result of instances of fraud, bad faith, gross negligence, etc. on the part of the seller. Thus, the Article 40 is an expression of the principles of fair trading that underlie also many other provisions of CISG, and it is by its very nature a codiication of a general principle. A derogation from such a general principle can hardly be inferred from the contractual provisions cited by [seller]. For that matter, even if an explicit derogation was made—a result of drafting efforts and discussions that stretch the imagination—it is highly questionable whether such derogation would be valid or enforceable under various domestic laws or any general principles for international trade practices. The Tribunal therefore concludes that the parties have not derogated from Article 40 of CISG. As for the other issue, namely [buyer’s] contention that the parties have agreed that no limitation period should apply to the alleged defect in this case, excluding even the two year cut-off period according to Article 39(2) of CISG, the Tribunal cannot share this view either. It may well be that the representatives of [seller] have indicated or even “promised” that the Press would last for at least thirty years. It may certainly be assumed that [buyer] expected the Press to last for a considerable number of years even in the absence of such a promise, and that [seller] realised this. This obviously has a bearing on

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the issue of non-conformity as such, but the statements by [seller], if any, or [buyer’s] expectations cannot be construed to set aside or derogate from the limitation periods for examination and notices either under the Contract or under CISG. A contractual provision to the effect that the remedies under the contract or under CISG would be available to the buyer throughout the lifetime of a sophisticated engineering product, irrespective of the seller’s good faith, would obviously differ from normal trade practices and would, in fact, be very exceptional. The Tribunal therefore concludes that the question of [seller’s] liability in damages as such turns on whether [buyer’s] claim meets the test under Article 40 of CISG.

6.3 Applicability of Article 40 It is undisputed that [buyer’s] notice of the alleged non-conformity was made well beyond the two year limitation period under Article 39(2) of CISG (and, of course, the 18-month guarantee period under the Contract). Therefore, [seller] will be liable for any non-conformity only if it relates to facts that [seller] could not have been unaware of and that were not disclosed to [buyer]. The Tribunal will address in turn the issues of non-conformity, [seller’s] awareness and disclosure to [buyer].

a) Non-conformity In order to determine whether the Press, with the A-5750 key retainer replaced by the P-52 lockplate, conformed to the Contract the obvious starting point is the contractual documents. The next step is to interpret the Contract to determine whether the Contract is to be supplemented by any or all of the warranties according to CISG. However, in this case there is no contractual speciication relating to the devices securing the lock-nuts on the intermediate gears (see further below), and the contractual warranties are, even if the CISG warranties were applicable, general in their nature. The Tribunal inds it necessary to analyze the technical aspects of the failure of the lockplate before a meaningful match can be made against these general warranties. [The tribunal engaged in a lengthy analysis of the parts, the substitution, and the faulty installation of the substitute part.] To summarize, the Tribunal inds that the change to the P-52 lockplate arrangement resulted in potentially dangerous deterioration in the quality of the Press and that the failure of the lockplate cannot be blamed on [buyer’s] negligence at installation (or failure to avail itself fully of [seller’s] supervision services) or maintenance. The Tribunal now turns to question whether these indings make the Press non-conforming. The Contract contains only one provision concerning the quality of the Press that has a bearing on the issue at hand. According to this provision, in Clause 13, [seller] “guarantees that the commodity hereof is made of the best materials with irst class workmanship, brand new and unused. . . . ” In the subsequent clauses dealing with inspection and remedies, etc. (Clauses 14 and 15) the concept of non-conformity is used without speciic reference to Clause 13, but there is a reference to the guarantee period according to Clause 13. Neither in these clauses nor in any other clause of the Contract there is an explicit derogation from the provisions of CISG. Article 35 of CISG stipulates at the outset (35(1)) that the goods shall conform to, among other things, the quality and description required by the contract. The article

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further states (35(2)) that except where the parties have agreed otherwise the goods shall be it for the purposes for which goods of the same description would be ordinarily be used (a) and for any particular purpose expressly or impliedly made known to the seller unless the buyer did not rely on the seller’s skill and judgement (b). The principle of the buyer’s reasonable expectancy with respect to the general and particular purpose of the goods that has found this expression in CISG appears in many domestic laws and can hardly be regarded as controversial. It is of course, possible to limit the seller’s liability for non-conformity with such purposes and this is often done in both standard contract forms and individual contracts, especially in the United States. Without explicit contractual provisions dealing with these natural expectations of the buyer, it is dificult to see how this provision of CISG can be effectively set aside. In the Tribunal’s opinion, it cannot be suficient to include in the contract warranties dealing in positive terms with general aspects of quality, as is the case in the present Contract. In fact, Clause 13 of the Contract would seem to contain exactly the sort of undertaking to which Article 35(1) refers and which shall be supplemented, unless the parties agree otherwise, with the subsequent general “guarantees” of the article. Hence, the Tribunal cannot ind that the parties have derogated in the Contract from CISG’s provisions on itness for purpose. Consequently, the Press must meet the test under CISG in order not to be non-conforming. Based on the foregoing discussion on the properties and performance of the P-52, the absence of any information on the installation or follow-up by [seller], and the circumstances related to [buyer’s] installation, the Tribunal is of the opinion that the Press in respect of this item falls short of what [buyer] was entitled to expect under the provisions of CISG. The Tribunal considers the P-52 part of the Press, in view of the possibility of improper installation and the resulting possible or even probable ultimate failure of the lockplate, not to be it for the long, continuous operation of the Press without serious failure that unquestionably was [buyer’s] reasonable expectancy and the purpose of its investment. Thus, the Tribunal concludes that the Press was not in conformity with the Contract as a result of the substitution of the A-5750 key retainer arrangement for the P-52 lockplate arrangement.

b) [Seller’s] awareness Article 40 of CISG is, as stated above, to be considered a safety valve for the buyer. Its application results in a dramatic weakening of the position of the seller, who loses his absolute defences based on often relatively short-term time limits for the buyer’s examination and notice of non-conformity, and instead is faced with the risk of claims only precluded by the general prescription rules under applicable domestic laws or possible international conventions (such as the 1974 Convention on the Limitation Period in the International Sale of Goods). It follows that Article 40 of CISG should only be applied in special circumstances. A seller is normally (through his employees) aware of the actual state of goods delivered from his plant, but the fact that he also may be aware that some part of the goods may fail to meet the standard set by CISG cannot automatically lead to Article 40 being applicable. In such case the time limits for claims under many contracts governed by CISG would become illusory.

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The doctrine on the issue of the seller’s awareness according to Article 40 also relects the dificulty in reaching a common denominator for the qualiication of the necessary “awareness.” There is, not unexpectedly, general consensus that fraud and similar cases of bad faith will make Article 40 applicable. But some authors are of the opinion that also what can be described as gross negligence or even ordinary negligence sufices, while others indicate that slightly more than gross negligence (approaching deliberate negligence) is required. As a clear case of the requisite awareness has been mentioned a situation where the non-conformity has already resulted in accidents in similar or identical goods sold by the seller and been made known to him or to the relevant branch of the industry. But also in the absence of such relatively clear cases awareness may be considered to be at hand if the facts relating to the non-conformity are easily apparent or detected. Some authors indicate that the seller is not under an obligation to investigate possible instances of non-conformity but others say that he must not ignore clues and some go so far as to suggest that the seller, at least in certain cases, has an obligation to examine the goods to ascertain their conformity. In this case, [seller] had not for several years before the Contract built a 4,000 ton press and there is no evidence that a P-52 lockplate has been used in or intended for presses of similar sizes before or after the Contract. The intended, “foolproof” design involved the A-5750 key retainer and a keyway with corresponding width. . . . However, this does not conclusively prove that [seller] foresaw the ultimate failure of the P-52 lockplate if improperly installed. In fact, one possible explanation for the absence of any information or, as contended by [seller], of any subsequent inspection of the installation of the lockplate is that [seller] itself did not fully appreciate the risk. But the alternative positioning marked by the two unthreaded holes on the lock-nut indicates that [seller] realized the necessity or at least desirability of a correct positioning of the lockplate, and it stands to reason that this was caused by the concern that impact forces otherwise could have a detrimental effect on the durability in the long run of the lockplate. Whatever the reason for the absence of records or information or follow-up on the P-52 lockplate, the Tribunal is of the opinion that it is not defensible to replace, apparently in an impromptu fashion, in a new and “custom made” press of a size that [seller] for many years had not built, a planned design intended for an important security function with a new device without ascertaining its performance or installation. These are the circumstances that in the Tribunal’s opinion distinguishes this case from the situation where a seller is generally “aware” that the goods manufactured in his ordinary course of business are not of the best quality or leave something to be desired. But that is not in itself enough to meet the test under Article 40. The requisite state of awareness that is the threshold criterion for the application of Article 40 must in the Tribunal’s opinion amount to at least a conscious disregard of facts that meet the eyes and are of evident relevance to the non-conformity. The absence of any document or witness showing [seller’s] internal deliberations when replacing the A-5750 with the P-52 lockplate does not prevent the application of Article 40. The article as phrased is intended to alleviate the burden of proof on the buyer in respect of the seller’s awareness, a burden that otherwise often would be impossible. If the evidence and the undisputed facts show that it is more likely than not that the seller

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is conscious of the facts that relate to the non-conformity, it must be up to the seller to show that he did not reach the requisite state of awareness. It is in the nature of things when applying Article 40 that considerable time may have passed since manufacture or delivery of the goods and that the evidentiary situation may be dificult. But once the buyer has suficiently established the basis for his claim under Article 40, it is the seller that must assume the risk of not being able to counterbalance this with evidence on his own design and manufacturing process that, after all, he is in a better position to secure than the buyer. In this matter, the Tribunal can draw no other conclusion from the available facts than that [seller], when substituting the P-52 for the A-5750 arrangement, was aware that the positioning of the P-52 lockplate was critical (as indeed also is stated by [seller] in its briefs). Yet there is no evidence or even claim from [seller] that [seller] either intended or made any effort to ascertain that the P-52 was in fact properly installed. It must therefore be assumed that [seller] did not have any such intention. It is not for the Tribunal to speculate on the reason for this. What is relevant is that [seller] cannot have been unaware of the fact that proper installation was critical, the fact that the possibility of improper installation by [buyer] could not be ruled out, the fact that there was a clear risk that this could lead to serious failure of the Press within a period of time that certainly differed from what [buyer] was entitled to expect under the Contract, and that [seller] did not do anything to eliminate this risk. The Tribunal therefore concludes that [seller] must be assumed to have consciously disregarded apparent facts which were of evident relevance to the non-conformity and which, in fact, caused the failure of the Press.

c) Disclosure In order to avoid liability for non-conformities of which the seller cannot be unaware, he must disclose them to the buyer. It is not suficient that the buyer should be able, from documents available to him, to deduce that some alteration has been made in the design of a machine or such like. The fact that “A 5750” was indicated in the service manual and that the actual locking device in the same place was stamped “P-52” does not amount to a disclosure by [seller] to [buyer] of the non-conformity in this case. As already stated in the foregoing, the non-conformity of the P-52 relates to the installation, and it is thus the failure by [seller] to instruct on or supervise installation that has resulted in the non-conformity being permitted to cause the failure of the Press. In other words, even if [seller] had informed [buyer] of the exchange as such (and without any further information on proper installation or the risks involved in the arrangement, etc.) this would not be enough; to disclose in the sense of Article 40 is to inform the buyer of the risks resulting from the nonconformity.

6.4 Summary The Tribunal concludes that [buyer] is not precluded from presenting a claim under Article 40 of CISG, and that the failure of the Press was caused by a non-conformity that related to facts of which [seller] could not have been unaware and which [seller] did not disclose to [buyer]. [Seller] is therefore liable in damages for the non-conformity of the Press. . . .

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[8.] Dissenting opinion by the arbitrator robert romlöv ... Based upon common sense and particularly upon the technical skills that could be expected from a professional buyer like [buyer] it is . . . my opinion that [seller]—for the purpose of application of Article 40—was entitled to expect [buyer] to understand that a device intended to prevent a tightly secured large nut from unscrewing shall be mounted so as to prevent that nut from unscrewing, i.e., from turning at all in a counter-clockwise direction. The arbitrators agree . . . that Article 40 shall only be applied in special circumstances. I would be inclined to use the words “exceptional circumstances” as I consider it a principle of fundamental importance from the point of view of predictability that a manufacturer shall normally be able to rely upon the expiry of an agreed guarantee time to represent the end point of his liability for defects (non-conformity). My reading of the requirement for the seller’s awareness is therefore more restrictive. The test of awareness or “conscious disregard” on the part of the seller requires in my opinion a higher degree of subjective blameworthiness than the one demonstrated by [seller] in this instance by their not supplying installation instructions for the P-52 lockplate. ...

Question 4.18 What factors does the court consider when assessing whether notice is timely? How does the timeliness of notice relate to the quality of the goods themselves?

Question 4.19 What is the efect of a guarantee period (e.g., guarantee of 18 months satisfactory performance) on the duty to give notice? What will happen if the contract contains a guarantee period longer than two years but does not state when notice must be given? Further issues can arise when multiple contracts are involved, or when deliveries are in installments, as you see in another familiar case.

CONDENSATE CRUDE OIL MIX CASE Netherlands Arbitration Institute Case No. 2319 Oct. 15, 2002 Available at Pace CISG Database: http://cisgw3.law.pace.edu/ cases/021015n1.html (Nov. 12, 2007) [The facts appear above.] [53] Even if the Rijn Blend were non-conforming in relation to the contractual obligations, [sellers] deny any liability because of the fact that [buyer] had been aware of the mercury problem and thus did not notify non-conformity within a short period as required by article 39 CISG. Moreover, the fact that [buyer] informed K.  . . . BV did not amount to knowledge on the part of [sellers] because K.  . . . BV in no way had authority to bind [sellers]. ...

5.2 Issue 2: Timely Notice of Non-Conformity [125] The Arbitral Tribunal having held that the delivery of Rijn Blend did not comply with the obligation to deliver in accordance with the contracts, now has to address the

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issue whether [buyer] gave a timely notice of non-conformity as required by article 39(1) CISG. [126] [Buyer] knew as of 1997 ([buyer]’s letters dated September 22, 1998) that there were mercury related problems at CH. . . . in Germany. However, the possible link with the Rijn Blend was not established immediately and when that happened it took some time before the evidence was gathered that the mercury problems might be related to the Rijn Blend contracts. Furthermore, negotiations have been held between [buyer] and K.  . . . BV in order to remedy the problems that had arisen. [127] On the basis of these elements, [sellers] are invoking that [buyer] did not give timely notice of the non-conformity of the Rijn Blend and, thus, has forfeited its rights to contractual remedies. [128] However, [buyer] did comply with the contracts until June 1998. Only when it was clear that the Rijn Blend contracts might be responsible for the increased levels of mercury, did [buyer] indicate that it would refuse further deliveries. Up to that point, [buyer] did not invoke lack of conformity and breach of contract on the part of [sellers]. [129] The question is thus whether [buyer] did breach the contract when it indicated that it would refuse further deliveries and when it actually did so. By virtue of Article 73(1) CISG incorporating a principle of severability of remedies regarding installment contracts as the present Rijn Blend sales contracts, Article 39(1) CISG is not applicable to the June 1998 lifting because the latter article assumes that delivery has been made. In the present case, no delivery had yet been made and [buyer] merely indicated that it would refuse further deliveries. ... [131] In relation to issue 2, the Arbitral Tribunal holds that there was no obligation to give a notice as required by article 39(1) CISG. . . .

B. Burden of Proof You will have noticed that the tribunals in both the Condensate Crude Oil case and the Beijing Light Automotive case paid attention to who bears the burden of proof. he allocation of the burden can easily determine the outcome in a warranty case, as well as others. If the tribunal remains undecided on the outcome, the party bearing the burden of proof will lose. You can see how a court allocates this burden in the following case. You will see that the burden need not be a heavy one.

Schmitz-Werke GmbH & Co. v. Rockland Industries, Inc. United States Court of Appeals for the Fourth Circuit, 2002 37 Fed. Appx. 687 Per Curiam:  On December 30, 1997, Plaintiff-Appellee Schmitz-Werke (Schmitz) iled a complaint in the United States District Court for the District of Maryland alleging that Defendant-Appellant Rockland International (Rockland) had breached a warranty under the United Nations Convention on the International Sale of Goods (CISG), 15 U.S.C. App., by supplying defective drapery fabric. Rockland iled a counterclaim against Schmitz seeking recission of a settlement agreement between the parties and recovery of moneys paid Schmitz

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under that agreement. . . . Judgment was entered in favor of Schmitz on its claim and in favor of Rockland on its counterclaim on December 30, 1999. Schmitz does not challenge the district court’s judgment on Rockland’s counterclaim, but Rockland now appeals that portion of the court’s judgment in favor of Schmitz. We afirm the judgment of the district court.

FACTS AND PROCEEDINGS BELOW Rockland is a Maryland corporation that manufactures drapery lining fabric. In the early to mid 1990s, Rockland manufactured a type of drapery fabric called Trevira Blackout FR (Trevira). “Blackout” refers to the fabric’s ability to block light completely. The fabric was manufactured to meet European lame resistance standards, and was intended for sale in European markets. Rockland no longer manufactures this fabric, and claims that this is because the product did not meet its volume requirements, while Schmitz maintains that Rockland discontinued Trevira because of numerous problems with the material. Schmitz is a German company that manufactures, prints, and sells inished decorative fabrics in Germany and in other countries. In 1993, a Rockland representative introduced the Trevira fabric to Schmitz, and during their negotiations Rockland’s representatives stated that the fabric was particularly suited to be a printing base for transfer printing. Transfer printing is a process for imprinting the base fabric with dyes of particular colors or patterns. In transfer printing, the fabric is drawn over a heated metal cylinder along with a sheet of transfer paper that contains the dye. The dye is heated by the cylinder and turns into a gas, which is picked up by the ibers in the fabric. Schmitz does not transfer print its fabrics itself. Instead, it relies on another German company, PMD, which specializes in making transfer print paper and in transfer printing fabrics. Schmitz initially placed an order for about 200 meters of the Rockland fabric for testing. The sample was shipped to PMD, which transfer printed it. On receipt of the test results, Schmitz notiied Rockland that there were several problems with the fabric but that in general they were satisied with the material. After this test, Schmitz placed an initial order of 15,000 meters of Trevira, which was shipped via ocean freight in mid-August 1994. Schmitz noted some additional problems with this initial shipment, but decided to go ahead and print the material. After the printing, additional problems with the fabric became apparent, and a Rockland representative was offered a chance to inspect the fabric. There was conlicting testimony at trial about the results of a meeting between Schmitz and Rockland’s representative that followed in October of 1994, but the district court credited Schmitz’ version of events. According to Schmitz, despite some problems with the Trevira fabric, Rockland urged Schmitz to continue printing the fabric, and claimed that the lower quality portions of the Trevira fabric could successfully be transfer printed with patterns (as opposed to being printed with solid colors). In November 1994, after this meeting, Schmitz placed another order of Trevira fabric, this time for 60,000 meters. PMD, meanwhile, was continuing to print the original shipment of the fabric. In December 1994, PMD told Schmitz about some of the problems it observed with the fabric. In February 1995, Schmitz had WKS, another German company, inspect part of the new order that Rockland had sent as part of the November 1994 order. On March 20, 1995, WKS issued its report, which indicated that it had found some problems with the Trevira fabric. By April of 1995, the post-printing percentage of fabric that was classiied as “seconds” (lower-grade material) was between 15% and 20%.

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On June 21, 1995, Schmitz contacted Rockland and indicated that they wanted to return approximately 8,000 meters of fabric, and eventually Schmitz shipped that amount back to Rockland. There were extended discussions between Rockland and Schmitz about how to settle this dispute, but eventually these discussions broke down and this suit followed. After a bench trial, the district court issued its indings of fact and conclusions of law in an oral opinion on November 5, 1999. The parties agreed that the CISG governed the transaction in this case, although the correct interpretation of that treaty was (and still is) in dispute. The district court found that Rockland gave Schmitz a warranty of itness for a particular purpose (transfer printing) under Article 35(2)(b) of the CISG. 15 U.S.C. App. Art. 35(2)(b). The court also found that the Trevira fabric sold by Rockland had latent defects which were not detectable before the fabric was transfer printed, and that Schmitz’ continued printing of the fabric even after it began to discover problems was reasonable since it was at the express urging of Rockland and was in any event the best way to mitigate its damages. The court speciically held that the goods did not conform to the warranty Rockland had given Schmitz, and that Schmitz had met its burden of proving that the defect existed at the time the fabric left Rockland’s plant. In making this ruling, the court held that Schmitz need not prove the exact mechanism of the defect, and that showing that the transfer printing process PMD had used on the fabric was ordinary and competent was enough to establish that the Trevira fabric was unit for the purpose of transfer printing. Having found for Schmitz, the court awarded damages in dollars and converted those dollars to Deutche Marks using the exchange rate as of the time Schmitz discovered the defects. Rockland now appeals. ...

CAUSATION Rockland argues that Schmitz must demonstrate both the existence and the nature of the defect in the fabric before it can recover for breach of warranty—and that to show the nature of that defect, expert testimony is required. Article 35 of the CISG governs the duty of the seller to deliver goods that conform with the contract. Article 35(2) lists various reasons goods may not conform with the contract, including goods which were expressly or impliedly warranted to be it for a particular purpose. In response, Schmitz argues that all it need show is that the goods were unit for the particular purpose warranted—transfer printing—and that it need not show precisely why or how the goods were unit if it can show that the transfer printing process the goods underwent was performed competently and normally. Rockland is correct that Schmitz did not provide any evidence at trial that would establish the exact nature of the defect in the Trevira fabric. The text of the CISG is silent on this matter. See CISG, 15 U.S.C. App., Art. 35(2). ... Under either the CISG or Maryland law, Schmitz may prevail on a claim that the fabric was unit for the purpose for which it was expressly warranted (transfer printing) by showing that when the fabric was properly used for the purpose Rockland warranted, the results were shoddy—even if Schmitz has introduced no evidence as to just why or how the fabric was unit. Schmitz has shown that the fabric was defective—the fabric’s defect was that it was unit for transfer printing. Rockland attempts to counter this argument by claiming that this improperly shifts the burden of proof. Rockland’s concerns are misplaced—Schmitz still must prove that the transfer printing process was ordinary and

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competently performed, and still must prove that the fabric was defective—it just permits Schmitz to do so without proving the exact nature of the defect. There was signiicant evidence regarding PMD’s transfer printing process presented at trial (including expert testimony), and the court’s inding that the PMD printing process was ordinary and competent is not clearly erroneous. The district court found that Rockland warranted its fabric to be it for transfer printing, that the fabric was transfer printed in a normal and competent way, and that the resulting printed fabric was unsatisfactory. This is enough to support the district court’s factual inding in favor of Schmitz on the warranty claim—the fabric was not it for the purpose for which it was warranted. . . .

RELIANCE Rockland also argues that even if the court properly found that the Trevira fabric was not particularly well suited for transfer printing as warranted, Schmitz cannot recover on such a warranty because it did not in fact rely on Rockland’s advice as required under CISG Article 35(2)(b). Rockland is correct that Article 35(2)(b) of the CISG requires that the buyer reasonably rely on the representations of the seller before liability attaches for breach of a warranty for itness for a particular purpose. See CISG Art. 35(2)(b). The district court explicitly found that Schmitz relied on the statements of Rockland’s representative that the Trevira fabric was particularly well suited for transfer printing. The court also found that Schmitz continued to print the fabric with the express consent of Rockland after it discovered and reported problems with the fabric. The district court’s inding that Schmitz relied on Rockland’s statements proclaiming the Trevira fabric’s suitability for transfer printing is supported by the evidence and was not clearly erroneous. ... Accordingly, the judgment of the district court is AFFIRMED.

C. Failure of Notice: Bar, Absent Buyer’s “Reasonable Excuse” or Seller’s Knowledge or Waiver As you recall from article 39(1) and the evocative Rotten Fish case, failure to give notice within a reasonable time can bar the buyer from relying on a defect. he buyer loses its right to withhold full payment for the goods. his serious consequence can be observed in the following case as well, which also shows the importance of giving notice adequate to serve the goals that animate the notice requirement.

ACRYLIC BLANKETS CASE Oberlandesgericht [OLG] Koblenz [Appellate Court of Koblenz] Jan. 31, 1997 (Ger.) Available at Pace CISG Database: http://cisgw3.law.pace.edu/ cases/970131g1.html#cx (Veit Konrad, trans.) (June 19, 2007) The Appellate Court holds that [Buyer]’s appeal is dismissed and [Seller]’s claim is justiied. ... [Buyer] is not entitled to rely on any of its counterclaims in defense to [Seller]’s claim. [Buyer] alleged that in the deliveries of 3 and 4 December 1993 not only were there the

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two missing rolls of blankets that [Seller] acknowledged, but that three more rolls of blankets had been missing, for which the price must be reduced by another 1,254.60 DM. This implies a partial cancellation of the contract for partial failure to perform. Arts. 51, 46, 47, and 49 CISG provide for such a partial avoidance of the contract. However, [Buyer] has lost its right to rely on these provisions according to Art. 39(1) CISG. Art. 35(1) CISG obligates the seller to deliver goods which are of the quantity, quality and description required by the contract. But, according to Art. 39(1) CISG, the buyer loses the right to rely on a lack of conformity of the goods—i.e., deicient quantity of the goods—if he does not give notice to the seller specifying the nature of the lack of conformity within a reasonable time after he has discovered it or ought to have discovered it. [Buyer] failed to give suficiently speciic notice in the sense required by Art. 39(1) CISG. [Seller]’s bill of 3 December 1993 listed rolls of blankets of different design. Yet, [Buyer]’s complaint notice of 8 December 1993 merely mentioned that ive rolls were missing. Such notice does not sufice to enable [Seller] to provide for remedy of its failure to perform. Therefore, it cannot sufice under Art. 39 CISG and the other relevant CISG provisions. Moreover, [Buyer] did not give speciic and timely notice in any other way either. ...

Question 4.20 Why, in litigated cases, is notice so oten a contested issue? Wouldn’t you think the parties would get the idea that they need to give notice of problems, if not for legal reasons, then for commercial ones? Consider Judge Enslen’s remark in Shuttle Packaging Systems.

Question 4.21 When determining whether the buyer’s notice is adequate, what are tribunals likely to be looking for? What purposes must the notice serve? Two qualiications to the article 39(1) bar should be noted. First, if the notice is properly dispatched, CISG article 27 puts the risk of its going missing on the seller. Second, as you will recall, article 44 provides a limited but potentially useful reprieve if the buyer has a “reasonable excuse” for failing to give notice. Article 44 has two more or less express limitations: it makes available only certain remedies and it ofers no reprieve from the two-year bar of article 39(2). Experience so far suggests that the most signiicant limitation in article 44 is not its express constraints but the skepticism of tribunals. Although recognizing the possibilities, the cases rarely ind a reasonable excuse on particular facts presented; we are aware of only a handful of cases that do so. See CISG Digest (2012) at 219 ¶¶ 5–6.

VI. Buyer’s Lack of Reliance At irst blush, the point of an assurance of quality is that the buyer can rely on it. he buyer may rely in a variety of ways; the most obvious is perhaps in choosing goods that are right for the need. Equally important in many cases is the efect on the price, which is perhaps easiest to see with a warranty: goods with diferent warranted characteristics will fetch different prices. In addition, the warranty itself has value. Consider the following scenario: he

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buyer inspects goods and believes that they are Grade A. he buyer will pay, roughly, a Grade A  price for them. If in addition a reputable and responsible seller warrants that they are Grade A, the buyer will pay a bit more. Now the buyer has not only its own opinion but also the seller’s, and probably more signiicantly, if the goods are not Grade A, the seller will be (inancially) responsible. he comparison of the basic scenario (no warranty) with the variation (with warranty) shows how a warranty, like contract terms generally, allocates risk. If the opinion(s) turn out to be mistaken, the buyer is responsible in the basic scenario, but the seller is responsible in the variation. he warranty shits the risk. he same is true of the CISG quality assurances. his sophisticated understanding must be kept in mind when considering whether the buyer has relied, legally, on an assurance of quality. According to CISG article 35(3), if “the buyer knew or could not have been unaware” of a nonconformity, the seller is not liable. he subtle meaning of this provision, with a sophisticated understanding of warranty, is demonstrated in the following problem.

Problem 4.22 (a) Buyer in Germany and Seller in Italy are car dealers. Seller agrees to sell Buyer a used Mercedes. he Seller’s attorney at the time says it was irst licensed in 1992 and has low mileage. Buyer’s employee suspects that the car is older. Nevertheless, the contract is signed. Upon delivery, the car turns out to have high mileage and to have been irst licensed in 1990. What result? Why? (b) Does your answer or analysis change if the Seller’s attorney, who had authority to bind the Seller, must have known the facts?

Problem 4.23 Buyer in Switzerland is interested in a used bulldozer owned by Seller in Italy. Buyer inspects it in Italy and discovers that it has undergone a number of repairs and that a number of further repairs are going to be necessary. Buyer orally accepts Seller’s ofer, provided that Seller undertakes three speciied repairs. Seller accomplishes those repairs and delivers the bulldozer. Buyer inds that the bulldozer is still unsatisfactory and complains that the bulldozer is defective. Buyer has already paid two installments on the purchase price but refuses to pay more. Seller sues for the rest of the price. What result?

VII. Disclaimer of Warranties and Other Assurances, with Comparative Notes on Domestic Laws On disclaimers of warranties, or of the similar CISG assurances of quality, there is nothing— and therefore everything—to say. We say “nothing” because the CISG excludes “the validity of the contract or any of its provisions” from its scope, “except as expressly provided.” Art. 4(a). here is no obvious provision in the treaty on the validity of disclaimers, so perhaps there is nothing to say. he exclusion, though, would mean that domestic law would govern, so any given law could govern attempted disclaimers, depending on the rules of private

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international law, and thus complete worldwide understanding would require knowing everything. Faithful internationalists might look for some way to ind this exclusion inapplicable, as usual, and it is quite possible to construct such an argument: it is “expressly provided” in article 11 that the contract of sale “is not subject to any . . . requirement as to form.” As a literal matter, the argument seems acceptable as a way to render inoperative domestic requirements for formal warranty disclaimers, such as those found in UCC § 2-316. Of course, outright invalidation of disclaimers (i.e., regardless of form) would still be operative, and article 11 would have nothing to say on the matter (e.g., the efect of BGB § 444). his point, however, might be countered by pointing to the words “Except where the parties have agreed otherwise,” which introduce the quality terms of article 35(2). hese words, an internationalist might argue, preclude a conclusion that parties are prohibited (e.g., by BGB § 444) from agreeing otherwise. As a matter of pure logic and careful interpretation of the words of the treaty, the faithful internationalists have a reasonable, perhaps even a strong, argument. In the end, we are not so sure. We read the validity exception fairly broadly:  it is a message that the draters could not reach consensus on validity issues, or could not reduce their ideas to language, or feared that validity rules would torpedo the potential for widespread adoption of the treaty. On the relatively narrow issues of validity where they could reach consensus, they said so clearly, as with the writing requirement:  there does seem to have been suicient agreement, political will, and ultimate success in eliminating national requirements as to form in general, and thus general formal requirements, such as a requirement for a writing or for notarization. We might further note that this provision was put forward together with an express authorization for contracting states to declare a reservation to that article in particular, which is a prominent sign of political hesitation. Would enough important countries ratify the treaty if article 11 abolished the writing requirement for international sales? If that were the stumbling block, it could be removed by any reluctant nation by invoking articles 12 and 96. Other questions of validity also held the potential to scuttle widespread adoption of the Convention, but article 4 provides the necessary reassurance: the treaty is “not concerned” with such matters, and domestic rules of validity would stay in place. Any adopting country would be put on notice of any exceptions to this exclusion by express treatment in the Convention. he words on which the faithful internationalists rely (“Except where the parties have agreed otherwise”) must be understood with article 4 in mind: the parties may agree otherwise so long as their agreement is not invalid under other law. his introductory phrase is not the kind of express provision required to defeat the article 4 exclusion (article 4 applies “except as otherwise expressly provided in this Convention”) and is not enough to put countries on notice that by adopting the CISG they are giving up their rules governing the validity of such basic ideas as itness for an ordinary purpose. As nothing on warranty disclaimers appears in the treaty, this line of argument might conclude that the article 4 exclusion is operative and domestic law will govern. Whether for these reasons or others, it seems generally to be accepted that domestic rules on the validity of the content of warranty disclaimers apply in international sales despite

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article 11, although article 11 might displace domestic formal requirements for disclaimers.3 Having said this much, though, we are quick to note that we are unaware of cases in which tribunals have resolved the article 11 argument explicitly. We further believe that many judges will irst look at the article 4 exclusion, then look at article 35, ind nothing there on disclaimers, and declare domestic law applicable, including domestic law on formal requirements for disclaimers.4 We are not aware of any case that has addressed another faithful internationalist argument: that the article 35 quality assurances are not warranties and thus restrictions on warranty disclaimers do not apply.5 (We ind this argument a stretch, especially compared to the article 11 argument. Although the terminology and some details are diferent, the content of the CISG and UCC obligations is so similar that a tribunal may be skeptical that article 35 obligations are so very diferent from the corresponding warranties. See Chicago Prime Packers, Inc. v. Northam Food Trading Co., supra (article 35 “mirror[s] the structure and content” of the UCC).) Given the lack of clarity in the law, though, it would seem that any conident planning for a disclaimer would have to take account of the relevant rules of domestic law restricting the validity of disclaimers. he rules in the UCC provide a convenient place to begin. hese rules are of three sorts. he irst kind prescribes a legalistic formula. To eliminate the implied warranty of merchantability of § 2-314, which is quite similar to article 35(2)(a), “the language must mention merchantability and in case of a writing must be conspicuous.” UCC § 2-316(2). A disclaimer of the warranty of itness for a particular purpose under § 2-315, which is quite similar to article 35(2)(b), must be in writing and conspicuous. hese are highly formal rules, which look to particular language and form. he second sort of rules are more informal. Implied warranties, that is, both itness for a particular purpose and merchantability, may be disclaimed by common language, with “as is” probably being the best known. See § 2-316(3) (a). No writing is required by the statute, although some courts have added a writing requirement. he third kind of disclaimer can occur through custom and conduct, whether it be a usage of trade or a buyer’s own inspection or refusal to inspect, similar to CISG articles 9 and 35(3), much as we saw in the Used Bulldozer problem. here is a fourth kind of rule that occurs both in the UCC and, as we will soon see, in German law. his kind of rule essentially prevents a seller from making a warranty out of one side of his mouth and a disclaimer out of the other side. Under UCC § 2-316(1), language tending to create and to negate warranties must be construed harmoniously, as far as is reasonable, but if they conlict, the attempted negation is inefective. hus, if a seller makes an express warranty (i.e., an airmation or promise about the goods that (as is presumed) becomes part of the basis of the bargain), it cannot be disclaimed. Two qualiications might be added, though.

3. See John O. Honnold, Uniform Law for International Sales under the 1980 United Nations Convention ¶ 230 (Harry Flechtner ed., 4th ed. 2009); Ingeborg Schwenzer, Article 35, in Schlechtriem & Schwenzer, Commentary on the UN Convention on the International Sale of Goods (CISG) 589 ¶¶ 42–43 (Ingeborg Schwenzer ed., 3d ed. 2010). 4. Consider Supermicro Computer Inc. v. Digitechnic, S.A., 145 F. Supp. 2d 1147, 1151 (N.D. Cal. 2001). 5. See Honnold ¶ 230.

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Obviously a seller who discovers a mistaken assertion before the sale can retract any airmation or promise, and thus it could not become part of the basis of the bargain. Also, § 2-316 is subject to the parol evidence rule of § 2-202. As you will recall from Chapter 3, this rule could sometimes prevent a buyer from presenting proof that a warranty was made. German law is similar to the CISG as to assurances of quality. he goods must be of the agreed quality, or if no particular agreement has been reached, then default rules that sound much like the CISG itness for ordinary or (in appropriate cases) particular purposes apply. See BGB § 434. German law is thus fairly liberal in allowing the parties to agree on quality, but it does have a limit: a seller who has warranted the quality of the goods cannot disclaim liability for defects. See BGB § 444. If the goods comply with the warranty, though, they are not defective, so German law provides quite a lot of freedom. (Recall, though, that consumer sales are outside the scope of this book.) French law works a bit diferently. Instead of merchantability and itness warranties, or their equivalents, sellers warrant goods against hidden defects, including defects that make the goods unsuitable for their characteristic purposes, or that diminish their usefulness for those purposes. See C. civ. art. 1641(Fr.). his law of redhibition does not apply to apparent defects or defects that the buyer could have discovered, and the seller, according to the Code, may disclaim the warranty as to hidden defects of which the seller had no knowledge. See C. civ. arts. 1642–1643 (Fr.). Case law, however, suggests that a professional seller, as will generally be involved in the transactions discussed in this book, is presumed to know of the hidden defects.

Problem 4.24 (a) What do you advise a client about to enter a contract about whether warranties or quality assurances can be disclaimed in an international sale? (b) What if your advice is being sought ater the sale has been concluded and the goods have proven defective? What arguments would you make if you represent the buyer? he seller?

VIII. Beyond the Goods, beyond the Statutes, beyond the Treaty: Quality Assurance Processes, Human Rights Protections, Environmentalism, and Other Issues his chapter has focused on the quality obligations with respect to the goods, and this is oten the focus of international and domestic law as well as the sales contracts themselves. Sometimes, though, the parties through their contracts may go a step further: oten a small step, but occasionally—and with growing frequency—a larger step too. Instead of simply specifying the quality of the goods, the parties may specify the manufacturing conditions in which the goods are made. Some contracts may stipulate particular requirements for manufacturing conditions purely to help assure the quality of the goods or to comply with regulatory requirements of the

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country of import. An example would be the manufacturing practices required by the United States Food and Drug Administration; US buyers of drugs made abroad must assure that the drug manufacturers, even if the factories are thousands of miles from the United States, comply with FDA manufacturing mandates. You can get a hint of such regulations and supervision in Problem 3.16 in Chapter 3 and in Medical Marketing International v. Internazionale Medico Scientiica in this chapter. More generally, and much better known, are manufacturing standards such as the ISO 9000 family of standards relating to quality management as well as regulatory compliance. Instead of specifying particular manufacturing standards peculiar to a particular contract, the parties may stipulate that manufacturing will be compliant with the ISO 9000 family of standards. his would allow the parties to adopt, by a quick reference in the contract, the extensive standards developed under the aegis of the International Organization for Standardization (ISO). Such a clause gives quality assurances to the buyer, and these assurances can be fortiied by a certiication by a neutral and independent third party that the seller’s manufacturing is indeed compliant with the speciied standards. he seller gets the beneit of being certiied, in essence, to be a high quality operation. Oten parties will use impressions and stereotypes (or put less pejoratively, reputation) to assure quality. Perhaps a buyer will want to buy high precision machinery from Germany, not Russia or Turkey. (his was suggested in the case that inspired Problem 8.42 in Chapter  8.) But perhaps a seller could show that it is worthy of just as good a reputation, provided that it has a suiciently rigorous and trustworthy certiication. his could greatly beneit a seller, as well as a buyer. he ISO standards are probably the most prominent such standards, with a sizable industry of certiication authorities, but they are not the only ones. Whatever their source, the purpose of these standards is to assure the quality of the goods themselves. It is a small step beyond the goods: the speciications are about practices like quality management, but the target of the contractual provision is the goods themselves. A larger step, but similarly oriented around manufacturing practices, is concerned not so much with the goods as with the people who make them. he point bears emphasis. People make goods. As the actual individuals are oten thousands of miles away, it is easy to forget about them. At least since the sweatshop scandals of the mid-1990s, however, it has become increasingly apparent that forgetting about those very real people is not only morally questionable but also potentially bad for business. Accordingly, many companies have now made responsible corporate practices part of their business, and these eforts include contractual mandates about the manufacturing conditions for goods sold internationally. It is a bit diicult to parse the companies’ motives—whether responding to moral responsibility or driven by proit maximization—but for whatever reasons, many contracts for international sales now specify standards to prevent abuses like child labor, extremely low wages, other labor abuses, and involuntary labor. Ater the exposés of the 1990s, companies—especially ones who were discovered to be selling products made through abusive practices—started using their supply contracts to stipulate particular forms of humane working conditions. he point of the clauses was not so much about the quality of the goods but about the conditions in the factories. Even if young children do excellent stitching on soccer balls, many people would rather not buy a ball made by a small child.

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No eforts so far have proved efective in stopping continual disaster and tragedy. In November 2012 over a hundred workers died in a ire at Tazreen Fashions, a garment factory in Bangladesh. Five months later, the Rana Plaza factory building collapsed, resulting in over a thousand deaths, again in Bangladesh. Such events are only the most recent and prominent as this book goes to press; there are countless more, and there are likely to be more, in Bangladesh and elsewhere. hese factories make clothes that are the heart of the subject of this book; this manufacturing industry, for better and for worse, is enabled by the system of international sales that is the subject of this book. And the problems are hardly conined to the apparel industry. he issues are multifaceted, being grounded in economics and business, law and morals, politics and social conditions. Much of this is well outside the scope of this book, and much will have to be let to other volumes, but the issues should not be ignored. Before moving to the contractual and structural aspects of these concerns, we want to address the moral question forthrightly, but also briely. his is not a work on moral philosophy, and we are hardly sure of our competence for such work. But we think it worth noting that some of the practices exposed are abhorrent. hey raise obvious moral issues and pose grave moral problems. here may well be a duty to act, including a duty incumbent on lawyers who work in such transactions. Many think so; you may think so; if you do, then this section discusses a way to do something about this problem. At the same time, as seems so oten to be true, the moral solution is not nearly as obvious as the moral problem. here are at least three major criticisms of eforts to enforce higher wages and to change working conditions. First, higher wages, if economic theory holds, will mean that fewer people will be employed. It is at least possible that the society in the country of manufacture would be better of if more people were making less money than if fewer people were making more. Second, cultural expectations vary. Cultural imperialism or “value imperialism” is at least sometimes, perhaps oten, well intentioned, but good intentions have hardly proved to be a reliable safeguard against pernicious efects. Is it cultural imperialism for the developed world to export—and impose—its working standards on other parts of the world? hird, it is not always clear that bad conditions for children making soccer balls are worse than the alternatives for those children. If it were shown that the children would otherwise be working as welders (which is very dangerous) or prostitutes (also appalling), perhaps the children ought to be allowed to stitch soccer balls or clothing. Caroline Lequesne of Oxfam, a British charity, has just returned from Bangladesh, where she visited factories to determine the impact of American retailers’ human-rights policies. She reckons that between 1993 and 1994 around 30,000 of the 50,000 children working in textile irms in Bangladesh were thrown out of factories because suppliers feared losing their business if they kept the children on. But the majority of these children have, because of penury, been forced to turn to prostitution or other industries like welding, where conditions pose far greater risks to them. Ethical Shopping; Human Rights, The Economist, June 3, 1995, at 58.

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here are a couple of criticisms of a slightly diferent sort as well. It can be put this way—which we hesitate to do, because it involves fraught history and even racism, but, unfortunately, these are relevant and we believe need to be recognized. Here is an indication: the “correct” Western thinker believes that standards all over the world should be raised. Such a thinker would not buy a soccer ball made by a child; the ball must be made by an adult who is paid a living wage and who works in reasonable conditions. his may make the soccer ball cost more, but it is worth it. he correct Western thinker would not think this way or certainly put it this way, but this is the white man’s burden. But, the critics respond, notice what happens: the burden is not so much a burden to the white man. It is a beneit! Again. Just like the white man’s “burden” the irst time around. Surprise, surprise. he beneit redounds to Western workers, not workers in the developing world. he efort to raise working conditions in the developing world is actually about raising prices for goods made outside the West: it is about protectionism for Western workers, who will otherwise lose their jobs to those willing to work for less. It is about making sure Western workers keep their high standard of living and not allowing others to earn even the pittance they were making before. It is also about correcting the great American trade imbalance. By making foreign-made goods more expensive, domestic goods will look more attractive, and domestic workers will be more competitive. hese are freighted claims. We are skeptical of many of them, but the point of rehearsing them is to indicate that there is much more uncertainty than irst meets the eye. We are not sure of the answers, but we are sure there is a problem. It is both large and complex, involving not only moral and legal elements but also economic and empirical questions. We are working to try to ind out more in the hope that more knowledge might lead to better solutions. To begin, we started collecting contracts. We have obtained, directly or indirectly, about 20 diferent contract clauses oriented to these issues from a number of diferent companies. hey are engaged in international sales of many varieties—including apparel, sporting goods, and food. Even though they cover a number of industries, all of the companies are in one way or another connected closely to the consumer sector. he relevant contract provisions can be broken into two categories: a two-party model and a three-party model. Some contracts have a mix. he two-party model is simply a standard two-party contract, but instead of limiting itself to what may be considered the usual provisions on the speciications for and qualities of the goods, plus standard commercial terms on credit, risk of loss, intellectual property, conidentiality, and so on, the contract speciies working conditions and the like, typically setting up an audit by the buyer to check compliance with the speciied standards. Generally, the speciied standards are stated in a company “code of conduct,” such as those at Nike6 and Abercrombie & Fitch.7 hese codes have provisions against forced labor, child labor, abnormally low wages, and similar abuses. A  contract can easily incorporate such a code by reference, thus stating the standards applicable to workers, just as the contract is likely to incorporate other documents like manufacturing manuals, which are designed to guide 6. See Compliance, Nike, http://nikeinc.com/pages/compliance (last visited Feb. 27, 2014). 7. See Code of Conduct, Abercrombie & Fitch, http://www.anfcares.org/sustainability/social/code_of_conduct.jsp (last visited Feb. 27, 2014).

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production of the goods. he contracts of this type that we have seen require the seller to maintain adequate records to document compliance with the code of conduct and also require the seller to submit to both announced and unannounced inspections by the buyer or its agent. We have primarily seen this sort of model in use by large and prominent manufacturers with the will and resources to state, post, revise, and update their standards—oten, we think, as a point of competition, just as they compete on design, color, or price. he three-party model seems similar at irst but, we believe, has the potential for more interesting impact. Such contracts incorporate a code of conduct as well as an audit mechanism set up by an independent third party. he Fair Labor Association (FLA)8 provides an example relatively well known on at least some university campuses. In essence, companies (buyers), licensors (such as universities, which license companies to manufacture apparel, sporting goods, and other paraphernalia with the university name, mascot, logo, etc.), and suppliers can “ailiate” with the FLA, and by doing so, commit to compliance with the FLA Code of Conduct. he FLA not only sets the standards but also monitors compliance and reports its results. But the FLA is only one example among many, many such third-party assurance providers. Some are of relatively recent vintage, like the FLA (1999); others are older companies and irms that have long specialized in providing inancial audits (like large accounting irms, including KPMG and PriceWaterhouseCoopers) or product inspection (like SGS—from the cocoa problem in 4.1—and Intertek) and that moved to include broader audit and inspection services related to “corporate social responsibility” (CSR). Sometimes the inspections are tailored to a particular company code of conduct, but other times they may be geared to a wider standard in use by a number of companies or a number of clients of the inspection service. he reason the three-party model is so interesting is that it has the potential for both standardization and choice, which can translate into private lawmaking.9 Assume that an organization like the FLA comes to have hundreds or thousands of ailiates that all subscribe, by contract, to the stated code of conduct. hat code comes to have the force of law, not because it was enacted by a government, but because the contractual mechanism includes government-backed enforcement, just as all contracts include government-backed enforcement. he French Civil Code states that a contract is the law between the parties. C. civ. art. 1134 (Fr.). If a party breaches its contract and is sued by its counterparty, the government—through courts and law enforcement oicers—will do something about it. hrough thousands of contracts, such a code of conduct can thus become law in a much broader sense than in a two-party contract. It can provide the operative rules for vast sectors of the economy. In a leading article on assurance services (an article to which this section of the book is deeply indebted), researchers included a case study on China that suggests that these private enforcement mechanisms may be considerably more efective than traditional, governmental law.10 In this way, such a code of conduct can become law, or something very close to law. 8. See Fair Labor Association, http://www.fairlabor.org (last visited Feb. 27, 2014). 9. See generally David V. Snyder, Private Lawmaking, 64 Ohio St. L.J. 371 (2003). For a discussion of how certiication or ailiation models can work as lawmaking, see id. at 442–46. 10. See Margaret M. Blair, Cynthia A. Williams & Li-Wen Lin, he New Role for Assurance Services in Global Commerce, 33 J. Corp. L. 325, 350–51 (2008).

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he burgeoning marketplace for assurance services for social responsibility shows how law and choice may be compatible. You just assumed that FLA had thousands of adherents and that its code of conduct came to function as, or at least like, law, complete with enforcement mechanisms—mechanisms more efective and thus stronger than those of the government. Now assume in addition that an alternative to and competitor of FLA also has thousands of adherents, to similar efect. For instance, Social Accountability International (SAI) sponsors the SA 8000 standards, which have been very prominent—we think at least as prominent as the FLA standards. he two groups’ standards are not the same. And as just mentioned, there are many others. Some are perhaps more rigorous; others may have more frequent monitoring; a few may have better remediation; and so on. Companies can choose which “law” will apply, based on their needs and desires. Whichever one they choose, they can put in their contract. To some extent this is a familiar idea. A  company may choose to locate in one or another of the United States (Alabama instead of Michigan, for example) because its management views the state laws as more favorable. his choice requires a territorial connection, but a geographical link is not always necessary. Oten US corporations choose to incorporate in Delaware but do not locate their operations there. Similarly with respect to responsible codes of conduct, there is private lawmaking, with the possibility of choosing the most attractive law without regard to geography. So far we have assumed just two choices, but in fact and in theory, there are many more. Even ISO has gotten into the game, although in a somewhat diferent way, with ISO 26000. his private and competitive regulatory structure is a federalist system—there are many “jurisdictions” making “laws”—but it is an extraterritorial one, as one of us has suggested.11 Whether this is good or bad is debatable, but the debate is beyond the scope of this book.12 Whatever the merits, this phenomenon is a reality of doing business and a possibility for lawyers wishing both to work in international commerce and to try to make the world a better, as well as a richer, place. What makes the world better is, to put it mildly, a broad subject. In addition to human rights protections, there have been strong moves to include standards, certiications, monitoring, and reporting with respect to environmental responsibility. We have not counted, but we believe there are perhaps as many environmental codes as human rights ones. Oten they go together, and oten standards, monitoring, and enforcement are demanded and ofered with respect to both human rights and environmental standards. Once you know how the basic models work, you can understand how those models can work for many issues, including not just human rights and the environment but “fair trade” requirements for goods like cofee, cocoa, and cotton. We should add, though, that sometimes the codes are geared to immediate or at least near-term implementation and compliance; others, including some environmental ones like ISO 14000, are more oriented to aspirations and changes over the longer term.

11. See generally David V. Snyder, Molecular Federalism and the Structures of Private Lawmaking, 14 Ind. J. Global Leg. Stud. 419 (2007). 12. he arguments for and against are reviewed by Snyder and by Blair et al., as well as in David V. Snyder, Contract Regulation, With and Without the State: Ruminations on Rules and heir Sources. A Comment on Jürgen Basedow, 56 Am. J. Comp. L. 723 (2008) (providing a model of monopolistic rent-seeking).

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As mentioned above, some arrangements use both a two-party model and a three-party model. Nike appears to have its own code of conduct, cited above; Nike is also ailiated with the FLA. Sometimes companies started in the 1990s with their own standards and followed a two-party model, oten in response to scandal. But they may have found that their credibility was boosted by movement to a three-party model.13 his approach enables both the capacity to compete (our code is tougher than our competitor’s) and the credibility of third-party reporting (don’t just trust us—the FLA says we’re OK too). he concerns and contractual provisions discussed in this section do not it neatly into the CISG or, for that matter, with many aspects of domestic law, so there is a greater onus on the contract drater to assure that the scheme works without much legal infrastructure from statutes, treaties, or case law. Article 35 is all about the goods and their qualities. Arguably goods not made in conformity with practices speciied in the agreement may violate the “description required by the contract,” but this would not be clear in a case where the goods themselves meet all of the quality speciications—but for, say, the fact that they were made by young children being held in padlocked dormitories. And even if the “description” were thus violated, the remedy might be far from clear. Assuming no bad publicity, there might be no pecuniary injury to the buyer. A (speciic) performance remedy would likely be troublesome at best and, more likely, outright undesirable. he most obvious remedy for noncompliance by the seller is termination by the buyer. Generally these contracts are seen by the seller as desirable and lucrative. he threat of losing a large and prominent customer is potentially a very strong motivation for compliance, even without the threat of any other monetary sanction. Indeed, this can be not only a potent motivation but also a crucial shield. Consider a situation like the one reported in China. Government regulation and the socially responsible standards were much the same with respect to the number of hours in the work week. he government regulation, however, was rarely enforced, and eforts to advocate its enforcement could be viewed as labor agitation likely to be punished by imprisonment. Adding the standards imposed by a large buyer changes the legal and political calculus. Instead of seeing enforcement of maximum hour or overtime legislation as unwelcome agitation, it can be viewed as a step necessary to maintain economic health and valuable jobs in the community.14 Termination of the contractual relationship comes with two caveats, one technical and one substantive. Both have solutions. he technical issue is that terminating a contract under the default rules of the CISG, as mentioned earlier in the chapter, generally requires a fundamental breach. Is there a fundamental breach if the clothes or soccer balls or other goods are made perfectly, but under objectionable conditions? A buyer would rather not have to litigate this issue. For that reason, the contract needs to provide that violation of the code of conduct allows the buyer the option to terminate the contract. he contract may say this

13. See Blair et al. at 348. 14. See Blair et al. at 350–51 & n.106.

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expressly, or it may deine fundamental breach in the contract to include violation of the code of conduct. In practice, the buyer may not want to terminate the contract for every violation. Our conversations with attorneys for buyers in these situations suggest that oten noncompliance is a matter of faulty recordkeeping. A well-drated code of conduct includes documentation requirements, and even in the best of circumstances maintenance of records that can pass perfectly in an audit is rare. As you will see in Chapter 6, even when immediate money is riding on it, as with letters of credit, the parties oten do not submit compliant paperwork. he thought with respect to social responsibility is that it is not good for the buyer, the seller, or the seller’s workers if the contract is terminated because of a technical violation. he point is sharpened when the story from Bangladesh in the 1990s (above) is brought to mind. Termination may well result in displacement of workers to jobs in even worse conditions. For this reason, many interested in social responsibility turn not to termination, at least not immediately, but remediation. he aim is to make the world a better place, and this goal can more likely be accomplished by helping the seller to comply than by cutting of the seller and its workers. he contracts and the relationships between the parties, from the perspective of this book, are at the core of this topic. he systems explained above are part of the eforts to address the problem, but the problems continue. Safety audits of the Tazreen Fashions factory were conducted by Specialized Technology Resources, Inc., which includes STR Responsible Sourcing and which is a division of Underwriters Laboratories (UL). he audit was conducted under the authorization of a large buyer—Wal-Mart. Yet the ire happened anyway. Similarly, the Rana Plaza had been inspected, and structural cracks discovered, the day before its collapse. So the contractual mechanisms—both two- and three-dimensional—are presumably a step in the right direction, but this step has certainly proved unsatisfactory. As discussed in Chapter 1, there is much more, and there are other perspectives. Matters of public law and regulation are outside the scope of the present work, and some current eforts fall within other subjects, most notably in the ield usually called “trade regulation” or “international trade law.” Traditionally centered on tarifs, duties, and other particular export and import taxes, trade law has been part of the response to the most recent catastrophes in Bangladesh. he United States revoked some tarif breaks given to that country under the Generalized System of Preferences (oten referred to as the GSP). Other moves and negotiations, or at least noises, are coming along similar lines from other parts of the world. Western buyers are also organizing their own responses; the details remain unsettled as we write. Apparently buyers in Europe and in the United States may go diferent routes, although there is criticism of and pressure on the US group to join the more ambitious European one, and there may be further developments. he end of this story cannot yet be written. But we have every conidence that whatever happens will be relected in the sales contracts between the buyers and the sellers, and the lawyers who work in this ield can continue to help their clients move toward solutions.

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Problem 4.25 (a) You are asked to drat a contract according to the two-party model. You are instructed that if the seller does not comply, the contract is to be terminated. You may assume that the standards to be followed are already drated and can be attached as an exhibit to the agreement. Drat the necessary clauses. See CISG arts. 6, 25, 26, and 49(1)(a). (b) What if the UCC were the chosen law? Assume the contract is for an installment sale. See UCC §§ 1-302, 2-612. (c) Revisit (a) and (b) with a three-party model. You may choose the assurance provider; you can ind many by searching the Internet, or you may use the FLA or SAI, cited above.

Problem 4.26 Abercrombie & Fitch states the following policy: Uzbek Cotton We have a policy against using Uzbek cotton due to the government sanctioned use of forced child labor during the harvesting process. We prohibit the use of cotton sourced from Uzbekistan and textiles produced using Uzbek cotton. We also exclude sourcing any products from Uzbekistan. See Uzbek Cotton, Abercrombie & Fitch, http://www.anfcares.org/sustainability/social/ uzbek_cotton.jsp (last visited Feb. 27, 2014). If you were a lawyer for the company, how would you implement this policy?

Question 4.27 Do you think contractual commitments to social responsibility, including human rights concerns and environmental values, are good or bad? Will they displace eforts at public lawmaking? Will they cause more resentment than beneit? Whom do such provisions help? Whom do they hurt?

Question 4.28 Assume now that contractual commitments to socially responsible behavior are, at least on balance, good. Do you think they will work for goods other than consumer products? What about the manufacture of industrial or agricultural chemicals, for instance? (You might note that thousands were killed and many more injured by the toxic chemical leak at a Union Carbide plant in Bhopal, India, in 1984.)

5

Delivery and the Passing of Risk I. Introduction he word “delivery” is used in more than one sense in relation to an international sale of goods. It may refer to contractual delivery, meaning the moment at which the seller has completed its contractual obligation to deliver the goods to the buyer. More simply and less technically, however, the word “delivery” may refer to physical movement of the goods from the seller to the buyer. In that sense, the buyer does not take delivery until it actually gets physical possession of the goods. In the same sense, we can speak of the goods being “delivered” as they pass from hand to hand along the transportation chain from the seller’s premises to the buyer’s premises. For example, the seller may deliver the goods to a trucking company, which delivers them to the operator of a container terminal at a seaport, which delivers them to a ship, which delivers them to a container terminal at the port of destination, which delivers them to another trucking company, which delivers them to the buyer. It is important not to confuse these senses of the word “delivery.” As we saw in Chapter 4, the seller has an obligation to ensure that the goods conform to the contractual description at the moment when contractual delivery is made, so it is obviously important to determine when and where delivery takes place in that strict, contractual sense. here are many possibilities, as the goods usually have to undergo a long and time-consuming journey between leaving the seller’s premises and arriving at the buyer’s premises. At what point during that transit is the seller’s obligation to make contractual delivery complete? At which of the moments of physical delivery from one person to another does contractual delivery take place? As we shall see in this chapter, in many, if not most, international sales, contractual delivery occurs long before the buyer takes physical delivery of the goods at their inal destination. In both senses, delivery is related to risk. In a simple sense, goods in transit from one country to another encounter many risks of loss or damage. hey face some risk of damage during the process of physical delivery from one mode of transport to another along the transportation chain (e.g., as the goods are moved from truck to railroad car to ship), and they face some risk of loss or damage during each transportation stage, too. Trucks may crash; trains may derail; ships may encounter heavy weather or may even sink. In a more technical sense, the moment when contractual delivery is made is also the moment when risk passes

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(and vice versa). If the goods are lost or damaged before the seller has made contractual delivery, that is a problem for the seller (and therefore not the buyer). In fact, the seller faces two potential problems. At the very least, the seller has lost the value of the goods. In addition, the seller faces the prospect of either procuring substitute goods and getting them to the buyer in time (and this cost could well exceed the value of the goods) or of being sued by the buyer for failure to do so, in breach of the contract of sale. Again, the damages could exceed the value of the goods. Depending on the cause of the loss, the seller may have an excuse that provides a defense to the buyer’s action, but even if such a defense is available, the seller has still lost the value of the goods. Conversely, if the goods are lost or damaged ater the seller has made contractual delivery, that is a problem for the buyer (and therefore not the seller) because the buyer cannot complain to the seller of the condition of the goods at the moment when the seller delivered them. he buyer must pay the purchase price in full (if it has not already done so), even though the goods are damaged or have been lost. he buyer thus will lose the agreed value of the goods (their contract price), although as long as the buyer pays on time for the damaged or destroyed goods, the buyer need not worry about being sued for breach of the sale contract. he goods are typically insured against the risks they encounter on the journey from seller’s premises to buyer’s premises. Whether the goods are insured by the seller or the buyer depends on what the parties have agreed in the sale contract. Some standard shipping terms include an insurance aspect, as we will see later in the chapter. Regardless of insurance, though, litigation is still possible. he names of many cases appear to be an action by the seller against the buyer, or vice versa, but the case captions conceal the reality: the parties in interest are oten the seller’s insurer and the buyer’s insurer, who are disputing which of their principals (buyer or seller) bore the risk of loss. hat party’s insurer will have to pay. Historically, risk in goods did not pass to the buyer (in the technical sense) until the buyer became their owner, whether or not physical delivery had taken place at that time. his rule relected an intuition you probably share: Who bears the risk of loss to anything? Whoever owns it. If a tree falls on a car in a thunderstorm, who bears the loss? Whoever owns the car—or more likely, the owner’s insurer. Courts for centuries answered questions about risk of loss the same way. If the goods are lost, the owner takes the risk, whether in the civil law or the common law. he maxim is res pereat domino—loosely, the owner must bear the accidental loss of his things. In a contract of sale, however, the question is more complicated. A sale is typically deined as a contract where something that had belonged to the seller is going to eventually belong to the buyer. In a sale, then, ownership (also called title or property) passes from the seller to the buyer. Traditionally, risk-of-loss cases generally tried to decide exactly when the property or title or ownership passed from the seller to the buyer. If title passed before the loss, the buyer bore the loss. If title had not yet passed, the seller bore the loss. hat notion is still relected in the default position under the law of the United Kingdom, which the Sale of Goods Act § 20(1) (1979) (U.K.) states as follows: Unless otherwise agreed, the goods remain at the seller’s risk until the property in them is transferred to the buyer, but when the property in them is transferred to the buyer the goods are at the buyer’s risk whether delivery has been made or not.

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he United States had much the same rule until the 1960s, when Article 2 of the UCC unhitched the concepts of risk and property. Karl Llewellyn, generally acknowledged to be the principal architect of the UCC and indeed the principal drater of Article 2, was also a leading Legal Realist. He thought everyone needed a healthy dose of realism about two things: what the best judges really paid attention to in deciding cases and what people really did in transacting their business. He thought the technical law—including rules about when title passes—had become disconnected from these two realities. He saw that the leading judges, although they did not necessarily say so explicitly, cared about matters like who would likely have insurance for the goods when they were lost. Consequently, if the buyer had already paid for the goods but they were destroyed while still on the seller’s premises, a court might be expected to hold that title had not yet passed, as a seller in that instance could be expected to have insurance, whereas the buyer might not. On the other hand, in disputes over some matters other than risk of loss, courts might be expected to hold that the goods became the buyer’s property when the buyer paid for them. hus courts held in some cases that title had not passed and in other cases that it had. As Llewellyn saw it, this kind of case law led to a general mess, a sloppy connection between reasonable commercial expectations and the law, and an unfortunate disconnect between decided cases and the stated rules. His solution was to try to suppress the importance of title. See UCC § 2-401 (“Each provision of this Article . . . . applies irrespective of title to the goods . . . . ”). Instead, Article 2 gives speciic rules for each kind of issue that used to be decided by determining whether title had passed. Risk-of-loss rules, which sometimes take insurance into account explicitly now (e.g., UCC § 2-510, which together with § 2-509 governs risk of loss), are diferent from rules, say, on whether the buyer can get the goods themselves or merely has a claim for damages (which used to be governed by title passage but is now governed by § 2-716). his legislative strategy, though diferent from traditional rules, is also adopted in the CISG. he CISG does not have exactly the same rules, but it divorces risk of loss from passage of title. his approach stands in contrast not only to that of the United Kingdom, quoted above, but also other major legal systems, including the French. Under French law, title (and thus risk) passes as soon as the buyer and seller have reached agreement on what is being sold and its price, even though the price has not yet been paid and the goods have not yet been delivered. C. Civ. art. 1583 (Fr.). hese systems would not work very well, especially for an international sale. If the parties to an international sale have agreed that the buyer can defer payment until some time ater it gets possession of the goods, as in Part II.D (“A Variation to the Transaction”) of the sample transaction in Chapter 1, a rule that linked the passing of risk to the passing of title would produce the result that contractual delivery of the goods would not be complete (and risk would not thereby pass) until ater the goods had passed into the buyer’s physical possession, if a court followed UK law. If a court followed French law, it would reach another result. As you will recall from Chapter 2, a court deciding on questions of title would have to look to domestic law, like that of the United Kingdom or France or the United States or whatever other country, because matters of title are excluded from the Convention. See CISG art. 4(b). he Incoterms 2010® are similar to the CISG: they contain explicit rules on risk of loss, but nothing on title.

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In summary, we can see that in international sales the following three important events oten occur at diferent times: (1) contractual delivery from seller to buyer, (2) delivery of physical possession to the buyer, and (3) the passing of title to the buyer. It is important to distinguish contractual delivery from physical delivery of possession but also to recall that contractual delivery and the passing of risk are synonymous. Once the seller has completed its contractual delivery obligation, the seller is done, assuming there is nothing wrong with the goods themselves at that time. If something happens to the goods later, that is the buyer’s problem, as the seller has already completed its performance obligation. Contractual delivery, including the concomitant shit in the risk of loss, and the delivery of possession are considered in this chapter, along with some related questions relating to passage of title.

II. Contractual Delivery and the Passing of Risk A. Incoterms 2010® and the Passing of Risk Chapter IV of the CISG is entitled “Passing of Risk.” It states default rules about when risk passes in an international sale of goods governed by the CISG. hose default rules are considered below. However, our consideration of the passing of risk begins not with the CISG but with Incoterms 2010®. Recall that in Chapter 1, we saw that the Incoterms 2010® are a set of deinitions of standard trading terms published by the International Chamber of Commerce (the ICC). Each one of the Incoterms 2010® contains provisions about contractual delivery and the passing of risk, in headings A4, A5, B4 and B5, as the following example shows. INCOTERMS 2010® INTERNATIONAL CHAMBER OF COMMERCE PUBLICATION NO. 715E, CFR COST AND FREIGHT (NAMED PORT OF DESTINATION) A4 Delivery The seller must deliver the goods either by placing them on board the vessel or by procuring the goods so delivered. In either case, the seller must deliver the goods on the agreed date or within the agreed period and in the manner customary at the port.

B4 Taking delivery The buyer must take delivery of the goods when they have been delivered as envisaged in A4 and receive them from the carrier at the named port of destination.

A5 Transfer of risks The seller bears all risks of loss of or damage to the goods until they have been delivered in accordance with A4, with the exception of loss or damage in the circumstances described in B5.

B5 Transfer of risks The buyer bears all risks of loss of or damage to the goods from the time they have been delivered as envisaged in A4. If the buyer fails to give notice in accordance with B7, then it bears all risks of loss of or damage to the goods from the agreed date or the expiry date of the agreed period for shipment, provided that the goods have been clearly identified as the contract goods.

Recall also from Chapter 2 that much of the CISG consists of default or suppletive rules that serve merely to ill gaps in the parties’ agreement, and that in any event the Convention in article 6 permits the parties to exclude or modify the operation of the Convention in whole or in part. Use of a trading term deined in Incoterms 2010® constitutes a detailed

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agreement about contractual delivery and the passing of risk that is suicient to exclude the operation of Chapter IV of the CISG. Although the sale contract may be governed in other respects by the provisions of the CISG, the passing of risk is governed by Incoterms 2010®, as the next case shows.

BP Oil International Ltd. v. Empresa Estatal Petroleos de Ecuador United States Court of Appeals for the Fifth Circuit, 2003 332 F.3d 333 [BP Oil International Ltd (“BP”) agreed to sell Empresa Estatal Petroleos de Ecuador (“PetroEcuador”) 140,000 barrels of unleaded gasoline on terms CFR La Libertad, Ecuador. On arrival at La Libertad, the gasoline was found to have a gum content unacceptably higher than the contractual specification, so PetroEcuador refused to take physical delivery of the gasoline from the carrying ship. BP sued PetroEcuador (among others) alleging breach of contract by refusal to take delivery. The sale contract was governed by Ecuadorian law. PetroEcuador provided evidence that Ecuadorian domestic law requires the seller to deliver conforming goods at the agreed destination—in this case, La Libertad. BP argued that use of the term “CFR” demonstrated the parties’ intent to pass the risk of loss to PetroEcuador once the goods were delivered on board the carrying ship at the port of loading in Texas. The district court accepted PetroEcuador’s argument and granted summary judgment for PetroEcuador. BP appealed. As we saw in Chapter 2, the US Court of Appeals for the Fifth Circuit held that the dispute was governed by the CISG, not the domestic law of Ecuador, “because the CISG is the law of Ecuador.”] Before smith and barksDale, Circuit Judges, and FitzWater, District Judge (sitting by designation) Smith, J.The CISG incorporates Incoterms through article 9(2), which provides: The parties are considered, unless otherwise agreed, to have impliedly made applicable to their contract or its formation a usage of which the parties knew or ought to have known and which in international trade is widely known to, and regularly observed by, parties to contracts of the type involved in the particular trade concerned. CISG art. 9(2). Even if the usage of Incoterms is not global, the fact that they are well known in international trade means that they are incorporated through article 9(2). PetroEcuador’s invitation to bid for the procurement of 140,000 barrels of gasoline proposed “CFR” delivery. The inal agreement, drafted by PetroEcuador, again speciied that the gasoline be sent “CFR La Libertad-Ecuador” and that the cargo’s gum content be tested pre-shipment. Shipments designated “CFR” require the seller to pay the costs and freight to transport the goods to the delivery port, but pass title and risk of loss to the buyer once the goods “pass the ship’s rail” at the port of shipment. The goods should be tested for conformity before the risk of loss passes to the buyer. In the event of subsequent damage or loss, the buyer generally must seek a remedy against the carrier or insurer. In light of the parties’ unambiguous use of the Incoterm “CFR,” BP fulilled its contractual obligations if the gasoline met the contract’s qualitative speciications when it passed the ship’s rail and risk transferred to PetroEcuador. CISG art. 36(1). Indeed,

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Saybolt’s testing conirmed that the gasoline’s gum content was adequate before departure from Texas. Nevertheless, in its opposition to BP’s motion for summary judgment, PetroEcuador contends that BP purchased the gasoline from Shell on an “as is” basis and thereafter failed to add suficient gum inhibitor as a way to “cut corners.” In other words, the cargo contained a hidden defect. Having appointed Saybolt to test the gasoline, PetroEcuador “ought to have discovered” the defect before the cargo left Texas. CISG art. 39(1). Permitting PetroEcuador now to distance itself from Saybolt’s test would negate the parties’ selection of CFR delivery and would undermine the key role that reliance plays in international sales agreements. Nevertheless, BP could have breached the agreement if it provided goods that it “knew or could not have been unaware” were defective when they “passed over the ship’s rail” and risk shifted to PetroEcuador. CISG art. 40. Therefore, there is a fact issue as to whether BP provided defective gasoline by failing to add suficient gum inhibitor. The district court should permit the parties to conduct discovery as to this issue only.

Question 5.1 A US seller S agrees to sell grain to a Spanish buyer B on terms CFR Cartagena, a Spanish port. Sampling tests at the port of loading indicate that the grain was in good condition when loaded onto the carrying ship. he ship sinks in the middle of the Atlantic Ocean on the way to Cartagena. Is B obliged to pay for the grain? If so, why, and what should B do ater having paid? If not, why not? In the BP Oil case, contractual delivery occurred and risk passed to PetroEcuador when the gasoline passed the ship’s rail in Houston, the port of loading. In all previous versions of Incoterms, the “ship’s rail” was the point at which risk passed when the goods were to be carried by sea, as the goods passed over a hypothetical vertical line rising up from the hull of the carrying ship. he latest version of Incoterms, Incoterms 2010®, inally did away with this venerable concept and replaced it with the concept that risk passes when the goods are “on board” the carrying ship—a phrase whose meaning is considerably less clear to us. It may seem a little counterintuitive that risk passed in Houston in the BP Oil case, given that the relevant Incoterm named the port of destination, La Libertad. hat is true of all of the “C” terms in Incoterms 2010®: CFR (Cost and Freight), CIF (Cost, Insurance and Freight), CPT (Carriage Paid To) and CIP (Carriage and Insurance Paid To). Although in each case the term names the port of destination, contractual delivery is made and risk passes at the port of loading. In that respect, “C” Incoterms are just the same as the “F” Incoterms FCA (Free Carrier), FAS (Free Alongside Ship) and FOB (Free On Board), which name the port of loading and under which risk passes at the port of loading. he key diference between “F” terms and “C” terms is that the buyer arranges ocean transportation under the F Incoterms but the seller does so under the C Incoterms. Both are what are called shipment terms, where the risk passes to the buyer on shipment. Use of either an F term or a C term, therefore, results in a shipment contract: the contract involves carriage of the goods (shipping them) and the risk of loss passes at the place of shipment, which is where the seller makes contractual delivery. We will later be more precise about where that place of shipment is, but the basic idea is that it is in the seller’s country, despite the parties’ expectation that the goods will be transported to the buyer’s country.

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By contrast, if the parties want contractual delivery to occur at the named port of destination, they must use one of the “D” terms, where risk remains with the seller until arrival at the named destination. A D term will create a destination contract. Distinguish the passing of risk under the CFR term we have just been considering with the passing of risk under the following Incoterm, DAP, which was introduced for the irst time in Incoterms 2010®. On the face of the contract, the two terms appear quite similar: CFR La Libertad as compared with DAP La Libertad, for example. However, despite the supericial similarity, the terms are very diferent in efect.

Question 5.2 What would have been the result in the BP Oil case if the gasoline had been sold on terms DAP La Libertad? INCOTERMS 2010® INTERNATIONAL CHAMBER OF COMMERCE PUBLICATION NO. 715E, DAP DELIVERED AT PLACE (NAMED PORT OF DESTINATION) A3 Contracts of carriage and insurance (a) Contract of carriage The seller must contract at its own expense for the carriage of the goods to the named place of destination or to the agreed point, if any, at the named place of destination. If a speciic point is not agreed or is not determined by practice, the seller may select the point at the named place of destination that best suits its purpose. b) Contract of insurance The seller has no obligation to the buyer to make a contract of insurance. However, the seller must provide the buyer, at the buyer’s request, risk and expense (if any), with information that the buyer needs for obtaining insurance.

B3 Contracts of carriage and insurance (a) Contract of carriage The buyer has no obligation to the seller to make a contract of carriage. (b) Contract of insurance The buyer has no obligation to the seller to make a contract of insurance. However, the buyer must provide the seller, upon request, with the necessary information for obtaining insurance.

A4 Delivery The seller must deliver the goods by placing them at the disposal of the buyer on the arriving means of transport ready for unloading at the agreed point, if any, at the named place of destination on the agreed date or within the agreed period.

B4 Taking delivery The buyer must take delivery of the goods when they have been delivered as envisaged in A4.

A5 Transfer of risks The seller bears all risks of loss of or damage to the goods until they have been delivered in accordance with A4, with the exception of loss or damage in the circumstances described in B5.

B5 Transfer of risks The buyer bears all risks of loss of or damage to the goods from the time they have been delivered as envisaged in A4. If (a) the buyer fails to fulil its obligations in accordance with B2 [i.e., getting import licences and completing customs formalities], then it bears all resulting risks of loss of or damage to the goods; or (b) the buyer fails to give notice in accordance with B7, then it bears all risks of loss or damage to the goods from the agreed date or the expiry date of the agreed period for delivery provided that the goods have been clearly identiied as the contract goods.

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here are small but very important diferences between the passing of risk provisions in diferent members of the “F” and “C” groups. Compare and contrast the passing of risk under FCA and FOB, under both of which it is the buyer’s obligation to arrange transportation from the seller’s country to the buyer’s country. INCOTERMS 2010® INTERNATIONAL CHAMBER OF COMMERCE PUBLICATION NO. 715E, FOB FREE ON BOARD (NAMED PORT) A4 Delivery The seller must deliver the goods either by placing them on board the vessel nominated by the buyer at the loading point, if any, indicated by the buyer at the named port of shipment or by procuring the goods so delivered. In either case, the seller must deliver the goods on the agreed date or within the agreed period and in the manner customary at the port.

B4 Taking delivery The buyer must take delivery of the goods when they have been delivered as envisaged in A4.

A5 Transfer of risks The seller bears all risks of loss of or damage to the goods until they have been delivered in accordance with A4, with the exception of loss or damage in the circumstances described in B5.

B5 Transfer of risks The buyer bears all risks of loss of or damage to the goods from the time they have been delivered as envisaged in A4. If (a) the buyer fails to notify the nomination of a vessel in accordance with B7; or (b) the vessel nominated by the buyer fails to arrive on time to enable the seller to comply with A4, is unable to take the goods, or closes for cargo earlier than the time notiied in accordance with B7; then, the buyer bears all risks of loss of or damage to the goods: (i) from the agreed date, or in the absence of an agreed date, (ii) from the date notiied by the seller under A7 within the agreed period, or, if no such date has been notiied, (iii) from the expiry date of any agreed period for delivery, provided that the goods have been clearly identiied as the contract goods.

FCA FREE CARRIER (NAMED PORT) A4 Delivery The seller must deliver the goods to the carrier or another person nominated by the buyer at the agreed point, if any, at the named place on the agreed date or within the agreed period. Delivery is completed: (a) if the named place is the seller’s premises, when the goods have been loaded on the means of transport provided by the buyer. (b) In any other case, when the goods are placed at the disposal of the carrier or another person nominated by the buyer on the seller’s means of transport ready for unloading.

B4 Taking delivery The buyer must take delivery of the goods when they have been delivered as envisaged in A4.

D eli very an d t h e Pa ssing o f R isk If no speciic point has been notiied by the buyer under B7 within the named place of delivery, and if there are several points available, the seller may select the point that best suits its purpose. Unless the buyer notiies the seller otherwise, the seller may deliver the goods for carriage in such a manner as the quantity and/or nature of the goods may require. A5 Transfer of risks The seller bears all risks of loss of or damage to the goods until they have been delivered in accordance with A4, with the exception of loss or damage in the circumstances described in B5.

B5 Transfer of risks The buyer bears all risks of loss of or damage to the goods from the time they have been delivered as envisaged in A4. If (a) the buyer fails in accordance with B7 to notify the nomination of a carrier or another person as envisaged in A4 or to give notice; or (b) the carrier or person nominated by the buyer as envisaged in A4 fails to take the goods into its charge, then, the buyer bears all risks of loss of or damage to the goods: (i) from the agreed date, or in the absence of an agreed date, (ii) from the date notiied by the seller under A7 within the agreed period, or, if no such date has been notiied, (iii) from the expiry date of any agreed period for delivery, provided that the goods have been clearly identiied as the contract goods.

he FCA term can be used no matter what the method of transportation from the seller’s country to the buyer’s country. Whether the goods are to be carried by road, rail, sea, or air, risk passes under FCA terms when the goods are handed over to the carrier, no matter where that takes place. In contrast, the FOB term is appropriate only when the goods are to be carried by sea. Risk does not pass from the seller to the buyer until the goods are placed on board the carrying ship at the port of loading, even if the seller handed them over to the carrier before that point. (In earlier versions of Incoterms, all the F terms were grouped together, as were all the C and D terms. Incoterms 2010® groups together “Rules for any mode or modes of transport”—EXW, FCA, CPT, CIP, DAT, DAP, DDP—separately from “Rules for sea and inland waterway transport”—FAS, FOB, CFR, CIF.)

Question 5.3 A Taiwanese seller S agrees to sell computer components to a US buyer B on terms FOB Keelung, Taiwan. S packs the goods into a shipping container at its factory in Taipei and arranges for them to be carried by truck to the port of Keelung. On arrival at the port, S’s trucker hands over the container to the container terminal operator, which acts on behalf of the shipping company that has been contracted by B to carry the goods to their destination in the United States. he container terminal operator stores the container on the wharf at Keelung pending arrival of the ship that will carry it to the United States. While the container is on the wharf, thieves break into it and steal all the contents. he thieves reseal the container, which is then loaded onto the ship and is carried to the United States. When the container arrives at B’s warehouse, B discovers that there is nothing inside. Does B have a claim against S for breach of the sale contract? Why (or why not)? What would be the position if the contract had been on terms FCA Keelung?

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he diference between CIF and CIP is similar to that between FOB and FCA, as is the diference between CFR and CPT. In CIP, CPT, and FCA, risk passes when the goods are handed to the carrier (or its agent); in CIF, CFR, and FOB, risk passes when the goods are placed on board the carrying ship. It is appropriate to use CIF, CFR, and FOB for bulk cargoes like the gasoline in the BP Oil case, because the goods in fact leave the seller’s control at the moment they are placed on board the carrying ship. For containerized cargoes like the one in Question 5.3, it is appropriate to use CIP, CPT, and FCA, so that contractual delivery is complete when the seller (or its agent) makes physical delivery of the goods to the carrier (or its agent), which usually occurs well before the goods are placed on board the carrying ship. Because shipping containers must usually be handed over to the carrier well before they are placed on board the carrying ship, it is not wise to contract on FOB or CIF terms in relation to goods carried in containers. Nevertheless, that is still very oten done in practice.

B. Default Provisions in the CISG on Delivery and the Passing of Risk If the parties’ contract is governed by the CISG but does not use or refer to one of the standard trade terms in Incoterms 2010®, the default provisions in the CISG about the seller’s obligation to deliver the goods and the passing of risk will apply. Where the contract “involves carriage of the goods,” delivery is complete under CISG article 31(a) and risk passes under CISG article 67(1) when the goods are handed over to the “irst carrier.” Conformity of the goods to the contractual description is judged as at that moment, as the next two cases illustrate.

Chicago Prime Packers, Inc. v. Northam Food Trading Co. United States Court of Appeals for the Seventh Circuit, 2005 408 F.3d 894 [As you may remember from a different part of this case excerpted in Chapter 4, the seller (Chicago Prime), based in Colorado, agreed to sell pork ribs to the Canadian buyer (Northam). The contract did not use any of the standard trading terms deined in Incoterms but merely identiied the date and location of the place from where the buyer was to pick up the ribs, which was a cold storage facility operated by a company named Brookield. The buyer sent a truck operated by a company named Brown to pick up the ribs from Brookield. Brown delivered the goods the next day to the warehouse of the buyer’s customer. (Neither the seller nor the buyer ever came into possession of the ribs themselves.) On arrival, the ribs were discovered to be “yellow, green . . . . abused, spoiled.” The buyer refused to pay for the ribs and the seller sued for the price. After a bench trial, the district judge gave judgment for the seller. The buyer appealed. The US Court of Appeals for the Seventh Circuit afirmed.] Before Flaum, Chief Judge, evans and Williams, Circuit Judges. Flaum, Chief Judge: The risk of loss passes from the seller to the buyer when the goods are transferred to the buyer’s carrier. CISG Art. 67(1). While the seller is liable “for any lack of conformity which exists at the time when risk passes to the buyer,” CISG Art. 36(1), the buyer bears the risk of “[l]oss of or damage to the goods after the risk has passed to the buye . . . . unless the damage is due to an act or omission of the seller.” CISG Art. 66. In other words, Chicago Prime is responsible for the loss if the ribs were spoiled (nonconforming)

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at the time Northam’s agent, Brown, received them from Chicago Prime’s agent, Brookield, while Northam is responsible if they did not become spoiled until after the transfer . . . . The district court held that Northam failed to prove that the ribs were spoiled, or nonconforming, at the time of transfer . . . . The evidence supporting Northam’s position was not so overwhelming that it was clear error to ind in favor of Chicago Prime. Northam offered no credited evidence showing that the ribs were spoiled at the time of transfer or excluding the possibility that the ribs became spoiled after the transfer. In addition, it presented no evidence that Brookield stored the ribs in unacceptable conditions that could have caused them to become spoiled before the transfer . . . . Upon this record, the district court did not clearly err in inding that Northam did not meet its burden of proof as to its afirmative defense of nonconformity.

Case No. VIII ZR 67/04 (The Frozen Pork Case) Bundesgerichtshof [BGH] [Federal Supreme Court], Mar. 2, 2005 (Ger.) Original available at: http://www.globalsaleslaw.org/content/api/ cisg/display.cfm?test=999 Unoficial English translation available at Pace CISG Database: http://cisgw3.law.pace.edu/cases/050302g1.html (Birgit Kurtz, Alston & Bird LLP, trans.) (May 29, 2008) [A Belgian seller and a German buyer made a contract for the sale and purchase of pork in three installments, which were sent directly from Belgium to the German buyer’s customer in Bosnia-Herzegovina. Around the time the pork arrived in Bosnia-Herzegovina, suspicions began to arise that Belgian pork was contaminated with dioxin. After the pork had arrived in Bosnia-Herzegovina, irst Germany then the European Union passed ordinances restricting the sale of Belgian pork and later Belgium extended the EU restrictions to Belgian meat that had already been exported. The authorities in Bosnia-Herzegovina prohibited the sale of the pork that had arrived in that country, which was eventually destroyed. The buyer refused to pay the balance of the purchase price and the seller sued. The Landgericht [regional trial court] dismissed the seller’s complaint. The seller’s appeal was dismissed by the Frankfurt Oberlandesgericht [regional appeal court]. The seller appealed to the Bundesgerichtshof.] Before DePPert, Presiding Justice, and beyer, WieChers, Wolst and hermanns, Justices: At the decisive point in time of the passing of the risk—here, at the time of the delivery of the goods at the seller’s Belgian domicile to the irst forwarding agent (Art. 67, irst sentence CISG) in April 1999—there was neither the suspicion of a harmful dioxin contamination of the pork, nor—more importantly—had the relevant ordinances yet been enacted in Belgium, Germany and the EU. This circumstance, however, does not contradict the goods’ lack of conformity with the contract as assumed by the lower courts; that is so because the non-conformity is already given, as expressly clariied in Art. 36(1), last clause CISG, at the point in time the risk passes if it already exists at this point in time but only later becomes apparent, i.e., if it is a hidden defect. Exactly this was the case here, insofar as it relates to the deliveries made on 15 and 27 April 1999 [the irst and second installments]; according to the invoices, the meat in

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question was processed and frozen on 3 March 1999. The suspicion of dioxin contamination harmful to health existed for all pigs slaughtered between 15 January and 23 July 1999 (Art. 3 of the Belgian Ministerial Ordinance of 28 July 1999). The meat was, to the extent it was still in Belgium, coniscated for precautionary reasons (Art. 1 id.); it was only to be sold if, by 31 August 1999, at the latest, by tracing the origin of the goods or through lab analysis, the suspicion of dioxin contamination was dispelled (Art. 2, 3 id.) vis-à-vis the responsible control authorities. To the extent the suspicion proved to be true, meat already exported was supposed to either be destroyed abroad or shipped back to Belgium, where it would also be coniscated and destroyed (Art. 11, id.). It is undisputed that the Seller failed to produce proof of the absence of dioxin as required by it.

Who is the “irst carrier” for the purposes of CISG articles 31(a) and 67(1) if the goods are carried by several diferent modes of transport on their way from the seller’s premises to the buyer’s premises? In Chicago Prime Packers, there was only one carrier, Brown, which picked the goods up from the warehouse designated by the seller and carried them to the buyer’s customer. In the Frozen Pork Case, the Court said that risk passed at the Belgian seller’s “domicile” when the goods were delivered to what the unoicial English translation calls “the irst forwarding agent.” he phrase used in the German original is “an den ersten Beförderer,” which is a German translation of the phrase that appears in CISG article 67(1) itself: “to the irst carrier.” (here is no oicial German version of the CISG. he only authentic texts of the Convention are the Arabic, Chinese, English, French, Russian, and Spanish texts.) he Bundesgerichtshof held that “den ersten Beförderer” meant the carrier who took possession of the goods from the Belgian seller, even though that carrier probably passed the goods on later to other carriers for international transit to Bosnia-Herzegovina. If the seller uses its own transportation—for example, its own trucks—to carry the goods to a seaport, airport, or railhead, delivery is complete and risk passes only when the goods are handed over at the port, because the seller’s own transportation does not constitute a “irst carrier” for these purposes. (See John O. Honnold, International Sales: The United Nations Convention on Contracts for the International Sale of Goods 8–9 (1984) (“he seller does not ‘hand over’ the goods when he loads his own truck, and those trucks are not a ‘carrier’.”)) In other words, unless the seller uses its own transportation to bring the goods to some intermediate hand-over place, such as a port or railhead, contractual delivery is complete and risk passes at the same place as it would under the Incoterm Ex Works (EXW), namely at the seller’s premises. If the parties want to make risk pass later in the transit from seller’s premises to buyer’s premises, they can do so, for example by using FOB or CIF. If they do that, though, they have opted out of Chapter IV of the CISG by agreeing to terms that are inconsistent with its provisions. In such a case, risk passes when the goods are placed aboard the carrying ship at the port of loading if the parties have agreed on FOB or CIF terms, not because the parties have thereby agreed that the seller must hand over the goods in “a particular place” for the purposes of CISG article 67(1) but because their use of FOB or CIF terms excludes the operation of CISG article 67 altogether, replacing it with the allocation of risk embodied in the Incoterms deinition of FOB or CIF.

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C. Default Provisions in the UCC on Delivery and the Passing of Risk If the parties’ contract is not governed by the CISG (i.e., if one of the parties is located in a country that is not a party to the CISG or if the parties have excluded the operation of the CISG), the contract may be governed either by the UCC or by the domestic law of the non-US party’s country. As we saw in Chapter 2, Former UCC § 1-105(1)/Revised UCC § 1-301(a) provides that when a sales transaction bears a “reasonable relation” to another state or nation, the parties may agree “that the law either of this state or of such other state or nation shall govern their rights and duties.” Where the parties have not agreed on a governing law, Former UCC § 1-105(1)/Revised UCC § 1-301(b) provides that the UCC governs transactions “bearing an appropriate relation” to the enacting state. If the contract is governed by the UCC but does not refer to Incoterms 2010®, the passing of risk is governed by the default provisions in the Uniform Commercial Code, UCC §§ 2-509, 2-510, unless it is proved that the Incoterms amount to a usage of trade under Former UCC § 1-205/Revised UCC § 1-303 (in which case the usage of trade constitutes part of the agreement and displaces the default rules of the UCC). he next case illustrates the operation of those provisions in an international sale.

Pestana v. Karinol Corp. District Court of Appeal of Florida, Third District, 1979 367 So.2d 1096 Before hubbart, kehoe and sChWartz, Judges. hubbart, Judge: This is an action for damages based on a contract for the sale of goods. The defendant seller and others prevailed in this action after a non-jury trial in the Circuit Court for the Eleventh Judicial Circuit of Florida. The plaintiff buyer appeals. The central issue presented for review is whether a contract for the sale of goods, which stipulates the place where the goods sold are to be sent by carrier but contains (a) no explicit provisions allocating the risk of loss while the goods are in the possession of the carrier and (b) no delivery terms such as FOB place of destination, is a shipment contract or a destination contract under the Uniform Commercial Code. We hold that such a contract, without more, constitutes a shipment contract wherein the risk of loss passes to the buyer when the seller duly delivers the goods to the carrier under a reasonable contract of carriage for shipment to the buyer. Accordingly, we afirm. [The plaintiff’s decedent, a resident of Mexico, contracted to buy two cartons of watches from the defendant, an exporter based in Miami. The contract was prepared by the defendant and was written in Spanish. Among other things, it provided (in Spanish): “Please send the merchandise in cardboard boxes duly strapped with metal bands via air parcel post to Chetumal. Documents to Banco de Commercio De Quintano Roo S.A.” There were no provisions in the contract speciically allocating the risk of loss; there were also no FOB, FAS, CIF, or C & F terms contained in the contract. The defendant seller delivered the watches in two cartons to a freight forwarder in Miami, which delivered them to an airline, which carried them to Belize City, Belize. The

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intention was that a representative of the buyer would then arrange for carriage of the cartons by truck from Belize City to Chetumal in Mexico. The buyer completed payment of the purchase price after being notiied that the cartons had arrived in Belize. When the buyer’s representative opened the cartons in Belize City, in the presence of customs oficials, it was discovered that there were no watches inside. As representative of the now-deceased buyer’s estate, the plaintiff sued the seller (among others), alleging that the seller had failed to make delivery to the buyer in Chetumal. After a bench trial, the trial court found for the defendant seller. The plaintiff appealed.]

B There are two types of sales contracts under Florida’s Uniform Commercial Code wherein a carrier is used to transport the goods sold: a shipment contract and a destination contract. A shipment contract is considered the normal contract in which the seller is required to send the subject goods by carrier to the buyer but is not required to guarantee delivery thereof at a particular destination. Under a shipment contract, the seller, unless otherwise agreed, must: (1) put the goods sold in the possession of a carrier and make a contract for their transportation as may be reasonable having regard for the nature of the goods and other attendant circumstances, (2) obtain and promptly deliver or tender in due form any document necessary to enable the buyer to obtain possession of the goods or otherwise required by the agreement or by usage of the trade, and (3) promptly notify the buyer of the shipment. On a shipment contract, the risk of loss passes to the buyer when the goods sold are duly delivered to the carrier for shipment to the buyer. [UCC §§ 2-503 & cmt. 5, 2-504, 2-509(1)]. A destination contract, on the other hand, is considered the variant contract in which the seller speciically agrees to deliver the goods sold to the buyer at a particular destination and to bear the risk of loss of the goods until tender of delivery. This can be accomplished by express provision in the sales contract to that effect or by the use of delivery terms such as FOB (place of destination). Under a destination contract, the seller is required to tender delivery of the goods sold to the buyer at the place of destination. The risk of loss under such a contract passes to the buyer when the goods sold are duly tendered to the buyer at the place of destination while in the possession of the carrier so as to enable the buyer to take delivery. The parties must explicitly agree to a destination contract; otherwise the contract will be considered a shipment contract. [UCC § 2-319(1) (b), 2-503 & cmt. 5, 2-509]. Where the risk of loss falls on the seller at the time the goods sold are lost or destroyed, the seller is liable in damages to the buyer for non-delivery unless the seller tenders a performance in replacement for the lost or destroyed goods. On the other hand, where the risk of loss falls on the buyer at the time the goods sold are lost or destroyed, the buyer is liable to the seller for the purchase price of the goods sold.

C In the instant case, we deal with the normal shipment contract involving the sale of goods. The defendant Karinol pursuant to this contract agreed to send the goods sold, a shipment of watches, to the plaintiff’s decedent in Chetumal, Mexico. There was no speciic provision in the contract between the parties which allocated the risk of loss on

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the goods sold while in transit. In addition, there were no delivery terms such as FOB Chetumal contained in the contract. All agree that there is suficient evidence that the defendant Karinol performed its obligations as a seller under the Uniform Commercial Code if this contract is considered a shipment contract. Karinol put the goods sold in the possession of a carrier and made a contract for the goods’ safe transportation to the plaintiff’s decedent; Karinol also promptly notiied the plaintiff’s decedent of the shipment and tendered to said party the necessary documents to obtain possession of the goods sold. The plaintiff Pestana contends, however, that the contract herein is a destination contract in which the risk of loss on the goods sold did not pass until delivery on such goods had been tendered to him at Chetumal, Mexico, an event which never occurred. He relies for this position on the notation at the bottom of the contract between the parties which provides that the goods were to be sent to Chetumal, Mexico. We cannot agree. A “send to” or “ship to” term is a part of every contract involving the sale of goods where carriage is contemplated and has no signiicance in determining whether the contract is a shipment or destination contract for risk of loss purposes. As such, the “send to” term contained in this contract cannot, without more, convert this into a destination contract. It therefore follows that the risk of loss in this case shifted to the plaintiff’s decedent as buyer when the defendant Karinol as seller duly delivered the goods to th . . . . freight forwarder American under a reasonable contract of carriage for shipment to the plaintiff’s decedent in Chetumal, Mexico. The defendant Karinol . . . . could not be held liable to the plaintiff in this action. The trial court properly entered judgment in favor of all the defendants herein. Afirmed.

If the parties to a contract governed by the UCC do use one of the standard trade terms, such as FOB or CIF, in their contract, the meaning of the relevant term may be found in the UCC itself, which deines some but not all of the terms in widespread use. here are deinitions of FOB and FAS (UCC § 2-319), CIF and C&F (UCC § 2-320), and delivery “Ex-Ship” (UCC § 2-321). In each case, the deinition states the seller’s obligations but does not state as clearly as Incoterms 2010® does when contractual delivery is complete and when risk passes. Nevertheless, it is understood that risk passes under a shipment contract when the seller completes its obligation to ship the goods to the buyer by handing them over to the carrier at the place of shipment for carriage to the buyer. (he carrier usually gives the seller a receipt known as a bill of lading in return for the goods, as mentioned in Chapter 1.) Risk does not pass under a destination contract until the goods are delivered at the designated destination. Under a shipment contract, if the goods are damaged or lost ater they have been handed to the carrier at the place of shipment, the buyer may sue the carrier under the contract of carriage. If, however, the goods are damaged or lost because of a defect existing in them at the moment when they were handed over to the carrier (i.e., when risk passed under the sale contract), the carrier has a defense to any action brought by the buyer, by operation of the Carriage of Goods by Sea Act (COGSA) § 4(2)(m), which gives the carrier a defense for “[L]oss or damage arising from inherent defect, quality or vice of the goods.” In those

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circumstances, the buyer has a claim against the seller for breach of the sale contract. he next case illustrates the relationship between these causes of action.

Larsen v. A.C. Carpenter, Inc. United States District Court for the Eastern District of New York, 1985 620 F. Supp. 1084 Affirmed without opinion, 800 F.2d 1128 (2d Cir. 1986) [The sellers (Carpenter), based in New  York, agreed to sell a shipload of potatoes to a Venezuelan buyer (APRA), on terms CIF Puerto Cabello, a port in Venezuela. (At the time the contract was made, neither Venezuela nor the United States was party to the CISG; Venezuela is still not party.) The potatoes were carried from the United States to Venezuela on a ship called the Jette Sif, owned by a Danish corporation called Larsen. The Jette Sif was not allowed to discharge the potatoes in Puerto Cabello because they were infected with a disease called erwinia. Eventually, the entire cargo of potatoes was dumped at sea in a rotten condition. Larsen sued both Carpenter and APRA, seeking damages for losses it had incurred because of the delay in delivering and then disposing of the potatoes. APRA counterclaimed against Larsen for destroying the potatoes and cross-claimed against Carpenter, alleging that the potatoes were not in conforming condition when risk passed under the sale contract. (There were also other cross-claims not relevant for present purposes.)] neaher, District Judge: As mentioned, one sale particular . . . . was “US DOLLARES 630,000.00 CIF PUERTO CABELLO . . . . That CIF term activated [UCC] § 2-320 . . . . Ordinarily, the CIF term also identiies who has the risk of loss. See Gilmore & Black § 3-7, at 107 (“Under a CIF term the buyer (for whose beneit the insurance is carried) bears the risk of loss in transit.”) (footnote omitted). That risk of loss transfer is described by [UCC] § 2-509 . . . . See Gilmore & Black § 3-8, at 109 (“The Article 2 rules on risk-shifting are set out in § 2-509. If the contract ‘requires . . . . the seller to ship the goods by carrier’ subsection (1) provides that the risk shifts at the delivery point.”). Notably, § 2-509 can be countermanded by § 2-510: (1) Where a . . . . delivery of goods so fails to conform to the contract as to give a right of rejection the risk of their loss remains on the seller until cure or acceptance. Here, the risk would have normally passed on October 30, 1981 with completion of the loading and signing of the bill [of lading]. See § 2-320 Comment 1. (“The CIF contract is not a destination but a shipment contract with risk of subsequent loss . . . . passing to the buyer upon shipment if the seller has properly performed all his obligations . . . . ”). That passing of the risk was stopped by § 2-510, since Carpenter breached the sale contract by delivering potatoes in improper condition to the Jette Sif. See Gilmore & Black § 3-8, at 109 (“[Section] 2-510 . . . . provides in substance that, if one party is in breach, he continues to bear the risk even though apart from the breach, the § 2-509 rules would allocate the risk to the other party.”). Cf. Ohoud Establishment for Trade and Contracts v. Tri-State Contracting & Trading Corp., 523 F. Supp. 249, 254 (D.N.J. 1981) (“According

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to the UCC, risk of loss in the absence of a breach passes to the buyer when the seller . . . . tenders the goods to the possession of the carrier . . . . [UCC] § 2-509 . . . . Therefore . . . . if the soda was delivered in proper condition to the ocean carriers, the risk of future damage by the acts of the carriers passed to the buyer.”). Here the erwinia inherent vice proximately caused the spoilage. Were it not for erwinia’s presence in some pulps (and on the skins) upon delivery to the vessel, the potatoes would not have decomposed when they did. See, e.g., Indiana Farm Bureau Cooperative Assoc. v.  S.S. SOVEREIGN FAYLENNE, 1978 A.M.C.  at 1517 (“To recover on its [UCC] warranty claims, [the fertilizer buyer] must show the . . . . breach of warranties made to it by [the seller]. It must also show that the [inherent] defect constituting the breach existed in the product when it was lifted [aboard] by the [carrier] at [the loading port], and that the defect proximately . . . . caused the damages . . . . ”). The wrongful tender to the ship of nonconforming goods with indwelling faults causally connected to the subsequent massive deterioration was a breach of the implied warranty of merchantability . . . . That breach gave APRA a § 2-510 right to reject . . . [Because the potatoes were infected with erwinia at the moment of contractual delivery when they were shipped on board the Jette Sif, the court held that APRA was entitled to recover damages from Carpenter for breach of the sale contract but not from Larsen for breach of the carriage contract. Risk never passed from Carpenter to APRA because of UCC § 2-510, so it was Carpenter who was held liable to Larsen for the delay at Puerto Cabello.]

he term FOB is used diferently within the United States than it is in international trade. As we saw earlier in this chapter, the Incoterms 2010® deinition of FOB provides that risk passes when the goods are placed on board the carrying ship at the port of loading. In other words, under Incoterms 2010®, FOB is always a shipment term, not a destination term. In addition, the FOB Incoterm is appropriate only for marine shipment; otherwise, there is no “vessel” where the goods can be placed “on board” so that risk can pass. In contrast, FOB in the UCC can be either a shipment or a destination term, and it can be used with any mode of transport: § 2-319(1) distinguishes “FOB place of shipment” from “FOB place of destination.” FOB place of shipment is equivalent to FOB under Incoterms 2010®, at least when the place of shipment is a seaport. FOB place of destination is a destination or delivery term. It is equivalent to one of the D terms under Incoterms 2010®, as the next case illustrates.

Buenger v. Pruden Supreme Court of Wyoming, 1986 713 P.2d 771 Before thomas, Chief Justice, and Brown, CarDine, urbiGkit and maCy, Justices. urbiGkit, J. Appellant Robert L. Buenger (Buenger) entered into detailed purchase documents with appellee Varco Pruden, to purchase certain buildings for erection at jobsite by shipment from Evansville, Wisconsin, to Gillette, Wyoming. Controversy arose about the account status, with freight charges and prejudgment interest questions now coming to this court by appeal.

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The agreement documents provided for FOB-destination or FOB-jobsite, and were then conirmed by seller by letter in explicit terms “Correction to my letter dated May 26, 1982. The referenced jobs will be shipped FOB destination.” The trial court charged freight to Buenger as buyer, and by opinion letter stated: “Defendant, in his Counterclaim, asserts that he is entitled to several credits. He points to the contract provision which states the buildings are to be delivered ‘FOB jobsite’ as supporting his claim to a credit for freight charges paid by him. Under the Uniform Commercial Code, FOB destination does not mean that the seller is agreeing to pay for freight costs, but merely that the seller is accepting the risk to the goods during shipment. W.S. § 34-21-236 (1977).” We ind § 34-21-236, W.S.1977 (UCC § 2-319) to be determinative in a contrary fashion to the trial-court decision . . . . The Practical Lawyer’s Glossary-“FOB,” The Practical Lawyer, Vol. 31, No. 7, October 15, 1985, p. 56, summarizes the subject: “When a shipment is to be FOB (‘free on board’) the place of shipment, the seller bears the expense and risk of putting the goods into the carrier’s possession, at which point, the risk of loss passes to the buyer . . . . If the shipment is to be FOB the place of destination, then the shipment is at the seller’s expense, and the risk of loss is on the seller until the goods are duly tendered to the buyer in accordance with UCC section 2-503. R. HENSON, THE LAW OF SALES 65 (ALI-ABA, Philadelphia, 1985).” In the terminology of the industry, the differentiation is between a destination or shipment contract. The agreement of the parties controlled by the designation used and this case is clearly a destination agreement whereby freight charges remain with seller. Under the purchase documents, the seller, Varco Pruden, owed costs for freight to Gillette for the buildings, and amounts paid by Buenger to secure freight release upon delivery are chargeable by offset and counterclaim. . . . The decision of the trial court is reversed and remanded for entry of the judgment in accord with this opinion.

Obviously, there is considerable potential for confusion if the term FOB is used in an international sale contract governed by the UCC, although the context should usually make it obvious whether the parties intend contractual delivery to be at the place of shipment or the destination. If the parties to an international sale contract governed by the UCC refer explicitly to Incoterms in an attempt to avoid such confusion, their agreement displaces the operation of the UCC because each of the deinitions of trade terms in the UCC is merely a default rule that applies in the absence of agreement.

Question 5.4 A US seller S is negotiating with a British buyer B for the sale of a consignment of wine. he United Kingdom is not party to the CISG. he parties have reached preliminary agreement that the sale contract will be governed by the UCC. If the parties do not want to use one of the Incoterms, what term should they include in their contract to achieve the result that risk does not pass until the wine arrives at Felixstowe, the English port

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where it will be unloaded from the carrying ship? What term should they use if they do want to use one of the Incoterms?

Question 5.5 A US seller S, in Vancouver, Washington, agrees with a Canadian buyer B, in Vancouver, British Columbia, for the sale of a consignment of apples. Unhelpfully, the contract provides that the sale is to be on terms “FOB Vancouver.” Where would risk pass to B if this contract were to be governed by the CISG (as it would be unless the parties opted out)? Where would risk pass to B if the parties expressly incorporated Incoterms 2010®? Where would risk pass to B if the parties opted out of the CISG, made no reference to Incoterms, and agreed that the contract should be governed by the UCC?

D. Foreign Domestic Law: he Example of the United Kingdom Recall that if an international sale contract is not governed by the CISG, it is either governed by the UCC, which we have just considered, or by the domestic sales law of the other country. Obviously, there is no international uniformity between the sales laws of countries that are not party to the CISG. An attorney advising a US party to such a contract would have to ind out what the relevant foreign law provides. In this section, we briely consider the sales law of the United Kingdom as an example of a non-CISG country. In the introduction to this chapter, we saw that the default position about the passing of risk under UK law is that risk passes when property passes. See the Sale of Goods Act § 20(1) (1979) (U.K.). Section 17 of the same Act provides that property passes when the parties intend it to pass, which usually occurs when payment is made in full. In such a case, § 20(1) has the efect that risk does not pass until the buyer makes payment, as the next case illustrates.

Stora Enso Oyj v. Port of Dundee Court of Session (Outer House), 2006 Scotland [2006] 1 C.L.C. 453 [Stora Enso Fine Papers Oyj, a Finnish company, agreed to sell wood pulp to a buyer in Scotland. The sale contract provided that “Prices and the terms of delivery will be on a CIP Dundee basis” and it also incorporated by reference the General Trade Rules for Wood Pulp. Rule 6(c) of the General Trade Rules for Wood Pulp provided that “Delivered pulp shall—to the extent permitted by the law of the buyer’s country—remain the property of the seller until the whole sum payable under the contract is paid . . . . ” When Stora sent an invoice to the buyer, the invoice stated the terms of delivery to be “CIP Dundee Incoterms 2000.” The seller sent two consignments of wood pulp from Finland to the port of Dundee, in Scotland. Upon arrival, the wood pulp was stored in a warehouse at the Port of Dundee, the defender in the case (“defender” is the word used for defendant in Scottish courts). From there the goods were to be forwarded to the buyer’s premises, but they were destroyed by ire while in the defender’s warehouse. At that time, the Scottish buyer had not yet paid the purchase price in full.

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The Finnish seller changed its name and acquired a different corporate personality. With that new identity, it sued the defender in the Outer House of the Court of Session (a Scottish trial court). (The seller’s successor is referred to in the extract below as the pursuer, the name used for plaintiff in Scottish courts.)] lorD Clarke: . . . .The evidence led at the preliminary proof, in my judgment, has established that, at the time of the destruction of the pulp, both the property and the risk in the pulp remained with the pursuer’s predecessors. It is a matter of agreement that the pursuer has succeeded to any claim that its predecessors may have had in this regard . . . . There is no doubt that both parties to the contract, relating to the supply by the pursuer’s predecessor to [the Scottish buyer] of pulp during 2000, agreed that the General Trade Rules would govern their relationship. Rule 6(c) of the Rules is unequivocal in its terms in providing that property in the pulp will not pass from the seller until the whole sum payable under the contract is paid. Section 17 and section 20 of the Sale of Goods Act . . . . provide that it is for the parties to agree when property in the goods under a contract of sale shall pass and, accordingly, when risk in the goods is to be transferred. The only question remaining is whether the use by the parties, of the expression ‘CIP’ in their agreement, in any respect, qualiied or negated the clear provisions of Rule 6(c). In my judgment it did not. The evidence of both Mr Crane and Miss Gale was that, in using that term, they were simply agreeing a shorthand way of recording that part of their agreement which was related to what was embraced in the price of the pulp. Neither of them, upon the evidence, intended to incorporate the ICC Term of Contract into their agreement to rule on matters such as when property and risk would pass. There is no reference to Incoterms 2000 to be found in [the sale contract]. The reference to Incoterms 2000, in the invoice, under the reference ‘CIP,’ came in a document which post-dates the agreement between the parties, and, in any event, did not, having regard to the evidence as a whole, relect any agreement about when risk and property would pass different from that contained in Rule 6(c) of the General Trade Rules and the provisions of the Sale of Goods Act 1979 . . . . In the present case, the intention of the parties to the contract, to be gathered from the relevant circumstances of the case, was that property and risk in the pulp should not pass until payment. It follows that at the time of the ire, property and risk had not passed from the pursuer’s predecessors. (Order accordingly)

Question 5.6 he Sale of Goods Act § 20(1) (1979) (U.K.) (quoted at the beginning of the chapter) provides that risk passes when property passes “Unless otherwise agreed.” What would you advise the parties to agree on if they want to disconnect the passing of risk from the passing of property under UK law?

Question 5.7 When would risk have passed in the Stora Enso case if the contract had incorporated Incoterms 2010® and had not incorporated the General Trade Rules for Wood Pulp?

Question 5.8 When would risk have passed in the Stora Enso case if the wood pulp had been destroyed by ire at a port in the United States and the contract had been governed by the UCC?

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III. Physical Delivery to the Buyer he seller is in a very vulnerable position if the buyer can get physical possession of the goods before paying for them. he buyer is in another country, perhaps on the other side of the world, and if it simply takes possession of the goods and uses them without paying for them, the seller will have to pursue payment in a faraway place in an unfamiliar legal system. For that reason, sellers oten want to retain the right to withhold physical delivery of the goods from the buyer until payment has been made. To achieve this result, the seller must rely on the carrier who carries the goods to the buyer’s country. he carrier promises the seller that it will not hand the goods over to the buyer (or its representative) in the buyer’s country until the seller tells it (the carrier) to do so. he seller then tells the carrier to release the goods to the buyer once payment has been made. hat outcome is usually achieved by use of a document known as a bill of lading. When the seller hands the goods to the carrier for carriage to the buyer’s country, the carrier gives the seller a bill of lading in return. he bill of lading acts as a receipt for the goods and as evidence of the contract of carriage. Importantly for present purposes, if the bill of lading is made out “To Order,” it also acts like a negotiable instrument and it becomes the means by which the seller can control the buyer’s right to physical possession. In US terms, it is a kind of negotiable document of title. UCC § 1-201(b)(16). An “Order” bill of lading is a promise by the carrier to deliver to the seller’s order. (In the carriage contract, the seller is known (a little confusingly) as the shipper. he entity carrying the goods, oten in a ship, is not the shipper but the carrier. An “Order” bill of lading is thus actually a promise by the carrier to deliver to the shipper’s order.) By making this promise, the carrier undertakes not to deliver the goods to the buyer until the seller gives the order to do so. he seller gives the order to deliver by giving the original bill of lading to the person to whom physical delivery must be made at the port of destination. hat should be the buyer, which is oten named on the bill of lading as “Notify Party,” meaning it is the person to whom notiication of arrival should be given by the carrier. Being named as “Notify Party” does not mean that the buyer is automatically entitled to physical delivery of the goods, however. he carrier delivers the cargo to whoever presents the original bill of lading at the port of destination because presentation of the original bill of lading is its order to deliver. Obviously, the seller does not want to give the bill of lading to the buyer any more than it wants to give the goods themselves to the buyer. he seller will hand over the bill of lading to the buyer only in return for the purchase price. he mechanics of how payment is made in return for the bill of lading are explained in Chapter 6. For present purposes, it is important to understand only that while the goods are in the carrier’s hands, an “Order,” or negotiable, bill of lading has the same value as the goods themselves because the carrier will deliver the goods to whoever is the holder of the original bill of lading at the port of destination. hus, the bill of lading can be bought and sold, or used as security for credit advances. An order bill of lading is a paper reiication of the goods much like a check is a reiication of money in a bank account. It is also important to remember once again that physical delivery is diferent from contractual delivery. he seller may have completed its contractual obligation to deliver the

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goods to the buyer when the goods were placed on board the ship at the port of loading (if the contract is on CIF terms, for example), but it may still want to ensure that the buyer cannot take physical delivery until payment has been made. he following case illustrates the role of the negotiable bill of lading and the importance of the carrier’s role in ensuring that the seller gets paid.

Allied Chemical International Corp. v. Companhia Navegacao Lloyd Brasileiro United States Court of Appeals for the Second Circuit, 1985 775 F.2d 476 [Banylsa, a Brazilian company, bought two lots of a chemical called caprolactam from Allied, the US seller, for $266,756.92 per lot, on terms C & F Salvador, Brazil. (C & F has the same meaning as the Incoterm® CFR.) Allied sent the caprolactam to Brazil on a ship operated by the defendant, Lloyd. Lloyd issued two order bills of lading to Allied at the port of loading, Norfolk, Virginia, one for each of the two lots of caprolactam. The sale contract provided that the original order bills of lading were to be sent by Allied to a Brazilian bank, which would hand them over to Banylsa in return for payment. Banylsa paid for only one of the two bills of lading, so it received only one bill of lading from the Brazilian bank. Banylsa asked Lloyd to deliver the lot of caprolactam for which it had no bill of lading. Lloyd did so in return for a document known as a “carta declaratoria” issued in accordance with Brazilian import regulations. Some weeks after taking physical delivery of the caprolactam, Banylsa complained to Allied about its quality. Allied then realized that Banylsa had obtained possession of all of the caprolactam despite having paid for only half of it. Banylsa then went into receivership. Allied made a claim against Banylsa in the Brazilian receivership but received very little of the money it was owed. It then sued Lloyd in the US District Court for the Southern District of New York to recover the remainder of the purchase price. The District Court found for Allied. Lloyd appealed.] Before meskill, kearse and Winter, Circuit Judges. meskill, Circuit Judge: In its complaint against Lloyd, Allied charged that the ocean carrier had breached its contract of carriage with Allied. It also claimed that Lloyd was liable for conversion of the cargo because Lloyd authorized the delivery of the cargo to a party not entitled to possession. The district judge decided in Allied’s favor . . . .

DISCUSSION ....

C. Liability The liability question in this case inextricably involves the critical importance of the documentary transaction in overseas trade. The documentary sale enables the distant seller to protect himself from an insolvent or fraudulent foreign buyer by ensuring that the buyer ordinarily cannot take possession of the goods until he has paid for them. It accomplishes

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this rather simply. The seller tenders shipping documents, including a negotiable bill of lading, rather than goods to the buyer. By paying for the documents, the buyer gets possession of the original bill of lading. Possession of the bill entitles him to possession of the goods; it represents the goods and conveys title to them. Most likely, the bill will be an order bill of lading, made to the order of or endorsed to the buyer. Absent a valid agreement to the contrary, the carrier, the issuer of the bill of lading, is responsible for releasing the cargo only to the party who presents the original bill of lading. “Delivery to the consignee named in the bill of lading does not sufice to discharge the [carrier] where the consignee does not hold the bill of lading.” 2 T.G. Carver, Carriage by Sea ¶ 1593 (R. Colinvaux 13th ed. 1982). If the carrier delivers the goods to one other than the authorized holder of the bill of lading, the carrier is liable for misdelivery. The ocean carrier’s liability arises from rights of property, 1 T.G. Carver, supra, at ¶ 120, and “[d]elivery to a person not entitled to the goods without production of the bill of lading is prima facie a conversion of the goods and a breach of contract.” 2 id. at ¶ 1593 (footnotes omitted). The dispute herein involved precisely the consequence that the documentary transaction is intended to avert: Banylsa, which turned out to be an insolvent buyer, was given possession of goods for which it had not paid. This result would have been avoided had Lloyd, in keeping with its obligation, demanded the production of the bill of lading before permitting Banylsa to claim the caprolactam. Before we can hold Lloyd liable for causing Allied’s loss, however, we must examine the respective rights and obligations of the parties at the time of the apparent misdelivery to determine whether Lloyd was somehow relieved of its duty to take up the bill of lading. Although the cargo had been discharged from the ship and, thus, the actual carriage completed when the apparent misdelivery occurred, the relationship between Allied and Lloyd was still governed by the contract of carriage. Our analysis begins with the bill of lading, the document evidencing the contract of carriage. We bear in mind that bills of lading are contracts of adhesion and, as such, are strictly construed against the carrier. [The court went on to hold that Lloyd, the carrier, was not protected by exclusion clauses in the bills of lading because they were nulliied by the Harter Act, 46 U.S.C. § 190 (now recodiied at 46 U.S.C. § 30701 (2006)), which applies to ocean carriage before loading onto and after discharge from the carrying ship. It also rejected Lloyd’s argument that its liability should be limited in amount by reference to a statutory formula in the Carriage of Goods by Sea Act (COGSA), 46 U.S.C. § 1304(5). (COGSA is now recodiied as a Statutory Note to 46 U.S.C. § 30701 (2006).)]

CONCLUSION The judgment of the district court is afirmed. Appellant is liable for costs.

If the seller and the buyer have a long-standing relationship, so that the seller trusts the buyer to pay for the goods even ater it has physically received them, the seller may be happy to let the buyer take physical possession of the goods before payment has been made. Similarly, the seller may allow the buyer to take physical possession of the goods before payment if the seller has some form of security from the buyer upon which it can draw in the event of nonpayment. Alternatively (but less commonly), the buyer may have paid for the goods in advance, before they have been shipped by the seller.

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In any of these cases, the seller does not need to use the bill of lading as the means of securing payment from the buyer. If so, there is no need to use an “Order,” negotiable, bill of lading of the kind used in the Allied Chemical case. he parties can use a document known as a straight bill of lading, by which the carrier simply promises to deliver to a named consignee, the buyer. Alternatively, the parties can use a similar document known as a sea waybill, which is also a contract for delivery to a named person. Because the carrier has undertaken to deliver to the buyer and no one else, there is no need for the buyer to present an original version of the sea waybill at the port of destination. For that reason, sea waybills are now typically electronic documents issued by the carrier to the shipper-seller and simply forwarded to the buyer-consignee. In contrast, if the carriage contract is a straight bill of lading, the buyer must still present the original document at the port of destination. Because that is both inconvenient and unnecessary, parties who want to use a nonnegotiable sea carriage document should now use an electronic sea waybill rather than a straight bill of lading. he Allied Chemical case shows that the carrier should not physically deliver the goods at their destination without presentation of the original bill of lading. he converse proposition is also true. he carrier must deliver the goods to the holder of the bill of lading, whether or not that is the buyer or other person named as “Notify Party.” hat proposition is established by the following provision of a statute known as the Federal Bills of Lading Act or Pomerene Act, which also deals with the carrier’s obligation to deliver under nonnegotiable carriage documents.

Federal Bills of Lading Act (the Pomerene Act) 49 U.S.C. § 80110 (2006) (a) General rules.—Except to the extent a common carrier establishes an excuse provided by law, the carrier must deliver goods covered by a bill of lading on demand of the consignee named in a nonnegotiable bill or the holder of a negotiable bill for the goods when the consignee or holder— (1) offers in good faith to satisfy the lien of the carrier on the goods; (2) has possession of the bill and, if a negotiable bill, offers to indorse and give the bill to the carrier; and (3) agrees to sign, on delivery of the goods, a receipt for delivery if requested by the carrier. (b) Persons to whom goods may be delivered.—Subject to section 80111 of this title, a common carrier may deliver the goods covered by a bill of lading to— (1) a person entitled to their possession; (2) the consignee named in a nonnegotiable bill; or (3) a person in possession of a negotiable bill if— (A) the goods are deliverable to the order of that person; or (B) the bill has been indorsed to that person or in blank by the consignee or another indorsee. ... (f) Third person claims not a defense.—Except as provided in subsections (b), (d), and (e) of this section, title or a right of a third person is not a defense to an action brought by the consignee of a nonnegotiable bill of lading or by the holder of a negotiable bill

D eli very an d t h e Pa ssing o f R isk

against the common carrier for failure to deliver the goods on demand unless enforced by legal process.

Question 5.9 An ocean carrier C agrees to carry goods from France to the United States. It issues a negotiable bill of lading to the French shipper-seller S. he bill of lading names the US buyer B as “Notify Party.” When the goods arrive at the port of destination in the United States, B asks C for delivery. B identiies itself as B and presents a faxed copy of the bill of lading, saying “he original is still at the bank—we’ll bring it to you when we get it.” Is B entitled to take delivery of the goods from C? If so, why? If not, why not?

Question 5.10 Would your answer to Question 5.9 be any diferent if the carriage contract was a sea waybill? If the goods are carried from the seller’s country to the buyer’s country by air, the parties must necessarily use a nonnegotiable carriage document, because the speed of air travel is such that the goods arrive in the buyer’s country before it would be possible to negotiate a negotiable bill of lading. For that reason, international carriage of goods by air is done using nonnegotiable documents called air waybills. You have probably illed out a Federal Express air waybill yourself. If carriage is done under a nonnegotiable document such as an air waybill, sea waybill, or straight bill of lading, the seller cannot use the ability to withhold physical delivery as its means of securing payment by the buyer. It must therefore use other methods of securing payment. Payment and security are considered next, in Chapter 6.

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Payments, Credit, and Performance Guarantees I. Introduction he Convention on the International Sale of Goods (CISG), the Uniform Commercial Code (UCC), and the Incoterms 2010® say very little about the buyer’s obligation to pay for the goods. For example, paragraph B1 of the Incoterms 2010® is very simple and says exactly the same in each of the 13 deined terms: “he buyer must pay the price as provided in the contract of sale.” he details of how payment is to be made are let to the parties. In many cases, the arrangements for payment of the purchase price are simple and straightforward. If, for example, the buyer is prepared to pay for the goods in advance, it can simply arrange for money to be transferred from its bank to the seller’s bank, usually by electronic funds transfer. Of course, the buyer then takes the risk that the seller may not send the goods, having already been paid, so it may want the contract to provide for some guarantee of performance by the seller or some simple means of recovering its money if it does not receive the goods. Conversely, and more commonly, the seller may be prepared to send the goods to the buyer on credit, without receiving payment immediately. his arrangement is usually called sale on open account. he seller sends goods to the buyer and adds their value to the buyer’s account. he buyer then transfers the purchase price—plus, in most cases, a sum to relect the seller’s credit charge—either once a month, once a quarter, or at some stipulated time ater the seller sends its invoice demanding payment. Here, too, the buyer simply arranges for money to be transferred from its bank to the seller’s bank, usually by electronic funds transfer. Buying on open account gives the buyer time to pay and, importantly, the ability to resell the goods or to use them for their intended purpose. his gives the buyer a cash low beneit, as it can pay the seller using the proceeds of resale. Of course, under this arrangement, the seller takes the risk that the buyer will not pay for the goods ater having received them, so it usually demands that the buyer give security by providing for a guarantee of payment if the buyer defaults.

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Payment in advance and payment on open account depend to some extent on trust although, as we have seen, that trust is usually backed up with some form of security. For example, a seller is more likely to agree to sell on open account to a buyer that it knows and trusts and whose creditworthiness it has had time to assess. If the parties are in a long-standing relationship, trading goods from one country to another over a period of years or even decades, it may well be more convenient and (as we shall see) cheaper for them to use one of the methods just described. If, however, the buyer and seller have not dealt with one another previously, or if information about their creditworthiness is scarce or unreliable, their concerns about commercial risk and security become much more prominent. he seller does not want to send goods to a foreign buyer without being sure that it will be paid. he buyer does not want to send money to a foreign seller without being sure that it will receive the goods as promised. he ideal solution would be a simultaneous exchange of the goods for the purchase price, but that is impossible in an international sale, when the goods must be carried from one country to another on a voyage that may take weeks. In such circumstances, the seller and buyer usually agree to use some form of documentary payment, under which the buyer either pays or gives an undertaking to pay in return for a bundle of documents representing the goods. his is an efective surrogate for the simultaneous exchange of goods for money: the seller (or, rather, a bank acting on its behalf ) releases the documents representing the goods only in return for the purchase price; the buyer (or, rather, a bank acting on its behalf ) pays or gives its undertaking to pay only in return for the documents representing the goods. he most important document in this exchange is the bill of lading representing the goods. As we saw at the end of Chapter 5, a negotiable or order bill of lading entitles the holder to demand delivery of the goods from the carrier. he machinery of documentary payments is complex but elegant. It is the main subject of this chapter. Before we move on to consider how documentary payments work, however, it is worth reiterating that they need not be used if the parties have established a relationship of trust and conidence, backed by some form of side security. As we saw in Chapter 1, documentary payments add transaction costs to the sale, in the form of bank and credit charges. Parties in a long-term relationship generally prefer to reduce those transaction costs by agreeing to trade on open account. his chapter begins by describing how documentary collections work, in Section II. Documentary collections were once the most common means of efecting documentary payment in international trade, but that is no longer true; they have largely been superseded by letters of credit, which are considered in Section III. (he operation of letters of credit was also sketched in Chapter 1.) We begin this chapter with documentary collections in order to highlight the weaknesses that letters of credit were designed to remedy. Documentary collections are still occasionally used in modern practice when payment is to be made by bill of exchange or time drat, two terms that are explained in Section IV, which deals with deferred payment. You or the professor directing your course (if there is one) may choose to skip Section II and move directly to Section III on letters of credit.

Pay men ts, Credi t, an d P erfo r m a nce Gua r a n t ees

II. Documentary Collections Documentary collections are the oldest, and simplest, form of documentary payment. For the purposes of the collection, the seller is called the principal. When the seller/principal receives the bill of lading representing the goods from the carrier, it takes the bill of lading and other relevant documents to a bank, known for these purposes as the remitting bank. (We shall return in the context of letters of credit to consider what other documents must be presented in addition to the bill of lading.) he remitting bank sends the documents to a bank in the buyer’s country—oten, but not always, the buyer’s own bank—with a covering document known as a collection instruction. he bank in the buyer’s country then contacts the buyer to inform it that the documents are ready for collection. Crucially, the bank in the buyer’s country, known for these purposes as the presenting bank, must not release the documents to the buyer (known for these purposes as the drawee) unless and until the buyer pays the purchase price or signs a document known as a drat or bill of exchange, which constitutes an undertaking to pay in the future. Drats and bills of exchange will be considered later in the chapter, when we look at the various methods available for the buyer to defer payment. For present purposes, all that needs to be understood is that the presenting bank acts as agent for the principal/seller, even though it may well be the drawee/buyer’s own bank. he presenting bank performs the all-important simultaneous exchange of documents for payment, acting on behalf of the principal/seller. Once the purchase price has been paid (or the drat or bill of exchange has been signed by the drawee), the presenting bank sends the funds to the remitting bank, which then credits them to the principal/seller’s account. $ Seller’s bank

Buyer’s bank Documents

$

Documents

Principal/seller F I GU R E   6 . 1

Documents

$

Drawee/buyer

Movement of documents and money under a documentary collection.

Although the machinery of the documentary collection is relatively straightforward, it depends on all parties, particularly the banks, performing their functions properly. International uniformity is very important in this context, as all banks in all countries must understand and perform their obligations in the same way. hat uniformity is usually achieved in practice by incorporation of a document published by the International Chamber of Commerce, called the Uniform Rules for Collections (1995 revision) or URC 522. (he document gets its popular abbreviated name from the fact that it is ICC Publication No. 522.) he ICC Uniform Rules for Collections were irst published in 1956. Revised versions were issued in 1967 and 1978. Although it has no oicial legal status, URC 522 provides the required international uniformity of governing rules, because it is almost always incorporated by reference into documentary collections for payment under international sales of goods.

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Article 7 of URC 522 provides for two alternative methods of release of the documents:  Documents Against Acceptance (D/A) and Documents Against Payment (D/P). Documents Against Acceptance (D/A) is concerned with the deferred payment instruments that will be considered later in the chapter. he extracts below are edited to deal only with Documents Against Payment (D/P) presentations in return for immediate payment by the buyer.

Uniform Rules for Collections—1995 Revision International Chamber of Commerce, ICC Publication No. 522 Article 1—Application of URC 522 (a) The Uniform Rules for Collections, 1995 Revision, ICC Publication No. 522, shall apply to all collections as deined in Article 2 where such rules are incorporated into the text of the “collection instruction” referred to in Article 4 and are binding on all parties thereto unless otherwise expressly agreed or contrary to the provisions of a national, state or local law and/or regulation which cannot be departed from. (b) Banks shall have no obligation to handle either a collection or any collection instruction or subsequent related instructions. (c) If a bank elects, for any reason, not to handle a collection or any related instructions received by it, it must advise the party from whom it received the collection or the instructions by telecommunication or, if that is not possible, by other expeditious means, without delay. ...

Article 3—Parties to a Collection (a) For the purposes of these Articles the “parties thereto” are: (i) the “principal” who is the party entrusting the handling of a collection to a bank; (ii) the “remitting bank” which is the bank to which the principal has entrusted the handling of a collection; (iii) the “collecting bank” which is any bank, other than the remitting bank, involved in processing the collection; (iv) the “presenting bank” which is the collecting bank making presentation to the drawee. (b) The “drawee” is the one to whom presentation is to be made in accordance with the collection instruction.

Article 4—Collection Instruction (a)(i) All documents sent for collection must be accompanied by a collection instruction indicating that the collection is subject to URC 522 and giving complete and precise instructions. Banks are only permitted to act upon the instructions given in such collection instruction, and in accordance with these Rules. (ii) Banks will not examine documents in order to obtain instructions.

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(iii) Unless otherwise authorised in the collection instruction, banks will disregard any instructions from any party/bank other than the party/bank from whom they received the collection. ...

Article 5—Presentation (a) For the purposes of these Articles, presentation is the procedure whereby the presenting bank makes the documents available to the drawee as instructed. (b) The collection instruction should state the exact period of time within which any action is to be taken by the drawee. Expressions such as “irst,” “prompt,” “immediate,” and the like should not be used in connection with presentation or with reference to any period of time within which documents have to be taken up or for any other action that is to be taken by the drawee. If such terms are used banks will disregard them. (c) Documents are to be presented to the drawee in the form in which they are received . . .

Article 6—Sight/Acceptance In the case of documents payable at sight the presenting bank must make presentation for payment without delay . . . ...

Article 9—Good faith and reasonable care Banks will act in good faith and exercise reasonable care. ...

Article 26—Advices ... (b) It shall be the responsibility of the remitting bank to instruct the collecting bank regarding the method by which the advices detailed in (c)(i), (c)(ii) and (c)(iii) are to be given. In the absence of such instructions, the collecting bank will send the relative advices by the method of its choice at the expense of the bank from which the collection instruction was received. (c) (i) Advice of Payment The collecting bank must send without delay advice of payment to the bank from which the collection instruction was received, detailing the amount or amounts collected, charges and/or disbursements and/or expenses deducted, where appropriate, and method of disposal of the funds. ... (iii) Advice of Non-payment . . . The presenting bank should endeavour to ascertain the reasons for non-payment . . . and advise accordingly, without delay, the bank from which it received the collection instruction.

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The presenting bank must send without delay advice of non-payment . . . to the bank from which it received the collection instruction. On receipt of such advice the remitting bank must give appropriate instruction as to the further handling of the documents. If such instructions are not received by the presenting bank within 60 days after its advice of non-payment and/or non-acceptance, the documents may be returned to the bank from which the collection instruction was received without any further responsibility on the part of the presenting bank.

Article 4 of the UCC deals with “Bank Deposits and Collections.” UCC § 4-103(a) provides that the provisions of Article 4 may be varied by agreement but the parties cannot disclaim a bank’s responsibility for its lack of good faith or failure to exercise ordinary care, or limit the damages available from the bank. he parties can agree on the standards by which the bank’s responsibility is to be measured, providing those standards are not “manifestly unreasonable.” See UCC § 4-103(a). In Gathercrest Ltd. v. First American Bank & Trust, 649 F. Supp. 106, 114 (M.D. Fla. 1985), the court made the following observations about the relationship between UCC Article 4 and the URC: Plaintifs’ expert testiied that it is normal and customary to incorporate the URC in transmittal letters, and that the URC represents the standards of international banking on drats. No evidence was produced by defendant to contradict this testimony. herefore, the Court determines that the standards were agreed upon by the parties through their conduct, and were not manifestly unreasonable. See Fla.Stat. § 674.103(1). Furthermore, the URC does not allow banks to disclaim responsibility for lack of good faith or failure to exercise ordinary care, and does not limit the measure of damages for such lack or failure. See URC Art. 1. hus, it does not contravene the requirements of UCC § 4-103 (§ 674.103). In summary, the Court concludes that the parties agreed, as that term is deined by the UCC, that the standards speciied in the URC should govern their duties with respect to the irst bill of exchange, and that an agreement to incorporate the provisions of the URC is permissible under UCC § 4-103 (§ 674.103). Like URC 522 article 9, UCC § 4-202(a)(1) requires banks to exercise ordinary care in presenting items under a collection. hus, if the presenting bank fails to follow the collection instructions, the seller/principal may proceed against it, both for breach of the undertaking it made under URC 522 when it accepted the collection instruction and, if the presenting bank is in the United States, for breach of UCC § 4-202(a)(1). As the following rather surprising decision shows, however, the procedures and standards mandated by URC 522 and the statutory standard of care imposed by UCC § 4-202(a)(1) apply only if the bank has agreed to handle the collection and to follow the collection instructions, which it has no obligation to do under URC 522 article 1(b).

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Inox Wares Pvt. Ltd. v. Interchange Bank United States District Court for the District of New Jersey, 2008 67 U.C.C. Rep. Serv. 2d 24 Before Chesler, District Judge. . . .

Background This case arises out of a series of transactions between two businesses in the kitchenware trade. Inox is a kitchenware dealer located in India; SRI is a kitchenware dealer located in Lodi, New Jersey. The essential facts about these transactions are undisputed. Inox maintains a banking relationship with Union Bank of India (“U-Bank”). SRI maintains a banking relationship with I-Bank, which has a branch in Lodi, New Jersey. Neither Inox nor U-Bank has any banking relationship with I-Bank. Inox and SRI engaged in a series of transactions between 1999 and 2005 in which SRI ordered goods from Inox, which exported them. There were approximately 97 sales transactions in which the following occurred: 1) U-Bank sent a package of sales transaction documents via DHL to I-Bank; 2) I-Bank received the package; 3) I-Bank employees read the shipping label, determined that the package should be forwarded to SRI, and called SRI to send someone to pick the package up; 4) SRI picked up the sealed package. The parties agree that no I-Bank employee ever opened any of these packages. The majority of these sales transactions were conducted on a documents against acceptance (“D/A”) basis:  U-Bank sent I-Bank shipping documents, which SRI used to take possession of the goods at the port of entry, later remitting payment to Inox. For 22 transactions, Inox expected that the transaction would be conducted on a documents against payment (“D/P”) basis. In a D/P transaction, an intermediary holds the shipping documents and is only authorized to release them after payment has been received from the buyer. A document inside each package sent to I-Bank instructed the recipient as to whether the transaction was D/A or D/P. The instruction document included in the D/P transaction packages directed the bank to collect payment pursuant to No. 522 of the Uniform Rules for Collection of the International Chamber of Commerce. It is undisputed that no I-Bank employee ever viewed an instruction document. I-Bank never processed any of the sales transactions on either a D/A or a D/P basis. Inox alleges that SRI paid it only a small portion of the amount owed on the D/P transactions, and that there is presently a balance due of $365,944.20. On September 13, 2006, Inox iled a Complaint with three counts in this Court. The First Count (breach of obligations) alleges that I-Bank was an agent of Inox and had a duty to collect payment from SRI prior to releasing the collection documents, and that it breached that duty. The Count asserts that these duties arose under the “New Jersey Uniform Commercial Code (“UCC”), the previous course of conduct between the parties and the International Chamber of Commerce Uniform Rules for Collection.” The Second Count (negligence) asserts that I-Bank owed Inox a duty of reasonable care, which it breached. The Third Count asserts that I-Bank acted in bad faith and breached the covenant of good faith and fair dealing . . . .

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II. The motion for partial summary judgment by Inox Inox moves for summary judgment in regard to I-Bank’s breach of the duty of care and asks the Court for a judgment in the amount of $365,944.20. In its supporting papers, Inox never speciies that it moves for judgment on the Second Count of the Complaint, for negligence; nonetheless, since the Second Count is the only count that rests on a breach of a duty of care, this Court construes the motion as a motion for partial summary judgment on the Second Count. Under New Jersey law, “[i]n a negligence case, plaintiff must show a duty of care, a breach of that duty, and that the breach proximately caused the harm.” . . . The motion for partial summary judgment on negligence turns on the issue of whether I-Bank owed a legal duty to Inox; the Court decides this as a matter of law. As the moving party with the burden of proof of negligence at trial, Inox must demonstrate that it is entitled to judgment as a matter of law. In its opening brief, Inox never clearly explains the legal basis for imposing a duty on I-Bank. Inox discusses at length No. 522 of the Uniform Rules for Collection of the International Chamber of Commerce (“URCs”), and makes references to the New Jersey Uniform Commercial Code, but never convincingly identiies the legal basis for imposing such a duty. Despite presenting a variety of arguments, Inox never establishes that, under these facts, any law imposes a duty on I-Bank to Inox regarding the D/P transactions. Inox irst argues that I-Bank violated the URCs. The URCs are rules promulgated by the International Chamber of Commerce which set forth procedures for documentary collection (collecting on a documents against payment basis). The basic ideas are as follows. URC No. 522 Article 3 deines the parties to such a collection:  a “principal” entrusts the handling of a collection to a “remitting bank,” while a “collecting bank” is any bank, other than the remitting bank, “involved in processing a collection.” Article 2(a) states: “ ‘Collection’ means the handling by banks of documents as deined in sub-Article 2(b), in accordance with instructions received . . . ” Article 4(a)(i) states: “All documents sent for collection must be accompanied by a collection instruction indicating that the collection is subject to URC 522 and giving complete and precise instructions.” In sum, the D/P process, under URC No. 522, involves a principal who entrusts a collection to the remitting bank, which sends a document for collection to the collecting bank, accompanied by the collection instruction. The collecting bank processes the collection in accordance with the instructions. With this background, No. 522 Article 1 provides the framework for the application of the URCs: [the Court then quoted Article 1, which is reproduced above]. Article 1 makes clear how parties make use of the URCs. A remitting bank sends a document for collection to a collecting bank, accompanied by the collection instruction. The collection instruction incorporates by reference No. 522 of the URCs. The collecting bank is not obligated to handle the collection but, if it agrees to do so, it has accepted the terms of the collection instruction and is bound by the URCs. The crucial point here is that the URCs are a set of principles created by a nongovernmental organization. URC No. 522 has no binding effect until a collecting bank accepts a document for collection which is accompanied by a collection instruction which incorporates No. 522. The operative legal mechanism is contractual: the URCs become binding when two parties enter into a contract which incorporates them. To succeed on its claim

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for breach of URC obligations, then, Inox must prove that I-Bank accepted documents for collection or otherwise agreed to the contractual terms stated in the collection instruction. Plaintiff has not done so. As a matter of undisputed fact, I-Bank never expressly agreed to the contractual terms stated in the collection instruction. I-Bank received DHL deliveries alleged to contain such documents and instructions, but never opened any of the packages. There is no evidence that I-Bank accepted the documents for collection in the sense that it agreed to act as a collecting bank. The URCs, incorporated by reference into the collection instruction, thus have no more binding effect on I-Bank than any offer to contract which is received physically but not ever read, no less consented to. A Sixth Circuit case provides a useful contrast. In Thiagarajar Mills, Ltd. v. Thornton, 242 F.3d 710, 712 (6th Cir. 2001), an Indian buyer sued SCB, a United States bank, which had acted as a collecting bank. There, the Court did look to the URCs to deine the duties owed by the collecting bank to the buyer. In that case, however, there was no question that SCB had processed a D/P transaction and had acted as a collecting bank, and its agreement to follow the URCs was clear. In the instant case, in contrast, the defendant bank never even opened the document shipments, no less acted as a collecting bank. Similarly, Proin S.A. v. LaSalle Bank, N.A., 223 F. Supp. 2d 960, 965 (N.D. Ill. 2002) and Gathercrest, Ltd. v. First American Bank & Trust, 649 F. Supp. 106, 114 (M.D. Fla. 1985), both cited by Inox, do not support its position. The Gathercrest court determined “that the parties agreed that the instructions in the transfer and collection letters . . . , including the incorporation of the URC, would govern their responsibilities . . . ” The Proin court determined that the parties were bound by an express contract which incorporated the URCs. Crucially, in the instant case, the parties have not entered into any such agreement. As to the effect of the New Jersey Uniform Commercial Code, Inox concedes that the UCC “imposes no obligation upon a bank to act as a collecting bank. However, should the bank agree to do so, it must act with ordinary care in accordance with the collection instructions. N.J. Stat. § 12A:4-202.” As with the URCs, then, the question of the application of the UCC turns on whether I-Bank agreed to act as a collecting bank. As Inox has failed to demonstrate that I-Bank agreed to act as a collecting bank, there is no basis to conclude that N.J. Stat. § 12A:4-202 imposed a duty of care upon I-Bank. Inox tries weakly, and without success, to show that the law imposes a duty on I-Bank in the absence of an agreement to act as a collecting bank. At one point, Inox argues that I-Bank “took possession of and handed [sic] the documents, and in doing so, assumed the role and duties of a presenting bank.” As support, Inox irst cites URC No. 522 Article 1, which does not say that taking possession of documents constitutes assuming the duties of a presenting bank. Inox also cites N.J. Stat. § 12A:4-105(e), which provides this deinition: “ ‘Collecting bank’ means a bank handling an item for collection except the payor bank.” Inox fails to show a legal basis for inding that the fact that I-Bank “took possession of and handed [sic] the documents” imposes upon it the legal duties of a collecting bank. In its reply brief, Inox continues this line of argument by citing Zhejiang Tongxiang Import & Export Corp. v. Asia Bank, N.A., 2001 WL 66331 (S.D.N.Y. Jan. 25, 2001). Two crucial differences distinguish Zhejiang: it was decided under New York law and, more signiicantly, the defendant bank had a correspondent banking relationship with the remitting bank and had collected on a number of previous D/P transactions. In the instant case, I-Bank did not have a correspondent banking relationship with U-Bank and it had never

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collected for them on previous D/P transactions; rather, there were no transactions with the remitting bank in which I-Bank followed the URC rules for international collection. There is no evidence that I-Bank ever processed any D/P collection. Inox points to the evidence that, on some occasions, I-Bank participated in the payment process by wiring money from SRI to Inox. Yet Piemonte states that I-Bank did not know that these wire transfers had any connection to the documents shipped to I-Bank. Absent such knowledge, the mere fact that I-Bank wired payments to Inox does not show that I-Bank even knew what was in the shipments it received, no less agreed to act as a collecting bank. Similarly, Inox points to the evidence that, on some occasions, SRI employees would bring documents to I-Bank and the branch manager, Aylin Boyaci, would stamp them with a stamp bearing the name and location of I-Bank. Inox argues: “[t]his conduct constitutes the taking up of the documents and imposes the duties of a collecting bank on Interchange Bank.” The argument cannot succeed because Boyaci testiied that she did not read or understand the documents she stamped. The portion of Boyaci’s testimony submitted by Inox establishes only that Boyaci stamped some unknown documents. It does not provide any evidence that Boyaci stamped documents pertaining to the D/P collections, and thus does not support the assertion that the stamping in some way constituted acting as a collecting bank. Inox also points to the evidence that I-Bank “handled” and “processed” the documents. This is wordplay facilitated by the many meanings of “handle.” There is no dispute that I-Bank handled the documents: it accepted the deliveries, contacted SRI, and handed the shipments to SRI. Such handling is distinctly different from agreeing to act as a collecting bank for the documents. There is no evidence that I-Bank handled or processed any documents beyond receiving and delivering the packages containing them. Inox has failed to persuade that I-Bank had a legal duty to Inox. This constitutes a complete failure of proof of an essential element of Plaintiff’s negligence case. Plantiff’s motion for summary judgment on the Second Count will be denied.

Question 6.1 If you were an I-Bank oicial, what would you expect to be contained in those DHL packages arriving from India? Would you have wondered why U-Bank was sending the packages to you rather than directly to SRI? Would you at least have opened the packages to see what was inside? If you had done so and had read the collection instruction, what could you have done if I-Bank did not want to act as collecting or presenting bank?

Question 6.2 If you were an Inox representative, would you have continued to send documents of to New Jersey via your bank, U-Bank, almost 100 times, without ever receiving back payment? If the buyer does not pay the purchase price, the presenting bank should retain the documents and promptly advise the remitting bank of nonpayment under URC 522 article 26(b) (iii). he carrier should not deliver the goods to the buyer because the buyer cannot present the original bill of lading, which is still in the hands of the presenting bank. hus, if both the presenting bank and carrier do as they have undertaken to do, the seller’s position remains secure. he seller/principal still retains the right to possession of the goods because

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it is entitled to ask the presenting bank to return the original bill of lading or to deal with it on the seller/principal’s behalf. he goods will not be released to the buyer without payment of the purchase price. If the buyer defaults altogether, the seller/principal can sell the goods to a new buyer by indorsing the bill of lading. Although the seller’s position would be secure in such circumstances, it would still be in a very weak position because its goods would now be far away, in the buyer’s country. Although the seller could ind a new buyer, it might well be forced to accept a lower price simply to get the goods of its hands. he seller would feel much more secure in sending the goods to the buyer’s country if it were sure that it would be paid even if the buyer defaulted. he seller would much prefer to have a guarantee that it will be paid as soon as the goods are sent to the buyer’s country. With such a guarantee in hand, the seller would no longer have any interest in, or concern for, the goods once they had been sent to the buyer’s country. Letters of credit are designed to provide the seller with just such a guarantee of payment. Because they provide the seller with much more security than does a documentary collection, letters of credit have largely replaced documentary collections in practice.

III. Letters of Credit A. How the Credit Works, UCP 600, and UCC Article 5 If the seller asks for payment by letter of credit, the buyer must persuade a bank in its country to make an undertaking to pay the seller. he buyer is known as the applicant and the bank as the issuing bank. he issuing bank charges the applicant a fee for its services and it will usually insist on some form of collateral security from the applicant to ensure that it will eventually be reimbursed the amount that it will promise to pay the seller. Oten, the applicant is an established customer of the issuing bank and may already have established a line of credit with the bank suiciently large to cover the amount in question. As we saw in Chapter 1, use of a letter of credit can add considerably to the transaction costs of an international sale. Banks issuing a letter of credit typically charge 3 percent or 4 percent of the face value of the letter of credit for amounts over $100,000, depending on the country. In other words, the issuing bank may charge about $30,000 to $40,000 to issue a $1 million dollar letter of credit. As we saw in Chapter 1, this cost buys the parties security by reducing the credit risks associated with the transaction, but it can become a heavy burden on parties who routinely deal with one another. For that reason, trading partners in a long-term relationship typically choose some other method of payment, such as open account, once they have established a relationship of trust—and some form of side security. he seller is called the beneiciary of the credit. he issuing bank sends a message to a bank in the seller’s country, asking that bank to advise the seller/beneiciary of the credit. Long ago, this was done by letter, which is why the device is called a “letter of credit.” Nowadays, the issuing bank sends an electronic message to the advising bank through the secure international interbank messaging system operated by the Society for Worldwide Interbank Financial Telecommunication (SWIFT). he advising bank then informs the seller/beneiciary that the credit has been opened in its favor and relays the information provided by the issuing bank about what documents must be presented to obtain payment.

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Obviously, the bill of lading representing the goods is the most important document that the seller/beneiciary must present. he buyer/applicant needs to get hold of the bill of lading in order to get possession of the goods on arrival in the buyer’s country. Recall also from Chapter 5 that a negotiable (order) bill of lading is as valuable as the goods are while the goods are still in the carrier’s possession, because the holder of the bill of lading is entitled to demand possession from the carrier. For that reason, the bill of lading also provides the issuing bank with additional security in return for its undertaking to pay the seller/beneiciary. If the buyer/applicant reneges on its promise to reimburse the issuing bank for the amount paid by the bank to the seller/beneiciary, the issuing bank will keep the bill of lading representing the goods. In theory, the issuing bank could then take possession of the goods but it would be more likely in practice to sell the bill of lading to a trader in order to liquidate its security. Although the bill of lading is the most important document that the buyer/applicant wants to receive in return for payment, it is not the only one. he documents listed in the letter of credit are the buyer/applicant’s best, and sometimes only, means of getting information about the goods before payment must be made. For example, if the goods are to be carried from the seller’s country to the buyer’s country in a shipping container, the bill of lading issued by the ocean carrier will typically only acknowledge receipt of the container itself, “said to contain” the goods listed on the face of the bill. (“Said to contain” is oten abbreviated to “STC,” an important set of initials.) he carrier has neither the time nor the inclination to open the container to inspect the goods inside before issuing the bill of lading. As a result, although the bill of lading gives the buyer/applicant the all-important right to take possession of the goods on arrival, an STC bill of lading tells the buyer/applicant virtually nothing about the goods themselves other than that they are said (by the seller/beneiciary/ shipper) to be in the container. In such circumstances, the buyer/applicant therefore usually demands to see some documentary veriication that the goods are actually in the container. hat kind of a document is usually called a packing list. Oten, the buyer/applicant also asks for a survey report that provides some independent veriication that the goods were in good condition when handed over to the carrier. If the goods are being sold on CIF or CIP terms, the buyer/applicant will also want to receive an insurance certiicate showing that the goods have been insured and entitling it to make a claim against the insurer in the event of loss or damage. A certiicate of origin veriies the country in which the goods were made or produced, which may be important for customs duty purposes in the buyer’s country, particularly if that country is party to regional free trade agreements that allow for preferential customs treatment for goods from speciied countries. A commercial invoice shows the price of the goods, which is at least a starting point for customs authorities in the buyer’s country to assess their value for customs purposes. Quarantine authorities in the buyer’s country may insist that the buyer prove that plant or food products are healthy before allowing them into the country, in which case the buyer will demand that the seller produce a document known as a phytosanitary certiicate, a plant health certiicate made by government authorities in the seller’s country. Some kinds of goods cannot be exported without government approval, in which case the buyer will demand to see the relevant export license. hese are only a few examples of the kinds of documents that may be required for presentation under a letter of credit. he key point to understand is that

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the buyer/applicant stipulates what documents it wants to receive in the application, and the issuing bank then makes presentation of those documents the condition for its promise to pay the purchase price. he letter of credit is an undertaking by the issuing bank to pay the designated amount in return for the stipulated documents. he letter of credit instructs the seller/beneiciary to present the stipulated documents to a bank in its own country, nominated by the issuing bank to act on its behalf. he letter of credit also speciies an expiry date for presentation; this is important to ensure that the documents have time to pass through the banking system before the goods arrive at their destination. he seller/beneiciary either presents the documents to the nominated bank directly or gives them to its own bank to send to the nominated bank. A bank that acts as an intermediary between the seller/beneiciary and the nominated bank is sometimes referred to as a collecting bank (see, e.g., Beyene v. Irving Trust Co., 762 F.2d 4 (2d Cir. 1985), reproduced below), although that terminology is more appropriate to documentary collections than letters of credit, where its use is unhelpful. Please refer to “FIGURE 6.2 he Letter of Credit” that is located between pages 284 and 285. he nominated bank scrutinizes the documents on behalf of the issuing bank to determine whether they conform to the description of them in the letter of credit. If they do, the nominated bank pays the seller/beneiciary on behalf of the issuing bank and forwards the documents to the issuing bank. he issuing bank reimburses the nominated bank in return for the documents, which it then presents to the buyer/applicant in return for the purchase price. If the documents do not conform to the credit, the nominated bank refuses to accept them and returns them to the seller/beneiciary, explaining what the discrepancies are. he seller/beneiciary may then try to take steps to cure the discrepancies in the documents by getting new ones issued. Unfortunately for the seller/beneiciary, its ability to cure any discrepancies and re-present the documents to the nominated bank is cramped by the fact that it must re-present the documents before the expiry date for presentation. he letter of credit elegantly shits the credit risk from the seller’s country to the buyer’s country. Unlike the position under documentary collections, where the seller continues to take the risk that the buyer will not pay, the issuing bank’s undertaking to pay the seller/ beneiciary under a letter of credit means that the issuing bank takes the risk of nonpayment by the buyer. Of course, as we have seen, the issuing bank charges a fee for that service, and it usually demands collateral security from its customer, the buyer/applicant, as well as retaining the security conferred by the negotiable (order) bill of lading. If the credit risk eventuates and the buyer/applicant cannot pay, any legal action then takes place between parties in the same country, the country where both the goods and the documents are now to be found: the buyer’s country. he seller/beneiciary can be sure of payment as soon as it has assembled the documents stipulated in the letter of credit. Although payment is made to the seller/beneiciary by the nominated bank, the legal undertaking to pay is given by the issuing bank, which is in the buyer’s country. Despite having a guarantee of payment by a bank, the seller/beneiciary may still feel a little uneasy about its position, particularly if it knows nothing about the issuing bank or if it thinks that legal action to enforce the issuing bank’s promise might prove diicult or costly in the issuing bank’s country. In such a situation, the seller may ask for a conirmed letter of credit. he

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buyer/applicant’s application to the issuing bank then requests a conirmed letter of credit and the issuing bank asks the nominated bank to add its conirmation to the issuing bank’s own undertaking to pay. If the bank in the seller’s country adds its conirmation to the issuing bank’s undertaking, it is known (predictably) as the conirming bank. he key diference between a nominated bank and a conirming bank is that the former pays as agent for the issuing bank but the latter undertakes to pay in its own name. (A conirming bank may also deal with the seller/beneiciary through the medium of yet another nominated bank in the seller’s country.) If the letter of credit is conirmed, the seller/beneiciary has a legally enforceable undertaking from a bank in its own country. hat provides the seller/beneiciary with yet more security but it adds yet more transaction costs to the payment process by making the machinery of payment yet more expensive. When the credit is advised to the seller/beneiciary, it indicates whether it is conirmed or unconirmed. Although an unconirmed letter of credit may sound rather unreliable or provisional, it is not. he expression means no more than that the undertaking to pay is given to the seller/beneiciary by one bank, not two. International uniformity of rights and obligations is just as important in this context as it is in relation to documentary collections. Here, too, that uniformity is provided by banks routinely incorporating a document prepared by the International Chamber of Commerce (ICC). he Uniform Customs and Practice for Documentary Credits (UCP) was irst promulgated by the ICC in 1933. he present version, which came into operation on July 1, 2007, is called UCP 600 because it is ICC Publication No. 600. It is incorporated by reference into almost all documentary letters of credit used in international sale transactions, although its two predecessors, UCP 500 and UCP 400 are still occasionally encountered in practice. (Another ICC document, URR 725, contains the Uniform Rules for Bank-toBank Reimbursements, which is an ampliication of the reimbursement obligations set out in UCP 600 article 13.) he extracts that appear below focus on the mechanism used for immediate payment; deferred payment is dealt with later in the chapter.

Uniform Customs and Practice for Documentary Credits—2007 Revision International Chamber of Commerce, ICC Publication No. 600 Article 1—Application of UCP The Uniform Customs and Practice for Documentary Credits, 2007 Revision, ICC Publication no. 600 (“UCP”) are rules that apply to any documentary credit (“credit”) (including, to the extent to which they may be applicable, any standby letter of credit) when the text of the credit expressly indicates that it is subject to these rules. They are binding on all parties thereto unless expressly modiied or excluded by the credit.

Article 2—Deinitions For the purpose of these rules: Advising bank means the bank that advises the credit at the request of the issuing bank.

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Applicant means the party on whose request the credit is issued. Banking day means a day on which a bank is regularly open at the place at which an act subject to these rules is to be performed. Beneiciary means the party in whose favour a credit is issued. Complying presentation means a presentation that is in accordance with the terms and conditions of the credit, the applicable provisions of these rules and international standard banking practice. Conirmation means a deinite undertaking of the conirming bank, in addition to that of the issuing bank, to honour or negotiate a complying presentation. Conirming bank means the bank that adds its conirmation to a credit upon the issuing bank’s authorization or request. Credit means any arrangement, however named or described, that is irrevocable and thereby constitutes a deinite undertaking of the issuing bank to honour a complying presentation. Honour means: (a) to pay at sight if the credit is available by sight payment . . . Issuing bank means the bank that issues a credit at the request of an applicant or on its own behalf. ... Nominated Bank means the bank with which the credit is available or any bank in the case of a credit available with any bank. Presentation means either the delivery of documents under a credit to the issuing bank or nominated bank or the documents so delivered. Presenter means a beneiciary, bank or other party that makes a presentation. ...

Article 7—Issuing Bank Undertaking (a) Provided that the stipulated documents are presented to the nominated bank or to the issuing bank and that they constitute a complying presentation, the issuing bank must honour . . . (b) An issuing bank is irrevocably bound to honour as of the time it issues the credit. (c) An issuing bank undertakes to reimburse a nominated bank that has honoured or negotiated a complying presentation and forwarded the documents to the issuing bank . . . An issuing bank’s undertaking to reimburse a nominated bank is independent of the issuing bank’s undertaking to the beneiciary.

Article 8—Conirming Bank Undertaking ... (b) A conirming bank is irrevocably bound to honour or negotiate as of the time it adds its conirmation to the credit. (c) A conirming bank undertakes to reimburse another nominated bank that has honoured or negotiated a complying presentation and forwarded the documents to the conirming bank . . . A conirming bank’s undertaking to reimburse another nominated bank is independent of the conirming bank’s undertaking to the beneiciary.

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(d) If a bank is authorized or requested by the issuing bank to conirm a credit but is not prepared to do so, it must inform the issuing bank without delay and may advise the credit without conirmation.

Article 5 of the UCC deals with “Letters of Credit.” Its provisions would supersede UCP 600 for letters of credit in the United States were it not for UCC § 5-116(c), which provides as follows: Except as otherwise provided in this subsection, the liability of an issuer, nominated person, or adviser is governed by any rules of custom or practice, such as the Uniform Customs and Practice for Documentary Credits, to which the letter of credit, conirmation, or other undertaking is expressly made subject. If (i) this article would govern the liability of an issuer, nominated person, or adviser under subsection (a) or (b), (ii) the relevant undertaking incorporates rules of custom or practice, and (iii) there is conlict between this article and those rules as applied to that undertaking, those rules govern except to the extent of any conlict with the nonvariable provisions speciied in Section 5-103(c). hus, only the nonvariable provisions in UCC § 5-103(c) prevail over the UCP 600 when it is incorporated by reference into the letter of credit, as it almost invariably is in international transactions. Also, where there is no conlict between Article 5 and UCP 600, both apply, as we will see later in the chapter in relation to the fraud exception. All 50 states, the District of Columbia, Puerto Rico, and the US Virgin Islands have adopted UCC § 5-116(c), thereby making legislative space for the private lawmaking undertaken by the ICC. (See David V.  Snyder, Private Lawmaking, 64 Ohio State L.J. 371, 389 (2003).)

B. Strict Compliance and Strict Preclusion he task of the issuing, conirming, or nominated bank is simply to determine whether the documents presented by the seller/beneiciary conform to the description set out in the letter of credit, which derives from the buyer/applicant’s application. he bank has no expertise in relation to the goods that are being sold, so it has no means of judging whether a discrepancy between the documents themselves and the description in the letter of credit is material. For example, if the contract of sale is for polyvinylidene chloride and the bill of lading presented by the seller/beneiciary acknowledges receipt by the carrier of polyvinylidene chloride but the survey certiicate refers to vinylidene chloride, the bank should refuse to pay. he bank is not expected to know whether vinylidene chloride is the same thing as polyvinylidene chloride nor is it required to check. It cannot and should not assume that the reference to vinylidene chloride is a mistaken reference to polyvinylidene chloride. (In fact, the two chemicals are diferent; vinylidene chloride is less valuable than polyvinylidene chloride but can be turned into it by a simple but slow and rather costly process.) If the survey certiicate does not comply with the description in the letter of credit, the documents are discrepant and that is reason enough in itself to refuse to accept them.

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his is an example of a principle known as the doctrine of strict compliance. he bank simply looks at the documents on their face and rejects them if there is any discrepancy. he doctrine was summed up long ago by Viscount Sumner of the House of Lords in Equitable Trust Co. of New York v. Dawson Partners Ltd. (1927) 27 Ll. L. Rep. 49, 52 in the following passage, the opening sentence of which is oten quoted (but seldom correctly attributed): here is no room for documents which are almost the same, or which will do just as well. Business could not proceed securely on any other lines. he bank’s branch abroad, which knows nothing oicially of the details of the transaction thus inanced, cannot take upon itself to decide what will do well enough and what will not. If it does as it is told, it is safe; if it declines to do anything else, it is safe; if it departs from the conditions laid down, it acts at its own risk. here is some tolerance of discrepancy, however, as there inevitably must be. he buyer/ applicant may have asked for presentation of a long list of documents, many of which are to be prepared by people other than the seller/beneiciary itself. It is very diicult for the seller/beneiciary to ensure that the documents generated by others conform precisely to the description of them in the letter of credit. (Indeed, there is an old joke that the only documents that conform perfectly to the credit are those that have been forged. Look back at the sample transaction in Chapter  1 where the documents in question were, in efect, forged to conform to the credit because we created them. Even those documents do not conform perfectly to the credit in a few respects, as pointed out in Chapter  1.) he system must allow some tolerance of minor discrepancies. To use an example from one of the Oicial Comments to UCC Article 5, a document referring to General Motors as “Jeneral Motors” should (probably) be regarded as a conforming document. UCC § 5-108 cmt. 1. (In an interesting and provocative article, Ronald Mann argued that discrepancies are so prevalent that the “classic story” of the reason for letters of credit—assurance to the seller/ beneiciary that it will get paid—is implausible, because any seller/beneiciary should know that the documents it presents for payment may be rejected by the bank. Mann argues that a better explanation of letters of credit is as a “veriication institution,” verifying information unavailable to the parties to the contract. See Ronald Mann, he Role of Letters of Credit in Payment Transactions, 98 Mich. L. Rev. 2494 (2000).) he converse of the doctrine of strict compliance is the doctrine of strict preclusion. If the bank does not strictly comply with the requirements of UCP 600 when rejecting discrepant documents, it is precluded from claiming that the documents do not conform. hus, if the bank accepts nonconforming documents without complaint, or takes longer than the permitted period of time to scrutinize the documents, or does not give notice of nonconformity within the stipulated time or in the stipulated form, it is bound to accept the documents because it is precluded from rejecting them. Put another way, the bank must state any discrepancy in a proper and timely “single notice” of dishonor or else it will be strictly precluded from relying on any unstated discrepancy as a reason for dishonor. UCP 600 art. 14(c). In the following extracts from UCP 600, the standard of tolerance for discrepancies appears in article 14(d); the doctrine of strict preclusion is set out in article 16(f ). UCC

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§ 5-108(a) also states a strict compliance standard modiied by “standard practice,” but recall that by virtue of UCC § 5-116(c) the provisions of UCP 600 prevail over those in UCC § 5-108(a) to the extent of any inconsistency.

Uniform Customs and Practice for Documentary Credits—2007 Revision International Chamber of Commerce, ICC Publication No. 600 Article 14—Standard for Examination of Documents (a) A nominated bank acting on its nomination, a conirming bank, if any, and the issuing bank must examine a presentation to determine, on the basis of the documents alone, whether or not the documents appear on their face to constitute a complying presentation. (b) A nominated bank acting on its nomination, a conirming bank, if any, and the issuing bank shall each have a maximum of ive banking days following the day of presentation to determine if a presentation is complying. This period is not curtailed or otherwise affected by the occurrence on or after the date of presentation of any expiry date or last day for presentation. ... (d) Data in a document, when read in context with the credit, the document itself and international standard banking practice, need not be identical to, but must not conlict with, data in that document, any other stipulated document or the credit. (e) In documents other than the commercial invoice, the description of the goods, services or performance, if stated, may be in general terms not conlicting with their description in the credit. (f) If a credit requires presentation of a document other than a transport document, insurance document or commercial invoice, without stipulating by whom the document is to be issued or its data content, banks will accept the document as presented if its content appears to fulil the function of the required document and otherwise complies with sub-article 14 (d). (g) A document presented but not required by the credit will be disregarded and may be returned to the presenter. ...

Article 16—Discrepant Documents, Waiver and Notice (a) When a nominated bank acting on its nomination, a conirming bank, if any, or the issuing bank determines that a presentation does not comply, it may refuse to honour or negotiate. (b) When an issuing bank determines that a presentation does not comply, it may in its sole judgement approach the applicant for a waiver of the discrepancies. This does not, however, extend the period mentioned in sub-article 14 (b). (c) When a nominated bank acting on its nomination, a conirming bank, if any, or the issuing bank decides to refuse to honour or negotiate, it must give a single notice to that effect to the presenter. The notice must state: (i) that the bank is refusing to honour or negotiate; and

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(ii) each discrepancy in respect of which the bank refuses to honour or negotiate; and (iii) (a) that the bank is holding the documents pending further instructions from the presenter; or (b) that the issuing bank is holding the documents until it receives a waiver from the applicant and agrees to accept it, or receives further instructions from the presenter prior to agreeing to accept a waiver; or (c) that the bank is returning the documents; or (d) that the bank is acting in accordance with instructions previously received from the presenter. (d) The notice required in sub-article 16 (c) must be given by telecommunication or, if that is not possible, by other expeditious means no later than the close of the ifth banking day following the day of presentation. (e) A nominated bank acting on its nomination, a conirming bank, if any, or the issuing bank may, after providing notice required by sub-article 16 (c) (iii) (a) or (b), return the documents to the presenter at any time. (f) If an issuing bank or a conirming bank fails to act in accordance with the provisions of this article, it shall be precluded from claiming that the documents do not constitute a complying presentation. (g) When an issuing bank refuses to honour or a conirming bank refuses to honour or negotiate and has given notice to that effect in accordance with this article, it shall then be entitled to claim a refund, with interest, of any reimbursement made.

Question 6.3 One of the predecessors to UCP 600 was UCP 400, issued in 1983. It provided that the issuing, conirming, and nominated bank should each have “a reasonable time” to examine the documents to determine whether they conformed to the credit. See UCP 400 art. 16(c). he imprecision of that phrase gave rise to a considerable amount of litigation about whether the bank had taken too long to scrutinize the documents. For example, in Banco General Runinahui v.  Citibank International, 97 F.3d 480 (11th Cir. 1996), a dispute arose about whether a period of two banking days amounted to a “reasonable time” for the purposes of article 16(c), given that the presentation deadline had expired while the documents were in the bank’s hands, with the result that the beneiciary could no longer try to cure the discrepancies and re-present the documents. he court held that two banking days was a “reasonable time” despite the fact that the presentation deadline had passed in the meantime. What would be the result in a similar case under UCP 600?

Question 6.4 he draters of UCP 500, issued in 1993, tried to give some precision to the vague phrase “a reasonable time” by adding the words “not to exceed seven banking days following the receipt of the documents.” UCP 500 art. 13(b). Unfortunately, that did not put an end to disputes. For example, in DBJJJ, Inc. v. National City Bank, 19 Cal. Rptr. 3d 904 (Cal. Dist. Ct. App. 2004), the court held that a period of seven full banking days was more than a “reasonable time” for the purposes of article 13(b). What would be the result in a similar case under UCP 600?

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Question 6.5 If the nominated bank pays the beneiciary ater wrongly accepting discrepant documents that do not conform to the credit, is it entitled to reimbursement from the issuing bank? See UCP 600 art. 16(g).

Question 6.6 Would the answer to Question 6.5 be any diferent if the issuing bank took longer than ive banking days to determine that the documents did not conform and that the presentation had been improperly honored by the nominated bank? See UCP 600 arts. 14(b), 16(f ). he next two (contrasting) cases illustrate the doctrine of strict compliance. he third case illustrates the doctrine of strict preclusion (although the court does not use the phrase). In the second case, the letter of credit was governed by UCP 400, and in the third case it was governed by UCP 500. As noted above, these were the two predecessors to UCP 600. When reference is made in the cases to provisions of UCP 400 or UCP 500, the equivalent provision of UCP 600 is identiied in square brackets.

Beyene v. Irving Trust Co. United States Court of Appeals for the Second Circuit, 1985 762 F.2d 4 Before timbers, neWman and kearse, Circuit Judges. kearse, Circuit Judge:

FACTS The material undisputed facts may be stated briely. In March 1978, Beyene agreed to sell to Mohammed Sofan, a resident of the Yemen Arab Republic (“YAR”), two prefabricated houses. Sofan attempted to inance the purchase through the use of a letter of credit issued by the Yemen Bank for Reconstruction and Development (“YBRD”) in favor of Beyene. YBRD designated Irving as the conirming bank for the letter of credit and Irving subsequently notiied Beyene of the letter’s terms and conditions. Beyene designated the National Bank of Washington (“NBW”) as his collecting bank. In May 1979, NBW sent Irving all of the documents required under the terms of the letter of credit. Thereafter, Irving telephoned NBW to inform it of several discrepancies in the submitted documents, including the fact that the bill of lading listed the party to be notiied by the shipping company as Mohammed Soran instead of Mohammed Sofan. The NBW oficial contacted testiied at deposition that Irving never waived the misspelling discrepancy and continued to assert that it was a discrepancy, though it undertook to request authorization from YBRD to pay the letter of credit despite the discrepancy. Such authorization was not forthcoming, and Irving refused to pay. Plaintiffs instituted the present suit seeking damages for Irving’s failure to pay the letter of credit. Irving moved for summary judgment dismissing the complaint on a variety of grounds. The district court . . . granted the motion on the sole ground that the misspelling of Sofan’s name in the bill of lading constituted a material discrepancy that gave Irving the right to dishonor the letter of credit. This appeal followed.

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DISCUSSION On appeal, plaintiffs contend principally that (1) the district court’s ruling is unsound as a matter of precedent and of policy, and (2) Irving should be required to pay the letter of credit on grounds of waiver and estoppel. We ind merit in none of plaintiffs’ contentions. We need discuss only the irst. The nature and functions of commercial letters of credit have recently been explored by this Court, see Voest-Alpine International Corp. v. Chase Manhattan Bank, N.A., 707 F.2d 680, 682–83 (2d Cir. 1983); Marino Industries Corp. v. Chase Manhattan Bank, N.A., 686 F.2d 112, 114–15 (2d Cir. 1982), and will not be repeated in detail here. The terms of a letter of credit generally require the beneiciary of the letter to submit to the issuing bank documents such as an invoice and a bill of lading to provide “the accredited buyer [with] some assurance that he will receive the goods for which he bargained and arranged payment.” H. Harield, Bank Credits and Acceptances 57 (5th ed. 1974). The issuing bank, or a bank that acts as conirming bank for the issuer, takes on an absolute duty to pay the amount of the credit to the beneiciary, so long as the beneiciary complies with the terms of the letter. In order to protect the issuing or conirming bank, this absolute duty does not arise unless the terms of the letter have been complied with strictly. Literal compliance is generally “essential so as not to impose an obligation upon the bank that it did not undertake and so as not to jeopardize the bank’s right to indemnity from its customer.” Voest-Alpine International Corp. v. Chase Manhattan Bank, 707 F.2d at 683; see H. Harield, Letters of Credit 57–59 (1979). While some variations in a bill of lading might be so insigniicant as not to relieve the issuing or conirming bank of its obligation to pay, see, e.g., H.  Harield, Bank Credits and Acceptances 75–78, we agree with the district court that the misspelling in the bill of lading of Sofan’s name as “Soran” was a material discrepancy that entitled Irving to refuse to honor the letter of credit. First, this is not a case where the name intended is unmistakably clear despite what is obviously a typographical error, as might be the case if, for example, “Smith” were misspelled “Smithh.” Nor have appellants claimed that in the Middle East “Soran” would obviously be recognized as an inadvertent misspelling of the surname “Sofan.” Second, “Sofan” was not a name that was inconsequential to the document, for Sofan was the person to whom the shipper [sic; meaning carrier] was to give notice of the arrival of the goods, and the misspelling of his name could well have resulted in his nonreceipt of the goods and his justiiable refusal to reimburse Irving for the credit. (Indeed, the record includes a telex from Beyene, stating that Sofan had not been notiied when the goods arrived in YAR and that as a result demurrage and other costs had been incurred.) In the circumstances, the district court was entirely correct in viewing the failure of Beyene and NBW to provide documents that strictly complied with the terms of the letter of credit as a failure that entitled Irving to refuse payment.

Question 6.7 You may recall from Chapter 5 that designation of the “Notify Party” on a negotiable bill of lading has no legal signiicance. It merely identiies the person who is expected to be the holder of the original bill of lading at the port of discharge, which is why the carrier must notify that person on arrival (usually, in practice, some days before arrival). If there were actually someone called Mohammed Soran at the port of discharge in Yemen, could he take delivery of the prefabricated houses when (wrongly) notiied by the carrier of

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their arrival? Would the misspelling of Sofan’s name be regarded as a material discrepancy under UCP 600 article 16(d), which tempers the doctrine of strict compliance by reference to “international standard banking practice”?

Boston Hides & Furs, Ltd. v. Sumitomo Bank, Ltd. United States District Court for the District of Massachusetts, 1994 870 F. Supp. 1153 Before tauro, Chief Judge:

Background In late May, 1992, plaintiff Boston Hides contracted to supply defendant Suelas Villegas, S.A. de C.V. (the “Buyer”) with cowhides in Laredo, Texas for $185,300.00. Pursuant to this contract, on June 4, 1992 defendant Banco Nacional de Mexico, S.A. (“Banamex”) issued a letter of credit (the “Letter of Credit”) in favor of Boston Hides for the Buyer’s account in the approximate amount of $175,000.00. Defendant Sumitomo Bank, Ltd. (“Sumitomo”) conirmed the Letter of Credit by advice dated June 5, 1992. In order to receive payment under the Letter of Credit, Boston Hides was required to present the following documents: CLEAN TRUCK BILL OF LADING, PLUS ONE NON-NEGOTIABLE COPY CONSIGNED TO [BANAMEX] MARKED NOTIFY TO MONE COMPANY, INC., 1902 FRANKFORT P.O. BOX 876, LAREDO, TEXAS 78040 U.S.A., AND SHOWING FREIGHT PREPAID. ORIGINAL AND 2 COPIES SIGNED COMMERCIAL INVOICE. The Letter of Credit also speciied “C. AND F.  LAREDO, TEXAS, U.S.A.” and indicated that it was subject to The Uniform Customs and Practice for Documentary Credits (1983 Revision), International Chamber of Commerce Publication Number 400 . . . (the “1983 U.C.P.”). On June 17, 1992, Boston Hides, through its collecting bank, State Street Bank and Trust Company (“State Street Bank”), made presentment to Sumitomo’s branch ofice in New York, seeking payment on the Letter of Credit. Boston Hide’s presentment included one commercial invoice, covering shipment of six trailer-loads of cowhides to Laredo, Texas with an aggregate value of $185,300.00 (the “Invoice”), and six bills of lading (the “Presentment Bills of Lading”). Sumitomo, and ultimately Banamex, (collectively, the “Banks”), however, refused to honor payment under the Letter of Credit. In support of its dishonor, Sumitomo cited a discrepancy between the identiication number of a trailer used to ship one of the six cowhide loads, as contained in one of the Presentment Bills of Lading (the “Bill of Lading”), and the identiication number for that same trailer contained in the Invoice. Boston Hides received notice of the rejected presentation from Sumitomo on June 18, 1992. Although Boston Hides did have until the following day to submit corrected documents, they did not do so. Subsequently, Banamex called the Buyer to get a waiver of the discrepancy. The Buyer, however, refused to provide such a waiver, and Boston Hides was never paid. Boston Hides commenced the present action on September 2, 1993 . . .

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IV. Analysis A. Banks’ Refusal to Pay under the Letter of Credit (Cross-Motions for Summary Judgment on Breach of Contract Claims) The parties’ claims for summary judgment under Counts I  and II hinge on two contested issues: (1) whether the trailer number inconsistency between the Bill of Lading and Invoice in plaintiff’s presentment justiied the Banks’ refusal to pay under the Letter of Credit, and (2) whether the plaintiff’s submission of the Presentment Bills of Lading as opposed to the Original Bills of Lading justiied the Banks’ refusal to pay under the Letter of Credit. The court will address each issue in turn.

1. Inconsistency Between Presentment Documents Generally, a demand for payment under a letter of credit must strictly comply with the letter of credit’s terms. Exotic Traders Far East Buying Ofice v. Exotic Trading U.S.A., Inc., 717 F. Supp. 14, 16 (D. Mass. 1989) (citing Banco Espanol de Credito v. State Street Bank & Trust Co., 385 F.2d 230, 237 (1st Cir. 1967), cert. denied, 390 U.S. 1013, 88 S. Ct. 1263, 20 L. Ed. 2d 163 (1968)). Accordingly, where presentment documents are not exactly as speciied in the letter of credit, demand may be rejected. Discrepancies between the presentment documents themselves, as opposed to between the presentment documents and the letter of credit, are also subject to this strict compliance principle. Pursuant to the 1983 U.C.P., a bank may refuse payment under a letter of credit where the presentment documents submitted are facially inconsistent. The Uniform Customs And Practice For Documentary Credits (1983 Revision), International Chamber Of Commerce Publication Number 400, Article 15 (1983). [UCP 600 article 14.] Such facially inconsistent presentment documents are treated as if they fail to meet the terms of the letter of credit. This general rule of strict compliance, however, has been moderately tempered. A bank may not dishonor payment based on a “hypertechnical reading” of the letter of credit. Exotic Traders, 717 F.  Supp. at 16. Instead, “a variance between documents speciied and documents submitted is not fatal if there is no possibility that the documents could mislead the paying bank to its detriment.” Flagship Cruises, Ltd. v. New England Merchants Nat. Bank of Boston, 569 F.2d 699, 705 (1st Cir. 1978); See also Beyene v. Irving Trust Co., 762 F.2d 4, 6 (2d Cir. 1985). The Banks do not contest the fact that Boston Hides’ presentment facially conformed to the Letter of Credit’s requirements. Instead, focusing on the internal trailer number discrepancy between the Invoice and the Bill of Lading, the Banks claim that this variance justiied dishonor. The court, however, disagrees. The inconsistent trailer numbers were a “technical variance,” Exotic Traders, 717 F. Supp. at 16; See Banco Espanol de Credito v. State Street Bank & Trust Co., 385 F.2d 230 (1st Cir. 1967), cert. denied, 390 U.S. 1013, 88 S. Ct. 1263, 20 L. Ed. 2d 163 (1968); Flagship Cruises, 569 F.2d at 705, regarding a matter which was not required under the terms of the Letter of Credit and which could not mislead the Banks to their detriment. [The court added in a footnote: “The court believes that the inconsistent trailer numbers in the present case fall within the scope articulated for allowable variances in the above cases.”] The Banks’ principal argument is that, “if the ‘marks and numbers’ identifying the goods on the [Presentment Bills of Lading] did not match the ‘marks and numbers’ that

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identiied the goods in possession of the freight forwarder or other custodian, there would be a clear risk that [the Banks’] claiming of the goods could have been prevented altogether or materially delayed.” (Memorandum in Support of Motion of Banks for Summary Judgment at 30). Accordingly, they maintain that the trailer number variance was a material discrepancy which threatened their security interest and, consequently, their ability to recover from the Buyer. This argument, however, ignores several important facts and is not supported by the relevant case law. First, the Letter of Credit did not even require “marks and numbers” be included on the Bill of Lading or Invoice. Where Boston Hides’ presentment would have been acceptable absent these “marks and numbers,” the court is unwilling to conclude that a minor, typographical error in such voluntarily included description defeats compliance. In Mueller Co. v.  South Shore Bank, 991 F.2d 14 (1st Cir. 1993), the letter of credit speciied that sight draft for payment was to be accompanied by invoices indicating order and shipment after a certain date. The court held dishonor justiied where many of the invoices submitted had order dates prior to the indicated date, directly contrary to the letter of credit’s requirements. In Beyene, 762 F.2d at 7, the court held that the bill of lading’s misspelling of the notice party’s name—“Sofan” as “Soran”—was a material discrepancy entitling the bank to refuse to honor the letter, since the plaintiffs did not claim that the names would be recognized as obvious misspellings of each other. The Letter of Credit in the present case, unlike those in Mueller and Beyene, never speciied any particulars required under the Presentment Bills of Lading and Invoices. Hence, the inconsistent trailer numbers were not a direct violation. [Again, the court added a footnote: “Even courts considering discrepancies between presentment documents upheld dishonor only where such discrepancies were also related to a required term of the letter of credit. See Voest-Alpine Intern. Corp. v. Chase Manhattan Bank, N.A., 545 F. Supp. 301 (S.D.N.Y. 1982), aff’d in part, rev’d in part, 707 F.2d 680 (2d Cir. 1983). For example, in Voest-Alpine, the letter of credit required “on board bills of lading evidencing current shipment dated no later than January 31, 1981” as well as certiicates of inspection and weight. Voest-Alpine, 545 F. Supp. at 302. The court found dishonor justiied where the certiicates of inspection and weight included a loading date other than the January 31, 1981 date indicated on the bills of lading. In the present case, the Letter of Credit never speciied that the Presentment Bills of Lading or Invoice should include trailer numbers. Thus, although there was a discrepancy between trailer numbers, the discrepancy did not relate to an explicit provision of the Letter of Credit as in Voest-Alpine.”] Moreover, despite any confusion created by the single numerical discrepancy in the trailer numbers, the Bill of Lading and Invoice did contain identical seal numbers, weights and numbers of pieces. The Banks could have resolved the slight trailer number inconsistency by reference to these other numbers on the face of the documents, and thereby recovered the goods. [Although the court held that the banks had improperly dishonored the presentation, it went on to deny the plaintiff’s motion for summary judgment and to give summary judgment for the banks because of the second of the two contested issues described above. The court held that the plaintiff’s submission of the presentment bills of lading as opposed to the original bills of lading justiied the banks’ refusal to pay under the letter of credit because the presentment bills of lading were false documents. That part of the case involved the fraud exception, which is considered later in the chapter.]

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Question 6.8 Did the letter of credit in the Beyene case specify that the bill of lading should name Sofan as Notify Party? Or was that a piece of information that the Beyene court regarded as signiicant but which was not speciied in the letter of credit?

Question 6.9 he inconsistency in the Boston Hides & Furs case was between the bill of lading and the invoice, which listed diferent trailer numbers. What if the inconsistency had been between the bill of lading and a packing list showing which trailer had been packed with the hides? Would that have been a material discrepancy?

Voest–Alpine Trading USA Corp. v. Bank of China United States Court of Appeals for the Fifth Circuit, 2002 288 F.3d 262 Before Politz, steWart and Clement, Circuit Judges. Clement, Circuit Judge: The Bank of China appeals an adverse judgment in its dispute with Voest-Alpine Trading USA Corporation regarding the validity of a letter of credit. After conducting a bench trial, the district court concluded that the bank improperly refused payment on the letter and awarded Voest-Alpine damages and attorney’s fees. We afirm the district court’s judgment.

I. FACTS AND PROCEEDINGS In June 1995, Jiangyin Foreign Trade Corporation (“JFTC”), a Chinese company, agreed to purchase 1,000 metric tons of styrene monomer from Voest-Alpine Trading USA Corporation (“Voest-Alpine”), an American company. At Voest-Alpine’s insistence, JFTC obtained a letter of credit from the Bank of China for the purchase price of $1.2 million. The letter of credit provided for payment to Voest-Alpine after it delivered the monomer and presented several designated documents to the Bank of China in accordance with the Uniform Customs and Practice for Documentary Credits of the International Chamber of Commerce, Publication No. 500 (“UCP 500”). By the time Voest-Alpine was ready to ship its product, the market price of styrene monomer had dropped signiicantly from the original contract price. JFTC asked for a price concession, but Voest-Alpine refused. After shipping the monomer to JFTC, Voest-Alpine presented the documents speciied in the letter of credit to Texas Commerce Bank (“TCB”), which would forward the documents to the Bank of China. TCB noted several discrepancies between what Voest-Alpine presented and what the letter of credit required. Because it did not believe any of the discrepancies would warrant refusal to pay, Voest-Alpine instructed TCB to present the documents to the Bank of China “on approval,” meaning that JFTC would be asked to waive the problems. The Bank of China received the documents on August 9, 1995. On August 11 the bank notiied TCB that the documents contained seven discrepancies and that it would contact JFTC about acceptance. On August 15, 1995, TCB, acting on behalf of Voest-Alpine, responded that the alleged discrepancies were not adequate grounds for dishonoring the letter of credit and demanded payment. On August 19, the Bank of China reiterated its position that the documents were insuficient and stated, “Now the discrepant documents may have us refuse to take up the documents according to article 14(B) of UCP 500.”

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[UCP 600 article 16(a).] JFTC refused to waive the discrepancies, and the Bank of China returned the documents to TCB on September 18, 1995. In October 1995, Voest-Alpine iled the instant action for payment on the letter of credit. The Bank of China initially iled a motion for judgment on the pleadings seeking dismissal for lack of jurisdiction and improper venue, which the district court denied. We afirmed the district court’s jurisdictional decision and held that the venue order was not yet appealable, and the case proceeded to trial. See Voest-Alpine Trading USA Corp. v. Bank of China, 142 F.3d 887 (5th Cir. 1998) (“Voest-Alpine I”). After conducting a bench trial, the district court ruled in favor of Voest-Alpine, inding that the Bank of China’s August 11, 1995 telex failed to provide notice of refusal and that the discrepancies noted in that telex were not suficient to allow rejection of the letter of credit.

II. DISCUSSION ...

B. Notice of Refusal The Bank of China’s primary contention on appeal is that the district court erroneously concluded that the bank failed to provide proper notice of refusal to Voest-Alpine. In order to reject payment on a letter of credit, an issuing bank must give notice of refusal to the beneiciary “no later than the close of the seventh banking day following the day of receipt of the [presentation] documents.” UCP 500 art. 14(d). [UCP 600 article 16(d): now the ifth banking day.] If the Bank of China did not provide timely notice, it must honor the letter of credit despite any questions as to Voest-Alpine’s compliance. See Heritage Bank v. Redcom Lab., Inc., 250 F.3d 319, 327 (5th Cir. 2001) (stating that an issuing bank waives its right to reject a letter of credit if it does not give notice of refusal within the time allotted by Article 14(d) of the UCP 500). The parties irst dispute the applicable standard of review for this issue. In a bench trial, indings of fact are reviewed for clear error and legal issues are reviewed de novo. See Kona Technology Corp. v. Southern Paciic Transportation, 225 F.3d 595, 601 (5th Cir. 2000). Voest-Alpine submits that adequacy of refusal is a factual determination subject to clear error review, because the UCP 500 is a set of trade usages and not law. The Bank of China concedes that the UCP 500 is not law, but it argues that de novo review is appropriate because the UCP 500 has acquired the function and status of law with respect to letters of credit which incorporate its terms. This circuit has long held that “[u]sage of trade is a question of fact.” Pennzoil Co. v. F.E.R.C., 789 F.2d 1128, 1143 (5th Cir. 1986). Accordingly, the district court’s inding that the Bank of China’s letter did not comply with the usages of trade set forth in the UCP 500 is a factual conclusion subject to review for clear error. The Bank of China received Voest-Alpine’s documents on August 9, 1995. Since August 12 and 13 were Chinese banking holidays, the deadline for giving notice of dishonor was August 18, 1995. The Bank of China’s only communication before the deadline was its telex of August 11, 1995. Accordingly, the issue is whether that telex provided notice of refusal. The bank’s August 11 telex stated: UPON CHECKING A/M DOCUMENTS, WE NOTE THE FOLLOWING DISCREPANCY: 1. LATE PRESENTATION. 2. BENEFICIARY’S NAME IS DIFFER (sic) FROM L/C.

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3. B/L SHOULD BE PRESENTED IN THREE ORIINALS (sic) I/O DUPLICATE, TRIPLICATE. 4. INV. P/L. AND CERT. OF ORIGIN NOT SHOWING “ORIGINAL.” 5. THE DATE OF SURVER (sic) REPORT LATER THAN B/L DATE. 6. WRONG L/C NO. IN FAX COPY. 7. WRONG DESTINATION IN CERT. OF ORIGIN AND BENEFICIARY’S CERT. WE ARE CONTACTING THE APPLICANT FOR ACCEPTANCE OF THE RELATIVE DISCREPANCY. HOLDING DOCUMENTS AT YOUR RISK AND DISPOSAL. The district court found that the telex failed to provide notice of refusal because (1) the bank did not explicitly state that it was rejecting the documents; (2) the bank’s statement that it would contact JFTC about accepting the documents despite the discrepancies “holds open the possibility of acceptance upon waiver” and “indicates that the Bank of China has not refused the documents”; and (3) the Bank of China did not even mention refusal until its August 19 telex in which it wrote: “Now the discrepant documents may have us refuse to take up the documents according to article 14(B) of UCP 500.” In light of these circumstances, the district court concluded that the August 11 telex was merely a status report, that the bank would not reject the documents until after it consulted JFTC, and that the bank did not raise the possibility of refusing payment on the letter of credit until August 19. Accordingly, the district court held that the Bank of China forfeited its right to refuse the documents and was obligated to pay Voest-Alpine. We ind ample evidence supporting the district court’s decision. The court’s determination that the August 11 telex did not reject the letter of credit is based primarily on the Bank of China’s offer to obtain waiver from JFTC. The offer to solicit waiver, the district court reasoned, suggests that the documents had not in fact been refused but might be accepted after consultation with JFTC. In reaching this conclusion, the district court relied heavily on the testimony of Professor James Byrne (“Byrne”), Voest-Alpine’s expert witness on international standard banking practice and the UCP 500. Byrne testiied that the bank’s telex would have given adequate notice had it not contained the waiver clause. The waiver clause, he explained, deviated from the norm and introduced an ambiguity that converted what might otherwise have been a notice of refusal into nothing more than a status report. Faced with this evidence, the district court correctly decided that the Bank of China noted discrepancies in the documents, and, instead of rejecting the letter of credit outright, contacted JFTC for waiver. Byrne further explained that the Bank of China’s actions, viewed in light of standard banking practices, were ambiguous. The UCP 500 contemplates a three-step procedure for dishonoring letters of credit. First, the issuing bank reviews the documents presented for discrepancies. Second, if the bank inds problems, it contacts the purchaser for waiver. Finally, after conferring with the purchaser, the bank may issue its notice of refusal. This sequence ensures the issuing bank’s independence in making its decision while also giving the purchaser an opportunity to waive discrepancies, thus promoting eficiency in a ield “where as many as half of the demands for payment under letters of credit are discrepant, yet, in the vast majority of cases, the account party waives the discrepancies and authorizes payment.” Alaska Textile Co., Inc. v. Chase Manhattan Bank, N.A., 982 F.2d 813, 824 (2d Cir. 1992). In light of the generally accepted procedure outlined by Byrne, we agree with the district court that the Bank of China’s notice of refusal was ambiguous and inadequate.

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. . . Viewed in the context of standard international banking practices, the Bank of China’s notice of refusal was clearly deicient. The bank failed to use the standard language for refusal, failed to comply with generally accepted trade usages, and created ambiguity by offering to contact JFTC about waiver, thus leaving open the possibility that the allegedly discrepant documents might have been accepted at a future date. Accordingly, the district court properly found that the August 11 telex was not an adequate notice of refusal. Since we agree with the district court that the bank failed to provide timely notice, we need not reach the question of whether the alleged discrepancies warranted refusal. ... Afirmed.

C. he Independence or Autonomy Principle and the Fraud Exception When considering the doctrine of strict compliance, we saw that the bank is not expected to know or inquire about the goods when scrutinizing the documents presented by the seller/ beneiciary. It is entitled to ignore the underlying transaction and focus on the documents. In fact, the relevant principle is stronger still: the bank is entitled and obliged to ignore the underlying transaction when considering whether to accept the documents and pay. his is another important doctrine of the law governing letters of credit, known as the independence principle or the autonomy principle. It means that the letter of credit is what is called an abstract undertaking, separate and independent from the underlying transaction that is the reason for its existence. For example, if the market price of the goods goes down between the time the contract is made and the time for performance, the buyer may form the view that it is paying too much under the sale contract and may try to renegotiate the price with the seller. In order to buy time for the renegotiations and to put commercial pressure on the seller, a buyer/applicant in this position might approach the issuing bank to ask it to ind some discrepancy in the documents presented by the seller/beneiciary so as to hold up payment of the agreed purchase price. he issuing bank should irmly reject any such advances by the buyer/applicant. he issuing bank’s undertaking to pay the seller/beneiciary is independent of anything that may be passing between the buyer/applicant and the seller/beneiciary in the underlying transaction. If the documents conform, the issuing bank should pay, even if that removes the ability of the buyer/applicant, its customer, to renegotiate the price. (Unfortunately, in practice, banks do not always keep their customers at the arm’s length required by the independence principle. Look back at Voest–Alpine Trading USA Corp. v. Bank of China, 288 F.3d 262 (5th Cir. 2002), reproduced above. It is diicult to avoid the conclusion that the issuing bank, the Bank of China, found discrepancies that the nominated bank, TCB, thought were immaterial because the Bank of China’s customer, the applicant JFTC, was trying to renegotiate the original contract price with the seller/ beneiciary Voest-Alpine.) he independence principle is stated in UCC § 5-103(d). It also appears, emphatically worded, in UCP 600:

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Uniform Customs and Practice for Documentary Credits—2007 Revision International Chamber of Commerce, ICC Publication No. 600 Article 4—Credits v. Contracts (a) A credit by its nature is a separate transaction from the sale or other contract on which it may be based. Banks are in no way concerned with or bound by such contract, even if any reference whatsoever to it is included in the credit. Consequently, the undertaking of a bank to honour, to negotiate or to fulil any other obligation under the credit is not subject to claims or defences by the applicant resulting from its relationships with the issuing bank or the beneiciary. A beneiciary can in no case avail itself of the contractual relationships existing between banks or between the applicant and the issuing bank. (b) An issuing bank should discourage any attempt by the applicant to include, as an integral part of the credit, copies of the underlying contract, proforma invoice and the like.

Article 5—Documents v. Goods, Services or Performance Banks deal with documents and not with goods, services or performance to which the documents may relate.

In the pure, unmodiied form in which it appears in UCP 600, the independence principle would be the perfect vehicle for fraud. All that a seller/beneiciary needs to do to get paid is to ensure that the documents conform to the credit. Documents can be forged or the third parties who produce them can be bribed. If the documents conform to the credit, the seller/beneiciary is entitled to payment in full even if it sends to the buyer/applicant only half of the goods promised in the sale contract, or a pile of garbage, or nothing at all. More fundamentally, the buyer/applicant is like the Sorcerer’s Apprentice: it cannot stop what it has started by applying for the credit, even if it inds out that it is being defrauded by the seller/beneiciary, because the bank’s obligation is simply to pay for conforming documents regardless of what is happening in the underlying transaction. Look again at UCP 600 article 4(a): the bank’s undertaking under the letter of credit “is not subject to claims or defences by the applicant resulting from its relationships with . . . the beneiciary.” If the seller is indeed defrauding the buyer, the buyer obviously has a claim against the seller under the sale contract, but the bank’s undertaking to pay is not afected by that claim. Although there must obviously be some legal mechanism for preventing the letter of credit being used for fraud, the UCP 600 provides none. It simply states the independence principle in pure form and contains no provisions dealing with fraud. As a result, countries have developed fraud exceptions as part of their domestic law. It is important to understand that although many countries have a fraud exception, there is no international uniformity. he precise contours of the fraud exception difer from country to country. Broadly speaking, the fraud exception allows the applicant to go to court to obtain an injunction restraining the bank from paying. Obviously, the court will demand to see evidence of fraud before it issues an injunction restraining the bank from performing its undertaking to the beneiciary. One of the important diferences of emphasis between diferent national versions of the fraud exception lies in the difering standards of persuasion that courts apply to the requisite proof of fraud.

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he seminal case about the fraud exception in the United States is Sztejn v. J. Henry Schroder Banking Corp., 31 N.Y.S.2d 631 (N.Y Sup. Ct. 1941). (It is remarkable how inluential this decision of a single trial judge has been. It has been described as the catalyst of the fraud exception throughout the common law world. See Xiang Gao, The Fraud Rule in the Law of Letters of Credit: A Comparative Study 39 (2002).) Ater acknowledging that “[i]t is well established that a letter of credit is independent of the primary contract of sale between the buyer and the seller” (Sztejn, 31 N.Y.S.2d 631, 633) Shientag, J. continued (id. at 634): his is not a controversy between the buyer and seller concerning a mere breach of warranty regarding the quality of the merchandise; on the present motion, it must be assumed that the seller has intentionally failed to ship any goods ordered by the buyer. In such a situation, where the seller’s fraud has been called to the bank’s attention before the drats and documents have been presented for payment, the principle of the independence of the bank’s obligation under the letter of credit should not be extended to protect the unscrupulous seller. It is true that even though the documents are forged or fraudulent, if the issuing bank has already paid the drat before receiving notice of the seller’s fraud, it will be protected if it exercised reasonable diligence before making such payment . . . However, in the instant action Schroder [the issuing bank] has received notice of Transea’s [the beneiciary’s] active fraud before it accepted or paid the drat. Accordingly, Shientag, J. refused to dismiss the plaintif ’s action to restrain the bank from paying under the letter of credit. Sztejn was followed and applied many times and the fraud exception became so much part of the fabric of US letter of credit law that it was codiied as part of the original UCC in 1955–57, in § 5-114(2). (he original UCC was published in 1952; UCC § 5-114 was in Supplement No. 1, which was published in 1955; it was amended in 1957.) he fraud exception thereater acquired statutory force as states adopted the UCC. When UCC Article 5 was amended in 1995, the fraud exception was moved to § 5-109. It allows the issuing bank to refuse to pay, or the applicant to obtain an injunction restraining the issuing bank from paying, when “a required document is forged or materially fraudulent, or honor of the presentation would facilitate a material fraud by the beneiciary on the issuer or applicant.” he former part of this phrase is oten distilled down to “fraud on the documents,” the latter part to “fraud in the underlying transaction.” he case extracted below deals with fraud in the underlying transaction. It also explains the relationship between UCP and the fraud exception in UCC § 5-109.

Mid-America Tire, Inc. v. PTZ Trading Ltd. Supreme Court of Ohio, 2002 768 N.E.2d 619 [Mid-America Tire, Inc. (MAT), a US company, agreed to buy two types of tires from PTZ Trading Ltd., a company based in Guernsey in the Channel Islands, which is part of the

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United Kingdom. MAT was principally interested in buying summer tires but it agreed to buy less lucrative winter tires as part of a package deal. PTZ arranged for shipment of the winter tires irst. In order to pay for the winter tires, MAT applied to First National Bank of Chicago to issue an unconirmed letter of credit to PTZ as beneiciary. The nominated bank was Barclays Bank in Guernsey. The letter of credit was expressed to be subject to UCP 500. As negotiations about the summer tires progressed, MAT discovered that PTZ did not have access to enough summer tires to be able to fulill the second part of the contract and would be unable to keep its promise in relation to the summer tires. MAT applied for an injunction to restrain First Bank and Barclays Bank from paying under the letter of credit in relation to the winter tires. The trial court granted a temporary restraining order. After that order was made, PTZ presented the documents in relation to the winter tires to Barclays Bank in Guernsey. When Barclays informed First Bank about the presentment, First Bank informed Barclays about the temporary restraining order. Barclays told PTZ that it could not pay under the letter of credit because of the court order. The trial court later granted a permanent injunction restraining payment. The trial court found that the documents presented by PTZ to Barclays were in strict compliance with the letter of credit but there was “clear and convincing evidence” that PTZ had fraudulently induced MAT to open the letter of credit for the winter tires by making false promises and representations about the summer tires. PTZ appealed. In a split decision, the Court of Appeals of Ohio reversed the judgment of the trial court, holding that the terms of UCP 500, which were incorporated into the letter of credit, superseded those of the Ohio enactment of UCC Article 5. Because UCP 500 said nothing about fraud, the Court of Appeals held that no injunction could be ordered. MAT appealed to the Supreme Court of Ohio.] resniCk, J.: ...

Governing Law R.C. Chapter 1305 is Ohio’s version of Article 5 of the Uniform Commercial Code (“UCC”). It was enacted in its current form, effective July 1, 1998, to relect the 1995 revision of Article 5, and is applicable to any LC that is issued on or after its effective date. See 1997 H.B. No. 338, uncodiied Section 4. Although R.C. Chapter 1305 is the primary source of law governing LCs in Ohio, it “is far from comprehensive.” UCC § 5-103, Oficial Comment 2 (1995). It is designed to cover only “certain rights and obligations arising out of transactions involving letters of credit.” R.C. 1305.02(A) [UCC § 5-103(a)]. It is intended to be supplemented by various principles of law and equity that will often apply to help determine those rights and obligations. R.C. 1301.03 [Former UCC § 1-103/Revised UCC § 1-103(b)]. And subject to certain exceptions, it allows the parties to vary the effect of its provisions “by agreement or by a provision stated or incorporated by reference in an undertaking.” R.C. 1305.02(C) [UCC § 5-103(c)]. See also R.C. 1301.02(C) [Former UCC § 1-102(3)/Revised UCC § 1-302(a)]. The parties in this case have speciically adopted the UCP as applicable to the present undertaking. In fact, “[m]any letters of credit, domestic and international, state that they shall be governed by the UCP.” 3 White & Summers, Uniform Commercial Code 122, Section

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26-3 (4th ed. 1995). “When rules of custom and practice are incorporated by reference, they are considered to be explicit terms of the agreement or undertaking.” UCC § 5-103, Oficial Comment 2. The question that naturally arises from such an incorporation is whether and to what extent R.C. Chapter 1305 will continue to apply to the undertaking. In other words, when a particular LC states that it is subject to the UCP, what is the resulting relationship between the UCP and R.C. Chapter 1305 with regard to that transaction? The Court of Appeals, perhaps unwittingly, took the approach that the entirety of R.C. Chapter 1305 is displaced whenever the UCP is incorporated into a particular transaction. We say “unwittingly” because the Court of Appeals relied extensively on a case that was decided under a unique provision contained in Alabama’s former statutory version of Article 5. In S. Energy Homes, Inc. v. AmSouth Bank of Alabama, 709 So.2d 1180, 1184 (Ala.1998), the Alabama Supreme Court explained: “Section 7-5-114(2), Ala.Code 1975, authorizes courts to issue injunctions that will prevent the issuer in a letter of credit transaction from honoring drafts or demands for payment where there has been a fraud in the issuance of the letter or a fraud in the underlying transaction. Benetton Services Corp. v. Benedot, Inc., 551 So.2d 295 (Ala. 1989). Section 7-5-102(4), however, speciically states that Article 5, including § 7-5-114(2), is inapplicable when letters of credit are subject to the UCP. The parties stipulated in the letter of credit that the UCP would govern any dispute that might arise in the credit transaction.” (Emphasis added.) Since no such provision as former Ala.Stat. § 7-5-102(4) has ever appeared in either Article 5 or R.C. Chapter 1305, the decision in S. Energy must be considered endemic to Alabama. Curiously, the Court of Appeals also quoted from Nassar v. Florida Fleet Sales, Inc., 79 F. Supp. 2d 284, 292 (S.D.N.Y. 1999), in order to demonstrate that the issuer’s liability under the UCP is independent of any fraud in the underlying transaction. In Nassar, the court explained that “[u]nder New York law, a letter of credit that states it is subject to the UCP is speciically exempted from the Uniform Commercial Code provisions dealing with letters of credit, codiied at Article 5. See N.Y. U.C.C. § 5-102(4).” Id. at 291. Thus, the New York statute is similar to the former Alabama statute applied in S. Energy. Yet the court in Nassar pointed out that even under this provision, New York courts hold that the fraud exception, “codiied at N.Y. U.C.C. § 5-114, is still applicable to letters of credit subject to the UCP.” (Emphasis added.) Id. at 291. In those jurisdictions that do not adopt Alabama’s former statutory modiication of the UCC, parties will not be able to avoid all of Article 5’s rules by incorporating the UCP into their undertaking. This is not a situation where one complete set of rules is substituted for another. The scope of the UCP is basically different from that of Article 5. “Because of their different scope, Article 5 [of the UCC] covers some important areas not covered by the UCP, and the UCP covers some important areas not covered by Article 5.” 6B Hawkland & Miller (Rev.2001), at 5-46 to 5-47, Section 5-103:3. Each of these bodies of rules will apply to govern the undertaking in their respective areas of coverage, and both will apply concurrently in the event of any overlapping consistent provisions. Id. at 5-47, Section 5-103:3. See also 7A Lawrence (Rev.2001) 431, Section 5-101:25.

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It is only when the UCP and R.C. Chapter 1305 contain overlapping inconsistent provisions on the same issue or subject that the UCP’s terms will displace those of R.C. Chapter 1305. Thus, when a particular LC states that it is subject to the UCP, the UCP’s terms will replace those of R.C. Chapter 1305 only to the extent that “there is a direct conlict between a provision of the UCP and an analogous provision of R.C. Chapter 1305.” Mantua Mfg. Co. v. Commerce Exchange Bank, 75 Ohio St.3d 1, 661 N.E.2d 161 (1996), paragraph one of the syllabus. In other words, “the UCP terms are permissible contractual modiications under [R.C. 1301.02(C) and 1305.02(C)] . . . when a rule explicitly stated in the UCP . . . is different from a rule explicitly stated in Article 5.” UCC 5-103, Oficial Comment 2. Thus, the fact that the credit in this case was expressly made subject to the UCP is not dispositive. Instead, the determinative issue is whether a direct conlict exists between the UCP and R.C. Chapter 1305 as to the availability of injunctive relief against honor where fraud is claimed. [The court quoted the Ohio enactments of UCC §§ 5-103(d), 5-108, 5-109(b) before continuing:] The UCP also adopts the independence principle, but does not provide for a fraud exception. Article 3(a) of the UCP states: “Credits, by their nature, are separate transactions from the sales or other contract(s) on which they may be based and banks are in no way concerned with or bound by such contract(s), even if any reference whatsoever to such contract(s) is included in the Credit. Consequently, the undertaking of a bank to pay, accept and pay Draft(s) or negotiate and/or to fulill any other obligation under the Credit, is not subject to claims or defences by the Applicant resulting from his relationships with the Issuing Bank or the Beneiciary.” Article 4 explains, “In Credit operations all parties concerned deal with documents, and not with goods, services and/or other performances to which the documents may relate.” The Court of Appeals, although guided by its reliance on S. Energy, 709 So.2d 1180, found essentially that the UCP’s silence on the issue of fraud precludes the applicant from obtaining relief under R.C. 1305.08(B) [UCC § 5-109(b)]. We disagree. In adopting the UCP, “the International Chamber of Commerce undertook to ill in operational details for documentary letter of credit transactions by stating a consensus view of the customs and practice for documentary credits.” 6B Hawkland & Miller (Rev.2001), at 5-44, Section 5-103:3. Because “the UCP ‘is by deinition a recording of practice rather than a statement of legal rules,’ [it] does not purport to offer rules which govern the issuance of an injunction against honor of a draft.” Intraworld Indus., Inc. v. Girard Trust Bank, 461 Pa. 343, 355, 336 A.2d 316 (1975), quoting Harield, Practice Commentary (McKinney’s Consol.Laws of N.Y., 1964), Comment 38. Thus, the UCP’s silence on the issue of fraud “should not be construed as preventing relief under the ‘fraud in the transaction’ doctrine, where applicable law permits it.” (Emphasis sic.) Wyle v. Bank Melli of Tehran, Iran, 577 F. Supp. 1148, 1164 (N.D. Cal. 1983). In fact, the overwhelming weight of authority is to the effect that Article 5’s fraud exception continues to apply in credit transactions made subject to the UCP. These courts hold, in one form or another, that the UCP’s failure to include a rule governing injunctive

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relief for fraud does not prevent the applicant from obtaining such relief under Article 5. Stated variously, these courts recognize that there is no inherent conlict between the UCP’s statement of the independence principle and Article 5’s remedy against honor where fraud is charged. Instead, this is merely a situation where Article 5 covers a subject not covered by the UCP. PTZ concedes that these cases were correctly decided under former UCP Publication No. 400 (1983), which was silent on the issue of fraud. According to PTZ, however, “UCP 500 art. 3, which controls this action, is no longer silent on the fraud exception.” Instead, PTZ argues that the last sentence in Article 3 of UCP 500, which did not appear in UCP 400, “speciically speaks to the fraud exception, [and provides that] a fraud claim may not be interposed to bar the collection of [an] L/C.” In fact, relying on Documentary Credits, UCP 500 & 400 Compared, International Chamber of Commerce Publication No. 511 (1993), PTZ contends that Article 3 was amended in 1993 for the express purpose of breaking the UCP’s long-standing silence on the issue of fraud in order to counteract the effect of the foregoing decisions. PTZ’s arguments regarding the amended UCP are ingenious but unavailing. Not all of the decisions applying Article 5’s fraud exception to LCs incorporating the UCP involved UCP 400. W.Sur.Co., 257 F.3d 933 and E. & H. Partners, 39 F. Supp. 2d 275, dealt with the incorporation of UCP 500. On the other hand, PTZ has not produced any case or other authority suggesting that the incorporation of UCP 500 into an undertaking displaces Article 5’s exception for fraud. Moreover, the oficial comments to UCP 511 [sic] do not support the notion that Article 3 has now addressed the issue of fraud. The word “fraud” does not even appear in the commentary quoted by PTZ. To the contrary, the Working Group states speciically that the new text of Article 3 operates to deter “the Applicant’s demand that payment should be stopped because of the Beneiciary’s breach of his contractual obligations to the Applicant.” (Emphasis added.) Reporting further, the Working Group explains, “This new language in UCP 500 Article 3 clariies that neither the Beneiciary nor the Applicant can avail himself of any underlying contractual relationship.” (Emphasis added.) The UCP has been amended approximately every ten years since 1962. See 7A Lawrence (Rev.2001) 428, fn. 32, Section 5-101:22. If the current version had inally broken the UCP’s longstanding silence on the issue of fraud, one would expect at least a mention of that fact somewhere in the amendatory text or commentary. Yet, one commentator examining the 1993 amendments to the UCP actually laments: “The choice of the Working Group not to address the issues of fraud in the tendered documents and/or the sale of goods transaction relects either an unwillingness to tackle a dificult but necessary issue, or an outdated view of the limited scope of the UCP as merely a codiication of bankers’ practices rather than a dispositive regime of rules. May a bank decline to pay on a credit when the beneiciary has attempted to defraud the applicant with respect to the goods or the documents? May the applicant and/or the bank petition the court to enjoin payment in this situation? With virtually no guidance from the UCP, these issues fall for determination under the applicable national law.” (Footnotes omitted.) Buckley, “The 1993 Revision of the Uniform Customs and Practice for Documentary Credits”, 28 G.W.J.Intl.L. & Econ. 265, 302–303 (1995).

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We hold, therefore, that when a letter of credit expressly incorporates the terms of the UCP, but the UCP does not contain any rule covering the issue in controversy, the UCP will not replace the relevant provisions of R.C. Chapter 1305. Since the UCP does not contain any rule addressing the issue of injunctive relief where fraud occurs in either the credit documents or the underlying transaction, R.C. 1305.08(B) remains applicable in credit transactions made subject to the UCP. Accordingly, the rights and obligations of the parties in this case are governed by R.C. 1305.08(B) [UCC § 5-109(b)], and the judgment of the Court of Appeals is reversed as to this issue.

C Establishing Fraud Under R.C. 1305.08(B) [UCC § 5-109(b)] Having determined the applicability of R.C. 1305.08(B) [UCC § 5-109(b)], we must now consider its boundaries. In this regard, we have been asked to decide whether an issuer may be enjoined from honoring a presentation on the basis of beneiciary’s fraud in the underlying transaction and to characterize the fraudulent activity justifying such relief.

1 Fraud in the Underlying Transaction May the issuer be enjoined from honoring a presentation under R.C. 1305.08(B) [UCC § 5-109(b)] on the basis of the beneiciary’s fraudulent activity in the underlying transaction? The short answer is yes, since R.C. 1305.08(B) [UCC § 5-109(b)] authorizes injunctive relief where “honor of the presentation would facilitate a material fraud by the beneiciary on the . . . applicant.” To fully appreciate the import of this language, however, it is necessary to review some of the history leading to its adoption. Before the independence principle was ever codiied, its parameters were set in the seminal case of Sztejn v. J. Henry Schroder Banking Corp., 177 Misc. 719, 31 N.Y.S.2d 631 (1941). In that case, the applicant-buyer contracted to purchase a quantity of bristles from the beneiciary-seller, but the seller shipped 50 crates of cow hair and other rubbish. The court concluded that these facts, if established, could support an injunction against honor. In so doing, the court explained that the independence principle applies “in cases concerning alleged breaches of warranty,” but does not extend to a case “involving an intentional fraud on the part of the seller.” Id. at 722, 31 N.Y.S.2d 631. In other words, the fraud defense actually “ ‘marks the limit of the generally accepted principle that a letter of credit is independent of whatever obligation it secures.’ ” E & H Partners, 39 F. Supp.2d at 285, quoting Rockwell Internatl. Sys., Inc. v. Citibank, N.A., 719 F.2d 583, 588 (2d Cir. 1983). As originally drafted in 1955, UCC § 5-114 provided that a court of appropriate jurisdiction may enjoin honor only if there was forgery or fraud in a required document. See United Bank Ltd. v. Cambridge Sporting Goods Corp., 41 N.Y.2d at 260, 392 N.Y.S.2d 265, 360 N.E.2d 943, fn. 5. In 1957, the drafters added language providing that the court may enjoin such honor where “a required document . . . is forged or fraudulent or there is fraud in the transaction.” (Emphasis added.) UCC § 5-114(2). This rule represents a codiication of the Sztejn case. Cambridge Sporting Goods Corp., 41 N.Y.2d at 259, 392 N.Y.S.2d 265, 360 N.E.2d 943; 3 White & Summers at 177, Section 26-10.

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One of the major disputes surrounding former UCC § 5-114(2) centered on whether the “transaction” meant only the credit transaction per se or encompassed the underlying transaction as well. As White and Summers explain: “[W]hat is the ‘transaction’ in which the fraud must have been committed to give rise to the 5-114(2) defense? Must fraud be in the letter of credit transaction, or can it be in the underlying transaction? The courts and commentators are split on the issue whether ‘transaction’ refers only to the letter of credit transactions or also to the underlying transaction. Those in the ‘credit transaction’ camp would limit the ‘fraud in the transaction’ exception to those situations in which the beneiciary has committed fraud on the issuer or has submitted false documents to the issuer. Proponents of this view would argue that the fraud committed in the Sztejn case [177 Misc. 719, 31 N.Y.S.2d 631] equals fraud in the credit transaction because the documents the beneiciary presented to the issuer actively misrepresented the underlying transaction. In contrast, advocates who argue that the word ‘transaction’ refers to the underlying transaction read Sztejn as a case in which the fraud existed in the underlying sales transaction because the buyer was going to receive rubbish instead of the goods he contracted for. Under this reading of the Sztejn case—and consequently under section 5-114(2)—an applicant has the right to enjoin the issuer’s payment of a draft if the beneiciary has committed fraud on the applicant in the underlying transaction.” (Footnotes omitted.) Id. at 179-180, Section 26-10. UCC § 5-114(2) was adopted verbatim in Ohio under former R.C. 1305.13(B). In State ex rel. Barclays Bank PLC v. Hamilton Cty. Court of Common Pleas, 74 Ohio St.3d 536, 540, 660 N.E.2d 458, fn. 4 (1996), the court acknowledged but declined to determine “the question of whether ‘fraud in the transaction’ in R.C. 1305.13(B) refers to fraud between the customer and the beneiciary in the underlying investment transaction or to fraud in the separate transaction of presentment of a draft for payment.” R.C. 1305.08(B) [UCC § 5-109(b)] now provides that a court of competent jurisdiction may grant injunctive relief where “honor of the presentation would facilitate a material fraud by the beneiciary on the issuer or applicant.” In so doing, R.C. 1305.08(B) [UCC § 5-109(b)] refocuses the court’s attention away from the particular transaction in which the fraud occurred and toward the level of fraud committed. See 3 White & Summers at 184, Section 26-10. It clariies that the beneiciary’s fraud in either transaction will sufice to enjoin the issuer from honoring a presentation, provided the fraud is material. Thus, UCC 5-109, Oficial Comment 1, states: “This recodiication makes clear that fraud must be found either in the documents or must have been committed by the beneiciary on the issuer or applicant. See Cromwell v. Commerce & Energy Bank, 464 So.2d 721 (La. 1985).” (Emphasis added.) In Cromwell, the court explained: “As illustrated in the foregoing cases the independence principle is a strong inluence in the decision of cases throughout the country. Adherence to that basic principle is necessary in order to protect the commercial utility of letters of credit.

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“Nevertheless, the jurisprudence and literature recognize and illustrate the need to extend the meaning of ‘fraud in the transaction’ at least a step beyond fraudulent documentation. The strongest reason for such an extended interpretation is to deny rewarding fraudulent conduct by letter of credit beneiciaries. One author writes: ‘Notwithstanding dictum to the contrary in some of the cases, the holding of the court in NMC Enterprises, Inc. v. Columbia Broadcasting System, Inc. [14 U.C.C. Rep.Serv. 1427 (N.Y.Sup. 1974)] that fraud in the underlying transaction is suficient to justify relief is the better rule. Since the issuer’s obligation on a letter of credit is generally completely independent of the underlying transaction, the customer who obtains a letter of credit assumes the risk that payment may be made when the beneiciary has not properly performed the underlying contract. Moreover, the beneiciary may have required the letter of credit in part to assure that a dispute regarding performance of the underlying contract would not delay payment. By obtaining a letter of credit, however, the customer should not be required to assume the risk of making payment to a beneiciary who has engaged in fraudulent conduct in the underlying transaction. Furthermore, a rule that precludes injunctive relief where the fraud is in the underlying transaction will compensate the beneiciary for wrongful acts in situations where the customer will not have an effective legal remedy for the fraudulent conduct and thus tend to encourage fraud, a policy that should be avoided. As the court said in Dynamics Corp. of America v. Citizens & Southern Nat. Bank [356 F. Supp. 991, 1000 (N.D. Ga 1973)], there is as much public interest in discouraging fraud as in encouraging the use of letters of credit.’ ” (Emphasis deleted.) Id., 464 So.2d at 733, quoting 6B Hawkland, at 5-236 to 5-237, Section 5-114:9. In NMC Ent., NMC agreed to purchase a large quantity of stereo receivers from CBS and opened an LC to secure its underlying obligations. In seeking a preliminary injunction to restrain the issuer from honoring the LC, NMC made a prima facie showing that CBS had misrepresented the performance speciications for the receivers, particularly with regard to their continuous power output ratings. In granting the injunction, the court held, “If the sales contract is tainted with fraud in its inducement, then any document or signed certiicate which the letter of credit requires CBS to submit . . . is equally tainted.” Id., 14 U.C.C. Rep. Serv. at 1430. Moreover, UCC § 5-109, 1995 Comment 3 addresses so-called “clean” or “suicide” LCs, which are LCs calling only for a draft and no other document. The comment explains that it would be dificult for there to be fraud in the presentation under these LCs and that courts should be skeptical of such claims. Nevertheless, the comment states that even under these kinds of LCs, “[i]f the applicant were able to show that the beneiciary were [sic] committing material fraud on the applicant in the underlying transaction, then payment would facilitate a material fraud by the beneiciary on the applicant and honor could be enjoined.” (Emphasis added.) We hold, therefore, that material fraud committed by the beneiciary in either the letter of credit transaction or the underlying sales transaction is suficient to warrant injunctive relief under R.C. 1305.08(B) [UCC § 5-109(b)]. Accordingly, the judgment of the Court of Appeals is reversed as to this issue.

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2 Measure of Fraud Another controversy that surrounded the “fraud in the transaction” language of UCC § 5-114(2) involved the degree or quantity of fraud necessary to warrant injunctive relief. As noted in Cromwell, 464 So.2d at 734, “There is more than one measure of ‘fraud’ in the various jurisdictions in the United States.” In fact, manifold tests were devised for establishing fraud under UCC § 5-114(2). See, generally, 7A Lawrence (Rev. 2001) 353–354, Section 5-114:67; 6B Hawkland & Miller (Rev. 2001), at 5-239 to 5-248, Section 5-114:9; 3 White & Summers, at 181–182, Section 26-10. However, UCC 5-109(b) [R.C. 1305.08(B)] clariies that only “material fraud” by the beneiciary will justify an injunction against honor. UCC § 5-109, Oficial Comment 1 explains: “Material fraud by the beneiciary occurs only when the beneiciary has no colorable right to expect honor and where there is no basis in fact to support such a right to honor. The section indorses articulations such as those stated in Intraworld Indus. v. Girard Trust Bank, 461 Pa. 343, 336 A.2d 316 (1975), Roman Ceramics Corp. v. People’s Nat. Bank, 714 F.2d 1207 (3d Cir. 1983), and similar decisions and embraces certain decisions under Section 5-114 that relied upon the phrase ‘fraud in the transaction.’ Some of these decisions have been summarized as follows in Ground Air Transfer, Inc. v. Westate’s [Westates] Airlines, Inc., 899 F.2d 1269, 1272–73 (1st Cir. 1990): ‘We have said throughout that courts may not “normally” issue an injunction because of an important exception to the general “no injunction” rule. The exception, as we also explained in Itek [Corp. v. First Natl. Bank of Boston, 730 F.2d 19, 24–25 (1st Cir. 1984)], concerns “fraud” so serious as to make it obviously pointless and unjust to permit the beneiciary to obtain the money. Where the circumstances “plainly” show that the underlying contract forbids the beneiciary to call a letter of credit, Itek, 730 F.2d at 24; where they show that the contract deprives the beneiciary of even a “colorable” right to do so, id., at 25; where the contract and circumstances reveal that the beneiciary’s demand for payment has “absolutely no basis in fact,” id.; see Dynamics Corp. of America, 356 F. Supp. at 999; where the beneiciary’s conduct has “so vitiated the entire transaction that the legitimate purposes of the independence of the issuer’s obligation would no longer be served,” Itek, 730 F.2d at 25 (quoting Roman Ceramics Corp. [supra], 714 F.2d [at] 1212, n. 12, 1215 (quoting Intraworld Indus., 336 A.2d at 324–25)); then a court may enjoin payment.’ ” (Emphasis sic.) As another court adhering to this standard explained, the applicant must show that the letter of credit was, in fact, being used by the beneiciary “as a vehicle for fraud,” or in other words, that the beneiciary’s conduct, if rewarded by payment, “would deprive the [applicant] of any beneit of the underlying contract and . . . transform the letter of credit . . . into a means for perpetrating fraud.” GATX Leasing Corp., 657 S.W.2d at 183.

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Thus, we hold that “material fraud” under R.C. 1305.08(B) [UCC § 5-109(b)] means fraud that has so vitiated the entire transaction that the legitimate purposes of the independence of the issuer’s obligation can no longer be served. The Court of Appeals actually did rely on Sztejn, 177 Misc. 719, 31 N.Y.S.2d 631, Intraworld Indus., 461 Pa. 343, 336 A.2d 316, and Roman Ceramics Corp., 714 F.2d 1207, to establish its so-called “vitiation exception,” but construed the exception so narrowly as to preclude relief where the beneiciary’s fraudulent conduct occurs solely in the underlying transaction. Thus, the Court of Appeals relied on the right cases for the wrong reasons. As a consequence, the Court of Appeals declined to address the issues of agency and fraud in the underlying contract, holding instead that the trial court should not even have taken evidence on these issues. Accordingly, the judgment of the Court of Appeals is reversed on this issue as well.

3 PTZ’s Actions [The court quoted the trial court’s indings of fact based on “clear and convincing evidence” and continued:] Given these facts, we are compelled to conclude that PTZ’s actions in this case are suficiently egregious to warrant injunctive relief under the “material fraud” standard of R.C. 1305.08(B) [UCC § 5-109(b)]. The trial court’s indings demonstrate that PTZ sought to unload a large quantity of surplus winter tires on appellants by promising a large number of bargain-priced summer tires, without which the winter tires would be virtually worthless to appellants. Keenly aware that appellants would not agree to purchase the winter tires without the summer tires, PTZ made, participated in, and/or failed to correct a series of materially fraudulent promises and representations regarding the more lucrative summer tires in order to induce appellants to commit to purchasing the winter tires and to open an LC in PTZ’s favor to secure payment. Dangling the prospect of the summer tires just beyond appellants’ reach, PTZ sought irst the issuance of the LC, and then shipping instructions, in an effort to cash in on the winter deal before appellants could discover the truth about the “DA/2C” tires and PTZ’s lack of ability and intention ever to provide summer tires at the price and quantity represented. Indeed, when appellants learned of PTZ’s fraud after opening the LC, and PTZ was no longer able to stall for shipping instructions with nonconforming lists of summer tires, Sievers proclaimed, “I have a letter of credit and I am shipping the tires.” Under these facts, it can truly be said that the LC in this case was being used by PTZ as a vehicle for fraud and that PTZ’s actions effectively deprived appellants of any beneit in the underlying arrangement. In this sense, PTZ’s conduct is comparable to the shipment of cow hair in Sztejn, 177 Misc. 719, 31 N.Y.S.2d 631, the shipment of old, ripped, and mildewed boxing gloves in Cambridge Sporting Goods, 41 N.Y.2d 254, 392 N.Y.S.2d 265, 360 N.E.2d 943, and the failure to disclose nonconforming performance speciications for the stereo receivers in NMC Ent., Inc., 14 U.C.C. Rep.Serv. 1427. PTZ’s demand for payment under these circumstances has absolutely no basis in fact, and it would be pointless and unjust to permit PTZ to draw the money. PTZ’s conduct has so vitiated the entire transaction that the only purpose served by invoking the independence principle in this case would be to transform the LC into a fraudulent seller’s Holy

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Grail, which once obtained would provide cover for fraudulent business practices in the name of commercial expedience. Accordingly, we reverse the Court of Appeals’ judgment as it bears on this issue.

Note Alabama and New York no longer have the nonuniform statutory provisions about the UCP referred to in the judgment. Like all other states and territories, they have adopted the revised version of UCC § 5-116(c), which is reproduced above. Ala. Code § 7-5-116(c) (1998); N.Y. U.C.C. § 5-116(c) (2000). In many countries, the fraud exception extends only to fraud on the documents. hat is the position in the United Kingdom, for example. In United City Merchants (Investments) Ltd. v. Royal Bank of Canada [1983] A.C. 168, 183, Lord Diplock said: To this general statement of principle [of independence] . . . there is one established exception: that is, where the seller, for the purpose of drawing on the credit, fraudulently presents to the conirming bank documents that contain, expressly or by implication, material representations of fact that to his knowledge are untrue. Similarly, in Australia, the fraud exception is conined to fraud on the documents. See Inlatable Toy Co. Pty Ltd v. State Bank of New South Wales Ltd (1994) 34 NSWLR 243. In contrast, in Bank of Nova Scotia v. Angelica-Whitewear Ltd [1987] 1 S.C.R. 59, Le Dain, J. delivering the judgment of the Supreme Court of Canada said: In my opinion, the fraud exception to the autonomy of documentary letters of credit should not be conined to cases of fraud in the tendered documents but should include fraud in the underlying transaction of such a character as to make the demand for payment under the credit a fraudulent one. Similarly, the fraud exception in the People’s Republic of China extends to fraud in the underlying transaction, although the relevant provisions spell out in detail what kinds of fraud in the transaction qualify for court intervention. See Zuigao Renmin Fayuan Guanyu Shenli Xinyongzheng Jioafu Anjian Ruogan Wenti De Guiding (Provisions Concerning Certain Issues in Hearing Letter of Credit Cases), an interpretive document promulgated by the Supreme People’s Court of the P.R.C. in September 2001, described by Xiang Gao (formerly a judge of the Supreme People’s Court) in The Fraud Rule in the Law of Letters of Credit: A Comparative Study, 183–87 (2002). hese diferences between the national laws of the United Kingdom, Australia, Canada, and China serve to emphasize the point made above about the lack of international uniformity in relation to the fraud exception. An attorney advising a buyer/applicant who fears fraud may have to provide (or, better, obtain) quick but accurate advice about the national law in another country and cannot safely assume that the law there will be the same as in UCC § 5-109.

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Question 6.10 If Mid-America Tire had sought an injunction in the United Kingdom to restrain the nominated bank, Barclays, from paying against the documents in Guernsey, would the court have granted that injunction, applying the United City Merchants test?

Question 6.11 If Barclays had paid PTZ in Guernsey in return for conforming documents before inding out about the fraud or the US court’s temporary restraining order, would Mid-America Tire have been entitled to an injunction restraining First Bank from reimbursing Barclays?

D. Standby Letters of Credit as a Means of Securing Performance Letters of credit are an eicient and secure means of arranging for payment, but they are relatively expensive, as several banks are involved even in the most straightforward of transactions, each charging a fee for its services (of varying size depending on the extent of its undertaking). As we have seen earlier in this chapter, if the seller and the buyer are in a long-term relationship involving many consignments of goods over a period of months or years, they are unlikely to use a letter of credit for each consignment of goods because to do so would add unnecessarily to the transaction costs. In such circumstances, the parties are more likely to agree to trade on open account terms, with the buyer periodically sending money to the seller by electronic funds transfer (a much cheaper means of money transfer). he seller may agree to those terms if it trusts the buyer, but it will still demand some form of security that it can draw on in the event of nonpayment by the buyer. Oten, that security takes the form of a standby letter of credit. In many respects, standby letters of credit operate in exactly the same way as ordinary or “commercial” letters of credit. If you look back to UCP 600 article 1 (extracted above), you will see that the rules in UCP 600 are expressed to apply to standby letters of credit “to the extent to which they may be applicable.” he key diference between a standby letter of credit and an ordinary or “commercial” letter of credit is that the latter is intended to be drawn on by the seller/beneiciary, whereas the former merely stands by waiting to be drawn on if needed, as its name suggests. To put it another way, a commercial letter of credit contemplates payment on performance but a standby letter of credit contemplates payment on a failure to perform. First Empire Bank-New York v. Fed. Deposit Ins. Corp., 572 F.2d 1361, 1367 (9th Cir. 1978). he seller need only draw on the standby letter of credit if the buyer does not pay by other means, as it has promised to do. he buyer/applicant asks the issuing bank to issue a standby letter of credit in the seller/beneiciary’s favor for any amount up to a stipulated maximum. he principal document stipulated for presentation under the standby letter of credit is a document called a beneiciary’s certiicate, generated by the seller/beneiciary, which simply states that the seller/beneiciary has not received payment of the stated amount. Upon receipt of that document, the bank pays the seller/beneiciary the amount stated in the beneiciary’s certiicate.

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he buyer/applicant may ask for presentation of other documents as well as the beneiciary’s certiicate, such as copies of invoices and, perhaps, some independent veriication that payment has not been received. his explains the reference in UCC § 5-109, Comment 3 to “suicide” letters of credit, quoted above in the Mid-America Tire case. If the seller/beneiciary need only present its own certiicate to demand payment on the standby letter of credit, the buyer/applicant is at considerable risk of being defrauded, as an unscrupulous seller/beneiciary could easily generate and present such a document even if it had been paid as promised. Banks in the United States are prohibited by federal banking regulations from guaranteeing third party obligations. Although the issuing bank has to pay under a standby letter of credit only if the principal obligor, the buyer/applicant, has failed to perform its obligations under the sale contract, the standby letter of credit is nevertheless not a guarantee. he independence principle applies in the same way to standby letters of credit as it does to commercial letters of credit; the issuing bank’s undertaking is independent from the underlying transaction. he distinction between a standby letter of credit and a guarantee was explained as follows in In re Hamada, 291 F.3d 645, 650 (9th Cir. 2002)  (citations omitted): “[T]he key distinction between letters of credit and guarantees is that the issuer’s obligation under a letter of credit is primary whereas a guarantor’s obligation is secondary—the guarantor is only obligated to pay if the principal defaults on the debt the principal owes.” A bank issuing a letter of credit, unlike a guarantor, is not obligated “until ater its customer fails to satisfy some obligation, [and] it is satisfying its own absolute and primary obligation to make payment rather than satisfying an obligation of its customer.” hus, as opposed to the guaranty given by a surety, in a letter of credit transaction the bank’s obligation under the letter of credit is independent of the underlying contract. In short, issuers of letters of credit are not “liable with” the debtor on the obligation owed to the creditor . . . Although a standby letter of credit is said not to be a guarantee, as you see in the Hamada quotation, a standby letter of credit may nevertheless be used to provide security for performance of any kind of primary obligation. (We have phrased the preceding sentence carefully. A standby letter of credit functions as a guarantee and is used as one. Something that is functionally a guarantee, we believe, probably ought to be treated as one by the law. Our purpose here, however, is to state the law as clearly as possible, and we have given what we believe the law to be. We include this note, though, so you can see that if the law does not make sense to you, you are not alone.) hus, a standby letter of credit can also be used to secure adequate performance of the seller’s obligations under an international sale contract. For example, if the buyer requires the goods to perform up to a certain speciied standard, it may not be satisied with knowing that it has a claim under the sale contract if the goods do not perform as promised. he buyer may ask the seller to provide a standby letter of credit allowing it (the buyer) to draw on the credit if the goods do not perform as

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promised. In such a case, the seller is the applicant and the buyer the beneiciary. he letter of credit will require presentation of a beneiciary’s certiicate complaining of nonperformance, but the seller may also ask for presentation of documents providing independent veriication of nonperformance and a quantiication of the losses that the buyer has sufered as a result. In all other respects, including the operation of the independence principle and the fraud exception, the letter of credit works in the ordinary way even though the usual roles are reversed. For example, in SRS Products Co., Inc. v. LG Engineering Co. Ltd., 994 S.W.2d 380, 385 (Tex. Ct. App. 1999) the court said: Typically, the beneiciary of the letter of credit is the seller and the account party [i.e. applicant] is the purchaser. his case presents an interesting variation in that the beneiciary of the letter of credit (LGE) is the purchaser and the account party (SRS) is the seller. LGE paid the entire purchase price for the refrigeration unit, a sum in excess of $2.4 million. At issue is the “reserve” that the parties contracted to set aside via the letter of credit to back SRS’ warranty obligations. LGE made demands for warranty work and gave SRS numerous opportunities to perform under the warranty. Despite repeated eforts to remedy the defects and efect the necessary repairs, the unit did not work and SRS refused to honor the warranty. While SRS argues that its warranty obligations were never triggered or, alternatively, that they were voided, and that LGE knew or should have known as much by virtue of its own actions in modifying the equipment, SRS points to no facts which show that the letter of credit was being used as a vehicle for fraud. In fact, the evidence shows that LGE was using the letter of credit exactly as the parties had contemplated at the time it was issued. SRS’ steadfast contention that it has no liability on the warranty, even if true, is insuicient to justify enjoining payment on the letter of credit under section 5.114(b) [Former UCC § 5-114(2)/Revised UCC § 5-109(b).] A dispute over the existence or scope of warranty obligations does not amount to fraud in the transaction, and therefore, does not provide grounds to enjoin payment of a letter of credit issued to secure performance of those obligations. To allow an account party to obtain an injunction based on a mere contractual dispute with the beneiciary would destroy the commercial viability of letters of credit and, in this case, would undermine the rationale for utilizing a letter of credit—to shit leverage back to the purchaser in demanding performance by the seller of the warranty obligations.

IV. Deferred Payment A. Time Drats, Bills of Exchange, and Deferred Payment Letters of Credit We have seen that the buyer oten wants to be given time to pay the seller, so that it can resell or use the goods in order to raise the money to make the payment. he seller may be prepared to wait for payment, particularly if it charges the buyer interest for doing so, and also if it has

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some security for eventual payment, such as a standby letter of credit. If, however, the seller wants or needs to be paid immediately, it may seem that that desire is incompatible with the buyer’s desire to defer payment. In fact, that is not so. Several devices can be used to satisfy both seemingly inconsistent desires. he irst, and oldest, is the time drat or bill of exchange. (hese instruments are called bills of exchange in the countries of the British Commonwealth and time drats in North America.) Drats are governed by UCC Article 3, which deals with negotiable instruments. Although UCC § 3-104 provides a deinition of “negotiable instrument” that governs time drats in the United States, a better, more succinct sense of how these instruments work can be obtained by reading the deinition in the UK’s Bills of Exchange Act 1882, which is the model for legislation throughout the British Commonwealth. Section 3(1) of that Act provides: A bill of exchange is an unconditional order in writing, addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at a ixed or determinable future time a sum certain in money to or to the order of a speciied person, or to bearer. An example of a bill of exchange can be seen in the sample transaction in Chapter 1. he person who draws up the drat/bill of exchange is called the drawer: see the deinition in UCC § 3-103(a)(5). In the context of an international sales transaction, the seller of the goods is the drawer. he seller/drawer prepares a drat/bill of exchange made out in its own favor for the amount of the sale price of the goods (plus any interest charges). he drat/bill of exchange is addressed to the buyer, who is called the drawee: see the deinition in UCC § 3-103(a)(4). he drat/bill of exchange is an order by the seller/drawer to the buyer/drawee to pay the purchase price, either immediately or “on sight,” in which case the drat is called a sight drat, or (more commonly these days) at some speciied time in the future, in which case the drat is called a time drat. he drat/bill of exchange takes efect only when the drawee accepts the obligation to pay, by signing the drat/bill of exchange. See UCC § 3-408. Once the drawee accepts, it is known as the acceptor: see the deinition in UCC § 3-103(a)(1). When the buyer/drawee/acceptor signs a time drat, it is bound to pay the seller/ drawer the stipulated amount on the designated maturity date, which is traditionally stated as some multiple of 30 days from the date of acceptance: for example, “60 days from acceptance.” he buyer/drawee/acceptor then gets 60 days to use the goods before it has to pay for them. Because the accepted drat/bill of exchange is a negotiable instrument, the seller/ drawer can sell or “negotiate” it to someone in return for immediate payment. he seller/ drawer transfers the drat/bill of exchange to the new holder by indorsing it—that is, by writing its signature on the back. See UCC § 3-204. he buyer/drawee/acceptor then owes its obligation to pay on the maturity date to the indorsee. he indorsee may sell the drat/bill of exchange to other indorsees. Each successive buyer of the drat/bill of exchange is called the holder in due course. See UCC § 3-302.

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here is an international market for negotiable instruments of this kind. Banks and professional inanciers, known in Europe (and increasingly in North America) as forfaiters, buy and sell the negotiable instruments. Without a liquid market for the negotiable instruments, this method of trade inancing would not work. he process of negotiating the drat/bill of exchange is oten called discounting because the indorsee does not pay the full face value in return for the negotiable instrument. (If it did, it could make no proit.) Ater buying the drat/bill of exchange, the holder in due course must both wait until the maturity date for payment and (importantly) take the risk that the buyer/drawee/acceptor will not honor the undertaking to pay. If the buyer/drawee/acceptor does not honor the drat/bill of exchange, the holder in due course is then entitled to claim against the buyer/drawee/acceptor. Importantly, in the event of dishonor by the acceptor, the holder in due course also has recourse against the indorser who sold it the drat/ bill of exchange (see UCC § 3-415(a)) unless the drat/bill of exchange is indorsed “without recourse.” See UCC § 3-415(b). As you might expect, time drats/bills of exchange are usually indorsed to and by banks and forfaiters without recourse. If the holder in due course were to be entitled to recover the amount that it paid the indorser (either the seller/drawer or an intermediate forfaiter/ indorser) if the buyer/drawee/acceptor dishonors the drat/bill of exchange, the indorser would not efectively have divested itself of the risk of nonpayment by the buyer. Divesting itself of the risk of nonpayment is exactly what the seller wants to achieve, so it usually wants to indorse the drat/bill of exchange “without recourse.” Indorsement “without recourse” leads to a deeper discount from the face value of the drat/bill of exchange, as the indorsee thereby accepts the risk of nonpayment by the buyer/drawee/acceptor. he end result of this process is that the buyer gets time to pay and the seller gets paid immediately, albeit at a discounted rate. Of course, if this method of payment is used, the seller calculates the purchase price and draws the drat/bill of exchange so as to ensure that it receives the true value of the goods ater discounting. [If you skipped reading Section II of this chapter, you should also skip the next few paragraphs, resuming ater the quotation from URC 522.] URC 522 makes provision for payment under a documentary collection using drafts/bills of exchange. Recall that URC 522 article 7 provides for two alternative methods of release of the documents under a documentary collection:  Documents Against Acceptance (D/A) and Documents Against Payment (D/P). Under a documentary collection on D/A terms, the seller sends its draft/bill of exchange to the presenting bank along with the documents to be presented to the buyer by the presenting bank. (The seller is then the principal under the collection and the drawer under the draft/bill of exchange. The buyer is the drawee under both the collection and the draft/bill of exchange.) The presenting bank releases the commercial documents (see the definition in URC 522 article 2(b)) to the buyer only when the buyer accepts the draft/bill of exchange drawn upon it. The presenting bank then returns the accepted draft/bill of exchange to the seller. We can now make sense of a fuller version of URC 522 article 6, which was reproduced above.

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Uniform Rules for Collections—1995 Revision International Chamber of Commerce, ICC Publication No. 522 Article 2—Deinitions . . . (b) ‘Documents’ means inancial documents and/or commercial documents: (1) ‘Financial documents’ means bills of exchange, promissory notes, cheques, or other similar instruments used for obtaining the payment of money. (2) ‘Commercial documents’ means invoices, transport documents, documents of title or other similar documents, or any other documents whatsoever, not being inancial documents. ...

Article 6—Sight/Acceptance In the case of documents payable at sight the presenting bank must make presentation for payment without delay. In the case of documents payable at a tenor other than sight the presenting bank must, where acceptance is called for, make presentation for acceptance without delay, and where payment is called for, make presentation for payment not later than the appropriate maturity date.

UCP 600 also makes provision for payment under a letter of credit using drats/bills of exchange. If a time drat/bill of exchange is used under a letter of credit, it is accepted by the issuing bank, not the buyer. he seller/beneiciary then has an undertaking by the issuing bank to pay on the drat/bill of exchange at some time in the future. he seller/beneiciary can discount the drat/bill of exchange immediately in the ordinary way, thereby selling the issuing bank’s future undertaking to a forfaiter (or, oten, to the seller/beneiciary’s own bank). he discount should be less than for a drat/bill of exchange accepted by the buyer, because the credit risk posed by the issuing bank should be smaller. Although UCP 600 does make provision for presentation of drats/bills of exchange, they are not oten used under letters of credit in modern trade practice. More commonly, the issuing bank simply issues a deferred payment letter of credit. As its name suggests, a deferred payment letter of credit is a promise by the issuing bank to pay at some maturity date in the future—again, traditionally, some multiple of 30 days from presentation. his achieves the same result as using a drat/bill of exchange but with one instrument, the deferred payment letter of credit, rather than two, the letter of credit and a drat/bill of exchange. Because the issuing bank only has to pay at some time in the future, the buyer/applicant gets time to pay for the goods. he seller/beneiciary can discount the deferred payment letter of credit to a forfaiter (or its own bank) in the same way as it can discount a time drat/bill of exchange. Recall that UCP 600 refers to the obligation of the issuing or conirming bank to “honour”—see UCP 600 arts. 7(a), 8(b), reproduced above—or to reimburse a nominated bank that has “honoured” on its behalf: see UCP 600 arts. 7(c), 8(c), reproduced above. he full deinition of “honour,” reproduced below, shows that UCP 600 operates in the same way for letters of credit for sight payment, deferred payment letters of credit, and letters of credit for presentation of a drat/bill of exchange.

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Uniform Customs and Practice for Documentary Credits—2007 Revision International Chamber of Commerce, ICC Publication No. 600 Article 2—Deinitions For the purpose of these rules: ... Honour means: (a) to pay at sight if the credit is available by sight payment; (b) to incur a deferred payment undertaking and pay at maturity if the credit is available by deferred payment; (c) to accept a bill of exchange (“draft”) drawn by the beneiciary and pay at maturity if the credit is available by acceptance.

Deferred payment letters of credit are becoming increasingly common in practice, largely replacing the use of time drats/bills of exchange and documentary collections. Oten, the nominated bank in the seller’s country (which may be the seller’s own bank) is invited to discount the deferred payment undertaking itself. If the letter of credit speciically authorizes the nominated bank to buy the deferred payment undertaking back from the beneiciary with a discounted prepayment, it is called a negotiation credit. When the nominated bank accepts that invitation, it makes an immediate payment to the beneiciary of a discounted sum once it accepts the documents as conforming. (he nominated bank may choose to do that even without an invitation from the issuing bank, just as any third party forfaiter might.) By prepaying at a discount, the nominated bank becomes the assignee from the beneiciary of the issuing bank’s promise to pay in full on the maturity date. he nominated bank then collects the full face value of the undertaking from the issuing bank on the maturity date, thereby making a proit of the diference between the discounted sum paid and the full sum received (minus the time value of the period between payment and maturity). If the bank in the seller’s country adds its conirmation to the deferred payment letter of credit, it may still discount the deferred payment undertaking ater accepting the documents. By doing so, it efectively buys back at a discount its own undertaking to pay on maturity and becomes the assignee of the issuing bank’s undertaking to pay.

B. he Fraud Exception and Deferred Payment We have seen how fraud on the part of a seller/beneiciary can relieve the issuing bank of the obligation to pay under an ordinary sight payment letter of credit. You might think that the same principle should apply to deferred payment instruments like time drats/bills of exchange or deferred payment letters of credit. If the same principle did apply, the acceptor of a time drat/bill of exchange (whether the buyer itself or an issuing bank) or the issuer of a deferred payment letter of credit would be relieved of the obligation to pay if the documents presented by the seller turned out to be fraudulent. hat is true if the fraud is discovered before the seller can discount the time drat/bill of exchange or deferred payment letter of credit. In those circumstances, the fraudulent seller cannot collect when the maturity date

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of the time drat/bill of exchange or deferred payment letter of credit arrives. What should happen, however, if the seller discounts the time drat/bill of exchange or deferred payment letter of credit to a third party bank or forfaiter before the fraud is discovered? he third party gave value in return for the deferred payment undertaking in good faith without notice of the fraud. If its right to collect at maturity were to be no better than that of the fraudulent indorser, that would put a chill on the market for negotiable instruments. A bank or forfaiter would be more reluctant to buy a negotiable instrument that might turn out to be worthless because of fraud on the part of the indorser. If the bank or forfaiter could still be persuaded to buy the negotiable instrument, its reluctance would be relected in the size of the discount. In order to protect the position of the innocent holder in due course, the UK Bills of Exchange Act § 38 (1882) provides as follows: he rights and powers of the holder of a bill are as follows: (1) He may sue on the bill in his own name; (2) Where he is a holder in due course, he holds the bill free from any defect of title of prior parties, as well as from mere personal defences available to prior parties among themselves, and may enforce payment against all parties liable on the bill . . . his provision helps to ensure the liquidity of the market for bills of exchange in the United Kingdom. Banks and forfaiters can with conidence buy bills of exchange at a discount, knowing that the only risk they face is of nonpayment by the acceptor. UCC § 3-302(a)(2) produces the equivalent efect in the United States. he same is not true of deferred payment letters of credit, at least in the United Kingdom. In Banco Santander S.A. v. Bayfern Ltd. [2001] 1 All E.R. (Comm.) 776, an issuing bank, Banque Paribas, issued a deferred payment letter of credit to Bayfern Ltd. as beneiciary, undertaking to pay 180 days ater presentation of conforming documents. he credit was conirmed by Banco Santander S.A. Bayfern presented conforming documents to Banco Santander in London. Ater accepting the documents, Banco Santander discounted the deferred payment undertaking, thereby buying back from Bayfern its own promise to pay in 180 days and buying the right to collect from Paribas on maturity. Unfortunately for Banco Santander, it was discovered during the intervening 180 days that the documents presented by Bayfern were fraudulent. On the maturity date, Paribas refused to pay Banco Santander, saying that Banco Santander was in no better a position to collect than Bayfern, the fraudster, would have been. he English Court of Appeal agreed with Paribas. As assignee of the deferred payment letter of credit, Banco Santander’s right to collect was subject to the same defects as that of the assignor, the fraudster Bayfern. If a bill of exchange had been used, Banco Santander would have been entitled to collect from Paribas because of § 38(2) of the Bills of Exchange Act 1882. Unfortunately for Banco Santander, there was no equivalent provision under English law for deferred payment letters of credit, which are a relatively recent phenomenon. he Singapore Court of Appeal arrived at a similar conclusion in Credit Agricole Indosuez v. Banque Nationale de Paris [2001] 2 S.L.R. 1 (Ct. App. Sing.). It was, however, the

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Banco Santander decision that sent a chill around the banking world, as London is an important market for negotiable instruments in international trade. Fortunately for US forfaiters, an assignee of a deferred payment letter of credit is protected under UCC § 5-109(a)(1)(iv), which requires the issuing bank to honor its undertaking if the assignee gave value without notice of forgery or material fraud. hat provision has been adopted in uniform form by all states (except, oddly, South Dakota), the District of Columbia, Puerto Rico, and the US Virgin Islands. hus, under the law in the United States, the risk of fraud is borne by the issuing bank (and ultimately the applicant), whereas in the United Kingdom and Singapore (and quite possibly other countries) it is borne by the nominated bank that buys the deferred payment undertaking without express authorization inviting it to do so. (In First Union National Bank v.  Paribas, 135 F.  Supp.  2d 443 (S.D.N.Y. 2001), a bank in the same position as Banco Santander hurriedly switched forums from England to New York ater the English Court of Appeal’s decision in Banco Santander, to try to take advantage of the New York enactment of UCC § 5-109(a)(1)(iv). he bank’s claim was dismissed on forum non conveniens grounds.) he Banco Santander decision caused such international concern that the International Chamber of Commerce introduced a provision into UCP 600 that was speciically designed to reverse its efect. UCP 600 article 12(b) provides: By nominating a bank to accept a drat or incur a deferred payment undertaking, an issuing bank authorizes that nominated bank to prepay or purchase a drat accepted or a deferred payment undertaking incurred by that nominated bank. Under previous versions of the UCP, a nominated bank that incurred a deferred payment undertaking on behalf of the issuing bank had the issuing bank’s authority to pay at maturity but not before, unless the letter of credit speciically authorized the nominated bank to prepay, in which case the credit was known as a negotiation credit. he new article 12(b) explicitly authorizes the nominated bank to pay before maturity in all cases, whether or not the letter of credit invites it to do so. By doing so, it shits the risk of fraud from the nominated bank to the issuing bank, just as UCC § 5-109(a)(1)(iv) does. (For that reason, some commentators have questioned whether the inclusion of article 12(b) was wise. See Koji Takahashi, he Introduction of Article 12(b) in the UCP 600: Was It Really a Step Forward?, 24 J. Int’l Banking L. & Reg. 285 (2009).) Of course, unlike § 5-109(a)(1)(iv), UCP 600 article 12(b) does nothing to protect the position of a third party forfaiter other than a nominated bank.

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Excused Performance When Circumstances Change I. Introduction Circumstances change. Contracts made in good times may have to be performed in bad times. he cost of the seller’s raw materials may skyrocket, making production more expensive than was contemplated when the sale price was agreed. Governments may prohibit export or import of certain types of goods, or impose new taxes or restrictions. Wars may break out, cutting of normal trade routes. Currency values may plummet or soar, making an agreed purchase price efectively much more expensive. Recession may strike an economy. he longer performance takes, the more likely it is that something will happen to alter the assumptions that the parties made when they reached their original agreement. What should happen in such cases? Should a contracting party whose performance has become much more diicult than expected be relieved of its obligation to perform? hese are questions that receive strikingly diferent answers in diferent countries, making this an area of particular sensitivity in international contracts. he diferent approaches stem from diferent philosophies about the nature of contractual obligation. In common law jurisdictions, breach of contract is seen as being quite distinct from fault, which is the province of the law of torts. If I promise you that I will do something and I do not, I have breached my contract and must pay you damages, whether or not it was my fault that I failed to perform. hat philosophy is oten expressed by using the Latin phrase pacta sunt servanda—agreements must be kept. (A lawyer trained in the civil law may regard use of this phrase by the common law as a bit ironic; the phrase has a more robust meaning in the civil law, particularly with respect to remedies for breach, as we will see in Chapter 8.) At common law, a contracting party was relieved of its obligation only if performance became impossible. In England the impossibility defense is oten grouped under the heading of discharge by rustration. his usage is followed in the United States to some degree, although oten US law treats impossibility, or its newer version, impracticability, separately from frustration. In a typical US analysis, impossibility or impracticability is a seller’s defense when the seller can show, among other things, that it would be impossible to deliver the goods (e.g.,

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because the contract calls for the delivery of a particular antique desk that has since been destroyed by ire). Frustration, on the other hand, is typically a buyer’s defense: it may still be perfectly possible for the buyer to perform (i.e., pay, which is generally the only signiicant duty of the buyer), but some supervening reason has frustrated the purpose of the contract— for instance, if the parties knew the buyer was purchasing the goods for a purpose that has since become illegal. Even the narrowly conined impossibility exception was not well established in the common law until relatively late. It is usually traced to the classic English case of Taylor v. Caldwell (1863) 3 B. & S. 826; 122 Eng. Rep. 309, where the owners of a music hall were held to be relieved from their obligation to lease the music hall when it burned down accidentally. he doctrine of frustration was announced even later in the Coronation cases, typiied by Krell v. Henry [1903] 2 K.B. 740, in which contracts to rent rooms overlooking the route of the coronation procession of King Edward VII were held to have been frustrated by the cancellation of the procession, because the whole purpose of the contract had been thwarted.1 (here are US equivalents of the Coronation cases, such as Alred Marks Realty Co. v. Hotel Hermitage Co., 156 N.Y.S. 179 (N.Y. App. Div. 1915) in which advertisers who were to pay for advertisements in a yacht race souvenir program were held discharged when the race was canceled because of World War I.) he narrow and unforgiving common law view gave rise to much argument about when performance is truly impossible. For example, if I am an apple farmer and I promise to sell you 10,000 pounds of apples, should I be relieved of my obligation to perform if my entire crop of apples is destroyed by pests or ire? I may feel that I cannot perform because I have lost all of my apples, but performance is not impossible, as I could buy apples from other farmers and on-sell them to you. hat may be very costly and I may take a loss but it is still possible for me to perform my promise. UCC § 2-615 modiies the harshness of the common law rule by excusing performance when it has been made impracticable “by the occurrence of a contingency the non-occurrence of which was a basic assumption on which the contract was made.” Although impracticability is a more forgiving criterion than impossibility, § 2-615 is generally construed narrowly, as we shall soon see. How expensive do those substitute apples have to be in order for it to be impracticable for me to buy them? My view of what amounts to commercial impracticability may be very diferent from yours. he one point that is clear is that impracticability lays somewhere between impossibility and impracticality, and a reading of the cases suggests that it is closer to the former than the latter.

1. he procession was cancelled because of the illness of the King, Edward VII. An earlier illness when he was Edward, Prince of Wales gave rise to what is said to be the worst couplet in English poetry, attributed to the then Poet Laureate Alfred Austin, although his defenders deny that he wrote it: “O’er the wires the electric message came—He is no better; he is much the same.” In an interesting article entitled Excuse Doctrine:  he Eisenberg Uncertainty Principle, 2 J. Legal Analysis 359 (2010), Victor Goldberg casts doubt on the idea that the postponement of the coronation was unforeseeable. Apparently, British bookmakers (who will take a bet on just about anything) had been taking bets that the coronation would be postponed. To quote Goldberg (at 363): “he likelihood that a sixty-year-old, grossly overweight, heavy smoker, who had been the target of at least one assassination attempt might be unavailable was not trivial. Moreover, the procession was to be in a city renowned for its miserable weather.”

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In contrast, civil law systems generally base contractual liability on proof of fault (a subject that will be discussed more in Chapter 8) and they are generally more forgiving of contracting parties for whom performance becomes much more diicult as a result of circumstances beyond their control. If my apples were destroyed by pests or ire despite my best eforts to protect them, it is not my fault that I cannot perform my obligation to sell them to you. If liability in contract depends (at least in part) upon fault, then I should be relieved of my obligations if I was not at fault. Contrast the following provision from the German Civil Code (the Bürgerliches Gesetzbuch or BGB) with the US case extracted thereater, which is a typical example of the interpretation of UCC § 2-615, one of many that have arisen in the wake of the great inancial crisis of 2008–2009. As you do so, you might consider whether the relatively low bar of the civil law is associated with “adaptation of the contract,” as you will see in BGB § 313(1), thus leaving the contract in place although in a diferent form, whereas the higher bar of the common law results from the common law doctrine that the contract is called of entirely.

German Civil Code (BGB) § 313 English translation available at http://www.gesetzeim-internet.de/englisch_bgb/ (Langenscheidt Translation Service & Neil Musset trans.) Interference with the basis of the transaction (1) If circumstances which became the basis of a contract have signiicantly changed since the contract was entered into and if the parties would not have entered into the contract or would have entered into it with different contents if they had foreseen this change, adaptation of the contract may be demanded to the extent that, taking account of all the circumstances of the speciic case, in particular the contractual or statutory distribution of risk, one of the parties cannot reasonably be expected to uphold the contract without alteration. (2) It is equivalent to a change of circumstances if material conceptions that have become the basis of the contract are found to be incorrect. (3) If adaptation of the contract is not possible or one party cannot reasonably be expected to accept it, the disadvantaged party may withdraw from the contract. In the case of continuing obligations, the right to terminate takes the place of the right to withdraw.

United Aluminum Corp. v. BOC Group, Inc. United States District Court for the District of Connecticut, Aug. 21, 2009 2009 WL 2589486 [Defendant BOC Group, Inc. (referred to in the opinion by its new name Linde) had been Plaintiff United Aluminum Corporation’s (UAC) sole supplier of nitrogen since the 1980s. A nitrogen supply agreement (the Supply Agreement) made by the parties in 1997 was stated to expire on August 31, 2008, but it gave UAC the right to extend the period of the contract up to a maximum of ive more years. UAC exercised that option by giving notice to Linde in April 2007. Linde said it would agree to the extension of the Supply Agreement

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only if the prices were increased by about 38 percent. UAC sued Linde in 2008. Linde’s Answer requested, among other things, that it be relieved of its obligations, arguing that it was commercially impracticable under UCC § 2-615 for it to continue providing nitrogen from 2008 to 2013 at prices agreed in 1997.] hall, District Judge. * * * Linde’s third Counterclaim seeks reformation of the Supply Agreement on the grounds that “the increase in gas prices and operation costs makes it commercially unreasonable for Linde to continue to perform under the fees, prices, and terms of payment referenced in Exhibit A for an extension period of ive (5) years.” UAC asserts that it is entitled to judgment on Linde’s third Counterclaim because, inter alia, Linde has not come forward with evidence on which a jury could ind the impracticability of the Supply Agreement. The court agrees. The Connecticut Uniform Commercial Code codiies the common law doctrine of commercial impracticability by excusing a seller from performance made impracticable by the occurrence of a contingency, the non-occurrence of which was a basic assumption on which the contract was made. See Conn. Gen. Stat. § 42a-2-615(a). As the Connecticut Supreme Court has held: The impracticability doctrine represents an exception to the accepted maxim of pacta sunt servanda, in recognition of the fact that certain conditions cannot be met because of unforeseen occurrences. A party claiming that a supervening event or contingency prevents, and thus excuses, a promised performance must demonstrate that: (1) the event makes the performance impracticable; (2) the nonoccurrence of the event is a basic assumption on which the contract is made; (3) the impracticability results without the fault of the party seeking to be excused; and (4) the party has not assumed a greater obligation than the law imposes. Dills v. Enield, 210 Conn. 705, 717, 557 A.2d 517 (Conn. 1989) (internal quotations and citations omitted). Importantly, “only in the most exceptional circumstances have courts concluded that a duty is discharged because additional inancial burdens make performance less practical than initially contemplated.” Id. This case does not present such an exceptional circumstance. Linde seeks to escape its obligations under the Supply Agreement because “the increase in gas prices and operation costs makes it commercially unreasonable for Linde to continue to perform” those obligations. Linde does not allege that the increase in gas prices and operation costs is due to an unforeseen event, the nonoccurrence of which was a basic assumption on which the Supply Agreement was made. Rather, Linde’s request for reformation seems to rest on its argument that allowing UAC to continue purchasing nitrogen at prices agreed to in 1997 is “unreasonable” and “illogical” because to do so would be unproitable for Linde. However, the fact that the Supply Agreement is now unproitable to Linde due to an increase in market prices does not excuse it from its obligations under the Supply Agreement. As the comments to section 2-615 of the Uniform Commercial Code provide: Increased cost alone does not excuse performance unless the rise in cost is due to some unforeseen contingency which alters the essential nature of the performance.

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Neither is a rise or a collapse in the market in itself a justiication, for that is exactly the type of business risk which business contracts made at ixed prices are intended to cover. U.C.C. § 2–615, Oficial Comment 4.  Because Linde has not set forth evidence which would support a inding that the rise in gas prices and operations costs was due to some unforeseen contingency which alters the essential nature of the performance of the Supply Agreement, UAC’s Motion for Summary Judgment is granted as to Linde’s third Counterclaim.

Question 7.1 (a) If the United Aluminum dispute had arisen in Germany, what arguments would you, as a German lawyer, make on Linde’s behalf under BGB § 313? Would they be more likely to succeed than Linde’s argument based upon UCC § 2-615? (b) If a court inds that the requirements of BGB § 313 are met, then what is the relief ? If a court inds that the requirements of UCC § 2-615 are met, then what is the relief ? Does this diference afect expectations about how easily a court will ind the relevant requirements to be met? Which provision should be easier to satisfy, and why? here are many points along the spectrum from pacta sunt servanda at one end to relief from hardship at the other. National laws difer markedly, which made the task of drating the relevant provision of the CISG controversial and diicult. Before we consider the operation of CISG art. 79 and UCC § 2-615 in more detail, it is important to note that the contracting parties themselves can and oten do make provision for changed circumstances in their contract. Clauses that relieve the parties of their obligations in the event that certain contingencies occur are usually called force majeure clauses. Indeed, the possibility that the parties might foresee and make provision for changed circumstances underlies the strictness of the common law position, which says, in efect: “You could have made provision for this contingency but as you did not, you must be taken to have accepted the risk that it might occur.” For example, when making the Supply Agreement in the United Aluminum case, Linde might have foreseen that circumstances might change so much between 1997 and 2008 that a further ive-year extension of the contract at the same prices would be unproitable for it and thus unwise. If Linde did not (or could not) get UAC to agree that the price would increase if the extension option were to be exercised, then it must be taken to have accepted the risk that the state of the economy would make performance more diicult and unproitable. Another type of provision that is sometimes included in long-term contracts is a hardship clause, although these are less common than force majeure clauses. A hardship clause provides for the renegotiation of contractual obligations when performance becomes very diicult for one party due to some unforeseen event. Opinions difer about their efectiveness because it is diicult to enforce an obligation to (re-)negotiate. However, hardship clauses typically provide that if the renegotiations fail, the party sufering hardship may withdraw from the contract. Examples of force majeure and hardship clauses will be given later in the chapter.

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A contractual force majeure or hardship clause can operate alongside UCC § 2-615. here are several examples of courts considering both the § 2-615 impracticability standard and the contingencies listed in the parties’ own force majeure clause. (See, e.g., Harriscom Svenska, A.B. v. Harris Corp., 3 F.3d 576 (2d Cir. 1993), which is extracted below.) Indeed, Oicial Comment 8 to § 2-615 contemplates that the parties may want to modify the protection provided by the section, particularly mentioning “express agreements as to exemptions designed to enlarge upon or supplant the provisions of this section.” he CISG treats force majeure and hardship clauses as it treats other derogations. As you will recall, article 6 provides that the Convention does not apply if the parties “derogate from or vary the efect of any of its provisions.” One might think that as a result, inclusion of a force majeure or hardship clause in an international sales contract would supplant the operation of CISG article 79 altogether. Nevertheless, the Oberlandesgericht Hamburg (a regional appeal court in Germany) considered CISG article 79 in tandem with the force majeure clause in the parties’ contract in a case in 1997. See Oberlandesgericht [OLG] [Appellate Court] Hamburg, Feb. 28, 1997, Case No. 1 U 167/95, CLOUT Case No. 277 (Ger.). Little turns on this point, it seems, because force majeure and hardship clauses are usually included for the very reason that the parties want them to be broader in operation than the default provisions that would apply by operation of statute. If the parties’ clause is broader in operation than CISG article 79, there is no need to refer to CISG article 79 in any event. Only if the parties’ agreement is narrower in efect than CISG article 79 would the article 6 ouster question arise, and that is unlikely (but not impossible) to occur in practice. (As the above extract from UCC § 2-615 Oicial Comment 8 indicates, any contractual provision narrower than § 2-615 would not oust the efect of the statutory provision.) Bearing in mind this small caveat about the relationship between the statutory default provisions and the parties’ own agreement, let us move on now to consider CISG article 79, UCC § 2-615, and the operation of force majeure and hardship clauses.

II. Relief Under the CISG for Performance Prevented by “Impediment” A. Introduction In general, the CISG adheres to the common law’s no-fault approach to breach of contract rather than the civil law’s fault-based approach. CISG article 45(1) provides that the buyer is entitled to rights and remedies simply if “the seller fails to perform any of his obligations under the contract or this Convention,” whether or not the seller was at fault. CISG article 61(1) makes identical provision for breach by the buyer. CISG article 79 is the only provision that excuses nonperformance for circumstances beyond a party’s control, thereby opening the door a little to intrusion of civil law concepts of fault and excuse. As noted above, CISG article 79 was the subject of extensive debate during the drating of the CISG, as the common lawyers and the civilians hammered out a compromise. A substantial part of two two-week sessions of the UNCITRAL Working Group,

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supported by written submissions, was devoted to the subject, followed by a long discussion by UNCITRAL itself, and inally by a debate at Vienna spread intermittently over four sessions of the First Committee of the Diplomatic Conference. See Barry Nicholas, Impracticability and Impossibility in the U.N. Convention on Contracts for the International Sale of Goods, in International Sales:  The United Nations Convention on Contracts for the International Sale of Goods 5-2, para. 5.01 (N. Galston & H. Smit eds., 1984). he US theologian Tryon Edwards wrote: “Compromise is but the sacriice of one right or good in the hope of retaining another—too oten ending in the loss of both.” Tryon Edwards, A  Dictionary of Thoughts 80 (1908). Unfortunately, that rather bleak view seems to be have been borne out in CISG article 79. he CISG’s preeminent commentator, John Honnold, wrote: “In spite of strenuous eforts of legislators and scholars we face the likelihood that Article 79 may be the Convention’s least successful part of the half-century of work towards international uniformity.” John Honnold, Uniform Law for International Sales under the 1980 United Nations Convention 484, para. 432.1 (3d ed. 1999). he main problem, present in relation to all aspects of the CISG but particularly true of CISG article 79, is: “[T]he danger that local tribunals may unconsciously read the patterns of their domestic law into the general language of the Convention.” Id. at 480, para. 429. In other words, although the text of CISG article 79 is the same everywhere, it will be read by US judges and arbitrators with UCC § 2-615 in mind, by German judges and arbitrators with BGB § 313 in mind, and so on around the world, thereby producing disuniformity of interpretation of an ostensible uniform provision. We will soon see some concrete examples of that prediction coming true in the United States.

B. Impediment CISG article 79(1) imposes four requirements before the nonperforming party is granted relief: • hat the failure in performance was prevented by an impediment beyond its control; • hat the nonperforming party could not reasonably be expected to have taken the impediment into account at the time the contract was made; • hat the nonperforming party could not reasonably be expected to have avoided or overcome the impediment or its consequences; • hat the nonperforming party gave timely notice to the other party of the impediment and its efect on performance. Obviously, the irst key question is:  When does something that makes performance diicult amount to an “impediment”? he word is not deined in the CISG. In English, “impediment” usually connotes some external obstacle that gets in the way of the desired result. he next case provides an example. It is also a graphic example of the accuracy of Honnold’s prediction that national courts will view CISG article 79 through the lens of their domestic law.

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Raw Materials, Inc. v. Manfred Forberich G.m.b.H. & Co., K.G. United States District Court for the Northern District of Illinois, 2004 53 U.C.C. Rep. Serv. 2d 878 [Plaintiff Raw Materials, Inc. (RMI), an Illinois corporation, contracted to buy 15,000– 18,000 metric tons of used railroad rail from Defendant Manfred Forberich G.m.b.H. & Co., K.G. (Forberich), a German limited partnership. The rail was to be shipped from the port of St. Petersburg, Russia. Under the contract as originally agreed, delivery was to be made by June 30, 2002. In June 2002, the parties agreed to extend the time for performance, although they were in dispute about what was actually agreed. RMI contended that the rail was to be delivered in Illinois by December 31, 2002, but Forberich contended that December 31, 2002, was the deadline for the rail to be loaded on board the carrying ship in St. Petersburg. The winter of 2002–2003 was the worst for almost 60  years in St. Petersburg. The port of St. Petersburg froze over in early December 2002, making it impossible for ships to depart from the port. RMI sued Forberich, alleging breach of contract for Forberich’s undisputed failure to meet its contractual obligation. Plaintiff moved for summary judgment. Defendant relied on CISG article 79, arguing that its performance had been prevented by the impediment of the port freezing over.] Before FiliP, District Judge: . . . As set forth above, it is undisputed that Forberich was contractually obligated to ship 15,000 to 18,000 metric tons of rail to RMI and that it failed to do so. Thus, Forberich’s ability to avoid summary judgment is dependent on whether it has presented suficient evidence to support its afirmative defense of force majeure based on the theory that it was prevented from performing by the freezing over of the St. Petersburg port. For the reasons explained below, the Court denies Plaintiff’s motion for summary judgment.

A. Applicable Law The parties agree that their contract is governed by the Convention on Contracts for the International Sale of Goods (“CISG”). Although the contract does not contain an express force majeure provision, the CISG provides that: A party is not liable for failure to perform any of his obligations if he proves that failure was due to an impediment beyond his control and that he could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract or to have avoided or overcome its consequences. CISG Art. 79. RMI asserts that “[w]hile no American court has speciically interpreted or applied Article 79 of the CISG, caselaw interpreting the Uniform Commercial Code’s (“U.C.C.”) provision on excuse provides guidance for interpreting the CISG’s excuse provision since it contains similar requirements as those set forth in Article 79.” This approach of looking to caselaw interpreting analogous provisions of the UCC has been used by other federal courts. See, e.g., Delchi Carrier SpA v. Rotorex Corp., 71 F.3d 1024, 1028 (2d Cir. 1995) (“caselaw interpreting analogous provisions of Article 2 of the Uniform Commercial Code (“UCC”) may also inform a court where the language of the relevant CISG provisions

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track that of the UCC”); Chicago Prime Packers, Inc. v.  Northam Food Trading Co., No. 01-4447, 2004 WL 1166628 at *4 (N.D. Ill. May 21, 2004) (same). Furthermore, Forberich does not dispute that this is proper and, in fact, also points to caselaw interpreting the UCC. Accordingly, in applying Article 79 of the CISG, the Court will use as a guide caselaw interpreting a similar provision of § 2-615 of the UCC. Under § 2-615 of the UCC, “three conditions must be satisied before performance is excused:  (1)  a contingency has occurred; (2)  the contingency has made performance impracticable; and (3)  the nonoccurrence of that contingency was a basic assumption upon which the contract was made.” Waldinger Corp. v. CRS Group Engineers, Inc., 775 F.2d 781, 786 (7th Cir. 1985). The third condition turns upon whether the contingency was foreseeable; “[i]f the risk of the occurrence of the contingency was unforeseeable, the seller cannot be said to have assumed the risk. If the risk of the occurrence of the contingency was foreseeable, that risk is tacitly assigned to the seller.” Id. RMI does not dispute that the freezing over of the port in St. Petersburg was a contingency. Rather, RMI essentially argues that it is entitled to summary judgment because the second and third conditions do not apply inasmuch as the undisputed facts show that the frozen port did not prevent Forberich from performing the contract and that the freezing of the port was foreseeable. Based on the record material cited by the parties, the Court respectfully disagrees.

B. Whether the Frozen Port Could Have Prevented Performance As mentioned above, RMI contends that the frozen port could not have prevented Forberich from performing because the port did not freeze over until mid-December 2002, and, since it takes 3-4 weeks for a ship carrying rail to travel from St. Petersburg to the United States, Forberich would have had to have shipped out the rail before the port froze in order for the shipment to arrive by the December 31, 2002 deadline. RMI’s argument is premised on its contention that it has established beyond genuine dispute that Forberich was obligated to ship the materials so that they would arrive by December 31, 2002 (rather than just load the ships by that date, as Forberich contends). In this regard, RMI asserts that Forberich’s admission in its answer that it “promised to deliver the aforementioned goods at RMI’s place of business on or before June 30, 2002,” is a judicial admission. While the Court agrees that this statement in RMI’s answer is a judicial admission that establishes beyond contention the fact that Forberich initially promised to deliver the rail at RMI’s place of business on or before June 30, 2002. . . this does not establish the inapplicability of the force majeure defense for at least two independent reasons. First, even assuming that Forberich was obligated to deliver the rails by December 31, 2002, Forberich has nonetheless presented evidence (which the Court must construe in the light most favorable to Forberich) that the frozen port prevented it from meeting this obligation. In particular, Mr. Forberich testiied that ice interfered with shipping not just in mid-December, but as early as the end of November. The fact that a Forberich ship left the port on approximately November 20, 2002 is not inconsistent with the port freezing in the remaining ten days or so of that month. Furthermore, as noted above, no conclusive evidence has been presented that any ships left the St. Petersburg port until months after November 20, 2002. In light of the undisputed fact that delivery to a port in the U.S. from St. Petersburg takes at least 3-4 weeks and Mr. Owczarzak’s testimony that he “would have

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been satisied had the 15,000 to 18,000 tons, metric tons of rail, been delivered to a port in the United States as of December 31st, 2002,” Forberich has presented evidence that it would have been in position to meet a December 31, 2002 deadline for delivery to the U.S. by shipping out rail in the last week or so of November or the irst few days of December but was prevented from doing so by the frozen port. Thus, for this reason alone, there is a disputed question of fact as to whether the frozen port prevented Forberich from performing its contractual obligations. The second reason RMI has failed to demonstrate that the frozen port did not prevent Forberich’s performance is that although it is established beyond contention that Forberich promised in the February 7, 2002, written agreement that Forberich would deliver the rail at RMI’s place of business on or before June 30, 2002, an issue of fact exists regarding the nature of the extension Mr. Owczarzac orally agreed to for the time for performance of the contract. (As indicated by the fact that the parties agreed to the extension, there is no requirement in the contract that any modiication be in writing. Furthermore, under the CISG, “[a] contract may be modiied or terminated by the mere agreement of the parties.” CISG Art. 29.) Neither side has presented evidence of what exactly was said by Mr. Owczarzak and Mr. Forberich during the initial telephone conversation in which Mr. Owczarzak agreed to an extension. On June 27, 2002, Mr. Owczarzak sent Mr. Forberich a letter stating “[w]ith reference to our telephone conversation of Wednesday, [sic] Jun 26, 2002, RAW MATERIALS, INC. has agreed to extend the delivery date from June 30, 2002 until a later date during this calendar year on CONTRACT FORB 3464/02. This later date will be conirmed sometime during your visit to Chicago in July of this year.” However, this letter contemplates further discussions and, although the parties apparently did not meet in Chicago in July, Mr. Owczarzak testiied that they did have further discussions, though he did not testify to the content of these discussions in detail. Mr. Owczarzak also testiied that he conveyed to Mr. Forberich that delivery to any port in the U.S. by December 31, 2002 would be satisfactory but he did not specify when or how (orally or by letter) he made this communication. In his declaration, Mr. Forberich stated that his understanding was that Forberich was given an extension “until December 31, 2002 to load the rails and execute a bill of lading to be in compliance with the contract.” Given that the original contract obligated delivery to RMI’s place of business in Chicago Heights by June 30, 2002, it appears unlikely that Mr. Owczarzak would have done more than agree to extend the delivery date to December 31, 2002, and change the delivery location to any U.S. port, but the evidence is unclear and contradictory and it is not the Court’s role in deciding a summary judgment motion to weigh evidence. . . Thus, a question of fact exists as to whether Forberich was obligated to deliver the rail to the U.S. by December 31, 2002 or whether Forberich was merely required to load the rail by that date. Consequently, since it cannot yet be determined whether Forberich would have met its contractual obligations by shipping rail from the port at the end of December, a question of fact exists as to whether the port’s freezing prevented Forberich from performing its obligation, even assuming the port froze in mid-December.

C. Foreseeability RMI’s sole basis for its contention that the early freezing of the port was foreseeable is the assertion, without citation to the record, in its brief in support of summary judgment, that

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“it hardly could come as a surprise to any experienced shipping merchant (or any grammar school geography student) that the port in St. Petersburg might become icy and frozen in the Russian winter months.” However, Forberich presented evidence that the severity of the winter in 2002 and the early onset of the freezing of the port and its consequences were far from ordinary occurrences. It is undisputed that although the St. Petersburg port does usually freeze over in the winter months, this typically does not happen until late January, and such freezing does not prevent the vessels from entering and exiting the port. More to the point, Mr. Forberich testiied that although ice breakers are normally used to allow for shipping, the winter of 2002 was the worst winter in St. Petersburg in almost sixty years and that ice interfered with shipping at the end of November and that even the icebreakers were stuck in the ice. He also testiied that these were “unexpected weather conditions.” Whether it was foreseeable that such severe weather would occur and would stop even the icebreakers from working is a question of fact for the jury. In so holding, the Court notes that the freezing over of the upper Mississippi River has been the basis of a successful force majeure defense. See Louis Dreyfus Corp. v. Continental Grain Co., 395 So.2d 442, 450 (La. Ct. App. 1981). In sum, because questions of fact exist as to whether the early freezing of the port prevented Forberich’s performance and was foreseeable, Forberich’s force majeure afirmative defense may be viable and summary judgment would be inappropriate.

CONCLUSION For the foregoing reasons, Plaintiff’s motion for summary judgment is denied.

Problem 7.2 A US seller contracted to sell chicken parts to a Romanian buyer, with the inal shipment to be by May 29. he seller shipped some chicken without incident, but on June 2, the seller had not shipped 62 containers of chicken parts still due under the contract. On that day, the Romanian government declared, without notice, that as of June 7, no chicken could be imported into Romania. he seller rushed out 20 of the remaining 62 containers, but as of June 7, 42 containers could not be shipped to Romania. he buyer proposed that the seller ship the chicken to a port in nearby Georgia. he seller refused. he buyer sued seller for breach of contract. Was the seller’s performance excused by CISG article 79? CISG article 79(3) provides for what happens if the impediment preventing performance comes to an end: the obligation to perform is revived. In contrast, CISG article 79 does not make provision for a diferent kind of partial impediment, one that prevents a party from performing some but not all of its obligations. What happens, for example, if new government regulations unexpectedly restrict the use of one of the seller’s raw materials, so that the seller can now manufacture some but not all of the goods promised to the buyer? he government regulation would constitute an “impediment” under CISG article 79, albeit not a complete one. It would be odd if the seller were to be relieved of its obligations completely because of a partial impediment of this kind. CISG article 79(1) does not say that the contract is terminated if performance is prevented by an impediment but rather that the performing party is not liable for any failure caused by the impediment. hat language suggests that the seller would be relieved of its obligations only to the extent of the partial impediment. See Honnold, op. cit., § 435.2, at 491–92 (the example of the partial restriction on raw materials is his).

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C. Hardship as Impediment Can hardship, such as an increase in cost or price, constitute an “impediment” for the purposes of CISG article 79? his argument has oten been made but has seldom succeeded, according to the UNCITRAL Digest of Case Law on the United Nations Convention on the International Sale of Goods (revised ed. 2012). CISG Advisory Council Opinion No. 7, entitled “Exemption of Liability for Damages under Article 79 of the CISG” states, in para. 3.1: “A change of circumstances that could not reasonably be expected to have been taken into account, rendering performance excessively onerous (‘hardship’) may qualify as an ‘impediment’ under Article 79(1).” he Opinion goes on to note, however, that: “[A]s of the time of the drating of this opinion [2007], no court has exempted a party from liability on the grounds of economic hardship” (para. 31). hat is no longer true. In Scaform International BV v. Lorraine Tubes S.A.S. (available at http://cisgw3.law.pace.edu/cases/090619b1.html), decided on June 19, 2009, Belgium’s Hof van Cassatie (the Court of Cassation, or Supreme Court) held that a French seller was relieved of its obligation to sell steel tubes to its Dutch buyer because the price of steel had unforeseeably increased by 70 percent between the time the contract was made and the time when performance was due. he court concluded that “these unforeseen increases in the price gave rise to a serious imbalance which rendered the further performance of the contracts under unchanged conditions exceptionally detrimental” for the seller. his result is surprising. Although the price rise was described as “unforeseeable,” it is surely true that an increase in the cost of raw materials is always foreseeable to some extent. A seller can protect itself against such developments by including a price escalation clause. he French seller in the Scaform International case did not, just as Linde did not in the United Aluminum case. Even if the increased price of steel was properly regarded as an “impediment,” it is diicult to see how the court could conclude that the seller could not reasonably be expected to have taken it into account when the contract was made, or to have avoided or overcome it. One of your coauthors has argued that the second requirement for the operation of CISG article 79(1)—that the nonperforming party could not reasonably be expected to have taken the impediment into account at the time the contract was made—is the main reason that CISG article 79 is so seldom invoked successfully. Although it is oten described as imposing a foreseeability requirement, CISG article 79 does not use the language of foreseeability as, for example, CISG articles 25 and 74 do. It asks whether the impediment could reasonably have been taken into account when the contract was made. Of course, one cannot take something into account unless one has foreseen it, but the distinction between foreseeing and taking into account is not insigniicant. Even if the seller in the Scaform case could not have foreseen a rise in the price of steel of the magnitude of 70 percent, it could have taken into account the possibility of price rises of any magnitude by including a price escalation clause in its contract. (Indeed, the decision of the trial court shows that the seller did have a price escalation clause in its standard form contract, but it had elected not to use that standard form for the present sale.) his, your coauthor argues, creates for CISG article 79 a version of Joseph Heller’s catch-22, where there are two

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alternatives, both of which lead to the same result. If the seller of a product such as steel tubes is foolish enough not to “take into account,” by including a price escalation clause in the sale contract, the possibility of a rise in the price of steel, then it should get no relief under CISG article 79 because of the second requirement for the operation of the article. If the seller does take that possibility into account by including a price escalation clause in the contract, then it needs no relief under CISG article 79 because it has relief under the terms of the contract. Either way, CISG article 79 has no work to do. See Martin Davies, Excuse of Impediment and Its Usefulness, in International Sales Law:  A  Global Challenge (L. DiMatteo ed., 2014). In coming to its decision in Scaform International the Hof van Cassatie referred to the Unidroit Principles of International Commercial Contracts (PICC). PICC article 6.2.2 deines hardship in terms of events that fundamentally alter the equilibrium of the contract. he following extract considers PICC article 6.2.2 when addressing the question of whether hardship can amount to impediment under CISG article 79. he article was published before the Scaform International decision.

Force Majeure and Hardship in International Sales Contracts Ingeborg Schwenzer 39 viCtoRia univeRsity of weLLington Law Review 709 (2009) B. Relevant Threshold for Hardship The crucial point in the irst place is to determine the threshold of hardship. When has performance become excessively onerous? When has the equilibrium of the contract been fundamentally altered? Thereby, either an increase in cost of performance or a decrease in value of the performance received may be relevant. This means that the aggrieved party can be either the seller or the buyer. The starting point has to be the contract itself. Primarily, it is up to the parties to deine their respective spheres of risk in the contract. One party may have expressly or impliedly assumed the risk for a fundamental change of circumstances or, on the contrary, certain risks may have been expressly or impliedly excluded. This determination can be done by simple contract interpretation. If, for example, the contract is highly speculative, the obligor can be presumed to have assumed the risk involved in the transaction. Thus, a German court of second instance did not exempt a seller from liability under Article 79 of the CISG although the market price for the contract item, iron molybdenum from China, had risen by 300 per cent. [This is a reference to CLOUT Case 277; Oberlandesgericht Hamburg; 1 U 167/95; 28 February 1997.] The court reasoned that in a trade sector with highly speculative traits the threshold for allowing hardship should be raised. As such, typical luctuations of price in the commodity trade generally will not give rise to an acknowledgement of hardship. It is questionable how the relevant threshold for giving rise to a hardship excuse is determined if no such special circumstances exist. Whereas the Comment to Article 6.2.2 of the PICC in its irst edition of 1994 suggested that an alteration amounting to 50 per

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cent or more would likely amount to a “fundamental” alteration, the second edition of the PICC in 2004 refrains from recommending any exact igure. Certainly, in ascertaining whether any alteration amounts to hardship, primary consideration is to be given to the circumstances of the individual case. Thus, it may be relevant whether we are dealing with a short term sales contract or a long term instalment contract. The proit margin in the respective trade sector may also play an important role. Finally, in cases where the inancial ruin of the obligor is imminent, the threshold for allowing hardship may be lowered. However, legal certainty clearly calls for some benchmark. Relying on a thorough comparative analysis of domestic solutions, one author [Christoph Brunner, ForCe maJeure anD harDshiP unDer General ContraCt PrinCiPles: exemPtion oF non-PerFormanCe in international arbitration 428-435 (2009)] has suggested that, as a general rule of thumb in standard situations, a threshold of 100 per cent should be favoured. However, courts interpreting Article 79(1) CISG have been very reluctant to allow hardship in case of luctuations of prices. Up to now, there is no single reported court or arbitral decision exempting a party—either a seller or a buyer—from liability under a CISG sales contract due to hardship. All decisions dealing with hardship under Article 79 concluded that even a price increase or decrease of more than 100 per cent would not sufice. The suggested “100 per cent threshold” seems to be based upon considerations of domestic markets where price luctuations are not to be expected to the same degree as in international markets. In an international market, one may expect the potentially aggrieved party to insist on incorporating terms for a possible adjustment in the contract or otherwise assuming the risk for higher luctuations than usually occur on domestic markets. Thus, the margin certainly has to be set at a higher point. A 150–200 per cent margin seems to be advisable.

D. Nonconforming Goods and Supply Failures Common law commentators argue that the choice of the word “impediment” conines CISG article 79 to cases where performance has been prevented entirely, and that CISG article 79 cannot apply to relieve the seller from liability for providing nonconforming goods, because conformity is always within the seller’s control. See Nicholas, op. cit., 5-10 to 5-14, para. 5.02(2). In contrast, civil law commentators argue that a defect present in the goods at the time the contract is made might conceivably constitute an impediment to the seller’s obligation to deliver conforming goods, if the seller could not reasonably have been expected to know of that defect. See H. Stoll & G. Gruber, Article 79, in Commentary on the U.N. Convention on the International Sale of Goods (CISG) 812–13 (Peter Schlechtriem & Ingeborg Schwenzer eds., 2d Eng. ed. 2005). his issue has caused a fair amount of academic debate, but it would seem that the civil law and the common law view will be the same as to the ultimate result except in the rarest circumstances because the law generally imputes full knowledge of the goods to most commercial sellers, even if in fact they were ignorant of the defect, and they are generally held responsible for nonconformity. One of the leading commentaries written from the civil law perspective now says, “he seller will . . . in practice hardly ever be able to rely on Article 79 in cases of non-conformity of the goods.” Ingeborg Schwenzer, Article 79, in Commentary on the U.N. Convention on

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the International Sale of Goods (CISG) ¶ 6, at 1065 (Ingeborg Schwenzer ed., 3d Eng. ed. 2010); see also id. ¶¶ 28–29, at 1075–76. One obvious example of an external “impediment” is speciically considered in CISG article 79(2), namely a failure by one of the seller’s suppliers to provide either the goods themselves or a crucial component of them. CISG article 79(2) provides that a seller is immune in such a case only if its supplier would be also. In the following case, known as the Vine Wax Case, the Bundesgerichtshof (the Federal Supreme Court of Germany) considered both the operation of CISG article 79(2) and the question whether CISG article 79 could apply in cases of nonconformity, rather than a complete failure to perform. It is regarded as one of the most signiicant international decisions on CISG article 79.

Case No. VIII ZR 121/98 (The Vine Wax Case) Bundesgerichtshof [BGH] [Federal Supreme Court], Mar. 24, 1999 (Ger.) Original available at: http://www.globalsaleslaw.org/content/ api/ cisg/display.cfm?test=396 Unoficial English translation available at: http://www.cisg.law.pace. edu/cisg/wais/db/cases2/990324g1.html (Todd Fox & Sonja Corterier trans.) (Nov. 26, 2007) [The German seller agreed to supply vine wax to be used by the Austrian buyer to protect grafts of grape vines from drying out. The seller had acquired the wax from its supplier, which manufactured the wax in part with raw materials provided by a Hungarian supplier that the supplier had not previously used. The seller forwarded the wax to the buyer when it received it from the supplier, without opening the package. The wax did not protect the vines. The buyer brought suit against the seller. The trial court (the Landgericht) dismissed the buyer’s complaint. On appeal, the intermediate appellate court (the Oberlandesgericht Zweibrücken) found the seller liable for delivering goods that did not conform to prevailing industry standards. The seller appealed to the Federal Supreme Court (the Bundesgerichtshof), claiming (among other things) that its failure to perform was caused by an impediment beyond its control, namely its supplier’s failure to provide it with adequate wax. Before reaching that question, the Bundesgerichtshof rejected the seller’s argument that the buyer had not established by adequate evidence that the wax was defective. It then continued as follows.] Before Judges zülCh, beyer, leimert, WieChers and Wolst: ... The Reasons for the Decision . . . The appeal further asserts that defendant is, in any event, not liable for the damages caused by the use of the vine wax because it was only the intermediary and, therefore, the vine wax’s non-conformity with the contract was beyond its control (CISG art. 79). This attack is also unsuccessful. (a) It may remain undecided whether CISG art. 79 encompasses all conceivable cases and forms of non-performance of contractual obligations creating a liability and is not limited to certain types of contractual violations and, therefore, includes the

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delivery of goods not in conformity with the contract because of their defectiveness or whether a seller who has delivered defective goods cannot rely on CISG art. 79 at all. An exemption pursuant to CISG art. 79, upon which the Court of Appeals correctly based its decision, is not applicable because, in any case, the defectiveness of the vine wax was not outside defendant’s control. It is, therefore, responsible for the consequences of a delivery of goods not in conformity with the contract. The possibility of exemption under CISG art. 79 does not change the allocation of the contractual risk. According to the [CISG], the reason for the seller’s liability is that he has agreed to provide the purchaser with goods that are in conformity with the contract. If the supplier’s (or suppliers’) breach of the contract is a general impediment within the meaning of CISG art. 79 at all, it is generally an impediment that the seller must avoid or overcome according to the content of the contract of sale. This follows the typical meaning of such a contract. From the buyer’s point of view, it makes no difference whether the seller produces the goods himself—with the consequence that the non-performance is generally in his actual control so that, as a rule, a dispensation pursuant to CISG art. 79(1) is generally excluded—or whether the seller obtains the goods from suppliers. Just as in the case of unspeciied obligations, where the seller is liable for the timely delivery by his supplier, he is also responsible to see that his supplier delivers defect-free goods. In this respect, the [CISG] does not distinguish between an untimely delivery and a delivery of goods not in conformity with the contract. For both breaches of contract the same standard of liability applies. The appeal does not indicate that the parties agreed to a different allocation of risk at the formation of the contract, nor is this otherwise apparent. Pursuant to CISG art. 79, the seller’s exemption from consequences of goods not in conformity with the contract can only be considered—if at all (see above)—when the non-conformity cannot be deemed to be within the seller’s control. Because the seller has the risk of acquisition (as shown), he can only be exempted under CISG art. 79 (1) or (2) (even when the reasons for the defectiveness of the goods are—as here—within the control of his supplier or his sub-supplier) if the defectiveness is due to circumstances out of his own control and out of each of his suppliers’ control. The appeal cannot show this. Insofar as the appeal points out that the manufacturer, in 1994, used an inappropriate raw material possibly imported from Hungary during the production of the delivered vine wax, this is not relevant with respect to CISG art. 79 because the manufacturer would be liable— and thus also plaintiff vis-à-vis defendant—for those product defects within its control. [The Bundesgerichtshof then held that the Court of Appeals (the Oberlandesgericht) had not adequately taken into account the buyer’s responsibility to mitigate its loss under CISG, article 77 (on which, see Chapter  8), and so it remanded the case to the Oberlandesgericht for further consideration of that point.]

III. Relief Under the UCC When Performance Becomes “Impracticable” Unlike CISG article 79, which provides relief to either party if performance fails as a result of an impediment, UCC § 2-615 provides relief to the seller only if performance becomes impracticable. A buyer whose performance becomes commercially impracticable is let without assistance, unless there is a force majeure or hardship clause in the contract or unless a

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court is willing to supplement the Code remedy with the common law doctrine of frustration (which at least some courts are willing to do). See UCC §§ 1-103(b), 2-615 cmt. 9, ¶ 2; e.g., Power Engineering & Mfg. v. Krug International, 501 N.W.2d 490, 494 n.2 (Iowa 1993). Furthermore, UCC § 2-615 excuses only two aspects of performance:  nondelivery and delayed delivery. In contrast, CISG article 79 excuses any failure of any obligation including, arguably, defective delivery. Rather oddly, one of the best known and most cited decisions about UCC § 2-615 was not directly concerned with a sales contract or, indeed, UCC § 2-615. he court did, however, make extensive reference to UCC § 2-615, and the views expressed about commercial impracticability are oten cited in cases about UCC § 2-615.

Transatlantic Financing Corp. v. United States United States Court of Appeals for the District of Columbia Circuit, 1966 363 F.2d 312 [The case concerns the 1956 crisis in the Middle East that resulted in the closure of the Suez Canal and is one of several so-called Suez Cases. The plaintiff, Transatlantic Financing Corp., chartered its ship S.S. Christos to the United States for a voyage to carry a full cargo of wheat from a US Gulf port to a safe port in Iran. Two days after the S.S. Christos left Galveston bound for Bandar Shapur in Iran, Israel invaded Egypt. Two days later, the United Kingdom and France invaded the Suez Canal Zone. Two days later, the Egyptian government closed the Suez Canal with sunken ships. The S.S. Christos completed the voyage to Bandar Shapur by taking the much longer route around the Cape of Good Hope. Transatlantic brought suit against the United States, seeking to recover the additional costs of the voyage. The district court dismissed the suit and Transatlantic appealed.] WriGht, Circuit Judge: . . . The doctrine of impossibility of performance has gradually been freed from the earlier ictional and unrealistic strictures of such tests as the “implied term” and the parties’ “contemplation.” It is now recognized that “A thing is impossible in legal contemplation when it is not practicable; and a thing is impracticable when it can only be done at an excessive and unreasonable cost.” Mineral Park Land Co. v. Howard, 172 Cal. 289, 293, 156 P. 458, 460, L.R.A. 1916F, 1 (1916). Accord, Whelan v. Grifith Consumers Company, D.C. Mun. App., 170 A.2d 229 (1961); RESTATEMENT, CONTRACTS § 454 (1932); UNIFORM COMMERCIAL CODE (U.L.A.) § 2-615, comment 3. The doctrine ultimately represents the ever-shifting line, drawn by courts hopefully responsive to commercial practices and mores, at which the community’s interest in having contracts enforced according to their terms is outweighed by the commercial senselessness of requiring performance. When the issue is raised, the court is asked to construct a condition of performance based on the changed circumstances, a process which involves at least three reasonably deinable steps. First, a contingency—something unexpected—must have occurred. Second, the risk of the unexpected occurrence must not have been allocated either by agreement or by custom. Finally, occurrence of the contingency

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must have rendered performance commercially impracticable.2 Unless the court inds these three requirements satisied, the plea of impossibility must fail. The irst requirement was met here. It seems reasonable, where no route is mentioned in a contract, to assume the parties expected performance by the usual and customary route at the time of contract. Since the usual and customary route from Texas to Iran at the time of contract was through Suez, closure of the Canal made impossible the expected method of performance. But this unexpected development raises rather than resolves the impossibility issue, which turns additionally on whether the risk of the contingency’s occurrence had been allocated and, if not, whether performance by alternative routes was rendered impracticable. Proof that the risk of a contingency’s occurrence has been allocated may be expressed in or implied from the agreement. Such proof may also be found in the surrounding circumstances, including custom and usages of the trade. See 6 CORBIN, supra, § 1339, at 394–397; 6 WILLISTON, supra, § 1948, at 5457–5458. The contract in this case does not expressly condition performance upon availability of the Suez route. Nor does it specify ‘via Suez’ or, on the other hand, ‘via Suez or Cape of Good Hope.’ Nor are there provisions in the contract from which we may properly imply that the continued availability of Suez was a condition of performance. Nor is there anything in custom or trade usage, or in the surrounding circumstances generally, which would support our constructing a condition of performance. The numerous cases requiring performance around the Cape when Suez was closed, see e.g., Ocean Tramp Tankers Corp. v. V/O Sovfracht (The Eugenia) [1964] 2 Q.B. 226, and cases cited therein, indicate that the Cape route is generally regarded as an alternative means of performance. So the implied expectation that the route would be via Suez is hardly adequate proof of an allocation to the promisee of the risk of closure. In some cases, even an express expectation may not amount to a condition of performance. The doctrine of deviation supports our assumption that parties normally expect performance by the usual and customary route, but it adds nothing beyond this that is probative of an allocation of the risk. If anything, the circumstances surrounding this contract indicate that the risk of the Canal’s closure may be deemed to have been allocated to Transatlantic. We know or may safely assume that the parties were aware, as were most commercial men with interests affected by the Suez situation, see The Eugenia, supra, that the Canal might become a dangerous area. No doubt the tension affected freight rates, and it is arguable that the risk of closure became part of the dickered terms. UNIFORM COMMERCIAL CODE § 2-615, comment 8. We do not deem the risk of closure so allocated, however. Foreseeability or even recognition of a risk does not necessarily prove its allocation. Compare UNIFORM

[2]. Compare UNIFORM COMMERCIAL CODE § 2-615(a), which provides that, in the absence of an assumption of greater liability, delay or non-delivery by a seller is not a breach if performance as agreed is made ‘impracticable’ by the occurrence of a ‘contingency’ the non-occurrence of which was a ‘basic assumption on which the contract was made.’ To the extent this limits relief to ‘unforeseen’ circumstances, comment 1, see the discussion below, and compare UNIFORM COMMERCIAL CODE § 2-614(1). There may be a point beyond which agreement cannot go, UNIFORM COMMERCIAL CODE § 2-615, comment 8, presumably the point at which the obligation would be ‘manifestly unreasonable,’ § 1-102(3), in bad faith, § 1-203, or unconscionable, § 2-302. For an application of these provisions see Judge Friendly’s opinion in United States v. Wegematic Corporation, 2 Cir., 360 F.2d 674 (1966).

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COMMERCIAL CODE § 2-615, Comment 1; RESTATEMENT, CONTRACTS § 457 (1932). Parties to a contract are not always able to provide for all the possibilities of which they are aware, sometimes because they cannot agree, often simply because they are too busy. Moreover, that some abnormal risk was contemplated is probative but does not necessarily establish an allocation of the risk of the contingency which actually occurs. In this case, for example, nationalization by Egypt of the Canal Corporation and formation of the Suez Users Group did not necessarily indicate that the Canal would be blocked even if a confrontation resulted. The surrounding circumstances do indicate, however, a willingness by Transatlantic to assume abnormal risks, and this fact should legitimately cause us to judge the impracticability of performance by an alternative route in stricter terms than we would were the contingency unforeseen. We turn then to the question whether occurrence of the contingency rendered performance commercially impracticable under the circumstances of this case. The goods shipped were not subject to harm from the longer, less temperate Southern route. The vessel and crew were it to proceed around the Cape. Transatlantic was no less able than the United States to purchase insurance to cover the contingency’s occurrence. If anything, it is more reasonable to expect owner-operators of vessels to insure against the hazards of war. They are in the best position to calculate the cost of performance by alternative routes (and therefore to estimate the amount of insurance required), and are undoubtedly sensitive to international troubles which uniquely affect the demand for and cost of their services. The only factor operating here in appellant’s favor is the added expense, allegedly $43,972.00 above and beyond the contract price of $305,842.92, of extending a 10,000 mile voyage by approximately 3,000 miles. While it may be an overstatement to say that increased cost and dificulty of performance never constitute impracticability, to justify relief there must be more of a variation between expected cost and the cost of performing by an available alternative than is present in this case, where the promisor can legitimately be presumed to have accepted some degree of abnormal risk, and where impracticability is urged on the basis of added expense alone.3 We conclude, therefore, as have most other courts considering related issues arising out of the Suez closure, that performance of this contract was not rendered legally impossible. Even if we agreed with appellant, its theory of relief seems untenable. When performance of a contract is deemed impossible it is a nullity. In the case of a charter party involving carriage of goods, the carrier may return to an appropriate port and unload its cargo, The Malcolm Baxter, Jr., 277 U.S. 323, 48 S. Ct. 516, 72 L. Ed. 901 (1928), subject of course to required steps to minimize damages. If the performance rendered has value, recovery in quantum meruit for the entire performance is proper. But here Transatlantic has collected its contract price, and now seeks quantum meruit relief for the additional expense of the trip around the Cape. If the contract is a nullity, Transatlantic’s theory of relief should have been quantum meruit for the entire trip, rather than only for the extra expense. Transatlantic attempts to take its proit on the contract, and then force the Government to absorb the cost of the additional voyage. When impracticability without fault occurs, the law seeks an equitable solution, see 6 CORBIN, supra, § 1321, and quantum meruit is one

[3]. See UNIFORM COMMERCIAL CODE § 2-615, comment 4: ‘Increased cost alone does not excuse performance unless the rise in cost is due to some unforeseen contingency which alters the essential nature of the performance.’ See also 6 CORBIN, supra, § 1333; 6 WILLISTON, supra, § 1952, at 5468.

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of its potent devices to achieve this end. There is no interest in casting the entire burden of commercial disaster on one party in order to preserve the other’s proit. Apparently the contract price in this case was advantageous enough to deter appellant from taking a stance on damages consistent with its theory of liability. In any event, there is no basis for relief. Afirmed.

Question 7.3 Seller agreed to supply uranium oxide yellowcake to buyer for a period of four years. During those four years, the seller’s cost of performance increased dramatically due to a combination of circumstances, including an Arab oil embargo, unexpected federal environmental and occupational safety regulations, wage inlation, and chemical and equipment costs. Seller’s cost of production ended up being 52.2 percent higher than the contract price paid by the buyer, causing the seller to sufer a loss of over $2 million. Should the seller’s obligation to perform be relieved under UCC § 2-615? Oicial Comment 5 to UCC § 2-615 addresses the situation contemplated by CISG article 79(2), namely a failure by the seller to deliver because of a failure on the part of its supplier. Oicial Comment 5 reads in pertinent part: Where a particular source of supply is exclusive under the agreement and fails through casualty, the present section applies. . . . he same holds true where a particular source of supply is shown by the circumstances to have been contemplated or assumed by the parties at the time of contracting. . . . In the case of failure of production by an agreed source for causes beyond the seller’s control, the seller should, if possible, be excused since production by an agreed source is without more a basic assumption of the contract. Such excuse should not result in relieving the defaulting supplier from liability nor in dropping into the seller’s lap an unearned bonus of damages over. . . . A condition of his making good the claim of excuse is the turning over to the buyer of his rights against the defaulting sources of supply to the extent of the buyer’s contract in relation to which excuse is being claimed. Recall that under CISG article 79(2), the seller would be excused only if the supplier’s failure were also to be excused by an impediment beyond its control in a manner that would be excused under CISG article 79(1). UCC § 2-615 Oicial Comment 5 is not so restrictive. It suggests that the seller should be excused if the mutually contemplated supplier defaults for any reason, subject to the requirement that the seller should turn over to the buyer any rights it has against the seller for an unexcused default. In this situation, courts interpreting UCC § 2-615 Oicial Comment 5 have added the restrictive requirements that the supplier’s failure must not have been foreseeable at the time of the contracting and that the party seeking to be excused must have employed all due measures to insure that the source did not fail. Rockland Industries, Inc. v. E+E (US), Inc., 991 F. Supp. 468 (D. Md. 1998), on reconsideration in part, 1 F.  Supp.  2d 528 (D. Md. 1998); Ecology Services, Inc. v.  Granturk Equipment, Inc., 443 F. Supp. 2d 756 (D. Md. 2006).

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Question 7.4 A seller agrees to sell garbage trucks to a buyer, to be itted with rear loaders manufactured and installed by the seller’s supplier. he seller fails to deliver all of the trucks to the buyer on time because steel shortages encountered by the supplier prevent the supplier from installing all of the rear loaders. Should the seller be relieved of its obligations under UCC § 2-615? What would it have to do to obtain relief ?

Question 7.5 If the facts in Question 7.4 were to arise in a contract governed by the CISG, would the seller be relieved of its obligations under CISG article 79? Remember what the Vine Wax court said about whether and when the supplier’s failure is within the seller’s control.

Question 7.6 Would your answers to Questions 7.4 and 7.5 be diferent if the supplier’s failure derived not from steel shortages but merely ineiciency on its part?

IV. Force Majeure and Hardship Clauses he operation of a force majeure or hardship clause will obviously depend upon its terms. Such clauses are oten long and verbose, trying to make provision for a “laundry list” of all kinds of contingencies. Interestingly, however, standard form force majeure clauses do not usually include major market changes or other economic conditions in their list of force majeure events. See Nathan Crystal & Francesca Giannoni-Crystal, Contract Enforceability During Economic Crisis: Legal Principles and Drating Solutions, 10.3 Global Jurist, Article 3 (2010). In drating a clause of this kind, two things must be addressed. First, the clause must state what events trigger the operation of the clause. Second, it must state what the efect or consequence of such an event should be. Commonly, force majeure clauses suspend performance of the contract for the duration of the force majeure event, but the clause may also give either party the right to terminate the contract if the event continues beyond a speciied time. Less commonly, some clauses provide for equal sharing of any losses that the parties sustain as a result of the force majeure event. In hardship clauses, the occurrence of the event usually triggers an obligation to negotiate alternative terms. Reproduced here are two standard form clauses published by the International Chamber of Commerce (ICC). hey should give you some idea of how such clauses are intended to work. he level of detail they contain is testament to how important the issue of changed circumstances is in a long-term contract.

ICC Force Majeure Clause 2003 International Chamber of Commerce Publication No. 650 (1) Unless otherwise agreed in the contract between the parties expressly or impliedly, where a party to a contract fails to perform one or more of its contractual duties, the

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consequences set out in paragraphs 4 to 9 of this Clause will follow if and to the extent that that party proves: (a) that its failure to perform was caused by an impediment beyond its reasonable control; and (b) that it could not reasonably have been expected to have taken the occurrence of the impediment into account at the time of the conclusion of the contract; and (c) that it could not reasonably have avoided or overcome the effects of the impediment. (2) Where a contracting party fails to perform one or more of its contractual duties because of default by a third party whom it has engaged to perform the whole or part of the contract, the consequences set out in paragraphs 4 to 9 of this Clause will only apply to the contracting party: (a) if and to the extent that the contracting party establishes the requirements set out in paragraph 1 of this Clause; and (b) if and to the extent that the contracting party proves that the same requirements apply to the third party. (3) In the absence of proof to the contrary and unless otherwise agreed in the contract between the parties expressly or impliedly, a party invoking this Clause shall be presumed to have established the conditions described in paragraph 1(a) and (b) of this Clause in case of the occurrence of one or more of the following impediments: (a) war (whether declared or not), armed conlict or the serious threat of same (including but not limited to hostile attack, blockade, military embargo), hostilities, invasion, act of a foreign enemy, extensive military mobilisation; (b) civil war, riot rebellion and revolution, military or usurped power, insurrection, civil commotion or disorder, mob violence, act of civil disobedience; (c) act of terrorism, sabotage or piracy; (d) act of authority whether lawful or unlawful, compliance with any law or governmental order, rule, regulation or direction, curfew restriction, expropriation, compulsory acquisition, seizure of works, requisition, nationalisation; (e) act of God, plague, epidemic, natural disaster such as but not limited to violent storm, cyclone, typhoon, hurricane, tornado, blizzard, earthquake, volcanic activity, landslide, tidal wave, tsunami, lood, damage or destruction by lightning, drought; (f) explosion, ire, destruction of machines, equipment, factories and of any kind of installation, prolonged break-down of transport, telecommunication or electric current; (g) general labour disturbance such as but not limited to boycott, strike and lock-out, go-slow, occupation of factories and premises. (4) A party successfully invoking this Clause is, subject to paragraph 6 below, relieved from its duty to perform its obligations under the contract from the time at which the impediment causes the failure to perform if notice thereof is given without delay or, if notice thereof is not given without delay, from the time at which notice thereof reaches the other party.

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(5) A party successfully invoking this Clause is, subject to paragraph 6 below, relieved from any liability in damages or any other contractual remedy for breach of contract from the time indicated in paragraph 4. (6) Where the effect of the impediment or event invoked is temporary, the consequences set out under paragraphs 4 and 5 above shall apply only insofar, to the extent that and as long as the impediment or the listed event invoked impedes performance by the party invoking this Clause of its contractual duties. Where this paragraph applies, the party invoking this Clause is under an obligation to notify the other party as soon as the impediment or listed event ceases to impede performance of its contractual duties. (7) A party invoking this Clause is under an obligation to take all reasonable means to limit the effect of the impediment or event invoked upon performance of its contractual duties. (8) Where the duration of the impediment invoked under paragraph 1 of this Clause or of the listed event invoked under paragraph 3 of this Clause has the effect of substantially depriving either or both of the contracting parties of what they were reasonably entitled to expect under the contract, either party has the right to terminate the contract by notiication within a reasonable period to the other party. (9) Where paragraph 8 above applies and where either contracting party has, by reason of anything done by another contracting party in the performance of the contract, derived a beneit before the termination of the contract, the party deriving such a beneit shall be under a duty to pay to the other party a sum of money equivalent to the value of such beneit.

ICC Hardship Clause 2003 International Chamber of Commerce Publication No. 650 (1) A party to a contract is bound to perform its contractual duties even if events have rendered performance more onerous than could reasonably have been anticipated at the time of the conclusion of the contract. (2) Notwithstanding paragraph 1 of this Clause, where a party to a contract proves that: (a) the continued performance of its contractual duties has become excessively onerous due to an event beyond its reasonable control which it could not reasonably have been expected to have taken into account at the time of the conclusion of the contract; and that (b) it could not reasonably have avoided or overcome the event or its consequences, the parties are bound, within a reasonable time of the invocation of this Clause, to negotiate alternative contractual terms which reasonably allow for the consequences of the event. (3) Where paragraph 2 of this Clause applies, but where alternative contractual terms which reasonably allow for the consequences of the event are not agreed by the other party to the contract as provided in that paragraph, the party invoking this Clause is entitled to termination of the contract.

Because force majeure clauses are, in efect, exculpatory clauses, they are interpreted in the same restrictive manner as exculpatory clauses. One important question of interpretation that oten arises is whether the alleged force majeure event actually caused the performing

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party’s inability to perform, or whether the party voluntarily chose not to perform because of increased hardship. he next two short extracts illustrate.

Macalloy Corp. v. Metallurg, Inc. Supreme Court of New York, Appellate Division, First Department, 2001 728 N.Y.S.2d 14 Before narDelli, J.P., mazzarelli, rubin, saxe and buCkley, JJ.: Order, Supreme Court, New  York County (Martin Schoenfeld, J.), entered August 30, 2000, which granted defendant’s motion for summary judgment, dismissing plaintiff’s complaint for injunctive and declaratory relief, unanimously modiied, on the law, only to the extent of declaring that plaintiff is not relieved from performing under the parties’ contract pursuant to the contract’s force majeure provision, and otherwise afirmed, with costs to defendant payable by plaintiff. Plaintiff was not relieved of its obligations to perform under the contract with defendant based on the “plant shutdown” language contained in the force majeure provision of the contract. Such force majeure clauses excuse non-performance only where the reasonable expectations of the parties have been frustrated due to circumstances beyond the control of the parties. Plaintiff shut down its plant voluntarily due to inancial considerations brought about by environmental regulations. Those are not circumstances constituting a force majeure event, and inancial hardship is not grounds for avoiding performance under a contract. Furthermore, plaintiff was fully aware of the environmental regulations, and the Environmental Protection Agency’s intention to enforce them fully, prior to entering into the contract with defendant. We modify only to declare in defendant’s favor.

Harriscom Svenska, A.B. v. Harris Corp. United States Court of Appeals for the Second Circuit, 1993 3 F.3d 576 CarDamone, Circuit Judge: Before us on this appeal are two companies that contracted with one another for the sale of radios and spare parts. One is the radios’ domestic manufacturer, the other is a Swedish organization, the manufacturer’s distributor to the Islamic Republic of Iran. Having some doubt as to the continued viability of such trade, a force majeure clause, which is the subject of this litigation, was inserted into the parties’ written agreement. What began as a doubt ripened into a certainty when the United States government prohibited all sales to Iran of goods it categorized as military equipment. A shipment of the contracted-for radio spare parts enroute to Sweden, but destined for Iran, was later detained by U.S. Customs. One of the issues before us is whether the manufacturer’s refusal to ship the spare parts was a voluntary act on its part, subjecting it to liability to its distributor for damages for breach of contract. We think it a foregone conclusion that a government bureaucracy determined to prevent what it considers military goods from leaving this country and with the will to compel compliance with its directives is an irresistible force, one that cannot

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reasonably be controlled. The government in these circumstances may be likened to the wife of “Rumpole of the Bailey,” John Mortimer’s ictional barrister, who describes his wife as “she who must be obeyed.” Harriscom Svenska, AB (Harriscom) appeals from two December 18, 1992 judgments of the United States District Court for the Western District of New York (Telesca, C.J.) granting defendant Harris Corp.’s (RF Systems) motion for summary judgment and dismissing Harriscom’s second complaint against Harris Corp. on res judicata grounds. [After describing the facts in more detail and the procedural background, the court continued:] Harriscom contends on appeal that the district court’s grant of summary judgment was in error because the following issues of material fact exist: (1) whether RF Systems’ decision not to ill the model 2301 radio contract orders was voluntary; (2) whether RF Systems acted in bad faith by not using its Indian licensee to supply radios to Iran; (3) whether RF Systems acted in bad faith by not applying for an export permit provided for in the November 1987 Commerce Department regulation. . . [Harriscom raised four other grounds of error raising issues other than impracticability and force majeure.] Harriscom’s irst contention is that RF Systems acted voluntarily when it and the United States government reached a compromise in which RF Systems agreed not to sell its products in Iran. As support, Harriscom points to the language of RF Systems’ July 24, 1986 letter to the State Department. What appellant ignores is the overwhelming and uncontradicted evidence that the government would not allow RF Systems to continue sales to Iran. RF Systems established the afirmative defense of commercial impracticability because it complied in good faith with the government’s informal requirements. See N.Y.U.C.C. § 2-615 & cmt. 10 (McKinney 1964). We reject appellant’s assertion that good faith automatically presents an issue of fact precluding summary judgment because the record contains no evidence that RF Systems acted in bad faith. Harriscom must demonstrate more than “some metaphysical doubt as to the material facts” in order to avoid dismissal. Further, for RF Systems to have failed to comply would have been unusually foolhardy and recalcitrant, for the government had undoubted power to compel compliance. Like commercial impracticability, a force majeure clause in a contract excuses nonperformance when circumstances beyond the control of the parties prevent performance. The contracts between these parties speciically contained force majeure clauses to excuse RF Systems’ performance under the present circumstances, namely, “governmental interference.” For substantially the same reasons, we see little merit to Harriscom’s second contention that the contracts’ covenant of good faith required RF Systems to provide substitute performance from its Indian licensee, Punjab Wireless Systems, Ltd. Harriscom’s third assertion that RF Systems should have applied in November 1987 for permission to export its products to Iran also is unpersuasive. The relevant Commerce Department regulation allows fulillment of existing contracts in effect before October 22, 1987. Because RF Systems’ performance was excused in July 1986, no contract in effect before October 22, 1987 still existed in November 1987. Harriscom failed to produce any evidence of an existing contract other than the assertions of its principal, which are inadequate to raise an issue of fact. In addition, RF Systems’ July 1986 letter outlining the compromise terms clearly considers the unilled Harriscom orders to be cancelled and a “loss.” [The court went on to reject the other four alleged grounds of error.]

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CONCLUSION The judgment appealed from accordingly is afirmed.

Question 7.7 What would have been the result in the United Aluminum case if the contract between Linde and UAC had contained the ICC Force Majeure Clause 2003?

Question 7.8 What would have been the result in the United Aluminum case if the contract between Linde and UAC had contained the ICC Hardship Clause 2003?

Question 7.9 What would have been the result in the Transatlantic Financing case if the contract between Transatlantic and the United States had contained the ICC Force Majeure Clause 2003? Question 7.10 S agrees to sell 100,000 barrels of crude oil to B in four monthly installments at a ixed price. Ater two installments have been sent, the price of crude oil in the world market collapses, principally because of the actions of the Saudi Arabian Government in looding the market with oil in an attempt to regain market share. he contract contains a force majeure clause deining force majeure to include, among many other things, “acts of any government or governmental body or authority.” Is B relieved from its obligation to pay the agreed market price for the remaining two installments?

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Remedies I. Introduction A. Remedies as the Crux of the Contract hinking of remedies as an aterthought, the detritus of a failed transaction, is easy, but it is a mistake. he international law of remedies deines what it means to have a legally recognized international sale. If the parties have agreed to a sale but there is no remedy for its breach, then it is not a sale for purposes of the law. here may be a moral obligation to perform, but such an obligation is not enforceable in a practical way. As the Enlightenment philosophers put it, such an obligation is enforceable only in the forum of the conscience and is thus merely an “imperfect obligation.” Not many clients, or even lawyers, today have much interest in such nice matters. With remedies there is one overarching practical question, and it drives two less obvious practical matters as well. First, what can be done, legally and enforceably, about breach? Most obviously, the law of remedies addresses a situation where the contract has been made and broken and the aggrieved party is looking for a remedy. Less obviously, the breaching party will be keenly aware of remedies and its own potential exposure, as clients usually put it. A party contemplating breach in order to gain another opportunity, or a party who did not mean to breach but who did, will be intensely focused on remedies. hey may be the diference between life and death for a company. We can demonstrate best with a story (funny now, but it was not so funny then). It is a case slightly disguised from one that a coauthor remembers from practice. It was about the sale of an enormous machine for wastewater treatment. he buyer was a factory located on a large and legendary river. he machine absolutely had to work properly to clean the water. his it did, just ine, for a while, until, unfortunately, it exploded. he factory then caught ire, and the ire spread to the surrounding village, all of which burned. his was not very good for the factory, the village, or the river, to put it mildly. Nor was it that great for the seller. he lawyers for the seller defended the case, which was arbitrated, as vigorously as possible. At the end the seller was found liable for damages of several hundreds of thousands of dollars. To some, this may seem like a big loss. In fact, the seller and its lawyers celebrated massively when they learned the award. Such machines cost millions of dollars; potential damages liability could easily have been measured in billions, possibly ruining the company. here was never

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much question about whether the seller would be found liable. Everything hinged on the remedy, and in particular, how damages would be measured. (Causation is sometimes hotly disputed in such cases as well.) An award against the defendant, even well into six digits, was a tremendous defense victory. It was also an enormous loss for the buyer (to a degree) and its insurers (much more so). And it was largely determined by the law of remedies. Although it is dramatic, this example is hardly unusual. And the lesson goes further— or more accurately, further back. Remedies—the inal straw, where no commercial party wants to go—afect everything. hey are the key to the reliability of contract. A lour mill can rely on a contract for buying wheat only if it knows that it will be compensated if the seller fails to deliver. To many lawyers, judges, and scholars, this chapter is the most important in the book. here is always a danger that remedies will seem like an aterthought, particularly to a student: you only get to them if a contract is formed, a breach is found, and there is actual litigation and a inal adjudication of a court. Remedies come at the chronological end of a dispute that has ensued from a now long-dead contract; they can seem like the last gasp. hey are the opposite. hey are the beginning as well as the end, and they afect everything in the contract, from formation to interpretation to performance and everything in-between. Because of this fact, many contracts courses put remedies irst. his book adheres to the more traditional chronological organization, but do not be fooled about the importance of remedies. he formation-stage signiicance of remedies is perhaps subtle, but it is no less signiicant for its subtlety. Remedies afect how the parties structure their transaction from the beginning. To take an easy example: a buyer may prefer for the contract to be governed by the CISG because of its greater remedial options (for buyers) compared to other prominent choices, like New York law or English law. For the same reason a seller may prefer the opposite, or may prefer the CISG to US law but not English law. A party may prefer French or German law, which allow greater choice of contractual remedies. Why would a party have a preference for one of these laws? Because of remedial choices, even at the beginning. If each party had complete trust in the other, they would not bother with a contract at all. hat they are taking the time and expense of a contract means that they are thinking that the other party needs to be bound; the legal knot is necessary. hat legal knot is only as good as the remedies available. Moreover, these concerns also afect the considerations and negotiations that may come up midstream in the life of the contract, when a party is contemplating the possibility of not performing, and the other party is considering how to persuade or coerce performance, or how it can otherwise protect its interests. Ater introducing a few fundamentals, we begin with that stage.

B. Some Basic Concepts in the Structure of Remedies From a distance, the architecture of legal remedies appears solid and simple. If a party breaches, the other party—the aggrieved party—has a right to have the other party forced to perform and/or has the right to be given monetary relief that will compensate for the breach. Even if the party in breach is forced to perform, some monetary compensation may still be owed, for example, because of an injury resulting from the delay. Alternatively, if the party in breach does not perform and cannot be forced to do so, the injury may be

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compensable through money. his distant view of the remedies structure is accurate, and well worth keeping in mind, even as the façade reveals its intricacies and the foundations of the structure are found to come from diferent times and places. In short, there are three concepts:  (1)  breach, (2)  performance as a remedy, and (3)  monetary relief. Each will receive detailed treatment below, but as is so oten the case with contract law, it sometimes seems impossible to learn anything without already knowing everything else. To better understand the more detailed treatment later in the chapter, keep in mind a few basic ideas. First, as to breach, all legal systems of which we are aware hold that some breaches are serious and some are not. To take a classic example, if you are selling something to me and I am supposed to pay you over time, you might insist in our contract that I give you collateral before you deliver. hat way you will feel more secure that you will be paid (collateral is called security for a reason). If I do not give you the collateral, it would be “monstrous” of the law to require you to deliver. You have said that you would not trust me to pay without security, and you should not have to perform—“against [your] teeth”—if I do not give it to you.1 My breach is serious enough to allow you to refuse to deliver. One way to think of this rule is that because my breach is serious, you need not perform, and the law will not make you. (Your right to stop performing under our contract is in fact one of your remedies in this case; you might pursue other remedies as well, like calling of the contract or seeking monetary compensation or both.) But what if our contract required me to deliver the collateral to you at noon on Tuesday, but I did not show up with it until 12:03 p.m. on Tuesday? hat is a much harder question, particularly if I caught you before you let our meeting place and if you did not have anything else to do then anyway. Perhaps if you were hurt by the delay in some way I should be made to pay the damages for delay, but you should still have to perform. My breach is not serious. You have a remedy for my breach—delay damages—but you do not have the right to refuse to perform yourself. Stopping your performance in that case is not one of your remedies. It is possible, of course, for the law to hold that any breach is serious (even three minutes), and a party is relieved of its duty to perform whenever the other party breaches, no matter how minor the breach. Such a principle is called the perfect tender rule. Common law systems have sometimes so held with respect to sales of goods, and sometimes they still do. But other systems do not, and the CISG does not. here thus needs to be a way to distinguish between a serious breach and a minor breach (even in the common law—remember, we said “sometimes”). Article 25 of the CISG gives a test for determining what is a fundamental breach (or a serious breach, as we were loosely calling it just now). A breach is fundamental “if it results in such detriment to the other party as substantially to deprive him of what he is entitled to expect under the contract,” unless such a result was not reasonably foreseeable. A fundamental breach allows the aggrieved party to call of the contract—avoid it, as the CISG puts it (as does the common law). When US law uses this kind of test for sales of goods (as opposed to 1. he colorful phrasing comes from one of the less-cited reports of the seminal case of Kingston v.  Preston, (1773) Lot 194, 198, 98 Eng. Rep. 606, 608 (K.B.) (Mansield, C.J.).

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a perfect tender rule), it is conceptually similar: the test is whether the breach “substantially impairs the value.” See, inter alia, UCC §§ 2-610, 2-612. In the UCC, calling of the contract because of breach is called cancellation. See UCC § 2-106. he concept in both systems, as well as others (although perhaps not all), is that the aggrieved party can stop performing and avoid the contract only when a certain legal test is met. Moreover, in the CISG a party avoiding the contract must give notice to that efect, and the failure to give notice is fatal to the avoidance remedy. See CISG art. 26. Legal systems generally value contracts and take an interest in seeing them performed. Keep this in the front of your mind: legal remedies are much easier to understand if you remember the marked preference of the law to keep the contract going. Given this legal value, usually, something reasonably serious has to happen to allow a party to call of the contract. In the CISG, that test is the fundamental breach test. More detail will come soon enough, but this working knowledge should suice for now. Anticipatory repudiation is the other concept you should understand at the outset. Our contract says that I  will show up at noon on Tuesday with the collateral. What if it is the preceding hursday but I say I will not be there on Tuesday? In some sense perhaps I cannot breach yet; the time for my performance has not yet arrived. But I have said that I will breach. Does that count as a breach right now, or must you wait until Tuesday to turn to your remedies? You might wish to look for a substitute transaction right away. Although legal systems did not at irst see the answer to this question as obvious, the general rule is that my declaration, if it is unequivocal, counts as a present breach by anticipatory repudiation. As you will see, a number of legal issues attach to these sorts of factual scenarios, but the basic idea is enough for present purposes. Before moving on, it is useful at this juncture to note what the possible remedies are. he lists are short. As we just discussed, one remedy is to call of the contract—avoidance or cancellation. hat does not typically mean the contract never existed. Rather, it relieves the aggrieved party from having to perform further, and the aggrieved party can engage in a substitute transaction (a buyer can buy the goods from someone else, called cover, or a seller can sell the goods to someone else, called resale). he aggrieved party can also collect damages from the other party (for instance, if the buyer had to cover at a higher price or the seller had to resell at a lower price). In the common law, the other remedies boil down to two: forced performance (called speciic performance) and monetary damages. he common law prefers damages. he civil law and the CISG, which theoretically prefer performance, have a slightly longer list. Aside from forced performance (which could include requiring a buyer to pay, or a seller to deliver goods or repair them or deliver conforming substitutes), there are two kinds of monetary remedies. One is the award of monetary damages, similar to those in the common law, and the other is price reduction, which uses a formula for monetary compensation that is unknown to common law systems. Some remedies can be combined, but some cannot. he rules on cumulation of remedies usually follow common sense. A buyer cannot both cover and require the seller to deliver the goods, for instance. Indeed, requiring performance is inconsistent with avoiding the contract. But as we noted earlier, if a buyer successfully forces a seller to perform, the buyer still may be able to collect damages—not for missing goods, but for receiving them late.

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Finally, recall from Chapter 4 that timely notice of breach is generally required for any remedy at all. Note particularly CISG article 39, as well as articles 26, 43, 49(2), and 64(2), and UCC §§ 2-602(1), 2-607(3)(a).

II. Remedies at the Performance Stage A. Suspension of Performance and Adequate Assurances In the world of business, we suspect, two remedies predominate. hey are not always considered legal remedies, but they are: they have legal ramiications, and they need to be used with care—perhaps more care than they are ordinarily given. One is simply to take the breach as bad luck, move beyond it, and ignore the contract (and the other party) forever. he law in the United States calls this cancelling the contract, which is a convenient and descriptive term; we referred to it above as calling of the contract. We will take up this sort of remedy later. he other, which we consider now, addresses a situation where the other party’s performance has become doubtful, and instead of wanting to throw up its hands and call of the contract, the worried party wants to make sure the other party will perform, and if not, wants to protect its interests as best it can. he UCC and CISG address this situation explicitly and give a remedy to the worried party. he everyday situation is simple enough. Suppose that the buyer’s employee hears from the seller’s that the seller may not have the goods on time and therefore will not be able to deliver them on time. Or suppose that the seller reads in the trade press that the buyer is in inancial diiculty, that it is not meeting all of its obligations as they come due, and that bankruptcy may be in the oing. his seller will be especially worried if it is supposed to deliver the goods and be paid 30 days ater delivery. Or consider a statement by one party that is not quite a repudiation but that calls performance into question (e.g., “I’m not sure I can have it to you by Tuesday as we’d talked about . . . ”). In these situations and countless others, one party will be quite unsure that the other will perform. he worried party will want to ind out whether the other (we will call it the “questionable party”) will perform in the end, and in the meantime, the worried party will want to hold of performing itself. Very likely the worried party will address the problems on its own, but these are fraught legal issues, and a wise client will contact its lawyer with the two questions: “How can I make sure they’ll perform? And do I have to perform myself if I’m not sure that they will?” Both questions are about straightforward business matters but both are legally delicate. he second one in particular holds many dangers for the worried party, but so does the irst. To “make sure” the other party will perform is essentially a problem of credit, and credit is typically one of the key negotiated terms of a contract, just like price. To “make sure” the questionable party will perform, then, may involve a demand for a change in the credit term of a contract. Demanding a change in the contract is dangerous because it can look like the worried party is calling its own performance into question and is trying to coerce an advantage that it did not receive, and did not bargain (or pay) for in the contract. An e-mail that says, “We’re worried because we hear you may go bankrupt, so you need to pay us before

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delivery, not 30 days aterwards as originally agreed,” appears to demand a change in a key term of the contract. True, the worried party has reason to worry and is entitled to the protection of the contract, but the questionable party is also entitled to the beneit of the contract. he questionable party got a 30-day credit term as part of its bargain, which the other party cannot just take away. Moreover, as to the second question, the worried party’s e-mail may itself be seen to threaten nonperformance—and thus a breach by the worried party. he worried party, of course, will see it as more than a little ironic, even downright unfair, that the uncertainty of the questionable party’s performance could wind up making the worried party the one liable for breach of the sale contract. Both of these problems—the arguably coerced modiication to the contract and the arguable breach by the worried party—were well known in the common law. Plenty of worried parties were found liable for breach, and many were found to have made unreasonable demands for a change in terms. he UCC responded to both of these problems, mainly in §  2-609 and to a degree in § 2-610. Stop now and read § 2-609(1) and (4). Although it sounds like common sense, there are several important elements in § 2-609(1), and it can be easy to miss them. First, there must be “reasonable grounds for insecurity.” A certain amount of case law addresses what constitutes “reasonable grounds” for being worried about performance. Realize that oten the source will be rumor; what will satisfy this element may therefore be less than clear. Second, as we emphasized already, the demand can be only for “adequate assurance of due performance.” he worried party cannot demand a change in the contract. Oicial comment 4 emphasizes that what constitutes reasonable grounds for insecurity and what would be an adequate assurance are tightly bound to highly individual facts, including the commercial reputation of the parties. For example, a seller who questions whether a buyer will be able to pay may not change the credit term, but it could demand a satisfactory reference from the buyer’s banker. hird, the demand for assurance must be in writing according to the statute, although case law has drawn exceptions occasionally. hose three elements might be considered the requirements for the remedy of adequate assurance and suspension of performance. When the worried party satisies those requirements, it is allowed to suspend its own performance, as long as it has not already received the agreed return for it and as long as it is otherwise commercially reasonable. (Obviously a buyer cannot refuse, on grounds of insecurity, to pay for satisfactory goods that have already been delivered.) Suspension of performance is the powerful part of the remedy and the essential part of § 2-609. As long as it is not coercing a change in the contract, there is nothing to stop a party from asking for assurance. And for that matter, it can request a change in the contract itself, without coercing one. What it cannot do without the aid of § 2-609 is “suspend” its own performance: suspension of a performance that is due under a contract is a breach of that contract. he main power of § 2-609 is to forgive the worried party’s breach until the situation is clariied. he other power of the section is that it assures that the situation will indeed be clariied one way or another. If the worried party satisies § 2-609(1), the questionable party will have to give adequate assurance of performance. If it does not do so within a reasonable time not exceeding 30 days, § 2-609(4) holds the questionable party to have repudiated,

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and thus to have breached, the contract. A questionable situation—will the questionable party breach or not—is now clear. here are either adequate assurances that performance will be duly made or there is an outright breach, which allows the worried party to exercise all appropriate remedies for breach. We began with UCC § 2-609 because it seems to have inluenced the CISG rule in article 71. he two provisions are the same in concept but diferent in one major way and in some details. Stop now and read article 71. Now used to looking for elements, you can easily identify several. You will need to use them to answer the following questions and problems. Ater them, we will focus more on anticipatory repudiation and will then return to the relationship between the suspension of performance remedy and adequate assurances and their relation to anticipatory repudiation.

Question 8.1 What are the elements of CISG article 71? How do they match up against UCC § 2-609? Question 8.2 Which is broader (i.e., more liberal) in allowing suspension of performance, UCC § 2-609 or CISG article 71? How so?

Question 8.3 his may be the most important question of all: What is the efect of suspending performance without giving immediate notice under article 71(3)?

Problem 8.4 (a) ASO, a company in China, manufactures scooters and kickboards. Peyer S.A.  in Switzerland buys them from ASO and resells them. Markus Peyer, who controls the buyer, also makes eforts to ind other customers for ASO’s products. If Peyer is successful in that regard, ASO ships the goods to the other buyers and pays Peyer a commission. All proceeds smoothly for a while. ASO, however, has now failed to pay Peyer $3 million in commissions. Peyer gives notice of the default and then withholds payment of $2 million for goods it has already received. ASO is supposed to send another $1 million worth of kickboards and scooters shortly; under the contract, it is to be paid within 30 days of delivery. Must ASO deliver? (b) Assume that ASO withholds delivery but commits to delivering upon payment. Peyer, however, says that ASO has fundamentally breached by failing to deliver and has called of the contract. ASO sues for the price. Peyer says it owes ASO nothing. Who wins? (c) What if ASO put on evidence that it had checked into Peyer’s credit before concluding its irst contract with Peyer a number of months ago and that the credit check showed Peyer to be, at best, only a so-so risk? (d) Would it matter if the commissions were due to Peyer personally under a contract separate from the contract for the sale of goods to Peyer S.A.?

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Problem 8.5 In which of the following cases would suspension of performance be justiied? (a) Ater the Buyer and Seller made the contract in question, Buyer failed to pay under an earlier contract. (b) Seller delivered 22,400 kg of goods, 420 kg of which failed to conform to the contract. (c) Buyer paid late under an earlier contract. (d) Seller is due to deliver 14 days ater payment but its preparations show that it will not be able to do so. (e) Buyer opened a letter of credit as required under the contract but the letter of credit had expired before it was given to the seller.

B. Anticipatory Repudiation and Its Relation to Suspension of Performance and Adequate Assurances Remember—as we earlier emphasized—that the law prefers that the contract be kept in place and that defects in performance be remedied without calling of the contract. If the breach is serious, this preference is displaced, but contract law across many jurisdictions has insisted on a “seriousness” requirement. We will see it again, but note how the preference will necessarily afect the legal attitude toward anticipatory repudiation. By deinition, an anticipatory repudiation happens before the time for performance. hat means it is not too late. Maybe everything will be (or could be) ixed. Early cases sometimes took this attitude, to the consternation of the aggrieved party who had done nothing wrong, who now found itself in a predicament. he other party indicated that it would not perform, but the worried party could not igure out how to deal with the situation because it might be damned if it resorted to remedies for breach (because the time for performance had not yet arrived), or might be damned for delay (if it waited until the contractually appointed time for performance before taking steps to protect itself ). his problem was particularly acute in sales of goods with luctuating prices. Suppose you and I have a contract for the sale of crude oil for $100 a barrel, and I am supposed to deliver June 1. On May 1, I tell you that I cannot deliver. You act quickly to protect yourself by buying substitute oil on May 2. You agree to pay the then-current market price of $110 and sue me for the $10 diference. Of course it takes a while for our case to come up before the court—well ater the June 1 delivery date. I look back at market prices and ind that on June 1 the price of crude was $90. I say I should not have to pay you at all because my breach helped you. You could have gotten oil on June 1, just like you were supposed to do under our contract, for $10 a barrel less than you were supposed to pay me. You beneited from my breach, I will say, and I owe you nothing. Under the reasoning of some cases, I win. You learn your lesson. A year later, you are unlucky again. Once more, you have a contract calling for delivery of oil on June 1 with a price of $100 a barrel. he seller repudiates a month before performance. his time you do not cover until June 1. he price is $115 a barrel. You sue for the $15 diference. he defendant looks back at prices and discovers that the price of oil in early May, when it repudiated, was in the low $90 range. “What were you

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doing all month?” it wants to know. It argues that you can collect no damages because you should have covered promptly ater you heard about the repudiation. Under the reasoning of some cases, the defendant wins. his was an intolerable situation. he irst step in resolving it was to make clear that repudiation before the time for performance should count as a breach at the time of repudiation. he second step was to focus on the remedy for such a breach. Remember, the breach might be minor. A minor breach does not justify calling of the contract. he breach is not forgiven, and there is a remedy for it (usually damages). But the contract is still in place, and both parties must still perform their obligations. his will be true whether the minor breach has occurred before the time for performance or aterward. Suspension of performance by the aggrieved party is not justiied when the other party has committed or will commit only a minor breach. he contract is still in place, and performance is required. Neither the UCC nor the CISG addresses an anticipatory repudiation that is minor. Such breaches can be addressed in the usual ways. he focus needs to be on when the aggrieved party can itself stop performing. hose cases are limited to serious breaches by the other party. So just as suspension of performance under CISG article 71 required the threatened breach to go to “a substantial part” of the obligations (we are sure you identiied this as an element under article 71 in Question 8.1), under article 72 an anticipatory repudiation allows the aggrieved party to call of the contract, refuse to perform, and resort to its remedies for breach—but only if it is clear that there will be a serious breach. he UCC takes the same approach. See UCC § 2-610. Of course, the CISG calls a serious breach a fundamental breach, as deined in article 25, which allows avoidance of the contract, whereas the UCC uses its “substantially impairs the value” test, which allows cancellation of the contract. hese are not identical tests, perhaps, but the chief diference seems to be terminological. he concepts are the same. When it becomes clear that the other party will not perform, then the aggrieved party can immediately call of the contract, if it so desires. Calling of the contract for breach also triggers the other appropriate remedies, such as cover (buying substitute goods) as well as damages. Unsurprisingly, part of the problem of the old anticipatory repudiation cases (and sometimes still) is that people do not always say, “here is absolutely no way I am going to perform, and you can just forget about that possibility ever happening. Period.” Oten people say something more like “I need to let you know that I’m having supply problems, and I’m not sure I’m going to be able to deliver.” Suppose I say that on May 1. Is that a repudiation? Probably not. It almost certainly gives reasonable grounds for insecurity under § 2-609. And perhaps, although it is far less clear, such a statement makes it “apparent that the other party will not perform a substantial part of his obligation” under article 71. We will assume so for the moment. In that case, the worried party can suspend performance upon giving notice (under the CISG) or demanding adequate assurances of performance (under the UCC). If the law works like it should, it will be clear during the period of suspension whether the other party is in breach. he CISG does not do this as cleanly as the UCC. he UCC provides in such a case that the lack of adequate assurance itself constitutes a breach, but a well-drated and reasonable notice tailored to the particular

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situation, sent from the worried party to the other party, will likely make it “clear” under article 72 whether the other party will perform or not. For example, “We are concerned that you say that you are not sure whether you can deliver June 1. We need your written or e-mailed assurance, within 10 days, that you will deliver as required under the contract. Absent such assurance, we must conclude that you will not perform your obligations under the contract and we will have to take other steps to protect our interests, possibly including the purchase of substitute oil.” Assuming 10 days is a reasonable time, this letter will mean that the buyer will either have assurance by May 11 that delivery will occur on June 1 or the buyer will know that the seller is in breach. In short, article 71 does not work very cleanly to turn an unclear situation (is it a breach or not?) into a clear one. his clariication role was conceived as part of the job for UCC § 2-609, in addition to allowing the worried party to suspend its own performance without breaching. Article 71, as it appears in the treaty (it was the subject of debate and redrating) is now largely conined to the suspension remedy, and only in fairly serious cases. It does not speak of grounds for insecurity; it is a remedy when “it becomes apparent that the other party will not perform” (emphasis added). he situation needs to be reasonably clear before performance can be suspended under article 71. he article does not quite require outright clarity, nor does it require a fundamental breach—that is the role of article 72. But article 71 is pretty close because of its requirement of a showing that the other party “will not perform” as opposed to may not perform, plus its requirement that the nonperformance go to a “substantial part” of the obligations. If those requirements are met, and notice is given, then suspension is proper, but only then. he suspension remains justiied unless the other party gives adequate assurance. Although articles 71 and 72 are very similar to each other, they are wholly diferent in outlook. Article 71 is about protecting the worried party with an aim to keeping the contract in place. Adequate assurances resolve the problem and put the contract back on track. Article 72 is the opposite: the remedy in that case is not suspension with an eye to putting everything back on track but is instead about calling of the contract entirely. If avoidance is the goal of the aggrieved party, it needs to use article 72, not article 71, and needs to meet the slightly higher standard of article 72 (“clear” that there will be nonperformance amounting to a “fundamental breach” rather than “apparent” that there will be nonperformance going to a “substantial part” of the obligations). As always, the aggrieved party must give notice, but the notice requirement is less stringent under article 72: notice must be “reasonable” rather than “immediate,” is only required “if time allows,” and is excused if the other party has actually repudiated. he purpose of the notice is the same: to allow the other party to give adequate assurances. In that case, the contract remains in place. Presumably this eventuality is unlikely in a case where article 72 is met; hence the relaxation of the notice requirement. Litigation has of course centered on the meaning of the requirements, particularly whether “it is clear” that there “will” be a breach. he following case illustrates, as do the subsequent questions and problems, all of which are drawn from actual disputes. We will return to this case in the section on performance remedies.

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Magellan International Corp. v. Salzgitter Handel GmbH United States District Court for the Northern District of Illinois, 1999 76 F. Supp. 2d 919 shaDur, Senior District Judge. ...

FACTS ...

Offers, Counteroffers and Acceptance Magellan is an Illinois-based distributor of steel products. Salzgitter is a steel trader that is headquartered in Dusseldorf, Germany and maintains an Illinois sales ofice. In January 1999 Magellan’s Robert Arthur (“Arthur”) and Salzgitter’s Thomas Riess (“Riess”) commenced negotiations on a potential deal under which Salzgitter would begin to act as middleman in Magellan’s purchase of steel bars—manufactured according to Magellan’s speciications—from a Ukrainian steel mill, Dneprospetsstal of Ukraine (“DSS”). By letter dated January 28, Magellan provided Salzgitter with written speciications for 5,585 metric tons of steel bars, with proposed pricing, and with an agreement to issue a letter of credit (“LC”) to Salzgitter as Magellan’s method of payment. Salzgitter responded two weeks later (on February 12 and 13) by proposing prices $5 to $20 per ton higher than those Magellan had speciied. On February 15 Magellan accepted Salzgitter’s price increases, agreed on 4,000 tons as the quantity being purchased, and added $5 per ton over Salzgitter’s numbers to effect shipping from Magellan’s preferred port (Ventspills, Latvia). Magellan memorialized those terms, as well as the other material terms previously discussed by the parties,2 in two February 15 purchase orders. Salzgitter then responded on February 17, apparently accepting Magellan’s memorialized terms except for two “amendments” as to prices. Riess asked for Magellan’s “acceptance” of those two price increases by return fax and promised to send its already-drawn-up order conirmations as soon as they were countersigned by DSS. Arthur consented, signing and returning the approved price amendments to Riess the same day. On February 19 Salzgitter sent its pro forma order conirmations to Magellan. But the general terms and conditions that were attached to those conirmations differed in some respects from those that had been attached to Magellan’s purchase orders, mainly with respect to vessel loading conditions, dispute resolution and choice of law. Contemplating an ongoing business relationship, Magellan and Salzgitter continued to negotiate in an effort to resolve the remaining conlicts between their respective forms. While those ine-tuning negotiations were under way, Salzgitter began to press Magellan to open its LC for the transaction in Salzgitter’s favor. On March 4 Magellan sent Salzgitter

[2]. Price, quantity, delivery date, delivery method and payment method had all been negotiated and agreed to by the parties.

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a draft LC for review.3 Salzgitter wrote back on March 8 proposing minor amendments to the LC and stating that “all other terms are acceptable.” Although Magellan preferred to wait until all of the minor details (the remaining conlicting terms) were ironed out before issuing the LC, Salzgitter continued to press for its immediate issuance. On March 22 Salzgitter sent amended order conirmations to Magellan. Riess visited Arthur four days later on March 26 and threatened to cancel the steel orders if Magellan did not open the LC in Salzgitter’s favor that day. They then came to agreement as to the remaining contractual issues. Accordingly, relying on Riess’s assurances that all remaining details of the deal were settled, Arthur had the $1.2 million LC issued later that same day.

Post–Acceptance Events Three days later (on March 29) Arthur and Riess engaged in an extended game of “fax tag” initiated by the latter. Essentially Salzgitter demanded that the LC be amended to permit the unconditional substitution of FCRs for bills of lading—even for partial orders—and Magellan refused to amend the LC, also pointing out the need to conform Salzgitter’s March 22 amended order conirmations to the terms of the parties’ ultimate March 26 agreement. At the same time, Magellan requested minor modiications in some of the steel speciications. Salzgitter replied that it was too late to modify the speciications: DSS had already manufactured 60% of the order, and the rest was under production. Perhaps unsurprisingly in light of what has been recited up to now, on the very next day (March 30) Magellan’s and Salzgitter’s friendly ine-tuning went lat. Salzgitter screeched an ultimatum to Magellan: Amend the LC by noon the following day or Salzgitter would “no longer feel obligated” to perform and would “sell the material elsewhere.” On April 1 Magellan requested that the LC be canceled because of what it considered to be Saltzgitter’s breach. Salzgitter returned the LC and has since been attempting to sell the manufactured steel to Magellan’s customers in the United States.

Magellan’s Claims Complaint Count I  posits that—pursuant to the Convention—a valid contract existed between Magellan and Salzgitter before Salzgitter’s March 30 ultimatum. Hence that attempted ukase is said to have amounted to an anticipatory repudiation of that contract, entitling Magellan to relief for its breach. ... [On a motion to dismiss, the court must examine the complaint, which must give adequate notice of the facts satisfying each element of the cause of action. In a breach of contract claim, one of those elements is breach. The Complaint alleges:] Salzgitter’s March 30 letter demanding that the bill of lading provision be removed from the letter of credit and threatening to cancel the contract constitutes an anticipatory repudiation and fundamental breach of the contract.

[3]. One of the LC terms—also included in Magellan’s purchase orders—required ocean bills of lading to be presented as a condition precedent to Salzgitter’s right to draw on the LC. But Salzgitter was permitted to substitute Forwarder’s Certiicates of Receipt (“FCR”) for bills of lading as to the full order if Magellan were to be more than 20 days late in providing a vessel for shipment.

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It would be dificult to imagine an allegation that more clearly fulills the notice function of pleading. Convention Art. 72 addresses the concept of anticipatory breach:  [the Court quotes article 72, as well as article 25 on fundamental breach]. That plain language reveals that under the Convention an anticipatory repudiation pleader need simply allege (1)  that the defendant intended to breach the contract before the contract’s performance date and (2) that such breach was fundamental. Here Magellan has pleaded that Salzgitter’s March 29 letter indicated its pre-performance intention not to perform the contract, coupled with Magellan’s allegation that the bill of lading requirement was an essential part of the parties’ bargain. That being the case, Saltzgitter’s insistence upon an amendment of that requirement would indeed be a fundamental breach.

Question 8.6 Does Salzgitter’s statement that it “would ‘no longer feel obligated’ to perform and would ‘sell the material elsewhere’ ” constitute an anticipatory repudiation?

Question 8.7 Recall again the dynamics of adequate assurances of performance. What does this case teach about suspending a performance until an additional condition is satisied?

Question 8.8 (a) Would it be “clear that one of the parties will commit a fundamental breach of contract” when the buyer fails to pay for previous consignments? See CISG arts. 72–73. (b) What about where the seller, before the contractual delivery date, terminates shipment of the goods? (c) Buyer in China orders 20,000 tons of compound fertilizer from Seller in Australia for USD 3.2 million. Seller in turn ordered the fertilizer from Supplier in Italy, which did not perform. Seller informed Buyer that Supplier would not perform, that the possibilities of inding substitute fertilizer were low, and that Buyer should take steps to mitigate any damages. Has Seller committed an anticipatory repudiation? (d) his question is a little more complicated because it requires two steps of analysis, but it is realistic (and in fact real) and worth working through: Buyer in Austria contracted with Seller in Switzerland for the delivery of spirits to Buyer’s customer in Moscow. Before payment or delivery, Buyer and Seller fell into dispute, with Buyer claiming the parties had agreed to ship by truck by September 1 and Seller claiming that no particular delivery mode or date had been set. Buyer refused to open the letter of credit for which the parties had contracted because Seller would not commit to delivering by truck by September 1. Without a letter of credit, Seller refused to ship the goods. Who has breached, if anyone? See CISG arts. 32–33. (e) he seller of computer equipment provides preliminary sketches of the  systems to be provided, but the sketches are lawed. he buyer requests correct sketches, but the seller says that they cannot be produced before the delivery date. Has the seller breached under article 72?

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A last word on adequate assurances of performance. Both articles 71 and 72 refer to adequate assurances of performance. Little case law addresses what constitutes an adequate assurance. All we know on this score is that a bond need not be posted.4 his is hardly surprising: requiring a bond would be like requiring a standby letter of credit without having contracted for one, and this would be a major—and expensive—change in the contract, as discussed in Chapter 6. We do learn something else interesting about adequate assurances by considering the case law: failure to provide an adequate assurance—even though the CISG, unlike UCC § 2-609, does not allow a worried party to demand one—might be held against a questionable party as a factor tending to make it “clear” that the questionable party will in fact commit a fundamental breach. Providing adequate assurances is not so much a requirement under the CISG as a factor that could be important in the eyes of a tribunal. By the same token, but in a more positive light, adequate assurances are a way for a questionable party to put the contract “back on track.” Getting a contract back on track is frequently the chief desire of one of the parties during a performance stage that has become fraught, as we see in the next section.

C. Cure, Plus a Word on the Nachrist Notice Cure, in some ways the most straightforward of remedies—what can be simpler than ixing the breach?—can be a remedy for either a buyer or a seller and for either a party in breach or a party who has been injured by the breach. Admittedly this is confusing, but it does make sense ater some thought. If I have not performed, or have performed badly, you might demand that I perform, or in the latter case, perform correctly. You, the party aggrieved by my breach, will be demanding that I cure, that is, that I perform. If I do not do so ater your demand, you might ask a court to require me to do so. In this sense, cure (or repair, or speciic performance) is a remedy like any other. It is one way the aggrieved party can try to make itself whole ater a breach of the contract. If the time for performance has already come and gone, the aggrieved party’s demand for cure can easily be distinguished from a demand for adequate assurances of performance. he former is a notice that comes ater the breaching party has already failed to perform; the latter is appropriate only when it appears that the party will not perform, although the time for performance has not yet arrived (and then adequate assurances can be demanded only under US law, although they are relevant under the CISG as well). Once the parties are past the time for performance, a demand for cure will contemplate a late performance, as it is already too late for on-time performance. he CISG sets up particular machinery for the giving of such a demand, which is called a Nachrist notice based on the Germanic doctrine for granting an extension for performance. Under article 47, “he buyer may ix an additional period of time of reasonable length for performance by the seller of his obligations.” Article 63 makes the same provision for the seller. Without more, these articles are puzzling only because they seem so obvious. Of course an aggrieved buyer or seller can allow the other party, who has breached, a second chance. But there is more. First,

4. Arbitration Court of the ICC  – Zurich, Jan. 1997, Arbitral Award No. 8786, available at Unilex database: http://www.unilex.info/case.cfm?id=463.

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during the additional time set by the Nachrist notice, the aggrieved party may not resort to any remedy for breach (e.g., obtaining substitute goods), although the aggrieved party retains its right to damages for delay. See CISG arts. 47(2), 63(2). More signiicantly, the Nachrist notice can allow the aggrieved party to avoid the contract entirely in certain circumstances if the party in breach fails to cure during the period set for the second chance. his aspect of Nachrist doctrine is explained below in the part of the chapter on ending the contract. he aspects of cure discussed so far are intuitive: a party who has sufered a breach will sometimes be given a right to require that it be cured. Less obviously, the right to cure might be something demanded by the party that itself has breached the contract. Usually the reason is that the breaching party wants to prevent the aggrieved party from calling of the contract (or invoking some other remedy that the breaching party regards as drastic) on account of the breach. Suppose I am to deliver 10,000 cases of goods to you by July 1. I deliver only 9000, and of them, 3000 are defective. As required, you give me notice. I may realize that this is a serious breach and that I am in danger of losing the beneit of this contract and being liable for further remedies as well. Sometimes our contract or the law will give me, the party in breach, a right to cure within a reasonable time. If I can get you 4000 good cases quickly, without unreasonable delay or inconvenience, perhaps you should not be allowed to call of the contract, especially if I will make up for any injury to you through the payment of delay damages or the like. In this situation, you can see why a party in breach might want—and be given, sometimes—a right to cure, just as in the irst situation you can see why an aggrieved party might want—and be given, sometimes—a right to demand cure. You can also no doubt see that the other party may want to deny that right. We concentrate in this section of the chapter on cure as a remedy for the party in breach. Later, when we take up the aggrieved party’s performance remedies, we return to cure and there focus on cure as a remedy for the aggrieved party. Primarily, cure as a remedy for the party in breach is linked to whether the other party can call of the contract. Well-drated contracts oten deal with both of these issues expressly. Lawyers negotiating transactions and drating contracts for them have to act as planners, considering and addressing numerous possible eventualities. One of those is breach, and what can be done about it. Indeed, in specifying what is required under the contract, the drater is also specifying what will be a breach, for any failure to perform according to the contract is in fact a breach. As we noted earlier, however, not all breaches are the same, and a crucial issue to address is which breaches allow the contract to be called of entirely. Both parties are likely to see calling of the contract as a serious remedy, particularly when they are at the drating stage; at that point, they both want the contract and see its beneits for themselves, and they will lose those beneits if the contract is called of. he law, you recall from the earlier discussion, takes this view: only a serious breach triggers a right to call of the contract. his is only a default rule, however, like the default settings on your computer (as discussed in Chapter 3), and the parties may prefer to tailor their contract to their particular needs rather than leave the trigger to the governing treaty or statute, to be interpreted by a court.

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In their contract, then, the parties can do one of two things. First, they may take the question away from the governing law and state expressly that the contract can be called of for any breach at all. Such a clause would be the contractual equivalent of the perfect tender rule. Alternatively, they may try to deine what will count as a serious breach rather than leave a tribunal to igure it out based on the general deinitions in the law. Such an efort may involve setting tolerances for quantities or setting diferent interest rates depending on the speed of payment. In other words, the attempt is to deine the quality of performance that will trigger a remedy but not allow the contract to be called of. Second, aside from these kinds of clauses, the parties oten will not consider a breach serious, no matter how bad it may be initially in terms of quality, if the defaulting party5 can ix it quickly and without causing much of a problem or too much expense or inconvenience for the aggrieved party. Consequently, the parties frequently include a “notice and cure” clause in their contract, oten linked to calling of the contract if the cure fails. It may state something like “Either party may cancel this Agreement for its breach (as deined by Part X) by the other party ater giving notice of the breach to the other party unless the other party cures the default within 10 days of the sending of notice of breach. Termination of the contract under this clause entitles the aggrieved party to the remedies set out in Part X of this Agreement.” Other clauses of the contract will deine how notices are given (certiied mail—which is very slow—or fax or e-mail or overnight courier, etc.) and will set out the remedies for termination because of breach. What such a clause does is to give the defaulting party a right to cure within a certain period, roughly 10 days in our example. he defaulting party who achieves an adequate and timely cure is not in breach at all: it has performed as required under the contract because the contract is set up to give a defaulting party a second chance. his second chance may be costly, but virtually all contracts require a party to incur some costs in performing. Consider the following clause: Buyer shall pay the price due within thirty (30) days of delivery. If buyer pays by electronic funds transfer under Clause X within ten (10) days of delivery, Buyer shall be allowed a discount of one and one-half percent (1.5%) of the price. If Buyer fails to pay within thirty (30) days of delivery, interest at twelve percent (12%) per annum compounded daily (“Interest Rate”) shall be due in addition to the price. If Buyer fails to pay within ninety (90) days of delivery, interest at two percent (2%) per annum compounded daily (“Default Interest Rate”) shall apply to the price instead of the Interest Rate and at such time Seller may, at its option and in its sole discretion, terminate the contract for its breach upon giving notice to Buyer unless Buyer, within ten (10) days of notice, pays all amounts due hereunder. Termination under this clause shall entitle Seller to the remedies set out in Part X of this Agreement in addition to

5. As explained in Chapter 3, default has two entirely diferent meanings. A party in default is one who has failed to perform as required, and in that sense default means something akin to breach. he same word also refers to background rules or settings that can be changed, as you can change the default settings on your computer or the parties may through their contract change the default rules (but not the mandatory rules) in the law.

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any remedies available under applicable law. If the Interest Rate or Default Interest Rate violates applicable law, the Interest Rate or Default Interest Rate, as the case may be, shall be reduced to the highest rate permissible under such law. his kind of clause is not uncommon. Many buyers are slow to pay. his clause allows the buyer to be a bit slow, but it will have to pay for that privilege. If the buyer is too slow, the seller can call of the contract, although it need not do so, and assuming that the seller thinks that it will be paid eventually, may prefer to collect the additional interest in addition to the price and keep its contract and its relation with the buyer. Considering these clauses in this light shows how performance and breach and remedies are diferent aspects of the same thing: the bargain of the parties. he same light shows that the default rules in the law are perhaps an attempt to mirror what the parties would have done if they had invested the time and money in a more complete contract. Many contracts, of course, do not contain such elaborate provisions, which are expensive to drat. Sometimes a trade usage or established practice that is to similar efect can be proved. If so, it is implicitly part of the contract and has just as much efect as if it were express. See CISG arts. 8(3), 9; UCC §§ 1-201(b)(3), 1-303. But oten there is nothing in the contract and no usage or practice to prove, even though the parties would probably expect a similar rule to apply to save a breaching seller6 from outright avoidance of the contract. Accordingly, the CISG allows a seller to cure, but only in some circumstances. Start by reading CISG article 37. he right to cure under article 37 is fairly narrow, being conined to early deliveries: if the seller has delivered before required to do so, and the delivery is short or faulty, the seller can cure the default under article 37 as long as the cure “does not cause the buyer unreasonable inconvenience or unreasonable expense.” Similarly in a documentary transaction, a seller who tenders defective documents before required to do so may obtain correct documents and tender them instead, again on condition that this cure “does not cause the buyer unreasonable inconvenience or unreasonable expense.” CISG art. 34. As you will recall from Chapter 6, discrepant documents are a constant problem. In either case, the seller has only until the contractually agreed date for performance to ix whatever the problem is, and in either case, the buyer has a right to damages, if it has sufered any, on account of the default. For instance, a buyer may take an early delivery that includes some defective goods, and ater notice the seller may then deliver replacement goods, but both the early delivery and the extra hauling out of defective goods and hauling in of replacements may cause the buyer to incur extra warehouse charges. he buyer would expect the seller to pay these extra expenses, and if the seller does not, the buyer is entitled to collect them as damages. In this situation, however, the buyer may not avoid the contract: it must accept the seller’s cure—probably—and content itself with the now-cured performance plus the damages.

6. Although cure may be allowed for a buyer under a contract, as in the example above, cure rights are usually contemplated for the seller. Aside from taking delivery of the goods, all the buyer generally has to do is pay, and questions of defective goods, short deliveries, etc., do not arise.

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In addition to article 37, the CISG gives the seller a more qualiied right to cure in article 48. Read it now. Although you will see a number of details, the core idea is that the seller is allowed to cure “even ater the date for delivery,” but only “if he can do so without unreasonable delay and without causing the buyer unreasonable inconvenience or uncertainty of reimbursement by the seller of expenses advanced by the buyer.” From the standpoint of the parties’ bargain, this is a much more signiicant cure right than that in article 37. Ater all, article 37 comes close to stating what is nearly (although arguably not quite) obvious: if the seller has delivered early, there is still time to ix any breach. Article 48, on the other hand, changes the stated bargain of the parties in a way that may be startling at irst. Suppose I am to deliver crude oil to you on March 1. At irst blush, it may seem that article 48 gives me the right to deliver ater March 1. Indeed, article 48 does that, but there is more to the story. First, and most clearly, recall that the parties are free to derogate from the rules of the CISG. As mentioned at the beginning of this section, the parties can deine not only what will be required for performance but also what will allow avoidance of the contract and what will count as a fundamental breach. Second, and probably more commonly, article 48 has to be understood not as a variation from the parties’ bargain but as a (likely) completion of it. We agreed that I would deliver March 1, and we did not specify precisely what would happen if I failed to do so. (If we had, the agreement would govern, and article 48 would not be relevant.) When I fail to deliver March 1—assume that I am two days late—I am in breach, and article 48 does not change that result. If you are harmed by my delay, you are entitled to a remedy for it. Are you entitled to damages for the delay? Yes, you are, if you have sufered any. Are you entitled to avoid the contract entirely, refuse delivery when I tender it two days late, and decline to pay? Yes, you are, if my delay was a fundamental breach, but otherwise not. If you have not lost a substantial part of your bargain, you are entitled to damages for whatever you have lost, but you are not allowed to call of the contract. Similarly, if I fail to deliver March 1, and I let you know that I will be two days late, and the tardy delivery is not an “unreasonable delay” and will not cause you any “unreasonable inconvenience . . . or uncertainty of reimbursement,” then the contract is still on, you must accept my cure, and you can collect damages from me for any injury my delay has caused. he treaty presumes, in essence, that this is the provision we would have put into our stated agreement if we had thought about the issue and expressed our expectations. March 1 is the delivery date; delivery ater that date is late, and is a breach, and entitles the buyer to a remedy, but the seller is entitled to cure (and still be liable for the delay) if it can do so without unreasonable delay and without causing the buyer any serious inconvenience. he UCC approach to cure by a defaulting seller is similar to that in the CISG, but it includes one other concept, and some background is necessary for the UCC approach to make sense. We give this background in simpliied form, leaving out some qualiications and details, but the simple statements are basically accurate and suicient for our purposes. he common law of contract (like the CISG) requires a serious breach before the contract can be called of. In US common law, a serious breach is called a material breach (equivalent to a fundamental breach in the CISG).7 If I commit a material breach of contract to, say, build 7. English law uses the term fundamental breach, but it has a somewhat diferent meaning that adds unnecessary confusion, and we therefore will not go into that subject.

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you a house, then you can call of the contract. Calling of the contract will mean that you do not have to pay me—your contractual duty is discharged by my material breach. his is a very serious thing indeed, especially if I have built part of the house for you already. In a construction contract, a court may prefer to ind that my breach is not material, that you have to pay me, but that you can subtract from your payment the damages I have caused you (which should be enough for you to hire someone else to complete the job right). hat way I get something for my work, and you are not unjustly enriched. Courts will consider a number of factors when deciding whether a breach rises to the level of being a material breach. See Restatement (Second) of Contracts § 241 (1981). he law of sales of goods in common law systems, however, was diferent. Historically it was oten considered a branch of commercial law that was separate from the common law of contract. Sales of goods were thought to be functionally diferent from other kinds of contracts, with diferent expectations. If I deliver a new television to you and it is missing a piece of plastic molding along the side, the breach might not be material. he television will still work ine, and the missing molding might not even be terribly unsightly, although noticeable. But you probably think that you should be able to refuse the set and refuse to pay for it. hat is what the law thought too. he goods should conform exactly to the contract, and if they do not, you could reject them and cancel the contract, refusing to pay and suing for any damages you had sufered. his is the perfect tender rule, to which we alluded in the introduction. Accordingly, the perfect tender rule requires the goods and their delivery to conform perfectly to the contract. If they fail to conform “in any respect” then the buyer may reject them. See UCC § 2-601. he perfect tender rule can be very harsh to sellers, which is bad enough, and worse, it can give the buyer the possibility of an opportunistic rejection. he most famous example is usually drawn from an old international sales case, as it happens, but one governed by the common law in Filley v. Pope, 115 US 213 (1885). he contract was for the sale of iron to be shipped from Glasgow, Scotland. he seller shipped the iron from Leith, a diferent port in Scotland. he buyer rejected the iron, as it had the right to do because of the perfect tender rule. he buyer, it should be emphasized, was within its rights. he perfect tender rule allows rejection if the goods or their delivery in any way do not conform to the contract. Yet it is extremely unlikely that the buyer cared which port in Scotland was the port of shipment. All things being equal, one might expect the buyer to accept the iron. All things were not equal, however. he price of iron had fallen signiicantly between the time of the contract and the time of delivery. By rejecting the iron from the seller and cancelling the contract, the buyer could buy iron on the open market for a considerably cheaper price. his result hardly seems like a good thing, but it results from the perfect tender rule. he UCC attempts to ix this problem in two ways. First, as will be discussed in the next section, the UCC outright abolishes the perfect tender rule for some cases (primarily installment sales, plus some other situations). he perfect tender rule remains in place for ordinary single-delivery contracts, however. For these situations, the UCC takes the second approach: it gives a relatively generous right to cure. Like the CISG, UCC § 2-508 allows a seller to cure (ater giving notice) if there is still time before performance is due under the contract. In addition, it allows the seller to cure if the buyer makes a surprise rejection, that

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is, if the buyer rejects a “tender which the seller had reasonable grounds to believe would be acceptable with or without money allowance.” In such a case, even if the time for delivery has expired, the seller may (ater giving notice) cure if it can do so within a reasonable time. Assuming the new delivery conforms to the contract and is made ater notice within a reasonable time, the buyer cannot reject it and must pay for it. Like most rules, this rule can be displaced by a contractual provision (e.g., a “no replacements” clause). But in that case, the seller should be on notice that it will not have a second chance. Finally, note that scholars have observed that US courts are even more generous with the right to cure than § 2-508 is.8 A surprise rejection happens under the statute only when “the seller had reasonable grounds to believe” that its nonconforming tender “would be acceptable with or without money allowance.” Consider the sale of a new car when the factory standard radio does not work at all. Although we doubt that a court would hold that such a tender would be acceptable, even with a money allowance—and thus we doubt that the standard of § 2-508(2) would be met (would you accept a brand new car with a radio that did not work?)—we believe that most courts would allow a seller a reasonable chance to put in a working radio before allowing the buyer to reject the car and cancel the contract. As we have seen before, the rules and counter-rules complement each other. he harsh common law rule on revocation of ofers is sotened by the mailbox rule. he tough perfect tender rule is tempered by a generous right to cure. he CISG allows the contract to be avoided only if there is a fundamental breach; accordingly, its right to cure does not include the surprise rejection rule. On the other hand, the CISG and UCC rules may not be so different; there will not be many surprise rejections that do not give the seller a right to cure under article 48. We continue to examine how these relations between rules work in the next section.

Problem 8.9 (a) Stockton Fisheries in Nova Scotia, Canada, is to deliver to Northeast Ohio Seafood Co. (NOSC) in Solon, Ohio, 198 tons of frozen skinless haddock ilets for US $800,000 “within twenty (20) days of the signed contract.” he contract is signed on April 3. On April 15, Stockton delivers the ish, but the skin is on the ilets. NOSC gives notice to Stockton the same day. Does Stockton have a right to cure? (b) What if the parties had chosen the UCC to apply to their contract? (c) Suppose that the delivery and notice were on April 23. Now what are your answers to parts (a) and (b)? (d) Suppose now that Stockton replies the same day to the notice of defect on April 23 that it will deliver skinless ilets within ive days and will have the skin-on ilets picked up by

8. he seminal article is probably Douglas J. Whaley, Tender, Acceptance, Rejection and Revocation—he UCC’s “TARR”-Baby, 24 Drake L. Rev. 52 (1974). he leading case is Wilson v. Scampoli, 228 A.2d 848, 850 (D.C. 1967), using Hawkland’s test: cure is allowed if it can be accomplished “without subjecting the buyer to any great inconvenience, risk or loss.” For more recent treatment, including some criticism of the current state of the law, see, e.g., William H. Lawrence, Appropriate Standards for a Buyer’s Refusal to Keep Goods Tendered by a Seller, 35 Wm. & Mary L. Rev. 1635, 1668–69 (1994), and sources cited therein.

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another buyer within three days. It is now late in the day on April 25. Does the seller have a right to cure under the CISG? See art. 48(2)-(4). What if the UCC applied instead?

III. Ending the Contract he remedy of ending the contract—calling it of, as we have been putting it—is the remedy that pervades all remedies. First we stressed that it is a remedy that is not always available. An aggrieved party is allowed to call of the contract only in certain circumstances. We noted that in the CISG and in many systems a party can call of the contract only when the other party’s breach is a serious one, although the common law rule is somewhat diferent. his section discusses these rules in more detail.

A. Avoidance under the CISG 1. Fundamental Breach he CISG refers to calling of the contract as avoiding it. When the buyer may avoid the contract is governed by article 49. he equivalent article for the seller is article 64. he primary criterion for whether the aggrieved party may avoid the contract is fundamental breach, but there is another: continued failure to perform ater the giving of a Nachrist notice, which is sort of a second chance. Begin with fundamental breach and its deinition in article 25. A breach “is fundamental if it results in such detriment to the other party as substantially to deprive him of what he is entitled to expect under the contract,” unless that result was not reasonably foreseeable. Unsurprisingly, avoidance requires the giving of notice under article 26. he real question, though, is what will constitute a fundamental breach. Many cases will be clear, but many will not, and accordingly, many cases are litigated. A few general rules of moderate utility have come from the case law. Because avoidance is seen as a drastic remedy, and because other remedies are available for breaches that are not fundamental, courts are cautious in inding a fundamental breach and read the requirements strictly and narrowly.9 With respect to foreseeability in particular, the text is clear that a party in breach is protected only if it did not itself foresee how serious its breach would be and a reasonable person would not have foreseen it either. he article does not say when foreseeability is to be measured, but common sense suggests that the time of contracting is the relevant point, and the case law conirms this instinct.10 One especially important factor for tribunals assessing the seriousness of a breach is whether the buyer can use the goods or resell them without unreasonable diiculty, even if the buyer must incur some extra expense in

9. Bundesgericht [BGer] [Federal Supreme Court] May 18, 2009 (Switz.), available at Pace CISG Database: http://cisgw3.law.pace.edu/cases/090518s1.html (May 7, 2010). 10. Oberlandesgericht [OLG] [Appellate Court] Düsseldorf, Apr. 24, 1997 (Ger.) (Italian Shoes Case), CLOUT Case No. 275; China International Economic & Trade Arbitration Commission [CIETAC] Aug. 18, 1997, CLOUT Case No. 681.

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efecting use or even if the buyer must resell them at a discount.11 Again, the tribunal will be conscious that the buyer has a remedy for this extra expense or the unexpected discount: the buyer can collect the damages from the seller, or reduce the price, as discussed below. It is not necessary to end the contract to make the buyer whole. he converse of this proposition is also true: if the buyer cannot use the goods in the way foreseeably expected under the contract, then the breach is fundamental. So compressors with lower cooling capacity and higher power consumption, needed by the buyer for manufacturing air conditioners for the summer season, fundamentally breach the contract,12 and either watered13 or artiicially sugared wine,14 both of which are prohibited in the buyer’s country and the seller’s, are fundamental breaches. his principle of the case law aligns well with the default rule in article 35(2)(b), which you will remember from Chapter 4: the treaty, like national law, generally assumes that a basic expectation of the contract is that the goods will work for the buyer’s use if that use should be known to the seller. Along the same lines, if the defect is a major one, then it becomes obvious that the buyer has been deprived of what it is entitled to expect, and the court will ind a fundamental breach. If the buyer has bought a horse for riding competitions but the animal is incurably lame,15 or if shoes have cracked leather,16 a tribunal will have no trouble inding a fundamental breach. As might be expected, though, few general principles beyond those that are reasonably obvious emerge from the cases. What counts as fundamental will inevitably be closely bound to the facts of particular transactions. he best way to get a feel for what is found fundamental and what is not is to consider some particular situations. In reading the following case excerpt, notice the court’s sensitivity not only to the qualities of the goods delivered and the eventual use and consumption of the goods, but also to the expectations formed by the negotiations of the parties as well as the terms of the contract.

Rynpoort Trading & Transport NV v. Meneba Meel Wormerveer B.V. Hof Gravenhage 23 april 2003 (Neth.) Available at Pace CISG Database: http://cisgw3.law.pace.edu/ cases/030423n1.html (Patrick Bout trans.) (Jan. 19, 2005) [To simplify the facts:  Buyer in Belgium contracted with Seller in the Netherlands for wheat lour to be delivered to users in Mozambique.] ...

11. Bundesgerichtshof [BGH] [Federal Supreme Court] Apr. 3, 1996 (Ger.), CLOUT Case No. 171; Bundesgericht [BGer] [Federal Supreme Court] Oct. 28, 1998 (Switz.), CLOUT Case No. 248; China International Economic & Trade Arbitration Commission [CIETAC] Jan. 1, 2000, CLOUT Case No. 988. 12. Delchi Carrier SpA v. Rotorex Corp., 71 F.3d 1024 (2d Cir. 1995). 13. Landgericht [LG] Trier [District Court of Trier] Oct. 12, 1995 (Ger.), CLOUT Case No. 170. 14. Cour de cassation [Cass.] [Supreme Court for Judicial Matters], Jan. 23, 1996 (Fr.), CLOUT Case No. 150. 15. Københavns Byret [Copenhagen District Court] Oct. 19, 2007 (Den.), CLOUT Case No. 992. 16. Oberlandesgericht [OLG] Frankfurt a.M. [Appellate Court of Frankfurt] Jan. 18, 1994 (Ger.), CLOUT Case No. 79.

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6. Both parties agree that these negotiations led to the conclusion of sales agreements in August and September 1996 for respectively 6,000 and 7,000 tons of wheat lour, with the following speciications: “EEC wheat lour type ‘Aigle du Nord’ with bread improver, protein min. 12% Nx6.25 on dry matter, moisture max. 14%, ash max. 0.60% on dry matter.” From the fax messages . . . it is apparent that the quality of the lour to be delivered was a very important issue for [Buyer]. Before the parties reached a inal agreement, [Seller] declared that the lour that was to be delivered by it was of superior quality if compared to Angolissar lour, because of the higher protein content and the very high standard of the added bread improvers. With regard to the preceding request by [Buyer] in the Post Script to the fax message, the following declaration by [Seller] in its fax message has to be regarded as an explicit warranty regarding—among other things—the quality of the bread improver: this preceding request by [Buyer] with regard to the issue of the quality of the lour to be delivered entails that [Buyer] and also Ispigo and MIT, to whom this declaration was directed, reasonably could have understood this declaration to be a warranty and therefore did not have to regard that statement as just a recommendation without further meaning; [Buyer] could reasonably understand this statement in such a way that [Seller] had the intention to warrant that the bread improvers were at least of the quality according to the international standard of that time. It is neither mentioned nor proven that, based on the price level of the lour to be delivered, [Buyer] should have understood that the quality of the lour was not according to the international standard. Also the health statement “it for human consumption” as was issued by [Seller] for both batches, could not have led [Buyer] to different thoughts. If [Seller] did not have the intention to apply an international standard through [Seller]’s statement, then, based on the principle of good faith to be upheld in international trade (article 7 CISG), [Seller] should have pointed out to [Buyer] that the quality of the bread improver was neither according to the standards of the EU during the last six months of 1996, nor according to the standards of the Codex Alimentarius, because of the use of potassium bromate. As it is neither stated nor proven that [Seller] has issued a statement to such effect to [Buyer], it has to be assumed that such a statement was indeed not issued. In those circumstances, it is not acceptable to assume that [Seller] would only be obligated to share information about the fact that the composition of the bread improver was not according to international standards in the event that [Buyer] had previously asked questions to that effect. The motivation that the addition of potassium bromate to the bread improver is a company secret, is not convincing. A company secret does not deserve protection in jure in a situation in which good faith demands to speak out. It cannot be assumed that [Seller] intended to apply the Mozambican rules, as [Seller]—in its Act of Reply (Conclusie van Antwoord)—implicitly admitted that it was not familiar with the content of the Mozambican law on this subject at that time. 7. [Seller] has added potassium bromate to the bread improver in a ratio of 25 ppm (parts per million), because of the proitable effect of it on the baking process and the date of tenability of the wheat in tropical countries. [Seller] has not informed [Buyer] that potassium bromate was added to the bread improver. The addition of potassium bromate to wheat has been prohibited since 1986 in The Netherlands, as a result of the FDA (“Warenwet”), and since 1990 in the EU. In a report that was brought out in 1992 (Evaluation of Certain Food Additives and Naturally Occurring Toxicans) by the “Joint WHO/

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FAO Expert Committee on Food Additives,” potassium bromate was marked as a genotoxic carcinogen (a substance that causes cancer, damaging DNA). In 1994, potassium bromate was banned from the list of admitted food additives of the Codex Alimentarius. Both The Netherlands and Mozambique are cooperative and have agreed to usage of the norms of the Codex Alimentarius. The Codex Alimentarius focuses on protection of consumers health and the promotion of fair practices, by issuing—among other things—standards to be regionally or globally followed. [Seller] has not denied knowledge of these restrictions and recommendations, so in jure it can be assumed that [Seller] was familiar with these norms. The conclusion is that, on one hand, [Seller] guaranteed to [Buyer] “the very high standard of the improvers that we add during the production of the lour at the mill,” while, on the other hand, [Seller] added potassium bromate to the wheat, knowing that this was in conlict with the laws of The Netherlands and the EU at that time, as well as in conlict with the recommendations of the Codex Alimentarius then. 8. This Court is of the opinion with [Buyer] that—by adding potassium bromate to the wheat—[Seller] has not delivered wheat of the quality that was agreed upon in the agreements, because of the fact that potassium bromate was not an allowed additive by the Codex Alimentarius during the second half of 1996 and because the export of wheat containing potassium bromate was even prohibited by The Netherlands and the EU. Although the composition of the bread improver to be added was not speciied in the contract that was concluded between the parties, [Buyer] could regard the declaration by [Seller] as a warranty by [Seller] that the quality of the bread improver would at least be according to international standards. The Codex Alimentarius should in this sense be regarded as the appropriate general standard, as both The Netherlands and Mozambique have agreed to the use of this Codex Alimentarius. The appeal by [Seller] that scientiically there is a discussion about the recommendations from the Codex Alimentarius, does not alter the fact that in the second half of 1996 there were legal bans on this subject in The Netherlands and the EU as well as that the Joint WHO/FAO Expert Committee on Food Additives has expressed a clear point of view. The fact that during the time of delivery of the batches of wheat the import of wheat with potassium bromate was de facto allowed or tolerated in Mozambique, does not negate the foregoing, as [Seller] concludes and [Buyer] opposes. A contrary opinion would implicate that products unit for human consumption could be delivered without contractual sanction by a seller from a highly developed country to a purchaser from a less developed country, who—due to the contract—may rightfully expect to have delivered to him a product that is reliable according to international standards and it for human consumption. 9. Furthermore, according to this Court, the breach by [Seller] has to be considered fundamental under article 25 of the CISG. Because the quality of the bread improver was not according to then valid international standards, the quality of the wheat on the date of delivery was clearly insuficient, as a result of the possibly harmful long-term effects for human health after consumption of products that were baked using this wheat. The defect of the wheat could not be cured, because the addition of potassium bromate to the bread improver could not be made undone. It should have been absolutely

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foreseeable to [Seller], that by delivering wheat with a bread improver containing potassium bromate, it could cause damage to [Buyer] as purchaser.

Problem 8.10 Consider how the fundamental breach and avoidance doctrines of the CISG work with the law of letters of credit. Seller submits a bill of lading for champagne of a particular label with a 1979 vintage. he contract and the letter of credit call for champagne of the 1978 vintage. he actual champagne is from 1978, and the labels on the bottles say as much, but there was a typographical error on the bill of lading. he 1978 vintage is thought to be extraordinary, but 1979 was an unremarkable year. (a) Should the bank dishonor a presentation that is compliant other than the error as to the year? (b) Must the buyer pay for the champagne? (c) Given your answer to the previous part of this question, how does the letter of credit matter?

Problem 8.11 Do the following constitute a fundamental breach? (a) he seller delivered defective souvenir coins to the buyer. he buyer was only able to resell 75 percent of them. (b) he buyer is put into insolvency proceedings. (c) he T-shirts delivered shrink two sizes ater the irst washing. (d) he seller delivers frozen meat that is more fatty and more moist than speciied in the contract. he buyer can sell it for only 72.5 percent of the value of conforming frozen meat. (e) A packaging machine can process two-thirds the level of production speciied. (f ) Flowers that are supposed to bloom all summer last only part of the season.

Problem 8.12 Might the breach of a collateral obligation, not having to do with delivery of the goods or payment for them, constitute a fundamental breach? Consider the following cases. (a) Buyer is licensed to sell shoes with a famous trademark and contracts with Manufacturer to make them. he contract requires Manufacturer to make the shoes bearing this mark according to particular speciications, and Manufacturer does so. Manufacturer is prohibited from marketing the trademarked shoes. When Manufacturer displays them for sale at a trade fair, Buyer notiies Manufacturer to desist, but Manufacturer continues. Has Manufacturer committed a fundamental breach? (b) Seller provides an incorrect certiicate of origin and an incorrect certiicate of analysis for cobalt sulfate 21 percent that was supposed to come from Britain but in fact came from South Africa, although the buyer could obtain correct certiicates and then resell the goods.

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2. Delayed Performance, Nonperformance, and Nachrist Notice Nonperformance, whether failure by the seller to deliver or failure by the buyer to pay, would seem to be as clear a fundamental breach as possible. “Show me the money!” was a memorable refrain from Hollywood17 that has worked its way into popular culture, and at least in international sales, the sentiment is just as accurate with respect to a letter of credit as to the money itself.18 he same is true for the goods. And from the retrospective point of view of litigation, it may be abundantly clear to everyone that one party or another has not performed at all, and no issue of fundamental breach will need to be argued. Failure to perform at all is certainly a fundamental breach. At the time that the failure happens, however, as opposed to looking back from the time of later litigation, the aggrieved party may have no idea whether there is a complete failure of performance and therefore an obviously fundamental breach or instead merely a delay in performance that could be either of no import or a minor inconvenience, or a major problem and thus a fundamental breach, depending on how long the delay lasts—if it is in fact a mere delay and not an outright failure. Return to our example where I am to deliver crude oil to you on March 1. I do not, and it is now March 2. You may not know whether I am going to deliver later today (a one-day delay, which may be of no import to you), or later this week (a delay of a few days, and some inconvenience but perhaps nothing more), or later this month (which may deprive you of substantially what you were entitled to expect), or never (the obviously fundamental breach). his might be a fundamental breach or not. You might have the right to avoid, but you might not. You need to know, and you may well need to know now. For instance, if I am going to be very late or never deliver at all, then you may well need to obtain oil from someone else, and soon. Of course if the situation were reversed the seller would have the same needs if the buyer had failed to pay or obtain a letter of credit on time. he Nachrist notice is the method the CISG gives for clarifying such a situation. Recall from the earlier discussion that the Nachrist notice gives the party in breach a second chance. he aggrieved party “may ix an additional period of time of reasonable length for performance by the [party in breach] of his obligations.” CISG arts. 47(1), 63(1). Unless the party in breach repudiates, the aggrieved party cannot resort to any remedies for breach: the giving of a second chance keeps the contract in place, and even though the party in breach may eventually owe damages for the injury its breach has caused under articles 47(2) or 63(2), an aggrieved buyer should not be buying substitute goods elsewhere, and an aggrieved seller should not be selling the goods to another buyer. During that reasonable period, the aggrieved party needs to wait. he advantage of this device for the aggrieved party is that if the party in breach does not perform in the time set in the Nachrist notice, the aggrieved party may then avoid the contract. See CISG arts. 49(1)(b), 64(1)(b). It is almost as if the Nachrist notice, coupled with continued failure to perform, can turn what may not have been a fundamental breach into a fundamental breach.

17. he movie is Jerry Maguire (TriStar Pictures, 1996). 18. See, e.g., Downs Investments Pty Ltd. v. Perwaja Steel SDN BHD [2000] (Austl.), CLOUT Case No. 631 (citing Helen Kaminski Pty. Ltd. v. Marketing Australian Products, Inc., Nos. M-47 (DLC), 96B46519, 97-8072A, 1997 WL 414137 (S.D.N.Y. July 23, 1997)).

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here are two important limits on this device for triggering the avoidance right. First, avoidance under this doctrine is available only in cases where the seller has failed to deliver or the buyer has failed to pay the price or take delivery. In other words, it is designed for situations as in our examples. he buyer’s failure to pay or take delivery or the seller’s failure to deliver are the most basic obligations and could amount to fundamental breach, but it will not be clear at the time set for performance or immediately aterward whether the failure is a mere delay and possibly only a minor breach or is instead fundamental. In these situations, the proper Nachrist notice will lead to a clariication of the situation one way or another. Either the party will perform according to the second chance voluntarily ofered by the aggrieved party, in which case the contract is still on track but damages may be owed, or the party will not perform within the allotted time and the contract can be avoided. his point brings up the second limit: the time set by the Nachrist notice must be “reasonable.” What is reasonable in particular circumstances may not be altogether clear, and although the clariication goal of the Nachrist doctrine is admirable, it has hardly eliminated litigation. All the circumstances will have to be considered, and the outcomes will vary. One case holds that two weeks may be too short to deliver three printing machines from Germany to Egypt, but that seven weeks is reasonable,19 while another suggests that a shorter period is reasonable in a car sale from a Danish seller to a German buyer.20 On the other side of the coin, one case holds that 29 days is reasonable for a buyer to take delivery of 200 tons of bacon,21 while a month plus another week is too short to reasonably allow a buyer to take delivery of 1600 tons of used cathode ray tubes (in case you are wondering, 1600 tons of cathode ray tubes is about 110 truckloads).22 When the obligation that has failed is only to pay the price or obtain a letter of credit, shorter periods are typically found reasonable. he cases suggest that in most cases two weeks is plenty of time, and 10 days is oten okay. A week or less probably is not reasonable.23 Aside from the uncertainty in determining a reasonable time, some other tricky points with respect to Nachrist notices require particular care, as some parties have learned to their sorrow. Sometimes parties send something that a tribunal interprets as a reminder rather than a Nachrist notice. he treaty mandates that the notice set a period for performance, and because of its connection to avoidance, tribunals can require the notice to set a deadline that is clearly inal. Realize that oten parties will be communicating in a businesslike way, not a legal way. hey may not (yet) have called their lawyers. Rather, they are concerned with a nondelivery or late delivery situation and communicate with the other party (very possibly

19. Oberlandesgericht [OLG] Celle [Appellate Court of Celle] May 24, 1995 (Ger.) (Used Printing Press Case), CLOUT Case No. 136, available at Pace CISG Database:  http://cisgw3.law.pace.edu/cases/950524g1.html (Feb. 20, 2007). 20. Oberlandesgericht [OLG] Naumburg [Appellate Court of Naumburg] Apr. 27, 1999 (Ger.) (Automobile Case), CLOUT Case No. 362, available at Pace CISG Database: http://cisgw3.law.pace.edu/cases/990427g1. html (Feb. 21, 2007). 21. Landgericht [LG] Bielefeld [District Court of Bielefeld] Jan. 18, 1991 (Ger.), available at www.globalsaleslaw. org/content/api/cisg/urteile/174.htm. 22. Tribunal de grande instance [TGI] [Ordinary Court of Original Jurisdiction] Strasbourg, Dec. 22, 2006 (Fr.), available at Pace CISG Database: http://cisgw3.law.pace.edu/cases/061222f1.html (Apr. 17, 2009). 23. See generally CISG Digest (2012) ¶ 6 at 303–04.

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orally, which is allowed under article 11) about how to resolve a problem. Later, as the situation deteriorates, the communications may be more demanding, but without legal advice, the parties are unlikely to focus on requirements set by a particular article of an international convention. When the lawyers come into the situation, they are then faced with trying to decide aterward whether a notice constituted a Nachrist notice, and eventually arguing that it did or did not. Finally, keep in mind that these businesslike communications may be interpreted not as a Nachrist notice but as an agreed change in the contractual delivery date—which would constitute a modiication of the contract. See CISG art. 29. In that case, delivery by the new date is timely performance, and by agreement, there is no longer a breach. Whether this is the import of the parties’ communication will be a matter of interpretation. he following case illustrates the back-and-forth nature of communications and their sometimes uneasy it with legal doctrine, as well as the routine but technical arrangements required for international sales of bulk commodities.

Valero Marketing & Supply Co. v. Greeni Oy United States Court of Appeals for the Third Circuit, 2007 242 Fed. Appx. 840 JorDan, Circuit Judge. Valero Marketing & Supply Co. (“Valero”) appeals from the judgment of the District Court against it and in favor of the defendant, Greeni Trading Oy (“Greeni”). Because we have concluded that the District Court erred in holding that the parties’ September 14, 2001 agreement was not a valid contract, we will reverse and remand the case for further consideration.

I. . . . On August 15, 2001, Greeni contracted with Valero to sell to Valero 25,000 metric tons of naphtha, a liquid that can be blended with other components to make inished gasoline. That contract (the “August 15 Agreement”) was the result of discussions conducted wholly through a middleman; Greeni and Valero did not speak to each other directly. A written conirmation of the deal was sent by the middleman to both parties that same day. The conirmation contained the agreed upon price term and provided that delivery was to be to Valero’s tanks in New York Harbor between September 10 and 20, 2001. The conirmation also provided that the vessel used to carry the naphtha would be “subject to [Valero’s] marine department acceptance which shall not be unreasonably withheld.” Valero sent its own written conirmation to Greeni on August 17, 2001. That document generally conirmed the terms of the August 15 Agreement as stated by the middleman, but also provided that “New York law and jurisdiction shall apply.” Greeni did not object or otherwise respond to Valero’s purported conirmation. After the August 15 Agreement was in place, Greeni arranged for a vessel to carry the naphtha from Greeni’s stock location in Europe to Valero’s tanks in New York Harbor. By

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August 23, 2001, Greeni had taken out subjects24 on a ship called the BEAR G, a ship that Greeni had previously used many times to carry petroleum products. Despite the contract provision that any ship Greeni chose to deliver the naphtha was subject to Valero’s approval, and in a reversal of the order of events it should have followed, Greeni obligated itself on August 29, 2001 to use the BEAR G to ship the naphtha, and only after that, on August 30, 2001, proposed the BEAR G to Valero. Greeni claims that it committed itself to the BEAR G before gaining Valero’s approval because Valero had previously approved the BEAR G to carry vacuum gas oil, another petroleum product. When Greeni nominated the BEAR G to Valero, Valero undertook a process it calls “vetting” the vessel. A representative of Valero worked for about an hour to review different reports and call industry contacts to ask for information about the BEAR G. Valero ultimately rejected the BEAR G, sending an email to Greeni on August 30 stating, without elaboration: “We have received your nomination of the vessel ‘Bear G.’ Unfortunately, this vessel does not meet Valero’s criteria for acceptance at this time. We kindly ask that you renominate another vessel for our review.” Despite Valero’s rejection of the BEAR G, and because Greeni was unable to ind another vessel, Greeni loaded the naphtha destined for Valero onto the BEAR G. However, because of a delay in loading the BEAR G in Hamburg, Germany, it did not leave Hamburg until September 10, 2001. As of that date, the master of the BEAR G estimated an arrival in New York Harbor on September 21, 2001, outside the contractual delivery window. On September 14, 2001, the parties entered into a new agreement (the “September 14 Agreement”). Valero, through the same middleman, sent a proposal to Greeni suggesting that it would not permit Greeni to ofload the naphtha directly at the terminal but would take delivery only by barge because Greeni had chosen to use an unapproved vessel, the BEAR G, to ship the naphtha. Valero also stated that, because it would be impossible for Greeni to deliver within the contractual window, Valero would accept the total volume of product delivered by Greeni to their terminal no later than midnight on September 23. For this accomodation [sic] the contract price will be adjusted by a discount of $0.0175 per us gallon. After this time Valero is not obligated to take any more volume under this contract. For all barrels delivered on September 20, Valero will of course pay the full contract price. The proposal also speciied that it would be Greeni’s responsibility to charter the barges, something that Greeni generally had not done before. Greeni agreed to the proposal, although it later complained that it felt the proposal was a “take it or leave it” proposition. Valero sent a written conirmation of the agreement to Greeni, specifying

[24]. “Taking out subjects” on a vessel is a common practice in the shipping industry, and means, as we understand from the record, reserving a ship subject to a later, deinitive obligation to use that ship. The practice allows the parties to a shipping contract a period of time to decide whether they want to use a particular vessel.

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that it would take delivery of all cargo delivered by barge before midnight on September 24, 2001.25 The BEAR G arrived in New York Harbor on September 22 at 3:30 in the morning. Greeni asserts that it could have delivered the naphtha by the end of the day on the 22nd, within the contract extension time, if Valero had not insisted that delivery be by barge.26 The parties do not dispute that no naphtha was delivered to Valero by September 24. Both parties claim they sustained signiicant losses. Valero asserts that it intended to blend the naphtha with other components to make 87 octane gasoline, which it would have sold prior to September 30, 2001, and that each day of delay cost Valero signiicant sums of money. Greeni, on the other hand, asserts that because Valero refused to accept delivery of the naphtha and because the market price for naphtha was falling, it had to cover by selling its naphtha to Valero and others at signiicantly reduced prices, and that it also incurred charges for keeping the BEAR G in New York Harbor for an extended period of time. Valero iled suit against Greeni in the United States District Court for the District of New Jersey on November 13, 2001, alleging that Greeni had breached the contract between the parties. Greeni counterclaimed, asserting that it was Valero that had breached the contract. Valero moved for summary judgment on liability. The District Court denied that motion, stating that the United Nations Convention on Contracts for the International Sale of Goods (“CISG”) applied to the agreement, and that, under that law, there were genuine issues of material fact as to whether there was a breach of contract. The Court also found that the September 14 Agreement constituted a new contract. The District Court conducted a four-day bench trial, and issued its indings of fact and conclusions of law on April 4, 2006. It concluded that Valero’s rejection of the BEAR G was unreasonable, and thus a violation of the August 15 Agreement. The Court also found that, under the CISG, Greeni had breached the August 15 Agreement by arriving in New  York Harbor two days outside the contractual window set by that agreement. However, the Court concluded that the delay did not entitle Valero to avoid its obligations under the contract because that two-day delay did not amount to a fundamental breach of the August 15 Agreement. The District Court went on to discuss the September 14 Agreement that allowed Greeni to deliver the naphtha by September 24. The Court highlighted Article 47 of the CISG, one of the provisions that govern the “Remedies for Breach of Contract by the Seller in a Sale of Goods.” That provision allows a buyer to set an additional period of time for the seller to deliver, but states that “the buyer may not, during that period, resort to any remedy for breach of contract.” 15 U.S.C. App. Art. 47(2). The Court held that, in consequence of that provision, Valero did not have the right to demand that Greeni enter into the September 14 Agreement, and thus despite its earlier holding to the contrary, the Court ruled that the September 14 Agreement was of no effect. Therefore, the District Court found that Valero was entitled to recover damages only for the two-day delay between

[25]. Although Valero had originally proposed that delivery must take place by September 23, the parties later agreed to delivery by September 24. [26]. Although Greeni attempted to charter barges to deliver the naphtha to Valero, it was unable to do so. As the District Court observed, “Greeni cites the World Trade Center attack of September 11, 2001 as the reason for its inability to charter barges by September 24, 2001.”

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the September 20 delivery deadline in the August 15 Agreement and the day the BEAR G arrived in New York Harbor. It went on to ind that Valero had not proven it suffered any damages from that delay. It also found that, because Valero improperly avoided its obligations under the August 15 Agreement, Greeni was entitled to recover damages for Valero’s failure to accept delivery of and pay for the naphtha as required by that Agreement. ...

II. Valero asserts, among other things, that the District Court erred in inding that the September 14 Agreement was of no effect. Whether the September 14 Agreement was a binding contract is a question of law subject to plenary review. We assume arguendo that the District Court was correct in applying the CISG in interpreting the September 14 Agreement.27 The CISG contains two provisions, Articles 29 and 47, which are arguably relevant to the September 14 Agreement. The District Court, however, analyzed the September 14 Agreement only under Article 47. Article 47 is one of the remedies the CISG provides to a buyer when a seller has breached a contract. [The court quoted article 47.] The purpose of Article 47 is to allow a buyer to set an additional period of time for delivery, after which the contract can be avoided. Under Article 47, however, during any additional period of time that a buyer may grant for performance, the buyer is not entitled to ask for any other remedy for the seller’s breach, including contract avoidance or price reduction. Because the September 14 Agreement contained a price reduction term and a requirement that Greeni deliver the naphtha by barge, the District Court viewed the September 14 Agreement as an improper invocation of an additional remedy prohibited in Article 47. The District Court thus found that the September 14 Agreement was of no effect. We do not agree with that reasoning. Assuming that the September 14 Agreement would not have been an appropriate use of Article 47 of the CISG, as the District Court held, that does not mean that the September 14 Agreement was an ineffective contract modiication. Article 29 of the CISG discusses contract modiication and states simply that “[a] contract may be modiied or terminated by the mere agreement of the parties.” Although Greeni asserted at trial that it agreed to the September 14 Agreement because it felt that it was a “take it or leave it” proposition, the record is clear that Greeni did assent to that agreement. Greeni does not argue that it was under duress, and it was indeed free to leave the September 14 Agreement on the bargaining table, attempt to cover, and seek remedies for any breach of the August 15 Agreement. It chose instead to take the new deal. The “mere agreement” of the parties relected in the September 14 Agreement thus constituted a permissible contract modiication under Article 29, rather than an extension of time for performance under Article 47 of the CISG. Accordingly, the September 14 Agreement was valid and governed the conduct of the parties for the remainder of their interaction.28 [27]. We do not perceive a conlict between the CISG and New  York law on the issue of whether the September 14 Agreement is valid and binding. [28]. We need not, therefore, consider the District Court’s inding that Valero unreasonably withheld its consent to the chartering of the BEAR G. We address here only the effectiveness of the September 14 Agreement. The legal consequences of that Agreement and the parties’ actions are a matter for the District Court to determine in the irst instance.

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We therefore reverse the District Court’s judgment based on its holding that the September 14 Agreement was ineffective, and remand the case for further proceedings consistent with this opinion.29

Question 8.13 In case of delay, must the aggrieved party give the Nachrist notice in order to avoid the contract? his is quite an important question. Consider CISG articles 26, 47, and 49 and how they work together. Be sure to give a practical answer as well as a technical one.

Question 8.14 May the aggrieved party use the Nachrist procedure before the time for performance has arrived?

Question 8.15 If the buyer sets too short a time in its Nachrist notice but actually waits a reasonable time before sending its declaration of avoidance, is it still entitled to avoid the contract? Problem 8.16 he Italian seller and German buyer agree on the purchase of 500 pairs of Italian shoes with delivery February 3. When the goods do not arrive, the buyer sends an e-mail to the seller, saying, “We are still looking for the delivery of the 500 pairs of shoes per our contract. We remind you that prompt delivery is necessary.” Four months go by. In a previous contract for the same kind of shoes, the buyer accepted delivery from this seller three months late. May the buyer avoid the contract?

Problem 8.17 On October 12, Buyer in Germany and Seller in England agree on a sale of 18,000 kg of iron molybdenum 64 percent from China for US $9.70/kg with delivery that month. On October 20, Seller informs Buyer that it could supply the goods only for $10.50/kg or could deliver lower quality goods (at 60 percent instead of 64 percent) for the same price. Buyer accepted the latter option and insisted on a shipment date by November 15, saying that it would cover and hold Seller responsible ater that date. Seller replied that it could not perform by that date. Buyer said it would give Seller until November 30, again threatening cover in the absence of delivery by then. Buyer demanded assurance the Seller would perform, and Seller assured Buyer. On December 13, however, Seller informed Buyer that Seller had not yet received the goods from its supplier. Buyer responded that same day that it needed the material and would need to cover at the current price of $31/kg. Seller said it would still try to fulill the contract. Further negotiations failed. In early January, Buyer informed Seller by telephone that it would cover by obtaining substitute goods. Buyer then did so for $30/kg for January/February delivery from China. Under the rules of private international law, German law applies. May Buyer avoid the contract with Seller and resort to its

[29]. Greeni has also iled a cross-appeal asserting that the District Court erred in not awarding it damages relating to demurrage charges it incurred because the BEAR G was in New York Harbor far longer than expected. Because we ind that the September 14 Agreement was valid, and are consequently vacating the District Court’s decision and remanding the case for a determination of the parties’ rights and obligations under that agreement, we will dismiss that appeal and leave to the District Court the determination of the parties’ damages in the irst instance.

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cover remedy for breach, collecting the diference between the cover price and the contract price? See CISG arts. 1(1)(b), 26, 47, 49, 75.

3. Notes on German and French Law he CISG Nachrist procedure captures well the idea of German law on nonperformance and late performance. Although broadly speaking the concepts are the same, emphasizing the use of notices and the allowance of a second chance, the CISG Nachrist procedure is not entirely in accord with the speciics of German law. he CISG took its model from German law before the 2002 revision of the obligations articles, and German law served only as a model. he German approach is more complex. he basic structure in German law is that there are two kinds of notice. here is the Nachrist notice that grants an extension or grace period, the outlines of which are discussed above (and again, there is some diference from German law, particularly in the availability of immediate avoidance when there is fundamental breach under the CISG), and there is a warning notice (Mahnung) required for the assertion of damages for delay. he debtor’s delay is usually called mora debitoris or Verzug. he key articles of the current (post-revision) BGB follow.30 Note particularly the Mahnung (warning notice), as well as the exceptions to both notice requirements, most notably the exception dies interpellat pro homine (the day calls for the man) that applies when dates are set according to the calendar. When the contract sets a date for performance, the Mahnung is not necessary—a rule of considerable practical importance, both from the standpoint of contract drating and litigation.

GERMAN CIVIL CODE (BGB) Bundesministerium der Justiz (Langenscheidt Translation Service, Neil Mussett, trans.) © 2012 juris GmbH, Saarbrücken http://www.gesetze-im-internet.de/englisch_bgb/englisch_bgb. html#p0430 Section 280 Damages for breach of duty (1) If the obligor breaches a duty arising from the obligation, the obligee may demand damages for the damage caused thereby. This does not apply if the obligor is not responsible for the breach of duty. (2) Damages for delay in performance may be demanded by the obligee only subject to the additional requirement of section 286. ...

30. Further details in a still brief treatment may be found in Basil Markesinis, Hannes Unberath & Angus Johnston, The German Law of Contract: A Comparative Treatise 464–69 (2d ed. 2006)] and in Reinhard Zimmermann, The New German Law of Obligations: Historical and Comparative Perspectives 53–58 (2005).

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Section 281 Damages in lieu of performance for nonperformance or failure to render performance as owed (1) To the extent that the obligor does not render performance when it is due or does not render performance as owed, the obligee may, subject to the requirements of section 280(1), demand damages in lieu of performance, if he has without result set a reasonable period for the obligor for performance or cure. If the obligor has performed only in part, the obligee may demand damages in lieu of complete performance only if he has no interest in the part performance. If the obligor has not rendered performance as owed, the obligee may not demand damages in lieu of performance if the breach of duty is immaterial. (2) Setting a period for performance may be dispensed with if the obligor seriously and deinitively refuses performance or if there are special circumstances which, after the interests of both parties are weighed, justify the immediate assertion of a claim for damages. (3) If the nature of the breach of duty is such that setting a period of time is out of the question, a warning notice is given instead. ...

Section 286 31

Default of the obligor (1) If the obligor, following a warning notice from the obligee that is made after performance is due, fails to perform, he is in default as a result of the warning notice. Bringing an action for performance and serving a demand for payment in summary debt proceedings for recovery of debt have the same effect as a warning notice. (2) There is no need for a warning notice if 1. a period of time according to the calendar has been speciied, 2. performance must be preceded by an event and a reasonable period of time for performance has been speciied in such a way that it can be calculated, starting from the event, according to the calendar, 3. the obligor seriously and deinitively refuses performance, 4. for special reasons, weighing the interests of both parties, the immediate commencement of default is justiied. (3) The obligor of a claim for payment is in default at the latest if he does not perform within thirty days after the due date and receipt of an invoice or equivalent statement of payment; this applies to an obligor who is a consumer only if these consequences are speciically referred to in the invoice or statement of payment. If the time at which the invoice or payment statement is received by the obligor is uncertain, an obligor who is not a consumer is in default at the latest thirty days after the due date and receipt of the consideration. (4) The obligor is not in default for as long as performance is not made as the result of a circumstance for which he is not responsible.

[31]. Oficial note: This provision also serves in part to implement Directive 2000/35/EC of the European Parliament and of the Council of 29 June 2000 on combating late payment in commercial transactions (OJ L 200, p. 35).

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French law with respect to delay damages rests on a similar concept, although the terminology and basic doctrine difer from German law. French law, instead of the Nachrist and Mahnung notices, uses the idea of mise en demeure, which we would translate as “putting in default.” Another common translation is “putting in delay.” As with German law, we are emphasizing just a few ideas in rather a sea of doctrine and history, but here is the basic layout. In principle, to obtain damages, the aggrieved party must put the other party in default by serving a notice on it. In commercial cases this has generally been done by letter,32 which is also now possible in contract cases in general since an amendment to the Civil Code.33 For a variety of reasons, however, putting in default only matters for delay damages, at most, because iling a lawsuit counts as a putting in default. he mise en demeure, then, is no longer a prerequisite to iling suit. If the plaintif wants delay damages, though, it will likely want them from as early a time as possible, and it may prefer to send the letter putting the other party in default immediately. Better yet, the parties may dispense with the mise en demeure in their contract. Sometimes courts ind such an agreement implied.34 In sum, mise en demeure was a robust doctrine requiring a notice that originally served to warn the party in breach that it better perform or else wind up in court. In cases not governed by the Commercial Code, the notice was served by a state oicial (the huissier), which may have helped wake up the other party. Over time, though, the doctrine has weakened so that the iling of suit constitutes a notice of default, and generally speaking the only practical reason to send a notice of default is to start the running of damages for delay.35 More practically still, a lawyer drating a contract governed by French domestic law may wish to include an express clause dispensing with the requirement of mise en demeure.36

Question 8.18 When are delay damages available under the CISG? German law? French law?

Question 8.19 Which system do you think is better suited to commercial transactions? Contract in general?

4. Installment Sales under Article 73 One way to understand the Nachrist procedure is as an aspect of the law’s preference for keeping the contract on track unless there is an obvious reason not to do so. he Nachrist notice gives the party in breach a second chance, and it must be a realistic chance given

32. Cour d’appel [CA] [Court of Appeal] Paris, Jan. 20, 2004 (Fr.), available at http://www.juritel.com/ Ldj_html-1017.html). See generally Barthélemy Mercadal, Mémento pratique–Droit commercial 344– 45, ¶¶ 14415–14421 (Francis Lefebvre ed., 19th ed. 2011). 33. C. civ. arts. 1139, 1146 (Fr.), amended by la loi du 9 juillet 1991 (in force 1993). 34. John Bell, Sophie Boyron & Simon Whittaker, Principles of French Law 353 & n.475 (2d ed. 2008) (citing Com. 8 Oct. 2003, Bull. Civ. IV no. 138, RTDCiv. 2003.503 note Mestre and Fages). 35. Id. at 353. 36. C. civ. art. 1139 (Fr.).

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the requirement that a reasonable time be set. his preference for keeping the contract on track holds even greater force with installment sales, which therefore have their own special avoidance rule in article 73. Read it now. he theory is that where multiple deliveries are contemplated, a more robust relationship is necessarily established, and robust relationships have economic and perhaps moral value, so they should be held together where doing so is reasonable. Recall the discussion of the relational theory of contract law. he force of that theory and its insights becomes greater as the relationships lengthen and strengthen. Installment sales tend to be part of stronger commercial relationships partly because they aford a greater opportunity for the parties to gain a better understanding of each other’s expectations and for them to build a mutually beneicial and cooperative working relationship. One of the points of relational contract theory (mentioned in Chapter 3) is that the knowledge developed over the course of the relationship may not have been distilled into the moment of contract formation. Indeed, in a new relationship it cannot have been, as the knowledge is developed ater formation during the course of performance of the contract. Nevertheless, the theory goes, the understanding that develops over the course of the relationship should not necessarily have less force than what was put into the agreement at the beginning. Instead, the later-developed knowledge and understanding may have greater value because it is more recent and is formed in light of more information and experience. A tribunal is likely to assess a performance that is arguably less than perfect with these ideas in mind. As discussed in Chapter 3, CISG articles 8 and 9 require the agreement to be interpreted according to practices the parties have established, including practices established ater contract formation. On the other hand, there is a danger that a court will weaken the agreement by giving legal force to informal accommodations that the parties did not mean to be binding. here is a ine line to walk, as you can see from considering the next problem.

Problem 8.20 Buyer in Spain ordered parts from Seller in Germany for use in Buyer’s production process. he parts were to be delivered in installments. Seller was four to eight weeks late in delivering the irst three installments, which the Buyer accepted, grateful that the parts (which it needed, ater all) had inally arrived but unhappy about the repeated delays. he fourth installment is now two days late, and Buyer, exasperated, seeks to avoid the contract. May Buyer do so? Whether a particular sale or group of sales should qualify as an installment sale may be subject to disagreement. Certainly a contract involving delivery of goods in separate lots is an installment contract. More questions arise when there are separate contracts between parties with an ongoing relationship. Functionally, the separate contracts might be seen as an installment contract, and in any case, the reason for the rule (ratio legis, as it is sometimes put) in article 73 supports the application of the rule in such a situation. Some cases do apply the installment sale rules in such situations.37 As discussed below, the 37. See CISG Digest 339 ¶ 4 (2012) (collecting cases).

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UCC states a separate, special rule for installment contracts, and its deinition of an installment contract accords with the CISG jurisprudence, as does its rule. Section 2-612(1) sets out not only the “separate lots” deinition but adds that a “contract that contains a clause ‘each delivery is a separate contract’ or its equivalent” is also an installment contract. When a sale is considered an installment contract, the special rules of article 73 are triggered. An aggrieved party can avoid an installment only if there is a fundamental breach as to that installment. Avoidance, of course, requires notice. See CISG arts. 26, 73. A fundamental breach as to an installment is not necessarily a fundamental breach as to future installments or as to the whole contract. Avoidance as to the future requires that there be “good grounds to conclude that a fundamental breach of contract will occur with respect to future installments.” And of course, avoidance must be declared within a reasonable time. hus article 73 seems to make an efort to keep the contract on track and the parties together, not necessarily allowing avoidance of the contract even if there is a fundamental breach as to one of the installments. here is another side, though, to article 73. It recognizes that the relationship may be soured or may be useless because of a breach, and it allows avoidance of the contract not just under the relatively diicult standard for anticipatory breach (article 72(1): “it is clear that one of the parties will commit a fundamental breach”) or even suspension (article 71(1): “it becomes apparent that the other party will not perform a substantial part of his obligations . . . ”), but under the apparently more liberal test of “good grounds to conclude.” When there are such grounds, the value of the relationship has been lost, and avoidance can be an appropriate, and therefore permissible, remedy. What constitutes a fundamental breach with respect to a single installment is not especially diferent from what constitutes a fundamental breach under any contract under article 25, so we will not revisit that issue here. he questions become more interesting when the issue is whether a breach as to one or more installments suiciently threatens future installments to allow avoidance of the whole contract. Utter nondelivery is a reasonably clear situation, and at least one case allows cancellation of the entire contract when the irst delivery is missed. Disrupting the buyer’s production, apparent inability to comply with relevant food safety regulations, or goods suiciently poor in quality may be enough. On the buyer’s side, a failure to open a letter of credit allows avoidance of the contract because it calls payment into question, and a buyer’s reselling the goods in prohibited markets (because of exclusive distribution rights) also permits complete avoidance.38 Sometimes, though, an assurance by the breaching party may defeat the claim that there are good grounds to believe that there will be a fundamental breach. In one case the buyer failed to open a letter of credit but irmly expressed its intent to open letters for future installments, and the court found that the seller could not avoid as to the future installments.39 he cases suggest that although there may be a technical diference in the standards of articles 71, 72, and 73, tribunals will have to be sensitive to many of the same facts and concerns, perhaps with diferent emphasis depending on

38. See CISG Digest 340 ¶¶ 7–8 (2012). 39. China International Economic & Trade Arbitration Commission [CIETAC] Sept. 18, 1996 (Lanthanide Compound Case), available at Pace CISG Database: http://cisgw3.law.pace.edu/cases/960918c1.html (Oct. 26, 2005).

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diferent relationships, goods, and markets. Standards are standards, and are loose; they do not work like rules. But the diferent formulations do open room for arguments.

5. Short Deliveries and Partially Conforming Deliveries under Article 51 Article 51 addresses a practical problem that is conceptually linked to installment contracts even though it applies to all kinds of contracts. What is a buyer to do if the delivery arrives and it is short (e.g., the seller is supposed to deliver 100 bales of cotton, to take a standard example, but delivers only 90)? Similarly, what if the seller delivers 100 bales, but 10 are defective? In either case, the buyer may wonder if it can reject the entire delivery. In the latter case, it may wonder whether it can keep the 90 good bales but call everything of for the remaining 10 (i.e., avoid the contract as to those 10 bales only). Article 51 is designed to answer these questions. Read it now. he efect of article 51 has been expressed in a couple of ways. One way to think of it is as splitting the contract into separate contracts.40 he part that the seller performed correctly is one contract, and the other part is a diferent contract. his oten means that the buyer’s remedy is restricted to the problematic part of the performance, which generally accords with German law41 but not the UCC. he buyer under the CISG can invoke the usual remedies (articles 46 through 50) with respect to that diferent, breached contract, but the buyer can reject the entire shipment—all the bales—only if the buyer is entitled to avoid the whole contract because the short or defective delivery constitutes a fundamental breach as to the whole. Another way to encapsulate the approach of article 51 is to see it as “narrowing the focus” to the problematic part of the contract.42 To continue with the example: if 10 bales are missing, there is a failure of timely delivery as to those 10 bales. With respect to them, the buyer may invoke any remedy that would be appropriate if the contract were for those 10 bales only. In this case, the buyer faces the usual problem of not knowing whether there is complete nondelivery or merely a late delivery. In most cases, the appropriate remedy for the missing 10 bales is to give a Nachrist notice setting a reasonable time for the seller to deliver the missing bales. If the seller does so, ine. If not, then the buyer may avoid as to those 10 bales and therefore not pay for them. If instead the seller had delivered all 100 bales but 10 were defective, the question would be: Is there a fundamental breach as to those 10 bales if there were a separate contract for those 10 bales? If so, the buyer may reject those 10 bales and avoid the contract as to them. Suppose, for instance, that those 10 bales were moldy and could not be cleaned, used, or resold. hen there would be a fundamental breach as to those 10 bales, and the buyer could reject those 10, and the buyer may invoke any other remedy appropriate to the particular situation. If there is not a fundamental breach, then the buyer cannot reject the 10 bales but must take 40. John O. Honnold, Uniform Law for International Sales under the 1980 United Nations Convention § 316 at 454 (Harry Flechtner ed., 4th ed. 2009). 41. BGB §§ 281(1), 323(5), cited in Markus Müller-Chen, Article 51, in Schlechtriem & Schwenzer, Commentary on the UN Convention on the International Sale of Goods (CISG) 781 n.2 (Ingeborg Schwenzer ed., 3d Eng. ed. 2010). 42. Peter Huber & Alastair Mullis, The CISG:  A  New Textbook for Students and Practitioners 294 (2007).

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them and invoke other appropriate remedies (such as damages or price reduction). If the 10 moldy bales could be cleaned, the buyer could claim damages for the cost of cleaning the 10 bales,43 but there would probably be no fundamental breach, even as to the 10 bales, and the buyer could not reject them. Of course, the buyer can reject all the bales that were delivered only if the missing or defective bales constituted a fundamental breach as to the whole contract. If 90 good bales were delivered, this would be an unlikely result, although particular facts could make it possible. In all of these cases, all of the usual rules would apply: the buyer must give timely notice under article 39, make any declarations of avoidance under articles 26 and 49, and be subject to the seller’s right to cure (article 48) to the usual extent. Article 51 presupposes two conditions: that the goods delivered be separable into freestanding commercial units and that some of the delivery conform and some not. As to the irst, courts have had no trouble dividing up contracts for the sale of 1000 tons of cucumbers44 or for shipments of wall tiles.45 Practically speaking, the second condition is closely related to the irst. Obviously if the entire delivery conforms, there is no problem. he condition is relevant only when there is some problem, whether it be nondelivery or delivered goods that do not conform. If the whole delivery fails to conform, then article 51 by its terms does not apply. So the second condition can be satisied only if the goods are separable into good units and bad ones. Sometimes this will be clear, as with cucumbers or wall tiles, on the one hand, or on the other hand, the delivery of a single truck that has a bad exhaust system. In the last case, the truck does not conform at all because the exhaust system is not separable, in a commercially useful way, from the truck. here is not much of a market for such trucks. It would not make sense to apply article 51 and divide up the truck into a contract for an exhaust system and a contract for the rest of the truck. Other remedies would it better, whether avoidance for fundamental breach or a demand for repair or substitute goods or simply damages. Between the two clear extremes, however, there are some more diicult cases.

Problem 8.21 Buyer in Austria ordered from Seller in Germany standard sotware to produce graphical images. he sotware was to be delivered on CD-ROM in return for a single payment of €7000. he sotware consists of several modules: the main graphical image program plus three add-on modules: one for modeling (“M” module), one for transfer into a universal platform like a pdf (“U” module), and one for translation to other computer program languages (“T” module). Seller delivered the CD-ROM with the main graphical program and with the M module, but U and T were missing. Buyer gave notice, and Seller 43. Damages, unlike all the other remedies mentioned in the text, do not appear in the articles (arts. 46–50) that article 51 cites as being available to the aggrieved buyer. Nevertheless, there seems to be no question that damages are available in appropriate cases, including those involving partial deliveries. See Oberlandesgericht [OLG] Düsseldorf [Appellate Court of Düsseldorf ] Feb. 10, 1994 (Ger.), CLOUT Case No. 82; Tribunal of International Commercial Arbitration at the Russian Federation Chamber of Commerce, Nov. 23, 1994, Arbitral Award No. 251/1993, available at Unilex Database: http://www.unilex.info/case.cfm?id=250. 44. Oberlandesgericht [OLG] Düsseldorf [Appellate Court of Düsseldorf ] Jan. 8, 1993 (Ger.) (Tinned Cucumbers Case), CLOUT Case No. 48, available at Pace CISG Database:  http://cisgw3.law.pace.edu/ cases/930108g1.html (Dec. 2, 2005). 45. Landgericht [LG] Baden-Baden [District Court of Baden-Baden] Aug. 14, 1991 (Ger.) (Wall Tiles Case), CLOUT Case No. 50, available at Pace CISG Database: http://cisgw3.law.pace.edu/cases/910814g1.html (Mar. 20, 2007).

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transmitted U electronically. Buyer complains of the lack of the proper CD-ROM and the still-missing module T. Seller does not supply the CD-ROM and says that module T cannot be delivered in a way that will work in Austria. Buyer would like to avoid the contract. May the buyer do so? What would be the test? As you can see, the way article 51 splits a contract into diferent pieces is reminiscent of installment contracts, which are by deinition split into diferent pieces. he consideration of a contract in diferent pieces under both articles 51 and 73 therefore proceeds along similar lines. Another common aspect when there are separate pieces of a contract is the efect of one piece on the other, as you could see in the previous problem. Sometimes the efect will be functional, as could be the case with sotware components. Sometimes, though, the efect will be a question of reliability, trust, and reputation. A defective delivery may shake the faith of the buyer, and sometimes decided cases seem to fall into a shaken faith doctrine more than anything else. Consider the following abstract of yet another case involving Italian shoes.

ITALIAN SHOES CASE Oberlandesgericht [OLG] Koblenz [Appellate Court of Koblenz] Nov. 21, 2007 (Ger.) Abstract available at Unilex Database: http://www.unilex.info/case. cfm?id=1380 An Italian seller and a German buyer concluded a contract for the supply of shoes on a regular basis. A lot of boots delivered between March and September 2001 showed defects and, as from July 2001, the buyer started to receive complaints from its customers. The buyer gave speciied notice thereof to the seller in respect to 36 pairs of boots. On 12 December 2001, the buyer sent a letter to the seller declaring the contract avoided and returned the goods to the seller. Since the buyer paid only for part of the goods, the seller brought an action against him and claimed payment of the outstanding price. ... [T]he Court held that, by means of its letter dated 12 December 2001 (Art. 26 CISG), the buyer had rightfully declared the contract avoided according to Arts. 49(1)(a) and 51(2) CISG, as the defects, although regarding only part of the goods, amounted to a fundamental breach of contract within the meaning of Art. 25 of CISG. In fact, in the present case the goods were either of [such a] poor material or so badly manufactured to lead the buyer to believe that also the remaining pair[s] of boots were defective. Furthermore, on account of the complaints already received by its customers, the buyer had reasonably expected a decrease in the sales and a consequent loss of reputation; all the more so, because the buyer run[s] a small shoe shop. Therefore, the circumstance that the defects regarded only a small percentage of the total amount of the shoes delivered did not prevent the contract from being avoided in its entirety. ... [T]he Court rejected the seller’s argument that the ixing of an additional period of time of reasonable length for performance by the seller was a requirement for contract termination (Art. 47 CISG). In fact, such an additional period is not necessary where a fundamental breach of contract has occurred.

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PROBLEMS Problem 8.22 A supermarket chain in France buys 15,000 pressure cookers from Seller in Portugal. About one-third of them have a leak in the lid that could lead to a user being burned. he French National Testing Laboratory conirms the danger, and Seller is now in negotiations over recall with the French Consumer Protection Agency. Some cookers are now in the homes of users; others are still in the possession of the supermarket chain. he parties agree that the faulty cookers must be recalled. he buyer thinks that all of the pressure cookers need to be recalled because it is diicult or impossible for anyone other than the manufacturer to determine which ones are faulty. he buyer seeks to avoid the entire contract. he seller argues that avoidance is proper only as to the third of the cookers that are faulty and volunteers to sort the good ones from the bad ones or to have the French National Testing Laboratory do so. Under the rules of private international law, French law applies, which is signiicant because Portugal is not a party to the CISG. What result? Problem 8.23 (a) Buyer in China orders from Seller in Italy 10,000 metric tons of plate round high tensile deformed steel for $300 per ton for delivery in late June. On June 29 Seller delivers 8000 metric tons, of which 1000 tons do not meet the high tensile strength speciication. Buyer notiies Seller on June 30 and says that Seller must pick up the 1000 tons that do not conform and must provide 3000 conforming tons within 10 weeks or else Buyer will avoid the entire contract (for all 10,000 tons), will not pay for them, and will seek damages if it must cover for a higher price. Seller fails to deliver within the 10 weeks set. May Buyer rightfully avoid the contract? (b) What would your answer be if Seller had delivered no steel at all, assuming that Buyer gave the same notice and Seller still failed to perform?

6. he Relation among Cure, Fundamental Breach, and Avoidance When assessing whether a breach is fundamental and the contract can therefore be avoided, a factor that a tribunal might naturally consider is whether the breach can be cured. he court in Rynpoort Trading & Transport NV v. Meneba Meel Wormerveer B.V., above, considered this factor as a matter of course. Whether a breach is fundamental, that is, whether the aggrieved party has been deprived of what it should be able to expect under the contract, CISG art. 25, is a question that ordinarily would be answered with reference to such a criterion. If you have breached your contract with me, but you can and will ix the problem without undue delay, expense, or inconvenience to me, can I say I have really been deprived of what I should be able to expect? Probably not, and we believe this is the correct answer under the CISG. he well-known Cobalt Sulfate Case on which Problem 8.12(b) is based even goes so far as to ind a breach not to be fundamental if the aggrieved party (rather than the breaching party) can ix the problem.46 Other cases have similar holdings, and almost all of the major

46. Bundesgerichtshof [BGH] [Federal Supreme Court] Apr. 3, 1996 (Ger.), available at Pace CISG Database: http://cisgw3.law.pace.edu/cases/960403g1.html (Nov. 15, 2007).

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commentaries reach the same result. Because of the drating of article 48, however, reaching this conclusion is not as easy as it should be. he problem is that article 48, which gives the seller the right to cure without undue inconvenience to the buyer, says that it is “[s]ubject to article 49.” Article 49 is the buyer’s right to avoid the contract. he plain meaning, then, is that the right to cure is not available if the buyer has a right to avoid. We believe it is helpful and important to acknowledge this plain meaning outright, even though it does not (by itself ) lead to the desirable result. Eforts to pretend that the drating plainly allows a seller to cure despite the buyer’s right to avoid under article 49,47 or to claim that the drating is unclear,48 are not in the end useful because neither claim is plausible given the patent import of the words chosen. We believe it is time to confess the drating error. Doing so allows resort to a workaround proposed in the literature49 and adopted, sensibly and without handwringing, by the case law (as you will see below). he workaround stresses the article 25 deinition of fundamental breach and holds, as explained in the previous paragraph, that there can be no fundamental breach, even if the defect is serious, if a good cure can be efected by the seller. Indeed, many of the cases are about repair in general, without being clear about whether the seller or the buyer will repair the goods. In any case, if the repair is easy enough and can be achieved without unreasonable inconvenience, the breach cannot be fundamental under article 25, and the buyer cannot avoid under article 49. he workaround is not wholly satisfactory as it reads “[s]ubject to article 49” out of article 48. Ordinarily this move in construction of a statute or treaty would not be legitimate. In the case of a drating error that would lead to an absurd result, however, we believe it is justiied. Ater all, the canon against absurd results ought to take precedence over the canon requiring that all words be given meaning. hat the result is absurd can be seen from Professor Honnold’s example: On June 1, the date for delivery speciied in the contract, Seller delivered to Buyer a large and expensive machine. On June 15, when Buyer put the machine into operation, one essential part of the machine did not function with the result that the machine did not operate. Buyer notiied Seller who ofered immediately to replace the defective part. Although the brief period required for making this replacement did not interfere with Buyer’s plans for using the machine, Buyer did not permit Seller to replace the defective part. Claiming that a defect that prevented the machine from operating was a “fundamental breach” under Article 25, Buyer declared that the contract was avoided (Art. 49(1)(a)) and stated that the seller must remove the machine and refund the price (Art. 81).50

47. Honnold, supra note 40, § 296 at 427 (“leaves little room for doubt”) (original Honnold) 48. Honnold, supra note 40, § 296.1 at 428 (“issue expressly (although not clearly) addressed in the opening phrase of Article 48(1)”) (Flechtner addendum) 49. Prominently in Markus Müller-Chen, Article 48, in Schlechtriem & Schwenzer, Commentary on the un Convention on the International Sale of Goods (CISG) (2005) ¶¶ 15–16 at 567–68, and in Schlechtriem & Schwenzer, supra note 41, at 739–40. 50. Honnold, supra note 40, § 184 at 280 (original Honnold).

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We can scarcely imagine a sensible tribunal, and certainly not a practical one, allowing a buyer to win in these circumstances. he facts suggest that the buyer must be attempting to avoid for some other reason—perhaps it is an opportunistic rejection; perhaps the buyer no longer needs the machine; perhaps the buyer regrets investing so much in a single piece of equipment. None of these reasons for avoidance is recognized by the parties’ bargain, the law, or policy. he breach is not fundamental, and the buyer should not be able to avoid the contract. hose willing to resort to legislative history will ind this result bolstered. Apparently the draters struggled to ind a way to express the relation between fundamental breach, avoidance, and cure. hey tried one formulation but were unhappy with it. Led by those favoring the right to cure, they settled on the unfortunate “[s]ubject to article 49” language that is now in the treaty.51 he draters’ intent appears clear enough from the history. Although we do not regard legislative history as a reliable or even entirely legitimate guide to interpretation of statutes or treaties, we are aware that many ind at least some role for it, and for them the legislative history reinforces the result we (and almost everyone else) suggest. he case law accords with this result. A brief excerpt nicely illustrates where the law has come to be.

DESIGNER CLOTHES CASE Oberlandesgericht [OLG] Köln [Appellate Court of Cologne] Oct. 14, 2002 (Ger.) Available at Pace CISG Database: http://cisgw3.law.pace.edu/ cases/021014g1.html (Tobias Koppitz trans.; Chantal Niggemann trans. ed.) (June 19, 2007) [A]voidance of contract requested by the [Buyer] requires a fundamental breach of contract pursuant to Arts. 25, 49(1)(a) CISG and that it is in so far decisive whether or not it is possible for the buyer to otherwise manufacture or sell the goods in regular business dealings, possibly even with a price reduction, without unreasonable expense, despite the deviation of the goods from the contractually agreed quality or despite another defect. In that respect, the buyer has to submit that, as a consequence of the breaches of contract of the seller, [Buyer] was substantially deprived of what it was entitled to expect under the contract. At the examination, under what circumstances—in case of missing explicit contractual agreements—a breach of contract by the seller essentially deprives the buyer of its positive interest, due consideration is also foremost to be had to the tendency of the CISG to restrain the remedy of avoidance of contract in favor of other possible legal remedies, especially reduction of price or compensation for damages (Arts. 50, 45(1)(b) CISG). The remedy of avoidance shall only be available to the seller as the last resort to react to a breach of contract by the other party, which is so fundamental that it essentially deprives it of its positive interest (Cobalt Sulfate Case, German Federal Supreme Court [3 April 1996] NJW [*] 1996, 2364 = MDR [*] 1996, 778; Swiss Federal

51. Honnold, supra note 40, § 184 at 280–81 & n.12 (original Honnold).

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Supreme Court [15 September 2000 (4C.105/2000)], TranspR-IHR [*] 2000, 14; Lurger IHR 2001, 91, 96). Therefore, not only the weight of the defect, but also the preparedness of the seller to cure the defect without unacceptable delay and burden to the buyer is of importance. Even a serious defect is not a fundamental breach of contract if the seller is prepared to replace the goods without unacceptable burden to the buyer (OLG Koblenz [31 January 1997], OLGR 1997, 37; Lurger, id. p. 98; Schlechtriem/Huber, CISG, 3rd ed., § 49 No. 12 et seq.; Staudinger/Magnus, BGB, revision 1999, Art. 49 CISG No. 14 with further references).

As you can see, the Cobalt Sulfate Case has become a leading authority, and German courts are following it. If the defect can easily be remedied, even by the buyer, and a fortiori through a seller’s cure under article 48 that is not unreasonably inconvenient, then the breach is not fundamental. his reasoning is appealing in French interpretations of the CISG as well.52 he following problem raises these issues and reviews a number of others as well.

Problem 8.24 On June 15, a Swiss chocolatier makes a contract for sale of 90,000 boxes of chocolate to Halpert Stands, Inc., which operates kiosks in malls, airports, and similar venues, for $788,800, with delivery in “late September” to Halpert’s New Jersey warehouse, from where the chocolates will be distributed across the country for sale during the holiday season (November and December). he chocolates are to be packaged in fancy boxes in green, red, bright blue, and gold, and are to bear the famous trademark of the Swiss maker. In mid-August, the US stock markets crash and the country is gripped by the worst recession since the Great Depression. On September 15, the boxes arrive at the New Jersey warehouse. hey are perfect except that there are no boxes packaged in blue—instead of being evenly distributed among the four speciied colors (22,500 boxes of each) as required by the contract, the boxes are divided evenly among only three (30,000 boxes of each). Halpert was planning to market the blue boxes for Chanukah buyers. Such buyers might choose gold, but are unlikely, Halpert believes, to buy red or green. Furthermore, because of the recession, Halpert is extremely concerned about selling the very expensive Swiss chocolates at all. Halpert would much rather stock domestic candy that would retail for less than the Swiss candy costs wholesale. Halpert gives notice of the color discrepancy within 24 hours of the arrival of the chocolates. (a) Is there a fundamental breach? See CISG arts. 25, 51. (b) Does the seller have a right to cure? Would it matter if the defective delivery were made on September 30 instead of September 15? Does it matter whether the color discrepancy is a fundamental breach? (c) Does Halpert have the right to avoid the contract?

52. Cour d’appel [CA] [Court of Appeal] Grenoble, Apr. 26, 1995 (Fr.), CLOUT Case No. 152, available at Pace CISG Database: http://cisgw3.law.pace.edu/cases/950426f2.html (Dec. 2, 2005).

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7. Efects of Avoidance Before leaving the subject of avoidance under the CISG, realize (as perhaps you have from the outset) that the word “avoidance” is a bit misleading. Avoiding the contract does not mean that the contract never existed. Primarily what is avoided is the duty to perform (or perform further) the primary duties under the contract, such as delivering goods or paying for them. he efects of avoidance are set out primarily in CISG article 81. Please read it. You will see that the central idea is that parties are relieved of their obligations under the contract, but damages for breach are still due, and the parts of the contract on settlement of disputes (e.g., an arbitration clause, a choice-of-law clause) survive, as do other parts of the contract providing for the consequences of breach and avoidance. As we will discuss below, sometimes parties include liquidated damages or penalty clauses, saying, perhaps, that a party will owe 5 percent of the price if it fails to satisfy a particular obligation. Article 81 states the perhaps obvious rule that this clause will survive avoidance of the contract on account of its breach. Articles 81 to 83 also deal with the problem of restitution. A party who has performed a contract that is avoided may claim restitution. he notion is that the contract is of (for the most part, anyway), so performances should be returned. he seller may say, “If you are avoiding the contract, then you must return to me the goods that I have delivered so far.” he buyer would be bound to do so. See art. 81(2). In that case, of course, the buyer, in addition to its right to damages, would be able to claim restitution for so much of the price that it had paid. See id. hese articles set out a number of rules for how the restitution is to proceed, although they hardly treat all of the potential questions. A number of issues arise, such as where restitution is to be made, transportation and risk of loss of the goods pending restitution, and so on. hey are not unimportant questions, but they are conined to highly speciic scenarios too detailed for discussion here. We will take up some of the larger points of those articles below when we discuss the role of the goods themselves in the remedial scheme.

B. Cancellation under the UCC he preceding discussion of avoidance under the CISG focused, necessarily, on fundamental breach and, to a lesser extent, the Nachrist path to avoidance. Because the basics of the UCC were explained at the outset, you already know that the UCC is to some degree the same and to some degree diferent. Recall that the common law position begins with the historical adoption of the perfect tender rule for sales of goods. Although it has been tempered, as we will explain more carefully shortly, the perfect tender rule still applies as a general rule for sales of goods. It is easy to miss, but it is contained in UCC § 2-601. Read it now; it is short. Do you see the perfect tender rule? Oten it takes a bit of emphasis in the reading for it to become apparent: if either the goods, or even the manner of their delivery, “fail in any respect to conform to the contract” (emphasis added), then the buyer may reject the whole shipment or just the part that fails to conform. Of course a partial rejection must be made in commercial units, and of course a buyer is free to waive the defect and accept the shipment. he main point, however, is that “any” nonconformity allows the buyer to reject the goods, or part of them. his rule is not only the opposite of the fundamental breach rule in general; it particularly contradicts CISG article 51 as to partially conforming deliveries and short deliveries. he

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buyer’s rejection of the goods, which of course requires timely notice, sets up the buyer’s right to cancel the contract. In UCC terminology, goods are rejected, and the contract is cancelled. As usual, the UCC provides a number of intricate rules on how rejection is to be accomplished. We leave their detailed treatment to other books, but one thing to appreciate is that if the buyer fails to make a proper rejection, the buyer is deemed to accept the goods and forever loses the right to reject. What the UCC afords instead is the right, later on (and only in proper circumstances, as when a defect was diicult to discover earlier), to revoke acceptance under §§ 2-607 to -608. Revocation of acceptance, of course, requires notice. See UCC § 2-607(3)(a). It also requires, more signiicantly for the present discussion, something very similar to fundamental breach. A buyer may revoke acceptance only if the “non-conformity substantially impairs” the value to the buyer of the goods as to which acceptance is being revoked. his rule is one of the ways the traditional perfect tender rule was tempered by the adoption of the UCC. In addition, the UCC uses the substantial impairment test for installment contracts. Further, it takes much the same path as CISG article 73, assessing breaches separately as to the installment or installments in question and as to the whole contract. he buyer may reject an installment only if it can show substantial impairment as to that installment. he buyer may reject the whole contract only if it has sufered substantial impairment as to the whole contract. See UCC § 2-612. Not only is this approach like that in article 73; it also meshes well with article 51. It is markedly diferent from the perfect tender rule that applies to single delivery contracts, where any nonconformity allows the buyer to reject the whole or reject the nonconforming part, without regard to the gravity of the breach. Finally, as you know, the cure right aforded by UCC § 2-508 and extended by the courts is a useful tool for sellers to prevent the buyer’s cancellation of the contract. Not only does § 2-601 expressly subject itself to the installment sale rule, § 2-508(2) provides a right to cure even ater the buyer rejects. If the seller then cures, the buyer can no longer cancel because there is now a conforming delivery of the goods by virtue of § 2-508.

Problem 8.25 (a) Reconsider the Swiss chocolate problem (Problem 8.24 above). Assume the parties had agreed in their contract that it would be governed by the UCC. May Halpert reject the entire shipment? (b) Does the seller have a right to cure? Would it matter if the defective delivery were made on September 30 instead of September 15? (c) Does the buyer have the right to cancel the contract?

C. Ending the Contract under French Law and German Law French law and German law, as might be expected from the discussion so far, are closer to the CISG than to the UCC. For deep reasons that are explained more in the next part of the chapter, Continental systems have a more pronounced preference for keeping the contract in place and allowing performance to proceed, even late. his preference gives way, of course, in situations where it no longer makes sense.

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he German law on termination of the contract follows the pattern discussed above with respect to Nachrist notice. his is the key provision:

GERMAN CIVIL CODE (BGB) Bundesministerium der Justiz (Langenscheidt Translation Service, Neil Mussett trans.) © 2012 juris GmbH, Saarbrücken http://www.gesetze-im-internet.de/englisch_bgb/englisch_bgb. html#p0430 Section 323 Revocation for nonperformance or for performance not in conformity with the contract53 (1) If, in the case of a reciprocal contract, the obligor does not render an act of performance which is due, or does not render it in conformity with the contract, then the obligee may revoke the contract, if he has speciied, without result, an additional period for performance or cure. (2) The speciication of a period of time can be dispensed with if 1. the obligor seriously and deinitively refuses performance, 2. the obligor does not render performance by a date speciied in the contract or within a speciic period and the obligee, in the contract, has made the continuation of his interest in performance subject to performance being rendered in good time, or 3. there are special circumstances which, when the interests of both parties are weighed, justify immediate revocation. (3) If the nature of the breach of duty is such that setting a period of time is out of the question, a warning notice [Abmahnung] is given instead. (4) The obligee may revoke the contract before performance is due if it is obvious that the requirements for revocation will be met. (5) If the obligor has performed in part, the obligee may revoke the whole contract only if he has no interest in part performance. If the obligor has not performed in conformity with the contract, the obligee may not revoke the contract if the breach of duty is trivial. (6) Revocation is excluded if the obligee is solely or very predominantly responsible for the circumstance that would entitle him to revoke the contract or if the circumstance for which the obligor is not responsible occurs at a time when the obligee is in default of acceptance.

By emphasizing the Nachrist device we intend to give what we regard as the central concept of German law on termination. here is much more to it. he revision of the obligations articles is built on a structure so divided in foundation and so elaborately constructed 53. Oicial note:  his provision also serves in part to implement Directive 1999/44/EC of the European Parliament and of the Council of 25 May 1999 on certain aspects of the sale of consumer goods and associated guarantees (OJ L 171, p. 12).

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from there as to boggle the minds of most people who are not German lawyers. In the understated words of one of the most learned German scholars, “the rules contained in the BGB were not generally admired for their clarity and ease of operation. On the contrary, it was extremely diicult to comprehend their doctrinal intricacies and to arrive at solutions which were both practicable and logically consistent.”54 he good news is that this was replaced; the bad news is that it was not entirely swept away. It still seems to inluence the German doctrinal approach. As Professor Zimmermann observes, “he new set of rules ater the reform is considerably simpler than the old law, though it is not exactly simple either.”55 We will limit the discussion to the most straightforward points. Under the old law, breaches were classiied according to a confounding scheme. Most of that scheme was mercifully eliminated, but breaches because of “impossibility,” as it was called under the old law, are still treated separately from other breaches. “Impossibility” as a German legal concept is related to impossibility in the ordinary sense, but it is not the same. Roughly speaking, the doctrinal bases for old-form impossibility are set out in new BGB § 275:  performance is excused, or the debtor is allowed to refuse it, when performance is either impossible; or the expense and efort necessary to perform is grossly disproportionate to the obligee’s interest in performance, taking good faith into account; or performance of a personal obligation— unusual perhaps in a sales context—cannot reasonably be required because of an obstacle that has arisen. In these cases, the creditor (who is generally the aggrieved party in these situations, continuing the phraseology from the discussions above) is automatically released from the contract. See BGB § 326. In other cases, the Nachrist procedure is necessary, generally speaking, unless excused by BGB § 323(2), above, or unless it is useless under § 323(3), in which case the warning notice (Abmahnung) is given instead. Except where the aggrieved party is automatically released under § 326, when termination is appropriate and the time is ripe, the termination is accomplished by the giving of notice under BGB § 349 (“Termination is efected by declaration to the other party.”). his is much the same as the CISG, see art. 26 (avoidance requires giving of notice), and much diferent, at least in principle, from French law, which generally requires judicial dissolution56 of a contract. We will state this rule again because those not brought up in the French or Spanish system oten ind it so remarkable as to be scarcely credible: avoiding a contract traditionally requires a lawsuit and a judgment of a court. Common law systems follow this rule only in one instance of which we are aware, and that instance can be explained because of its civil law (more particularly, ecclesiastical law) roots:  even in the United States and England, contracts of marriage require judicial intervention to achieve dissolution. But that is quite another subject. he French approach to contractual dissolution in general is less astonishing if a few principles are kept in mind. First, and most generally, French law is marked by an abhorrence of self-help, rooted in the Revolutionary revulsion to powerful creditors during the ancien régime enforcing their rights against their debtors by force. 54. Zimmermann, supra note 30, at 68. 55. Id. 56. he French term is résolution, which is sometimes translated into English as “resolution” as in “resolution of the contract.” We believe “dissolution” is a better translation; “rescission” would also work.

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Dissolution of a contract extinguishes legal rights, so a court should be involved instead of allowing a creditor, through its sheer power as a creditor, to declare those rights gone. Recall that French law on these matters comes from the (still largely unrevised) Code civil of 1804, which was born of the Revolution. By the time you read this, these Code articles may have been revised, but as we write there is no great change in this respect on the horizon. Second, and more particularly, the aggrieved party (the creditor) is hardly helpless, and if the debtor has not performed its concurrent obligation, then the creditor need not perform. Traditionally this principle has been called by its Latin name, which comes from medieval Roman law: the exceptio non adimpleti contractus (the defense of the unperformed contract). In the case of sales, the Civil Code itself gives the seller the right not to deliver goods for which the buyer fails to pay (or collapses inancially). See C. civ. arts. 1612–1613; see also id. art. 1653 (some protection for the buyer, although not quite the same). he courts have extended the particular rules in the Code into a general principle, sometimes under the Latin rubric and sometimes under the newer French formulation (exception d’inexécution). his exceptio or exception or defense can be asserted in an action if the aggrieved party is sued, but it is not restricted to use in court: it does protect the aggrieved party from having to perform its obligation if the other party has failed to perform its corresponding duty under the contract.57 It is a very limited kind of self-help: the aggrieved party need not perform in fact, but it is not relieved of its duty to perform. If the party in breach comes around and performs, then the aggrieved party must do so too, and in the meantime stand ready. To be relieved of this duty, the contract that created the duty must be dissolved, and dissolution requires a judicial act under article 1184 of the Civil Code.58 he aggrieved party must ile an action en résolution. It is worth reading the Code to understand the force of the commitment, although some of it is lost because English lacks the emphatic negative available in French (the Code uses ne . . . point, sometimes translated as “not at all,” in the second paragraph instead of the simple ne . . . pas).

Code civil (French Civil Code) (our translation) Article 1184 A resolutory condition is always implied in synallagmatic contracts for the case where one of the two parties does not perform its obligation. In that case, the contract is not dissolved by operation of law.59 The party for whom the obligation has not been performed has the choice to compel the other to perform the agreement where that is possible or to ask for dissolution with damages. Dissolution must be requested in court and the defendant may be given an extension [by the court] according to the circumstances.

57. See generally Barry Nicholas, The French Law of Contract 213–16 (2d ed. 1992). 58. Our explanation of the French law of dissolution is based, in general, on Nicholas, supra note 57, at 241–46; see also Bell et al., supra note 34, 357–59. We have tried to ill out the view a bit further and to update it, for which see the further citations inra. [59]. The French words are de plein droit, often translated “as a matter of right.” We believe “by operation of law” is better because it imports the idea of dissolution happening automatically, which is not permitted.

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Why would a party go to the trouble of obtaining judicial dissolution when the exceptio is available? he question is particularly sharp because there is no legal test for when dissolution may be granted by the court; the decision rests in the “sovereign power” (pouvoir souverain) of the trial judge. Moreover, the trial judge under article 1184 may grant the defendant another chance to perform, picturesquely called a délai de grâce. he primary reason a seller would take the trouble to go to court is probably so it can engage in a substitute transaction. he contract must be dissolved before the seller can resell the goods committed to the contract, and the buyer, unless it can use at least double the quantity of the goods for which it has contracted, will not be entirely safe in buying them elsewhere until it is relieved of its duty to buy them from the seller. At this point in the explanation, the French scheme still seems scarcely supportable from an everyday commercial standpoint. Some particulars and exceptions help ill out the picture and suggest that it is not as impractical as it appears (although to common law eyes it is still amazing). When the defendant has completely failed to perform, trial courts grant dissolution as a matter of course—the Code itself provides that a party may ask for dissolution in such cases under articles 1610 and 1654—so there is not too much doubt in such cases about what will happen, although the judge may grant a délai if it seems justiied. When the breach is less than total, the trial judge has discretion; one factor that will be of particular importance under the case law (jurisprudence) is whether the default can be remedied with monetary compensation without calling of the entire contract. he judge will also consider the economic circumstances and the parties’ conduct, with special regard to good faith or bad. An examination of the jurisprudence, then, allows the creditor to proceed to court with an intelligent understanding of its chances. his assessment of a likely judicial outcome is all the more important because of the exceptions to the requirement of judicial dissolution. Sometimes the parties may be able to treat the contract as dissolved without judicial intervention. One such exception, found in Civil Code article 1657, is sometimes helpful to sellers, but it is surprisingly constricted: “With respect to sales of commodities and goods, dissolution takes place by operation of law and without demand, in favor of the seller, ater the time for removal has expired.” So a seller receives automatic dissolution in cases where the buyer has failed to pick up the goods in the period set by the contract. he article does not cover cases of failure to pay the price, nor is there an article in favor of the buyer for when the seller fails to deliver the goods. In such cases, sense would suggest that the seller would be safe to treat the contract as dissolved. Ater all, the Civil Code itself says dissolution is appropriate in such cases. See C. civ. arts. 1610, 1654. he case law has come around to this view, and indeed has gone a bit further, although how far it goes is not yet settled. Where there was an urgent need, the courts found at irst that the aggrieved party could unilaterally dissolve the contract without going to court. In 1998, the Cour de cassation extended this right to other cases where the gravity of the other party’s behavior justiies unilateral dissolution.60 What this means for sales cases is not entirely clear, but in sales, sometimes urgency itself can be shown, as when

60. Civ. (1) 13 Oct. 1998, bull. civ. I no. 300, D 1999.197 note Jamin.

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there is a need for a buyer to cover or for a seller to resell.61 Particularly in an installment sale, the aggrieved party may be able to show that the default is the kind that makes the relationship between the parties intolerable, which the cases recognize as justifying a unilateral dissolution of the contract.62 In any event, a key factor will be the degree of harm done to the aggrieved party by the other party’s default.63 In all of these cases, the aggrieved party may treat the contract as dissolved and engage in a substitute transaction. he party that unilaterally treats the contract as dissolved without the aid of a court, however, does so at its own risk (à ses risques et périls).64 If the other party sues and wins an argument that dissolution was not justiied, then the party who attempted unilateral dissolution will itself be found in breach. he narrow circumstances in which there is automatic dissolution under article 1657 and the sometimes risky nature of unilateral dissolution under the case law just discussed65 magnify the importance of the inal relevant exception to the rule requiring judicial dissolution: the parties are free in their contract to provide for automatic dissolution. his is quite an important exception indeed. Such clauses are common—“[b]usinessmen usually include such a clause and lawyers always do”66—and one can understand why. hey are generally valid but subject to policing by the courts in cases of overreaching or bad faith. To invoke the clause, the aggrieved party must put the other party in default by giving the mise en demeure notice (as discussed earlier in the chapter) unless the contract also dispenses with the mise en demeure requirement. he efects of dissolution, avoidance, or termination are to some degree intuitive and to some degree not. hose that are not are too involved for discussion in a book on international sales in general. Suice it for our purposes to note that all of the terms—avoidance, termination, dissolution, and so on—overstate the efects. Calling of the contract under any of these doctrines in some ways results in the law working to restore the status quo before the contract (so there are requirements of restitution as under the CISG), but the law does not entirely ignore the existence of the contract. Clauses on arbitration, damages, and the like may survive. In addition, there may be claims for contractual damages even though the contract is avoided. his is true even under French law, under which dissolution (résolution) undoes the contract retroactively, and all the more so under German law, see BGB § 325, which under its new law does not.67

61. See Cour d’appel [CA] [Court of Appeal] Nancy, Nov. 20, 2000, JCP E 2002, pan. nº 199 (on urgency). 62. For the formulation (not met in that case), see Cour d’appel [CA] [Court of Appeal] Paris, Nov. 7, 2002, Expertises 2003, 153. 63. For recent case law, see, e.g., Com. June 30, 2009, nº 08-14.944, NP, JCP 2009, chron. 273, nº 24, obs. P. Grosser; RJDA 2009, nº 1038; D. 2010, pan. 234, obs. B. Fauvarque-Cosson. 64. Civ. (1) 13 Oct. 1998, bull. civ. I no. 300, D 1999.197 note Jamin. 65. For the case law, see generally Philippe le Tourneau, Droit de la responsabilité et des contrats ¶ 6031 (2010); see also id. ¶ 6907. For the currently proposed revision of the French Civil Code, which follows the evolution of French case law as explained in the text and provides Code provisions closer to the law in other countries, see Avant-Projet de Réforme du Droit des Obligations arts. 125-128, 132-134, 202 (Oct. 23, 2013). 66. Konrad Zweigert & Hein Kötz, Introduction to Comparative Law 498 (Tony Weir trans., 3d rev. ed. 1998) 67. In a contract involving continual performance where retroactive dissolution would not make sense, French law allows the aggrieved party to ask to resile from the contract (résiliation rather than résolution). German law also has a special doctrine for contracts involving extended performance (Kündigung).

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his overview of the methods for avoiding the contract under French and German law highlights the inclination of civil law systems to have the contract performed, even late or imperfectly, and to ix any problems with monetary compensation while keeping the fundamental obligation to perform intact. his attitude, we suggested at the beginning of this part, is founded on deep philosophical and moral commitments that shape the civil law. hey difer famously from the more commercial outlook of the common law. Nowhere are these diferent attitudes more prominent than in remedies, and the great theoretical diference— and the considerably more limited practical diference—becomes most apparent in the comparative treatment of the right to performance of the contract. Ater posing some questions, we take up those issues.

Question 8.26 When may an aggrieved party terminate a contract under German law? Question 8.27 If the breach is fundamental, is a Nachrist notice necessary for termination under German law? How does this rule compare to the CISG?

Question 8.28 Does German law allow a buyer to use the Nachrist notice to turn a non-fundamental delay into a ground for avoidance as the CISG does? Question 8.29 Given all of the exceptions, is it really true that French law requires judicial action for dissolution of a contract?

Question 8.30 How does “putting in default” (mise en demeure) it with dissolution (résolution)?

Question 8.31 With respect to the issue of avoidance, would you advise your client to choose the UCC, French domestic law, German domestic law, or the CISG? Suppose that some time ago your client commented to you, “All this fancy legal stuf is just that, and expensive at that. If one of these things goes wrong—especially a deal with a foreign partner—all I’m going to do is just wash my hands of the whole thing. Our deals aren’t big enough to be worth suing over.” What are the advantages and disadvantages of each regime?

IV. Performance as a Remedy A. Comparative Law: Such a Great Divide? To consider the availability of a performance remedy in an international sale in which one of the parties is in a civil law jurisdiction and the other in a common law jurisdiction is to take on one of the classic debates in the study of law. Anglo-American contract law has long emphasized the extraordinary nature of speciic performance and the correspondingly ordinary character of damages as a contract remedy. At the same time, even brief comparative work has shown that the civil law favors speciic performance as the ordinary remedy. Much can be made of this systematic diference. A more careful understanding of the laws of the

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diferent systems yields a set of remedial principles that is both more subtle and more uniied than has generally been appreciated. he unity is most apparent by concentrating not on overgeneralized principles—like those in the irst few sentences above—but on the particulars of the limits to those general rules. he limits in the diferent legal systems pull the polar generalities to a practice that is more functional. To understand both the real diferences in approach and the smaller diferences in practice, a certain level of detail is necessary, although this will hardly be an exhaustive treatment. It will be simplest to begin with the common law and the UCC.

1. Domestic Law in the United States Understanding the Anglo-American approach to performance remedies requires a brief historical note. We will baldly simplify, but the cartoon version tells the necessary story. he courts of common law were able to award only money damages. hey did not have the power or ability to enter personal orders against a defendant; they could not punish him for disobedience. hey could issue only an adjudication, for example, that Ralph owes a certain amount of money to Hugo. he judgment of the court was not an order that Ralph pay. If he did not, then the sherif might go and seize some of Ralph’s goods and sell them until enough was raised to pay Hugo, but Ralph could go on his merry way (although ater the sherif ’s sale he may have been a little less merry). A plaintif who wanted something other than money could not get relief from a common law court. Eventually, he could go to the chancellor, a powerful igure in medieval England who had authority to issue orders against persons and also had men who could seize the person of any disobedient defendant and put him in a suitable dungeon until he did what he was ordered to do. he chancellor, however, had many duties in running the kingdom, and he would only grant this sort of aid if it was necessary and if the plaintif was deserving. Accordingly, the plaintif who wanted an order that the defendant perform the contract would have to show the chancellor that he (the plaintif ) had “no adequate remedy at law” from the common law courts, that he would sufer “irreparable harm” without the order because money could not recompense him for his injury, that he was a good and deserving person and thus had “clean hands,” and that the order would be consistent with the “public interest” of the kingdom. hese equitable showings, many of which are closely related, are further subjected to the discretionary judgment of the chancellor as to matters related to fairness and practicality. he chancellor will have to decide whether the balance of the equities favor the plaintif, and will further be concerned that his order can be enforced without an undue administrative burden for him or his court. (His court was called the Court of Chancery, which was a “court of equity,” which in turn gives its name to equitable remedies like speciic performance of a contract.) his history has indelibly marked contractual remedies in the United States. All of the equitable showings are still necessary, perhaps surprisingly, some few centuries ater the conclusion of the Middle Ages, even though in most places in the United States there are no longer separate courts of law and courts of equity. A plaintif who wants to force a defendant to perform a contract, including a contract for sale, must make the equitable showings. A litigant is not entitled to speciic enforcement of its contract unless it can make these showings,

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which is why speciic performance is oten called an extraordinary remedy. Perhaps this result is justiied because individual defendants are still subject to imprisonment if they disobey court orders. How extraordinary the remedy is, however, can be overstated. Leaving aside contracts for the sale of land (because they are not the subject of this book), in which speciic performance is granted “as a matter of course,”68 the performance remedy has always been available for unique goods, like heirlooms or works of art, and now even more readily. Even if the goods are not unique, a plaintif may obtain speciic performance if obtaining substitute goods will be too diicult. Alternatively, the plaintif may obtain speciic performance even for goods that are widely available in an output or requirements contract whose disruption would raise too much uncertainty about the plaintif ’s uninterrupted supply chain. See generally UCC §2-716 & cmts. 1–3. Eastern Air Lines v. Gulf Oil Corp., included in Chapter 3, is such a case. Similarly, a seller who sues to be paid, rather than simply for damages, must also be recognized to be asking for speciic performance, and the law has nominally treated such plaintifs in the same way as others seeking speciic performance. his is how the rule is usually stated: such relief is unavailable, except in certain circumstances. Yet in most of the cases where a seller would actually want such relief (called an action for the price), it is available. If the buyer has accepted the goods, then of course the seller is entitled to the price, and in such a case, the performance remedy is identical to the damages remedy.69 Even if the buyer has not accepted the goods, the seller may recover the price if the goods are destroyed ater the risk of their loss passed to the buyer. If the buyer has not accepted the goods, and if the goods remain undamaged, the seller may still collect the price from the buyer if the seller cannot sell the goods to someone else. See UCC § 2-709.70 Once these details are known, then, one might state the rule as follows: the seller has a right to speciic performance in general, except when the seller still has the goods and can resell, and thus mitigate damages, with reasonable ease. his is the opposite of the way the rule is usually phrased, but both phrasings come down to the same thing.

68. See, e.g., Loveless v. Diehl, 364 S.W.2d 317, 320 (Ark. 1963). 69. See Arbitration Court of the ICC, Feb. 1997, Arbitral Award No. 8716, ICC International Court of Arbitration Bulletin, vol. 11, No. 2, at 61 (Fall 2000). 70. he text of the provision indicates that a few technical qualiications must be made. Under § 2-709(1)(b), the seller must have taken the necessary steps to identify the goods to the contract. his presents no real obstacle, however, because the seller is free to identify the goods as necessary, even ater the buyer’s breach. See §§ 2-501, 2-704(1). Also, under 2-709(1)(a), there is a time limit to the seller’s action for the price. If the risk of loss has passed to the buyer but the buyer has not accepted the goods, they will generally still be in the hands of the seller. he loss of the goods will be the buyer’s loss, and the buyer must pay the price for them, at least for a while. he “commercially reasonable time” limit on this right to the price refers to a situation, presumably not terribly common, where the risk has passed to the buyer and the seller holds onto the goods beyond the time in which the seller could reasonably have resold them to someone else. In such a situation, it would appear that the seller has decided to keep the goods for itself—why else would the seller be holding them so long, without undertaking reasonable mitigation?—so a loss at that point will be the seller’s loss. In other words, under this rather obscure epicycle of the usual rule, the seller starts of with the goods and thus their risk of loss, sells them to the buyer, and at some point their risk passes to the buyer, then the buyer breaches, then the seller holds onto the goods for a period longer than reasonably required to sell them to someone else, and then the goods are lost. In that situation, the seller will not be able to recover the price.

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2. he Performance Remedy in French Law he civil law, as noted above, starts out at the other end from the common law. Its basic formulation is that an aggrieved party is entitled to demand performance of a contract, including a contract of sale, and is entitled to judicial help, if necessary, in obtaining it from the other party. Pacta sunt servanda—promises must be kept—is the hoary maxim, and judicial help is available if the defendant does not on his own keep the promise made. Performance is not an extraordinary remedy. It is the ordinary remedy. French law is clearest on this result with respect to contracts for sale. (he result is the same for contracts generally, but getting to that result took quite a lot of logical reconstruction and judicial work. hat story need not detain us since our subject is sales of goods. We simply note that personal services contracts, which are a rare concern for international sales of goods, are not speciically enforceable, but other contracts generally are.) A contract for sale is a typical contract “to give” (donner) something, and the Code civil subjects donner obligations to the general rule under which speciic performance is the ordinary remedy.71 A lawyer trained in the civil law will see the performance remedy as a natural efect of the obligation itself, as can be seen most clearly in contracts of sale: any obligation to deliver (including a sale) is complete under French law merely by the agreement of the contracting parties. he agreement itself makes the creditor the owner as of the moment that delivery should have been accomplished. See C. civ. art. 1138. his situation is probably most typical in a sale, and there is a speciic provision that reiterates the general rule to this efect and that emphasizes that the same result obtains not only in the absence of actual delivery but even if the price has not been paid. See C. civ. art. 1583; see also id. art. 1582. In a dispute between the buyer and the seller, therefore, whatever has been sold is the buyer’s property at the designated time. he buyer is the owner; the seller is not. he buyer should therefore be able to recover the goods from the seller, as the goods belong to the buyer.72 he same rule applies (and causes considerable confusion, although it need not take our time) not just in contracts of sale but also in contracts to sell. See C. civ. art. 1589. he efect of this thinking is that where the sale is complete and unconditional, and the time for delivery has passed, the buyer is the owner of something in the seller’s possession.

71. French law derives this result from reading together C. civ. arts. 1126 (dividing obligations into donner and faire or ne pas faire) and 1142 (taking faire and ne pas faire obligations out of the general rule, although as mentioned in the text, the codal rule was eventually reversed in the doctrine and jurisprudence). Note that some of the leading French scholarship on this subject is now available in French-English facing texts in he Primacy of Execution in Kind/La primauté de l’exécution en nature, 2012 Revue de droit Henri Capitant no. 3. 72. his reasoning is not conined to the civil law. In the common law, many older contracts cases in which the buyer seeks the goods themselves are not for speciic performance as such but state the cause of action for replevin. In a replevin action, the plaintif seeks to vindicate its superior right to possession of goods held by the defendant. he plaintif-buyer’s theory in such a case was that title to the goods (i.e., ownership of the goods) had passed to the buyer, and that a court should adjudge the plaintif entitled to possession of them on grounds of his ownership. A sherif or similar oicial could enforce such an order by seizing the goods and handing them over to the plaintif. One of the most famous cases in US private law is such a case, beginning, “Replevin for a cow.” See Sherwood v. Walker, 33 N.W. 919, 919 (Mich. 1887), distinguished by Nester v. Michigan Land & Iron Co., 37 N.W. 278, 280 (Mich. 1888), and holding limited by Lenawee County Bd. of Health v. Messerly, 331 N.W.2d 203 (Mich. 1982). As the courts in contracts cases came to determine replevin actions based on the same standard as speciic performance, see, e.g., Scholl v. Hartzell, 20 Pa. D. & C.3d 304 (Penn. Ct. Common Pleas 1981), this theory of recovery has largely been disused in this context. he UCC treats them as nearly coterminous for purposes of sales of goods. See UCC § 2-716(3). his is part of the efort of the UCC to suppress reasoning based on the timing of passage of title. See UCC § 2-401.

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he buyer or other transferee is perfectly well justiied in obtaining the aid of the civil authorities to recover the improperly detained property. he aggrieved buyer has an appropriate cause of action to have goods taken from the seller (by saisie-revendication).73 hus it may be said that the speciic performance remedy is nothing more than a natural efect of the obligation, really an aspect of the obligation itself. French law uses the astreinte, a system of monetary penalties, to enforce orders for performance. If the defendant fails to comply, the court may assess a ine. If necessary, these ines can escalate. For some time the astreinte was plagued by the question whether it had to be linked to the amount of damages being sufered by the plaintif. If so, practical problems could ensue: aside from a feeling of duty to comply with a judicial order, why would a defendant comply if the cost of noncompliance was capped at damages? In many cases, the damages would be unlikely to put the defendant in a signiicantly worse position than performance would do. Doubts on that issue have been settled now, both by judicial decision and by positive legislation. he amount of the astreinte need not be related to the amount of damages and can be set in an amount that is calculated to achieve the defendant’s compliance with the court order.74 One may well wonder whether this system is signiicantly diferent from that in the United States. Although imprisonment for contempt of court is possible for individual defendants, it is thought to be rare, especially in contracts or commercial cases.75 Moreover, corporate defendants are not susceptible of imprisonment (although their agents may be), and ines are the typical sanction for contempt by corporations and are therefore the primary tool to achieve compliance when the defendant is not an individual.76 On the other hand, anecdotal evidence suggests that even in cases where a performance order is issued, enforcement is, at best, grudging in the French system. he Revolutionary ideals that undergird French law and that are a part of French culture are hardly consistent with forced execution of a contract. It is not clear that French law as we write would typically decree speciic performance in a case where it made no sense, and if the revision of the French Civil Code as currently proposed is enacted, this result will become certain by a bar on the remedy where the “cost is manifestly unreasonable.” Avant-Projet de Réforme du Droit des Obligations art. 129 (Oct. 23, 2013). More important, the number of cases in which such an order will be sought in the irst place, much less given, is probably small. We will return to that point ater giving the basics of our other civil law example, German law.

3. he Performance Remedy under German Law German law in this respect,77 generally speaking, is similar to French law. Both adhere to the civil law precept in favor of the performance remedy, which is thought to be an “efect” of the obligation. (“he efect of an obligation is that the creditor is entitled to claim performance 73. See generally Nicholas, supra note 57, at 211, 216–20. 74. See decisions of the Cour de cassation [Cass.] [Supreme Court for Judicial Matters], 20.10.1959, S.1959.225, D.1959.537; loi of 5 July 1972, No. 72-626. See Nicholas, supra note 57, at 223–24 & nn. 61–62. 75. See Steven Walt, For Speciic Performance under the United Nations Sales Convention, 26 Tex. Int’l L.J. 211, 233–34 (1991). 76. See generally Dan B. Dobbs, Law of Remedies § 2.8 (2d ed. 1994). 77. Our summary is based primarily on Zimmermann, supra note 30, at 43–49.

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from the debtor.”), BGB § 241(1), as translated in Zimmermann, supra note 30, at 43. his remains true ater the overhaul of the German obligations articles that became efective in 2002. As with US law, in which we saw that the supposedly extraordinary character of speciic performance was not so extraordinary once the rules and tests were understood, the German preference for speciic performance is shaped importantly by the limits on that remedy.

GERMAN CIVIL CODE (BGB) Bundesministerium der Justiz (Langenscheidt Translation Service, Neil Mussett trans.) © 2012 juris GmbH, Saarbrücken http://www.gesetze-im-internet.de/englisch_bgb/englisch_bgb. html#p0430 Section 275 Exclusion of the duty of performance (1) A claim for performance is excluded to the extent that performance is impossible for the obligor or for any other person. (2) The obligor may refuse performance to the extent that performance requires expense and effort which, taking into account the subject matter of the obligation and the requirements of good faith, is grossly disproportionate to the interest in performance of the obligee. When it is determined what efforts may reasonably be required of the obligor, it must also be taken into account whether he is responsible for the obstacle to performance. (3) In addition, the obligor may refuse performance if he is to render the performance in person and, when the obstacle to the performance of the obligor is weighed against the interest of the obligee in performance, performance cannot be reasonably required of the obligor. ...

hese ideas require some unpacking. he proposition in § 275(1) is ancient78 and perhaps obvious: the law will not require a performance that is actually impossible. he more important point is that under German law before the obligations revision, much doctrine was subsumed under the rubric of impossibility, which was said (with some reason) to be a complex and artiicial category, as mentioned above. he new § 275(1) is meant to encompass different kinds of impossibility from the old law: subjective or objective, initial or subsequent, total or partial, with fault or without. And at this point the reader comes to understand the many issues that can arise on a claim for performance that is met with a defense of impossibility under the old German law. Not all of them are covered by § 275(1). he law also takes into account the division under the old law between “practical impossibility” and “economic impossibility,” which is encompassed by § 275(2). In these terms, the concept sounds similar to common law impossibility or impracticability doctrine,79 but a reading of § 275(2) shows

78. Impossibilium nulla est obligatio, as the Romans had it. Dig. 50.17.185 (Celsus Digestorum 8). 79. See generally UCC §§ 2-613–2-616.

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that the ideas are not the same. At bottom, § 275(2) appears to be a good faith and reasonableness limit on the performance remedy. Instead of asking whether the defendant would ind the performance impracticable because of a change of circumstances (an issue treated under other rules),80 it asks about the proportion of the cost to the defendant in relation to the beneit to the plaintif, keeping in mind such matters that go to good faith and reasonableness as the subject of the contract (how important is it?) and whether the impediment to performance is a problem of the defendant’s own making. he last sentence shows the concern with personal liberty, although it is of particular interest in its frank balancing test. Anglo-American law does not share this candor, expressing a great concern for personal liberty and an absolute bar on a performance order while putting this liberty to great strain through the negative injunction. he new German law, on the other hand, states a simple reasonableness test, taking into account the plaintif ’s interest and the impediment to the defendant’s performance. he defendant, even if required by the contract to perform in person, may be required to do so as long as an order for performance is reasonable. hus, although subject to a reasonableness limit that takes into account concerns about personal liberty, the attitude of German law is forthrightly unshrinking. hese should not oten be issues in international sales cases, so we pretermit further discussion. In the end, then, German law and French law take the attitude for which they are known. here is a moral and societal value in the performance of a promise, and the law will order that performance except in certain situations. he law in the United States, like the law in England, takes the attitude for which it is known: as long as damages are an adequate remedy, a performance remedy is not available. he best explanation for the common law choice is probably historical. hat does not mean that it is not the better rule. Aside from the historical explanation, there are economic and commercial justiications, as well as high-lown (and given the state of Anglo-American law, we think rather overblown) rhetoric about protection of personal liberty. hese questions will be addressed in the next section, but irst we discuss whether the common law and civil law rules are so diferent. Consider the rules stated symbolically. Under the civil law, the plaintif is entitled to X [a performance remedy] unless A  or B or C [various exceptions]. Under the common law, plaintif is not entitled to X [a performance remedy] unless D or E or F [various exceptions, primarily that damages are inadequate]. he symbolic representation underscores two points. First, either rule could be put the other way. he common law rule, for example, could be stated: a plaintif is entitled to speciic performance unless damages are an adequate remedy. he same is true of the civil law rule. his brings us to the second point. How the rule is stated could be about one of two facts: (1) the starting position, or basic attitude, of the legal system; or (2) how big the exceptions are compared to the general rule. As to (2), the usual notion is that the general rule should be larger (presumably, apply in more cases) than the exceptions, which should be small relative to the general rule. Whether this is true is a practical question, to which we turn now. We believe the common law and civil law rules, when put into practice, are much the same.

80. See BGB § 313.

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B. Functional, Practical, and Strategic Aspects of the Performance Remedy 1. he Reality of a Damages Preference across Legal Systems In the world of actual transactions, there is good reason to doubt that parties will prefer speciic performance except in cases where it is actually necessary (a situation we will call “actual necessity”). he available empirical evidence shows that even in those systems with a strong theoretical commitment to the performance remedy, the parties strongly prefer damages. In their important study, Henrik Lando and Caspar Rose show that speciic performance is a rare remedy in France and Germany. Denmark has abandoned the remedy. hey attribute this fact to the cost of enforcing a speciic performance order.81 his inding, which accords with the other available authorities,82 will not come as a surprise to many practicing lawyers because it simply relects the practical problems with speciic performance. Considering the facts of a breach of contract should bring to mind the reasons that a plaintif will generally avoid a remedy requiring performance. he defendant has already breached the contract, and has thereby shown itself untrustworthy in the irst instance. In all likelihood, the plaintif has already tried various nonjudicial paths to get the defendant to perform before bringing suit, which we will assume (with ample reason) is the last resort. In this situation, the defendant will have proved not just untrustworthy but also unwilling, and possibly recalcitrant, especially in the plaintif ’s eyes. And this is the better of the two typical scenarios; the other typical scenario involves a defendant who would be perfectly happy to perform if it could but it actually cannot. Even assuming the “better” situation, in a typical transaction would we expect a plaintif to go to court and ask for a judicial order that the untrustworthy, unwilling, and recalcitrant defendant perform? Such a course seems unlikely because it is unattractive. he plaintif remains at the mercy of the defendant, even if the defendant is eventually powerfully prodded. Until it wins a court order, the plaintif has nothing, aside from the settlement value of the lawsuit. On the other hand, if the plaintif contracts for a substitute transaction—covering by buying similar goods elsewhere, or reselling to another buyer—the plaintif at least has whatever it was that it needed or wanted in the irst place, when it made the irst contract. he plaintif may or may not be out any extra cash or merchandise, depending on whether it has prepaid the defendant or delivered the goods and also on what the price is in the substitute transaction. But if the plaintif really wants whatever it had contracted for, it will likely prefer to engage a party who is not demonstrably untrustworthy, unwilling, and recalcitrant. his preference for a substitute transaction will be strengthened in those cases, probably not infrequent, where the reason the defendant has not performed is that it cannot.

81. Henrik Lando & Caspar Rose, On the Enforcement of Speciic Performance in Civil Law Countries, 24 Int’l Rev. L. & Econ. 473 (2004). 82. See Alan Schwartz, he Myth hat Promisees Prefer Supracompensatory Remedies: An Analysis of Contracting for Damage Measures, 100 Yale L.J. 369, 389 (1990); Alan Schwartz, he Case for Speciic Performance, 89 Yale L.J. 271, 277 n.24 (1979); John P. Dawson, Speciic Performance in France and Germany, 57 Mich. L. Rev. 495 (1959); Nicholas, supra note 57, at 220.

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he most signiicant exception is those cases where the plaintif cannot obtain an adequate substitute transaction. In those cases, speciic performance is an actual necessity. Also in those cases, the plaintif will be able to show that he has no adequate remedy at law and will be irreparably harmed in the absence of speciic performance. his reality explains why courts rarely have reason to dismiss speciic performance demands on the basis of the irreparable injury rule.83 In the end, we may observe that plaintifs for practical reasons will generally prefer a substitute transaction over speciic performance. hese preferences are dictated by commercial realities, not by the available law. Even more important, in those cases in which plaintifs will want a performance remedy, it is available under the UCC and common law as well as under the civil law. hese facts are observable to those who have studied the matter empirically.84 here may be an exception in cases of eicient breach, and in those cases the governing law may make a diference. hey are discussed next.

2. Eicient Breach and Its Relation to Performance Remedies An eicient breach of contract envisions the following scenario: if the cost to the defendant to perform is much greater than the beneit to the plaintif of the performance, then the defendant should breach and pay expectancy damages to the plaintif. In such a situation, breach should arguably be encouraged where the plaintif will be no worse of—because it receives full compensation for breach—and defendant is better of, having avoided the even higher costs of performance. Further, an order for speciic performance will not result in performance of the contract, assuming the plaintif and defendant are rational proit maximizers. Because the beneit to the plaintif is lower than the defendant’s cost to perform, ater the order is issued by the court, the defendant will ofer the plaintif a settlement (to discharge the contract) that is greater than the beneit the plaintif would receive from performance but less than the defendant would have to pay to perform. he plaintif will either accept this settlement or the parties will agree to another amount between the value of the beneit to the plaintif and the cost to the defendant to perform. Ater all, this makes the plaintif better of than performance would, and it is less costly to the defendant than performance would be. Performance will not occur; the speciic performance order simply raises the settlement value of the lawsuit. To understand irmly how this works concretely, consider the suit if no performance remedy is available. Suppose that possible damages are $10 million, and that such an amount would truly compensate the plaintif for its entire loss but no more. here is some chance, of course, that the plaintif will fail to prove its breach or will fail to prove all of the damages. he plaintif will accept $10 million for settlement right now, and in fact, will accept a bit less. he defendant, facing exposure of up to $10 million, will probably pay something more than zero to be free of the suit. In the worst case for the defendant, however,

83. See Schwartz, he Myth hat Promisees Prefer Supracompensatory Remedies at 388–89 (construing Douglas Laycock, he Death of the Irreparable Injury Rule, 103 Harv. L. Rev. 688 (1990)). 84. See Lando & Rose. See also Walt at nn. 37, 76, 107–09 & accompanying text. CISG Digest (2012) on article 46, ¶ 4 (“right to require performance has not oten been invoked in reported decisions. . . . aggrieved parties have generally preferred to pursue other remedies—in particular the right to claim damages”). Even cases reciting the availability of performance feature parties who instead pursue their rights to damages or avoidance. See id. ¶ 7 n.6.

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it will have to pay no more than $10 million and so will settle only for something less than that amount. So settlement value is something between zero and $10 million. Now suppose that the plaintif has a right to require performance, and if necessary, to have a court and law enforcement oicials coerce that performance. Suppose further that performance in this case would cost the defendant $15 million to achieve. he settlement value of the lawsuit has increased, assuming everything else (e.g., the plaintif ’s and defendant’s views of their chances of success) stays the same, because the defendant’s exposure has increased. Although this is a simpliied scenario compared to the real world, the addition of less ideal factors, we believe, will tend to increase this efect. Uncertainty always pervades legal disputes; it goes up as they become more complex, including more international. he same is true of attorneys’ fees and uncompensable aggravation and other damage that probably cannot be proved. Depending on further facts, the settlement may well be something over $10 million (the plaintif will be very happy because it will be better of than it would have been under the contract) and less than $15 million (which is defendant’s worst case). his result will give the plaintif an amount greater than the damage it has sufered. If the case reaches the point that an order for performance is entered against the defendant, the case will certainly settle between $10 million and $15 million, and the performance will not occur. Plaintif will do better with $10,000,001 than with performance, and defendant will be better paying up to $14,999,999 compared to how it would fare if it performed. Everyone will do better without performance. his is why breach of this contract is called an eicient breach. It does not mean the defendant is relieved of its duty. It means just the opposite: the defendant still owes its duty but should not perform it. Instead, the defendant should breach and pay the plaintif its damages. Everyone will be better of that way. he possibility of eicient breach—and the policy of encouraging it—is one of the usual justiications for the common law rule against speciic performance. Eicient breach ought to be encouraged, the reasoning goes. Both parties are better of without performance. No one is worse of. hat means all of society is better of. he net wealth of society goes up if the contract is not performed. his result is what the law should encourage. Others, however, have identiied problems with this reasoning, particularly with respect to sales contracts. Oten the reason one party wants to breach is because it has found someone else who will pay more. If that is the case, however, should not the buyer be allowed to obtain the goods, as agreed in the contract, and then itself sell the goods to the party who has turned up on the scene willing to pay more for them?85 Perhaps. Untangling all of the economics involved in eicient breach is a diicult matter and remains controverted in the legal and economics literature. here is also more than a little doubt expressed about whether eicient breaches occur ever, or at least enough to be considered for policy- and lawmaking purposes, once all of the costs are taken into account. We thankfully need not untie this Gordian knot. What we need to observe is that there will be times that a plaintif will prefer a performance remedy because it will give the plaintif more money than it would otherwise get. hat makes the CISG more attractive to such a plaintif. Note, however, that it does not 85. Consider Walt at 234–37.

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necessarily make the CISG more attractive to a contracting party unless it has good reason to think it is more likely to wind up being a plaintif than a defendant. In general, parties should not prefer supercompensatory remedies. hey make the contract needlessly expensive. How much would you demand as a price if you knew that on breach you would have to pay the plaintif $1 million more than the plaintif ’s actual damages? How oten do you think your buyer would be willing to pay that premium in order to get such a supercompensatory remedy? Not very oten, is the answer.86

Problem 8.32 Buyer in New York and Seller in Quebec have an installment contract for the sale of many millions of tons of coal for $40 a ton. Seller’s coal costs $20 a ton to produce. he contract is performed without any problem for several installments. hen, because of a major shit in market prices for coal, Buyer can obtain coal from another source for $10 a ton. Buyer repudiates the contract. Assume that a court in Quebec applying Quebecois domestic law (which is similar to French law) would enter an order for speciic performance. A court in New York applying the New York UCC would not. Answer the following questions assuming that the CISG has been excluded from the contract. (a) If suit is iled in Quebec and the court applies Quebecois law, will performance occur? What is the settlement value of the suit? (b) What if suit were iled in New York and the New York UCC applied?

C. Comparative Conclusions on the Performance Remedy Where this leaves us is with a practical near-uniication of case results under common law and civil law. Before the discussion of eicient breach, we saw that plaintifs will generally prefer a monetary remedy so they can engage in a substitute transaction instead of being stuck with a demonstrably unsatisfactory contracting partner. In the exceptional cases, in which the plaintif truly needs the contracted performance from its original partner, the plaintif is equally entitled to that relief under common law and civil law systems. he only possible exception involves cases of eicient breach, whose very existence is debated, and which in any event do not occur oten enough to have generated very many real cases that present the issues squarely. Eicient breach does, however, present the theoretical questions nicely. hey are ably addressed in an inluential article, Ronald J. Scalise Jr., Why No “Eicient Breach” in the Civil Law?: A Comparative Assessment of the Doctrine of Eicient Breach of Contract, 55 Am. J. Comp. L. 721 (2007). he draters of the CISG were well aware of this issue, and they faced two facts. First, they knew the civil law and common law systems were diametrically opposed in attitude and commitment. Second, they knew the practical diference was small. heir solution, as usual, was a compromise. his one appears happier than most.

86. See Schwartz, he Myth hat Promisees Prefer Supracompensatory Remedies.

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D. Performance Remedies under the CISG he CISG chose the civil law approach with respect to performance remedies. To common law eyes, the choice may not be apparent immediately because the phrasing seems innocuous. Read articles 46 and 62. A civil law reader will think, “Of course.” A common law reader may skim easily through before focusing on the right to actual “performance.” But it is there. he buyer can have a court order the seller to hand over the goods, and a seller can have a court order the buyer to pay. And more. he CISG gives the buyer the right to require the seller to cure (e.g., repair the goods), which is just another aspect of giving the buyer the right in article 46 to demand performance, whereas the UCC sees cure only as a right of the seller, who may thus prevent the buyer from obtaining an excessive recovery, as discussed above. At this point, the common law reader will be well and truly dismayed. hese articles contain none of the detailed limits stated in the UCC.87 here are, however, a number of qualiications, some very much in line with doctrines covered above and one a result of the compromise. Aside from the obvious points that a performance remedy is available only when the plaintif has given due notice and has not resorted to an inconsistent remedy, the buyer may demand “substitute goods” only if there has been a fundamental breach. See CISG art. 46(2). As this provision applies only to substitute goods, meaning a delivery has already been made so one set of goods will be replacing another set, the idea was that performance would make sense only if the breach were serious. Particularly in an international transaction, removing the nonconforming goods and delivering new ones could involve unduly high transportation costs if the nonconformity were only minor. his rule also prevents an eicient breach sort of scenario where a plaintif-buyer demands a performance that will be very expensive for the defendant-seller but have relatively little beneit for the plaintif-buyer—a situation that would suggest that plaintif was engaged in strategic and illegitimate behavior to force an unduly high settlement from the defendant. In addition, a buyer who demands substitute goods must be able to give back the nonconforming goods that it is rejecting, unless its inability to do so is not its fault. See CISG article 82, discussed a bit more below. Like fundamental breach, the restitution requirement is the same with respect to the performance remedy as in the avoidance remedy. Similarly, a buyer is entitled to demand repair as another aspect of the performance remedy. Demanding that goods be repaired is a way of obtaining actual performance of the contract. Again, however, repair is an available remedy only as long as it is not “unreasonable having regard to all the circumstances.” CISG art. 46(3). A fundamental breach is not required, but certainly a tribunal would take costs into account when deciding whether repair was reasonable. here are also provisions that may indirectly qualify the right to conforming performance in articles 85 (aggrieved seller’s duty to preserve goods in its possession), 86 (same for aggrieved buyer), and 88 (sale of goods subject to preservation duty). Honnold, supra note 40, § 193 at 292. he most salient limitation on speciic performance is in article 28, which you should now read. It is evidence of compromise between the systems and forms an interesting

87. See UCC §§ 2-709, 2-716.

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structure for comparative study. For the practical and functional reasons discussed above, however, it has had little impact. he following excerpt comes from the Magellan case, one of the few cases to discuss article 28. Review the facts earlier in the chapter and then note how the court interprets the article. Its reasoning is not unique to courts in the United States. To similar efect, but with respect to Swiss law instead of the UCC, is Obergericht des Kantons Bern, Dec. 1, 2004, CISG-online No. 1192, available at http://www.globalsaleslaw.org/content/api/cisg/display.cfm?test=1192

Magellan International Corp. v. Salzgitter Handel GmbH United States District Court for the Northern District of Illinois, 1999 76 F. Supp. 2d 919 shaDur, Senior District Judge. ...

Count II: Speciic Performance or Replevin Convention Art. 46(1) provides that a buyer may require the seller to perform its obligations unless the buyer has resorted to a remedy inconsistent with that requirement. As such, that provision would appear to make speciic performance routinely available under the Convention. But Convention Art. 28 conditions the availability of speciic performance:88 [the court quotes article 28]. Simply put, that looks to the availability of such relief under the UCC. And in pleading terms, any complaint adequate to provide notice under the UCC is equally suficient under the Convention. Under UCC § 2–716(1) a court may decree speciic performance “where the goods are unique or in other proper circumstances.”89 That provision’s Oficial Commentary instructs that inability to cover should be considered “strong evidence” of “other proper circumstances.” UCC § 2–716 was designed to liberalize the common law, which rarely allowed speciic performance. Basically courts now determine whether goods are replaceable as a practical matter—for example, whether it would be dificult to obtain similar goods on the open market. Given the centrality of the replaceability issue in determining the availability of speciic relief under the UCC, a pleader need allege only the dificulty of cover to state a claim under that section. Magellan has done that.

Question 8.33 Does the Magellan court hold that speciic performance is available in an international sale only when it is available under the UCC because of CISG article 28?

[88]. See generally Steven Walt, For Speciic Performance Under the United Nations Sales Convention, 26 Tex. Int’l L.J. 211 (1991), which takes the position that given the Convention’s documentary history and given domestic case law, speciic performance should be routinely available under the Convention. [89]. Because the Convention does not have a replevin provision similar to UCC § 2–716(3), Convention Art. 28 renders such relief unavailable under Complaint Count II.

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Problem 8.34 Buyer and Seller have a contract for the production and delivery of 30,000 metric tons of aluminum ingots per year for 15 years. Buyer is located in Argentina. Seller is located in Russia, which at the relevant time is in a stable but not entirely settled condition because of political and legal upheavals. Ater ive years of satisfactory performance under the contract, Seller is reorganized at the impetus of the Russian government. An internal investigation of the Seller is ongoing, and Seller stops delivering to Buyer. Buyer commences arbitration in Switzerland, as provided in the contract. hat proceeding has now been going on for two years. May Buyer obtain speciic performance?

Problem 8.35 You may recall Problem 8.11.d. he seller delivers frozen meat that is more fatty and more moist than speciied in the contract. he buyer can sell it for only 72.5 percent of the value of conforming frozen meat. he buyer demands substitute goods. Must the seller comply?

Problem 8.36 (a) Buyer in the United States orders 30 new espresso and cappuccino machines from seller for its chain of restaurants for $6750 each. he seller is in Italy and sells many machines to the US market through its website, but it has no personnel in the United States. When the buyer installs the irst machine in its lagship restaurant, it immediately loses power and stops working. he restaurant engineer takes a look and determines that the fuse with which it is itted is made for use in Continental Europe, and another fuse must be substituted. He goes to the hardware store and buys the fuse, which costs $3.75. When the fuse is replaced, the machine works ine. May the buyer demand substitute goods? (b) May the buyer require the seller to repair the remaining 29 machines? Repairing all of the machines would probably take about an hour, in addition to the cost of the fuses.

Problem 8.37 he buyer, a ine papermaker in the United States, obtains rag from the seller in Uzbekistan. he rag is supposed to be 100 percent cotton, but the rag that arrives is less than half cotton. he buyer has no use for it, and there is no market for it in the United States. he buyer promptly gives notice under article 39 and demands substitute goods. he buyer stores the nonconforming rag in the warehouse area of its plant. he night ater sending the notice, the plant burns to the ground because one of buyer’s employees negligently failed to follow the procedure for shutting down the plant at night, and a piece of manufacturing equipment overheated. he rag is destroyed in the ire. Does the buyer have a right to substitute goods? If not, what can the buyer do? See CISG art. 82.

Problem 8.38 he City of Ledet, New  York, is a small industrial suburb about 45 minutes from Manhattan. Its industry has been dying, and the city government has obtained a multi-year grant from the state and federal governments to develop an arts community. Factory lots with magniicent city views are plentiful and cheap, perfect for artists’ homes and studios. Enterprises like printmaking and publishing are easy to develop

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in disused spaces formerly devoted to heavy industry. Ernst (Ernie) Mueller decides to go into the business of printing high quality art books, such as those for museum exhibitions and for scholarly works in art history. Such books are currently printed abroad as there are no domestic presses that can do work of suiciently high quality. Ernie can do it, he believes, because he worked for years at a leading press in Germany before moving to the United States. Ernie contracts with Florian A.G. in Germany to buy a set of presses for $3 million. Ernie’s business, including this purchase, is primarily inanced by grant money he obtains from the City of Ledet Art Redevelopment Initiative (CLARI). Pursuant to his contract with Florian, Ernie has made a payment of $200,000. Florian has commenced work on the presses, which are custom designed and custom-made. he presses will take about nine months to produce. Unfortunately, two months ater making the contract, all of the CLARI grant funding is cancelled because of government budget cuts. Ernie must reluctantly give up on his business plan. Without the grant money, he will not have the money to buy the press, and he will not have the money to pay the workers. He decides instead to open a lithography shop, which he can do for much less money. It will not employ as many people and will not be as big a business, but Ernie has the inancing for it, and it is the best he can do. He informs Florian. If Florian stops production now, it will waste $400,000: that is how much Florian has spent on the presses so far, and they have no value to anyone else (except a negligible scrap value) because they are speciically designed for use only in Ernie’s space. Florian was expecting to spend $2.1 million more in the coming months, in parts, labor, etc., for a total cost of $2.5 million, which would have given Florian a proit of $500,000. Luckily, Florian has not yet bought all of the parts, and it can employ its workers on other projects. (a) Assume that Florian stops working on Ernie’s project as soon as it receives the notice. If Florian asked for damages, how much would make Florian whole? To how much is it entitled under CISG article 74? (b) Assume now instead that Florian wishes to complete the manufacture of Ernie’s presses and wants to force Ernie to take delivery and pay the $3 million price. May it do so under the CISG? Assume that suit is brought and proper in Germany and that article 28 creates no diiculties. In your view, is this a good result? (c) What if suit were in New York? (d) Are these odd facts, or will the same analysis hold whenever the beneit to the plaintif is less than the defendant’s cost of performance?

Problem 8.39 (a) Buyer in Canada made a contract with Seller in China for the production of various items of clothing. Buyer, which was planning to resell the garments to department stores in Canada, became aware that the items were not selling well to consumers and that it probably would be unable to sell the clothes at all. It so informed the seller, which had not yet started making the clothes. he price was $6000. he seller was expecting to make a proit of $1000. Seller seeks an order from a court in China requiring the buyer to take delivery and pay the price (once the clothes are made). Who wins?

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(b) What if buyer were in the United States, not Canada, and suit was brought in the United States?

V. Monetary Remedies he transition from performance remedies to monetary remedies does not require a large step. First, a party may seek damages in addition to performance; they are not necessarily inconsistent, much less mutually exclusive.90 For example, a plaintif who seeks and is awarded performance may receive it late, in which case it may need delay damages in addition to performance before it is fully compensated for its loss. Second, the concept of performance remedies and monetary remedies is the same: the goal is to enforce the contract, that is, to put the aggrieved party (generally the plaintif ) where it would be had the contract been kept. his is the expectancy principle, which is irmly embedded in the CISG, as well as in the UCC and many other domestic systems, whether through a substitutional remedy like damages, as in the UCC and the common law, or through a performance remedy, as in the civil law. We begin our explanation of monetary remedies with damages. As has so oten been true, a few points are useful to keep in mind at the outset, although they will need further examination later. First, not all remedies are damages. Obviously the performance remedy discussed in the previous part of this chapter is not a damages remedy. Less obviously, especially to those accustomed to common-law systems, not all monetary remedies in the CISG are damages. he treaty contains a price reduction remedy in article 50 that is technically designated as a remedy other than damages, even though it is calculated in money. Second, damages under the CISG, like under the common law and the UCC and in accord with the growing (but not unanimous) trend in contract law around the world, is a matter of strict liability. A defendant who does not perform, generally speaking, is liable even if it was not at fault. If I promise you that I will perform and do not, then I am liable to pay you damages for your injury, even if I did my best to perform, and my best was as good as any reasonable person’s. he only signiicant exception to that general rule under the CISG, the UCC, and the common law are forces majeures, that is, impediments beyond the control of the party who has failed to perform, as discussed in Chapter 7. his no-fault regime with respect to damages diferentiates the CISG and the UCC from traditional German law and, to a lesser degree, French law.

A. Damages 1. he CISG and the UCC (a) General Principles and Basic Rules Because they are so similar, we discuss the CISG and UCC rules on damages together. he rules are not identical, but they are very close, both in concept and in many (but not all) details. he chief diference is in drating style, with the treaty covering much the same

90. See, e.g., Arbitration Court of the International Chamber of Commerce, France, 2004, Arbitral Award No. 12173, Y.B. of Commercial Arb. 2009 at 111.

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ground as the UCC by concisely stating a few principles when the UCC takes a number of sections of substantial statutory verbiage. It is easiest to begin, though, with a principle so general that it is not stated expressly in either the CISG or UCC Article 2.91 he goal of damages, in both systems, is to put the plaintif where it would be had the contract been kept. his goal is called the expectancy or expectation principle because it represents what the plaintif was entitled to expect under the contract. It is conventionally thought to efectuate a crucial policy of contract law: reliability of the contract, or, as it is sometimes put, security of transactions. Consider an example. You own a bakery for which you need lour. You have enough lour for the next month, but you will need more a month from now. You make a contract with me to deliver to you 10,000 pounds of bakers’ standard patent bulk lour one month from today for $19 per hundredweight (cwt). You now can run your business counting on having that lour at the price we agreed. If I fail to deliver, you can cover by obtaining substitute lour, and if you have to pay more, and have to pay rush charges, and so on, you can recover the extra amounts from me. Even if I do not deliver, then, you will know that once everything has settled, you will have the lour you needed at the agreed price since I have to compensate you for any extra amounts. With the expectancy measure of damages, you can rely on our contract. Most alternative measures of damages are lower, oten attempting to put you or me back where we were before the contract. Restoring that state (the status quo ante, the state of things beforehand) does not give you the beneit of your contract. If that were the remedy, you could not safely rely on our contract. You might be able to rely on me, if I am trustworthy, but that leaves matters to trust. he law helps the economy by allowing you to trust the contract even if you do not entirely trust me. Of course, this conventional account is not immune to objections. he real world can be messy, and you might not be able to prove all of your damages, for instance. And you generally will not be able to recover for the aggravation and similar costs that are incident to a breach. You may not be able to get attorneys’ fees. For these reasons and others, even expectancy damages can be less than fully compensatory. We will take up some of these issues below. For now, we will assume that expectancy damages are close enough to being fully compensatory. Once you know what the expectancy principle is and that the CISG and UCC follow it, you know what all the rules of damages in those systems must be, at least in broad outline. Each rule will try to put the aggrieved party where it would be had the contract been kept (i.e., had there been no breach). Article 74 of the CISG puts the rule this way: “Damages for breach of contract by one party consist of a sum equal to the loss, including loss of proit, sufered by the other party as a consequence of the breach.” Although it is framed in terms of “loss,” the loss is not just costs like expenditures made in reliance on the contract. Such an interpretation is foreclosed by the phrase “including loss of proit,” showing that the

91. It is stated in UCC Article 1: UCC remedies in general “must be liberally administered to the end that the aggrieved party may be put in as good a position as if the other party had fully performed.” UCC § 1-305(a). he section includes some limitations on consequential, penal, and special damages; such damages are discussed below. he expectancy principle is recognized without controversy in the CISG. See, e.g., Oberster Gerichtshof [OGH] [Supreme Court] Jan. 14, 2002, Docket No. 7Ob 301/01t (Austria), CLOUT Case No. 541, as well as the Delchi Carrier case excerpted below.

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compensable loss “includ[es]” lost opportunities. he damages remedy aims to put the plaintif where it would be had the contract been kept, not just back to where it was before the contract. he rule of article 75 is a necessary implication of the principle in article 74. If the buyer avoids the contract—and thus has no goods—it might choose to cover. If it has to pay more for the substitute goods, the diference between the cover price and the contract price will be part of its loss. It may also have other loss under article 74 (e.g., delay damages, brokerage fees incident to the cover transaction). Similarly, if the buyer breaches and the seller avoids the contract, the seller may resell the goods to someone else. If the price they bring is less than the contract price, the seller can recover the diference under article 75, as well as any other damages under article 74. he UCC states the same rules in §§ 2-706(1) (seller’s right to diference between contract price and resale price) and 2-712(2) (buyer’s right to diference between cover price and contract price). Of course the aggrieved party must act reasonably with respect to the substitute transaction. Various rules and cases deal with issues relating to reasonableness. Article 75 requires that the substitute transaction be made “in a reasonable manner and within a reasonable time.” Predictable questions arise. Did the aggrieved party wait too long?92 Many circumstances may be relevant. A resale of scrap steel within two months might be reasonable,93 but perhaps not for fashionable shoes made for the winter season. hat same two months may be reasonable for the shoes, however, if most buyers had already bought shoes for the winter season by the time the seller avoided the contract in August.94 If the delay is caused by trying to ind out whether the buyer will actually refuse the goods, then the seller’s case will look much stronger, particularly if the seller acts quickly once the buyer makes its breach clear.95 here are many circumstances to consider, and the tribunals are sensitive to the transactional and commercial realities. Of particular concern is whether an aggrieved buyer paid too much or an aggrieved seller obtained too little in the substitute transaction. Although the treaty has no express rule on the price obtained, a tribunal will likely be suspicious of the reasonableness of the cover if the buyer pays double the contract price96 or if a seller manages to obtain only a quarter of the contract price on resale, absent some very good explanation.97 Courts and arbitrators also

92. See Hof van Beroep [HvB] [Court of Appeals] Antwerp, Apr. 24, 2006 (Belg.), available at Pace CISG Database: http://cisgw3.law.pace.edu/cases/060424b1.html (Apr. 23, 2007). 93. See Downs Investments v. Perwaja Steel [2000] (Austl.), CLOUT Case No. 631; Downs Investments v. Perwaja Steel [2001] (Austl.), available at Pace CISG Database: http://cisgw3.law.pace.edu/cases/011012a2.html ( July 31, 2009). 94. See Oberlandesgericht [OLG] Düsseldorf [Appellate Court of Düsseldorf ] Jan. 14, 1994 (Ger.), CLOUT Case No. 130. 95. See Kantonsgericht Zug, Dec. 12, 2002 (Switz.), CLOUT Case No. 629. 96. See Cour d’appel [CA] [Court of Appeal] Rennes, May 27, 2008 (Fr.) (Brassiere Cups Case), CLOUT Case No. 1029, available at Pace CISG Database: http://cisgw3.law.pace.edu/cases/080527f1.html (Mar. 18, 2011). 97. See Oberlandesgericht [OLG] Hamm [Appellate Court of Hamm] Sept. 22, 1992, CLOUT Case No. 227 (Ger.).

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want to be sure that the transaction is a true commercial substitute, although the transaction need not be identical. A  buyer expecting a new top-of-the-line Ford Taurus sedan is not covering if it, ater the seller’s breach, obtains a Rolls-Royce Phantom in alleged substitution, although both may be new four-door sedans with leather seats. On the other hand, the buyer may not be able to obtain a Taurus with the features it needs in a timely way and may need to buy a Ford Crown Victoria instead. A court in some circumstances may well be willing to hold that the Crown Victoria is a reasonable substitute, although it would be surprising if a court would ever hold a Rolls-Royce to be. he aggrieved party is expected to act with care and prudence, although it might ignore small diferences in quality.98 It is oten said that there is nothing to require an aggrieved buyer to cover or an aggrieved seller to resell (although this can be a bit misleading because of the duty to mitigate, discussed below). If the aggrieved party does not enter into a substitute transaction, then the market price is the way to measure its damages. If the contract were kept, the buyer would have goods worth their market price. If that is greater than the contract price, then the buyer will have sufered damages of the diference between the market price and the contract price. If the buyer was to receive wheat worth $150,000 in return for a payment of $130,000, then the buyer has sufered damages of $20,000—the loss of its bargain. On the other side, if the buyer repudiates in a sale where the price was $270,000 and the value of the goods at the time of delivery was $240,000, the seller has sufered damages of $30,000. hese rules, all of which are implications of the basic principle, are stated in CISG article 76 and UCC §§ 2-708(1) and 2-713(1). Although the market diferential formula of article 76 is like that in the UCC and many domestic systems, and although goods oten have an easily determined “current” market price compared to, say, real estate or personal services or lives or limbs (as other branches of the law have to contend with), questions inevitably are raised by actual cases. Some goods may not have a current market price. In that case, a tribunal might prefer to base its award on a proit margin, particularly where that margin relects the least level of beneit the plaintif would have obtained from the contract.99 Or the tribunal may have to be creative in inding current prices. Published prices may not be for the correct market, and the decision-makers may rather look to negotiated contract prices, even if those contracts were never concluded.100 Determining the correct market can itself be a perplexing exercise. Article 76(2) is devoted to stating a rule, the nub of which is “the place where delivery should have been made,” or if necessary, “a reasonable substitute.” But where is delivery made? As you know from Chapter  5, in many and probably most international commercial sales, delivery is

98. Arbitration Court of the ICC – Basel, 1995, Arbitral Award No. 8128, available at Unilex Database: http:// www.unilex.info/case.cfm?id=207. 99. See, e.g., China International Economic & Trade Arbitration Commission [CIETAC] Oct. 2007 (CD-R and DVD-R Production Systems Case), available at Pace CISG Database: http://cisgw3.law.pace.edu/cases/071000c1. html (Sept. 4, 2009); Oberlandesgericht [OLG] Braunschweig [Appellate Court of Braunschweig] Oct. 28, 1999 (Ger.) (Frozen Venison Case), available at Unilex Database: http://www.unilex.info/case.cfm?id=444. 100. See China International Economic & Trade Arbitration Commission [CIETAC] Jan. 20, 1993 (Ferrosilicon Case), available at Pace CISG Database: http://cisgw3.law.pace.edu/cases/930120c1.html ( June 27, 2006).

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made—technically speaking—at the port of shipment, not at the destination. his technical point is confounding, however. An international buyer of goods in the United States wants the goods in the United States, although the place of delivery may well be in China. Or Korea. Or wherever. he contract for transportation will relect that the goods are wanted in the United States. Perhaps the market that is relevant for delivery should be the US market, “making due allowance for diferences in the cost of transporting the goods.” his, however, is not what article 76 says and not how it is interpreted. Delivery under a shipment contract takes place at the port of departure, not the port of destination. So under a typical FOB or CIF or CFR contract—and under any “C” or “F” Incoterm—the relevant market is the port of departure: China in our irst example just now, and in any event, not the United States, assuming the parties did not break with the usual practice (e.g., using a “D” term would take the parties out of the usual practice and the usual rules). he cases are uniform in adhering to this technically correct holding.101 In a market that is global, we believe this rule is increasingly outmoded, but it is nevertheless the rule. So far, we have been assuming that the breach and avoidance came before anyone did anything. Oten that assumption will be false, but the actions can be taken into account easily enough. If the buyer has already paid the price, then it would be entitled to a return of the price along with its loss of bargain. Recall the wheat example and suppose the buyer had already paid the entire price before the seller’s breach and the buyer’s consequent avoidance. Recovery of the price plus the $20,000 loss of bargain would make the buyer whole. If the buyer had not paid the whole price but only a $10,000 deposit, it would be entitled to recover the $10,000 deposit plus the $20,000 loss of bargain. his idea is implicit in the basic principle and is not stated very prominently in the enacted language, but there is no controversy about it. It is stated expressly in the UCC, although it is hidden. See UCC § 2-711(1) (“in addition to recovering so much of the price as has been paid”). he concepts cause no problems in the abstract. he diiculties come in the details, like where and when the market price is to be measured. On those matters, the UCC and the CISG are not entirely aligned, and in fact, some of the rules under the UCC are not clear and thus result in a split of authority even within US domestic law. he cases discussed so far involve avoidance of the contract. he buyer has no goods, or on the other side, the seller has the goods to sell. Oten, however, the contract is not avoided even though there is a breach, as emphasized at great and perhaps painful length above. he expectancy principle takes care of those cases as well, although of course the damages formulas are diferent. When the buyer has accepted the goods but they do not conform to the contract, the buyer’s damages are typically measured by the diference between the value of the goods as they were supposed to be and the value of the goods as they are. Section 2-714(2) of the UCC states this rule expressly. he CISG does not state it, but it is implicit in article 74. A diferent possibility is that the seller delivers conforming goods but the buyer nevertheless fails to pay for them. In that case, the seller’s damages are the price. If the contract had been kept, the seller would have the price. he action for the price thus gives the seller its damages. 101. See cases collected in CISG Digest at 367 nn.35–37. Part of the accompanying text of the Digest is confusing, but the cases are correctly described parenthetically in the notes. See also id. at 366 n.20.

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In such cases, as noted above, the damages remedy is identical to granting a performance remedy to the seller. See CISG art. 62; UCC § 2-709. he compensation discussed so far sometimes goes under the name “direct damages.” he plaintif recovers its loss of bargain through these measures. Other losses may also be recoverable. he UCC and CISG allow recovery of incidental damages for either party. Such damages are included in the “loss” for which article 74 provides. he UCC, again, provides for them expressly and lists examples of incidentals both for the aggrieved seller, § 2-710, and the aggrieved buyer, § 2-715(1); see also §§ 2-712(2), 2-713(1), 2-714(3). Although it is hard to deine incidental damages in a way that clearly distinguishes them from consequential damages, incidentals generally have to do with dealing with the breached contract itself, the goods associated with it, and the transaction or transactions to substitute for it. he best way to get a feel for what would be considered incidental damages is to read the lists of examples in §§ 2-710 and 2-715(1). As long as both incidental and consequential damages are recoverable, there is not much need to distinguish between them. Although the CISG allows an aggrieved buyer or an aggrieved seller to recover incidental and consequential damages, the UCC unfortunately allows consequential damages only to the aggrieved buyer. Compare UCC §§ 2-712 to 715 (allowing both incidentals and consequentials to a buyer) with id. §§ 2-706(1), 2-708(1), 2-710 (allowing incidentals, without mention of consequentials, to a seller). Although this distinction arguably makes some sense in consumer cases—should an individual consumer be liable for potentially large consequential damages to a seller when the consumer decides against a purchase?—it is hard to justify in commercial cases. It has sometimes been thought a drating error, but the rules are too consistent for such an explanation to be convincing. Accordingly, the courts enforce the distinction, sometimes reluctantly, and thus have to distinguish consequential damages, which a seller cannot recover, from direct and incidental damages, which a seller can recover. In essence, consequential damages are those damages incurred because of losses with respect to other contracts but on account of the breach of the contract in suit. For instance, if I fail to deliver lour to you as agreed, you may still have to pay your workers (under their employment contracts) even though they are idle for a day or two while you obtain substitute lour. You also may lose money on your contracts with your customers because you are unable to supply bread to them as agreed. Further, you may be unable to make other contracts to sell bread for those days. All of these would be consequential damages. As you gather from the example, buyers can incur all sorts of consequential damages; luckily, they are allowed to recover them. On the other side, an aggrieved seller’s consequential damages generally are conined to interest. If the buyer breaches, the usual breach is failure to pay. If the buyer had paid, the seller could have, at a minimum, invested the money and received interest. It is possible that the seller might have used the money to do something else and was prevented from so doing because of the buyer’s breach. Such losses would be consequential damages recoverable under the CISG but not the UCC. Again, though, they would likely be measured by interest: the reasonable seller, ater a buyer’s failure to pay in such a case, should borrow the money (assuming it can) and do whatever it was going to do anyway, thereby avoiding the

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consequential loss except for the cost of borrowing the money. he cost of borrowing that money, of course, is interest. Interest is always recoverable under the CISG, as provided in a speciic article on the subject, article 78. How interest is measured is not addressed in the treaty and is discussed below. Interest is not recoverable for a seller under the UCC because of the prohibition of consequential damages for sellers. his is the view under the great weight of authority (“all appellate opinions that have discussed that question to date”), although the statutory rule may be inadvisable, and some prominent judges and commentators have looked for and occasionally found ways around the rule. See generally 1 James J. White & Robert S. Summers, Uniform Commercial Code § 7-16 (5th Prac. ed. 2006). here is another sort of seller’s injury that may sound like consequential damages at irst but is not treated as such. A lost-volume seller could have made another sale and another proit but for the buyer’s breach. he CISG implicitly and the UCC more or less explicitly allow a special measure of recovery for the lost-volume seller. We will follow the UCC primarily because it has express rules; the CISG rule is embedded in its general principle, as the case law has recognized. To illustrate, consider two simple hypotheticals, one that does not involve a lost-volume seller and one that does. Assume that you have an old bike you no longer want. You post an ad that you will sell it for $200. I see your ad and agree to buy it for $200, delivery and payment one week later. he day ater our agreement, however, I repudiate. You post your ad again. A diferent buyer responds, this one considerably more trustworthy than I have been. He agrees to buy the bike for $200, and the two of you go through with the transaction. You have no damages, aside from some incidentals, perhaps; you may have had to pay a fee to post the second ad, for instance. If the second buyer had paid only $190, then your damages would include the $10 price diference. You have only one bike, and you are not in the business of buying or selling bikes. his amount would make you whole. Consider now a seller that is a bike dealer, for whom a diferent result is necessary. As before, I agree to buy a bike for $200, then breach. he next day, the dealer sells the bike that I was going to buy to the more trustworthy buyer for $200, who follows through. If we use the same concept and formula as in your case, the dealer will receive no damages (except perhaps some minor incidentals). But this would be wrong, assuming the dealer has or can timely obtain as many bikes as it can sell, which is probably true. But for my breach, the dealer would have had another sale and another proit. It would have sold a bike to me and to the trustworthy buyer. If the dealer makes a 10 percent ($20) proit on each bike it sells, it should collect that foregone proit in damages from me. Only then would it be whole. his result difers from your case, because the test is not satisied there. It is not true that but for my breach, you would have had another sale and another proit. You had only one bike. hese situations are governed by UCC §§ 2-706 and 2-708. Your resale is governed by § 2-706. If you had not resold, the law would have used the market price under § 2-708(1) instead of the resale price under § 2-706, but this would yield the same result of no damages (other than your incidentals, or in the variation where the resale or market price is $190, then that $10 as well). For the lost-volume seller, these measures would be “inadequate to put the seller in as good a position as performance would have done,” so under § 2-708(2), the lost-volume seller’s damages are its “proit (including reasonable overhead) which the seller would have

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made from full performance by the buyer.” So the dealer gets its $20 proit from me, as well as any incidental damages it has sufered.102 he treatment of overhead in these damages calculations is much litigated, and it is worth noting that the UCC allows its recovery through the parenthetical “including reasonable overhead.” his rule simpliies basic calculations, although understanding the rule requires some careful thought. For those already familiar with these notions, the bottom line is that the lost-volume seller can recover its gross proit. he gross proit is determined by subtracting direct costs, but not overhead, from the price. Because overhead is not subtracted, the bottom line number will “include[e]” the “overhead,” as required by the statute. he reason overhead is included in the damages is that otherwise the seller would not be in as good a position as if the contract had been performed. he following explanation from Vitex Manufacturing Corp. v. Caribtex Corp., 377 F.2d 795, 799 (3d Cir. 1967), which as it happens was a pre-CISG international sales case, is oten quoted: [A]s the number of transaction[s] over which overhead can be spread becomes smaller [because of the buyer’s breach], each transaction must bear a greater portion or allocate share of the ixed overhead cost. Suppose a company has ixed overhead of $10,000 and engages in ive similar transactions; then the receipts of each transaction would bear $2000 of overhead expense. If the company is now forced to spread this $10,000 over only four transactions, then the overhead expense per transaction will rise to $2500, signiicantly reducing the proitability of the four remaining transactions. hus, where the contract is between businessmen familiar with commercial practices, as here, the breaching party should reasonably foresee that his breach will not only cause a loss of “clear” proit, but also a loss in that the proitability of other transactions will be reduced. In short, the expectancy principle requires that overhead be recoverable. It should be conined to “reasonable” overhead, of course; extravagant overhead would be unforeseeable. he foreseeability, avoidability, and certainty limitations on damages are discussed in the next section. he foreseeability and certainty limits are also discussed in the following case, which primarily serves to illustrate a number of points made above and particularly the treatment of overhead in the calculation of proits. Note that variable or direct costs are those costs that vary with, and are thus directly related to, the production (or sale) of each unit. On the other hand, ixed or indirect or overhead costs do not vary. If the bike dealer wants to sell another bike for say, $200, it will have to order another one from the manufacturer for, say, a wholesale cost of $180. Its cost of rent and utilities and management, however, are unlikely to vary over the sale (or not) of another bike or two. hose costs are ixed and will not go away unless the dealer goes out of business or shrinks signiicantly. hose overhead costs must be spread over all of the sales that it

102. UCC § 2-708(2) is not well drated. he analysis we give in the text is reasonably well established by the case law, which had to perform a certain amount of interpretive surgery on the section. Questions remain, particularly in the academic literature, but we believe the statements in the text represent the weight of authority.

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makes, so each sale bears an allocable portion of overhead, as explained by Vitex. he bottom line damages in the bike case, as we suggested, will be $20, that is, $200 – $180 direct costs. No overhead costs will be subtracted. hus the bike dealer obtains its gross proit and is now whole, as Vitex said. Note that its net proit will be less. Its net proit will have to relect its overhead costs. It is relevant to investors, certainly, but is not subtracted in the calculation of proits as damages. You may recall the following case from Chapter 4; we now focus on the part of the opinion that addresses the calculation of damages.

Delchi Carrier SpA V. Rotorex Corp. United States Court of Appeals for the Second Circuit, 1995 71 F.3d 1024 Winter, Circuit Judge: Rotorex Corporation, a New York corporation, appeals from a judgment of $1,785,772.44 in damages for lost proits and other consequential damages awarded to Delchi Carrier SpA following a bench trial before Judge Munson. The basis for the award was Rotorex’s delivery of nonconforming compressors to Delchi, an Italian manufacturer of air conditioners. Delchi cross-appeals from the denial of certain incidental and consequential damages. We afirm the award of damages; we reverse in part on Delchi’s cross-appeal and remand for further proceedings.

BACKGROUND In January 1988, Rotorex agreed to sell 10,800 compressors to Delchi for use in Delchi’s “Ariele” line of portable room air conditioners. The air conditioners were scheduled to go on sale in the spring and summer of 1988. Prior to executing the contract, Rotorex sent Delchi a sample compressor and accompanying written performance speciications. The compressors were scheduled to be delivered in three shipments before May 15, 1988. Rotorex sent the irst shipment by sea on March 26. Delchi paid for this shipment, which arrived at its Italian factory on April 20, by letter of credit. Rotorex sent a second shipment of compressors on or about May 9. Delchi also remitted payment for this shipment by letter of credit. While the second shipment was en route, Delchi discovered that the irst lot of compressors did not conform to the sample model and accompanying speciications. On May 13, after a Rotorex representative visited the Delchi factory in Italy, Delchi informed Rotorex that 93 percent of the compressors were rejected in quality control checks because they had lower cooling capacity and consumed more power than the sample model and speciications. After several unsuccessful attempts to cure the defects in the compressors, Delchi asked Rotorex to supply new compressors conforming to the original sample and speciications. Rotorex refused, claiming that the performance speciications were “inadvertently communicated” to Delchi. In a faxed letter dated May 23, 1988, Delchi cancelled the contract. Although it was able to expedite a previously planned order of suitable compressors from Sanyo, another supplier, Delchi was unable to obtain in a timely fashion substitute compressors from other sources and thus suffered a loss in its sales volume of Arieles during the 1988 selling season. Delchi iled the instant action under the United Nations Convention on Contracts for the International Sale of Goods (“CISG” or “the Convention”) for breach of

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contract and failure to deliver conforming goods. On January 10, 1991, Judge Cholakis granted Delchi’s motion for partial summary judgment, holding Rotorex liable for breach of contract. After three years of discovery and a bench trial on the issue of damages, Judge Munson, to whom the case had been transferred, held Rotorex liable to Delchi for $1,248,331.87. This amount included consequential damages for: (i) lost proits resulting from a diminished sales level of Ariele units, (ii) expenses that Delchi incurred in attempting to remedy the nonconformity of the compressors, (iii) the cost of expediting shipment of previously ordered Sanyo compressors after Delchi rejected the Rotorex compressors, and (iv) costs of handling and storing the rejected compressors. The district court also awarded prejudgment interest under CISG art. 78. The court denied Delchi’s claim for damages based on other expenses, including: (i) shipping, customs, and incidentals relating to the two shipments of Rotorex compressors; (ii) the cost of obsolete insulation and tubing that Delchi purchased only for use with Rotorex compressors; (iii) the cost of obsolete tooling purchased only for production of units with Rotorex compressors; and (iv) labor costs for four days when Delchi’s production line was idle because it had no compressors to install in the air conditioning units. The court denied an award for these items on the ground that it would lead to a double recovery because “those costs are accounted for in Delchi’s recovery on its lost proits claim.” It also denied an award for the cost of modiication of electrical panels for use with substitute Sanyo compressors on the ground that the cost was not attributable to the breach. Finally, the court denied recovery on Delchi’s claim of 4000 additional lost sales in Italy. On appeal, Rotorex argues that it did not breach the agreement, that Delchi is not entitled to lost proits because it maintained inventory levels in excess of the maximum number of possible lost sales, that the calculation of the number of lost sales was improper, and that the district court improperly excluded ixed costs and depreciation from the manufacturing cost in calculating lost proits. Delchi cross-appeals, claiming that it is entitled to the additional out-of-pocket expenses and the lost proits on additional sales denied by Judge Munson.

DISCUSSION The district court held, and the parties agree, that the instant matter is governed by the CISG, a self-executing agreement between the United States and other signatories, including Italy. Because there is virtually no caselaw under the Convention, we look to its language and to “the general principles” upon which it is based. See CISG art. 7(2). The Convention directs that its interpretation be informed by its “international character and . . . the need to promote uniformity in its application and the observance of good faith in international trade.” See CISG art. 7(1). Caselaw interpreting analogous provisions of Article 2 of the Uniform Commercial Code (“UCC”), may also inform a court where the language of the relevant CISG provisions tracks that of the UCC. However, UCC caselaw “is not per se applicable.” Orbisphere Corp. v. United States, 726 F.Supp. 1344, 1355 (Ct. Int’l Trade 1989). We irst address the liability issue . . . Under the CISG, “[t]he seller must deliver goods which are of the quantity, quality and description required by the contract,” and “the goods do not conform with the contract

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unless they . . . [p]ossess the qualities of goods which the seller has held out to the buyer as a sample or model.” CISG art. 35. The CISG further states that “[t]he seller is liable in accordance with the contract and this Convention for any lack of conformity.” CISG art. 36. Judge Cholakis held that “there is no question that [Rotorex’s] compressors did not conform to the terms of the contract between the parties” and noted that “[t]here are ample admissions [by Rotorex] to that effect.” We agree. The agreement between Delchi and Rotorex was based upon a sample compressor supplied by Rotorex and upon written speciications regarding cooling capacity and power consumption. After the problems were discovered, Rotorex’s engineering representative, Ernest Gamache, admitted in a May 13, 1988 letter that the speciication sheet was “in error” and that the compressors would actually generate less cooling power and consume more energy than the speciications indicated. . . . Under the CISG, if the breach is “fundamental” the buyer may either require delivery of substitute goods, CISG art. 46, or declare the contract void, CISG art. 49, and seek damages. [The court quoted article 25 on fundamental breach.] In granting summary judgment, the district court held that “[t]here appears to be no question that [Delchi] did not substantially receive that which [it] was entitled to expect” and that “any reasonable person could foresee that shipping non-conforming goods to a buyer would result in the buyer not receiving that which he expected and was entitled to receive.” Because the cooling power and energy consumption of an air conditioner compressor are important determinants of the product’s value, the district court’s conclusion that Rotorex was liable for a fundamental breach of contract under the Convention was proper. We turn now to the district court’s award of damages following the bench trial. . . . [The court quoted article 74.] This provision is “designed to place the aggrieved party in as good a position as if the other party had properly performed the contract.” [John Honnold, Uniform Law for International Sales Under the 1980 United Nations Convention 503 (2d ed. 1991).] Rotorex argues that Delchi is not entitled to lost proits because it was able to maintain inventory levels of Ariele air conditioning units in excess of the maximum number of possible lost sales. In Rotorex’s view, therefore, there was no actual shortfall of Ariele units available for sale because of Rotorex’s delivery of nonconforming compressors. Rotorex’s argument goes as follows. The end of the air conditioner selling season is August 1. If one totals the number of units available to Delchi from March to August 1, the sum is enough to ill all sales. We may assume that the evidence in the record supports the factual premise. Nevertheless, the argument is fallacious. Because of Rotorex’s breach, Delchi had to shut down its manufacturing operation for a few days in May, and the date on which particular units were available for sale was substantially delayed. For example, units available in late July could not be used to meet orders in the spring. As a result, Delchi lost sales in the spring and early summer. We therefore conclude that the district court’s indings regarding lost sales are not clearly erroneous. A detailed discussion of the precise number of lost sales is unnecessary because the district court’s indings were, if anything, conservative. Rotorex contends, in the alternative, that the district court improperly awarded lost proits for unilled orders from Delchi afiliates in Europe and from sales agents within Italy. We disagree. The CISG requires that damages be limited by the familiar principle

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of foreseeability established in Hadley v. Baxendale, 156 Eng. Rep. 145 (1854). CISG art. 74. However, it was objectively foreseeable that Delchi would take orders for Ariele sales based on the number of compressors it had ordered and expected to have ready for the season. The district court was entitled to rely upon the documents and testimony regarding these lost sales and was well within its authority in deciding which orders were proven with suficient certainty. Rotorex also challenges the district court’s exclusion of ixed costs and depreciation from the manufacturing cost used to calculate lost proits. The trial judge calculated lost proits by subtracting the 478,783 lire “manufacturing cost”—the total variable cost—of an Ariele unit from the 654,644 lire average sale price. The CISG does not explicitly state whether only variable expenses, or both ixed and variable expenses, should be subtracted from sales revenue in calculating lost proits. However, courts generally do not include ixed costs in the calculation of lost proits. See Indu Craft, Inc. v. Bank of Baroda, 47 F.3d 490, 495 (2d Cir.1995) (only when the breach ends an ongoing business should ixed costs be subtracted along with variable costs); Adams v. Lindblad Travel, Inc., 730 F.2d 89, 92-93 (2d Cir.1984) (ixed costs should not be included in lost proits equation when the plaintiff is an ongoing business whose ixed costs are not affected by the breach). This is, of course, because the ixed costs would have been encountered whether or not the breach occurred. In the absence of a speciic provision in the CISG for calculating lost proits, the district court was correct to use the standard formula employed by most American courts and to deduct only variable costs from sales revenue to arrive at a igure for lost proits. In its cross-appeal, Delchi challenges the district court’s denial of various consequential and incidental damages, including reimbursement for:  (i)  shipping, customs, and incidentals relating to the irst and second shipments—rejected and returned—of Rotorex compressors; (ii) obsolete insulation materials and tubing purchased for use only with Rotorex compressors; (iii) obsolete tooling purchased exclusively for production of units with Rotorex compressors; and (iv) labor costs for the period of May 16–19, 1988, when the Delchi production line was idle due to a lack of compressors to install in Ariele air conditioning units. The district court denied damages for these items on the ground that they “are accounted for in Delchi’s recovery on its lost proits claim,” and, therefore, an award would constitute a double recovery for Delchi. We disagree. The Convention provides that a contract plaintiff may collect damages to compensate for the full loss. This includes, but is not limited to, lost proits, subject only to the familiar limitation that the breaching party must have foreseen, or should have foreseen, the loss as a probable consequence. CISG art. 74; see Hadley v. Baxendale, supra. An award for lost proits will not compensate Delchi for the expenses in question. Delchi’s lost proits are determined by calculating the hypothetical revenues to be derived from unmade sales less the hypothetical variable costs that would have been, but were not, incurred. This igure, however, does not compensate for costs actually incurred that led to no sales. Thus, to award damages for costs actually incurred in no way creates a double recovery and instead furthers the purpose of giving the injured party damages “equal to the loss.” CISG art. 74. The only remaining inquiries, therefore, are whether the expenses were reasonably foreseeable and legitimate incidental or consequential damages. The expenses incurred by Delchi for shipping, customs, and related matters for the two returned shipments of

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Rotorex compressors, including storage expenses for the second shipment at Genoa, were clearly foreseeable and recoverable incidental expenses. These are up-front expenses that had to be paid to get the goods to the manufacturing plant for inspection and were thus incurred largely before the nonconformities were detected. To deny reimbursement to Delchi for these incidental damages would effectively cut into the lost proits award. The same is true of unreimbursed tooling expenses and the cost of the useless insulation and tubing materials. These are legitimate consequential damages that in no way duplicate lost proits damages. The labor expense incurred as a result of the production line shutdown of May 16–19, 1988 is also a reasonably foreseeable result of delivering nonconforming compressors for installation in air conditioners. However, Rotorex argues that the labor costs in question were ixed costs that would have been incurred whether or not there was a breach. The district court labeled the labor costs “ixed costs,” but did not explore whether Delchi would have paid these wages regardless of how much it produced. Variable costs are generally those costs that “luctuate with a irm’s output,” and typically include labor (but not management) costs. Whether Delchi’s labor costs during this four-day period are variable or ixed costs is in large measure a fact question that we cannot answer because we lack factual indings by the district court. We therefore remand to the district court on this issue. The district court also denied an award for the modiication of electrical panels for use with substitute Sanyo compressors. It denied damages on the ground that Delchi failed to show that the modiications were not part of the regular cost of production of units with Sanyo compressors and were therefore attributable to Rotorex’s breach. This appears to have been a credibility determination that was within the court’s authority to make. We therefore afirm on the ground that this inding is not clearly erroneous. Finally, Delchi cross-appeals from the denial of its claimed 4000 additional lost sales in Italy. The district court held that Delchi did not prove these orders with suficient certainty. The trial court was in the best position to evaluate the testimony of the Italian sales agents who stated that they would have ordered more Arieles if they had been available. It found the agents’ claims to be too speculative, and this conclusion is not clearly erroneous.

CONCLUSION We afirm the award of damages. We reverse in part the denial of incidental and consequential damages. We remand for further proceedings in accord with this opinion.

It should probably be noted that the Delchi Carrier decision gave greater weight to US authority than would make some happy. he result, however, is not uniquely American. Another example is Oberlandesgericht [OLG] Hamburg [Appellate Court of Hamburg] Nov. 26, 1999 (Ger.), CLOUT Case No. 348. See also Oberster Gerichtshof [OGH] [Supreme Court] Apr. 28, 2000, Docket No. 1 Ob 292/99v (Austria), CLOUT Case No. 427; Bielloni Castello S.p.A. v. EGO S.A., Corte di Appello di Milano, 11 dicembre 1998 (It.), CLOUT Case No. 645. An even more lexible approach, which simply uses the plaintif ’s ordinary proit margin as the measure, has been used by the Supreme Court of Switzerland. See Bundesgericht [BGer] [Federal Supreme Court] Dec. 17, 2009

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(Switz.) (Watches Case), available at Pace CISG Database:  http://cisgw3.law.pace.edu/ cases/091217s1.html (Mar. 16, 2010). Indeed, the courts seem quite amenable to a claimed standard 10 percent proit margin. See Handelsgericht des Kantons Aargau Sept. 26, 1997 (Switz.), CLOUT Case No. 217 (10 percent ordinary proit margin allowed by majority); see also Oberlandesgericht [OLG] Braunschweig [Appellate Court of Braunschweig] Oct. 28, 1999 (Ger.) (Frozen Venison Case), available at Unilex Database: http://www.unilex. info/case.cfm?id=444.

Problem 8.40 (a) Barham & Co. in Australia makes a contract to obtain certain computer components from Kunshan Amalgamated Enterprises in China. he components are very small and must be made with exacting precision. Barham has generally obtained these components from Atkins & Son in California, with whom it has had a long-term relationship and a favorable price because Barham is a large and well-established customer. Barham generally orders 20,000 per month for $45 each. he current market price for wholesale buyers of these components is $55. Kunshan, which is now attempting to break into this market, ofers a per unit price of $40. For its October order, Barham reduced its order to Atkins to 15,000 and ordered 5000 from Kunshan. When the Kunshan components arrived, however, they proved to be of unsatisfactory quality and therefore unusable. Barham gave prompt notice to Kunshan and avoided the contract. Barham rapidly ordered 5000 more from Atkins at its usual price. Will Barham prefer damages under article 75 or 76? How much would be available under article 75? article 76? To how much is Barham entitled? (b) What would be your answer if the UCC governed instead of the CISG? See UCC §§ 2-712 & 2-713 and their comments; see also id. §§ 2-706, 2-708, and comment 2 to § 2-706. (c) Suppose again that the transaction is governed by the CISG. his time, though, Barham acts more strategically. It gives prompt notice of the defects under article 39. It does not, however, send notice of avoidance under article 26—yet. Instead, it immediately orders the 5000 more components from Atkins. Shortly thereater, it avoids the contract by sending notice under article 26. If Kunshan argues that the notice of avoidance was late, Barham plans to argue irst that it was sent quite promptly, within a few hours or days, and second, that it could not avoid immediately because it wanted to see whether Kunshan would cure (although it knew this was extremely unlikely as Kunshan seemed unable to produce components to the speciied standards). Now what? In addition to considering articles 74 to 76, recall article 7. We believe you will ind at least three possibilities, none of which is appealing. What are they, and what are their pros and cons? (And as long as you are being pelted with vexatious questions, consider this too: What if—unlike the present case—a plaintif preferred, as usual, the cover price diferential to the market price diferential? Would it be disqualiied from the cover price diferential simply because it ordered the goods before declaration of avoidance?) (d) What if Barham had adopted a diferent strategy: it made its order from Atkins for the replacement components ater avoidance (as in (a)), but realized that it could get by with

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only 1000 more units that month (i.e., it would use a total of 16,000 instead of its usual 20,000)? What is your answer now?

Problem 8.41 (a) A Lamborghini dealer in Italy inds customers—a clothing designer and a music star who, at least for now, are “together”—who could not live without a Lamborghini LP 570-4 Superleggera, which is a lightweight and very expensive sports car. he celebrity couple is willing to pay not only the usual price but a high premium for such a car if they can get it soon. he wait for such a car to be manufactured, given small production, high demand, and customers particular about their options, is long. Luckily, the Italian dealer inds such a car available, in pristine condition, with a German dealer in used luxury cars. he parties check all of the paperwork, even going to the trouble of taking the registration to the police. he buyer also checks with its glamorous customers, who are ecstatic that they can have the car so soon. he dealers agree on a price (between them) of €250,000. hey obtain an export license plate, and again the paperwork checks out ine. Shortly ater the car arrives in Italy, the police arrive and take the car. hey have identiied the car as stolen ater all. Why the car checked out as ine—twice—is not clear, but obviously the systems leave something to be desired. Everyone is mystiied, but the bottom line is that the car is in the hands of a third party who owns the car under applicable law, and neither the buyer nor the seller nor the celebrity couple has the car. he buyer has missed out on a great sale, for a great price, to the disappointed celebrities. May the buyer collect damages from the seller? See CISG art. 41. (b) Would the answer difer under the UCC? See UCC § 2-312(1)(a).

Problem 8.42 Buyer in Iraq ordered used milling equipment from Seller in Germany. he parties agreed that it would be of a particular high quality German manufacture and would meet a variety of speciications. Later, the parties agreed to change the speciications. When Seller attempted to obtain the equipment matching the new speciications, it could not do so in time to fulill the order. Only inferior quality parts of Russian and Turkish manufacture were available for those speciications in the time frame envisioned. Seller did not disclose this fact to Buyer, who duly paid the €500,000 purchase price. When the inferior equipment arrived, Buyer complained, but it has decided to keep the equipment anyway. Is it entitled to any compensation? If so, how much?

Question 8.43 Which of the following damages are compensable under the CISG? the UCC? (a) (b) (c) (d)

Buyer’s costs for inspecting nonconforming goods. Seller’s costs for storing goods ater Buyer’s anticipatory repudiation. Buyer’s shipping and customs costs for returning nonconforming goods. Seller’s costs in modifying equipment, ater Buyer’s repudiation, to resell to another buyer.

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(e) Buyer’s cost to have the nonconforming goods repaired. (f ) Seller, a bus dealer in the United States, agreed to sell 50 school buses to Buyer in Mexico. During the negotiations, Seller agreed to give Buyer a favorable price. Seller explained that the 50-bus sale would just put it over the mark for a manufacturer’s incentive sales plan. With that sale, Seller would pass 1000 buses for the year and would receive a bonus payment from the manufacturer. To close the deal, Seller said it would “share the bonus” with Buyer by reducing the price even below the usual discounts. Buyer happily agreed. Later, however, Buyer repudiated the contract. Seller sues for the lost bonus as well as the usual damages. Is the bonus recoverable? (g) Buyer’s travel expenses to go to the seller’s factory to try to salvage the contract. (h) Buyer’s expenses in retrieving defective goods from its customers and paying its customers’ damages. (i) Seller chartered a vessel for delivery of the goods. Ater Buyer’s repudiation, Seller sub-chartered the vessel at a loss. Is that loss recoverable?

Question 8.44 Where must damages be paid? See CISG art. 57. Problem 8.45 Buyer in the United States purchased from Seller in Canada a multi-rip saw for use in a lumber mill. Because of a manufacturing defect, the saw caused a large block of wood to explode. (We do not know how such a thing could happen, but it did.) he explosion killed one worker and caused another to lose his let arm. It also damaged other factory equipment. What damages are compensable, and how? See CISG arts. 5, 74.

Question 8.46 May the aggrieved party recover for loss to reputation, goodwill, and the like?

Problem 8.47 To see the issues that can arise from luctuations in the value of currencies, consider the following problems. he law is unsettled on how to treat many of them, and there is little guidance in the CISG. Assume that the buyer is in the United States and the seller is in a Latin American country that uses its own peso as its currency. hese facts remain constant through the problem; we vary other facts so you can see what factors some courts have found relevant. (a) Plaintif-Buyer paid the price in pesos. It has now discovered a serious defect in the goods and has avoided the contract. Some of its damages are sufered in the United States and are measurable in dollars. Some of its damages, though, include restitution of the price it earlier paid in pesos. he seller happily tenders return of the price in pesos. he problem is that between the payment of the price and now, galloping inlation has meant that the peso is now worth only 10 percent of what it was worth when the price was paid. he buyer demands either 10 times the price, in pesos, or payment of the amount of dollars it had to pay to buy the pesos at the time it paid the price. Who should win?

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(b) Now assume that the plaintif was the seller, that it was entitled to payment of damages in pesos, and that the great inlation occurred ater it sufered the damages but before they are paid? Or what if the currency value changed not because of inlation but because of a government devaluation? (c) Suppose now that nothing so dramatic as a government devaluation has occurred. Nevertheless, because of changes in exchange rates (which are linked to innumerable economic factors), the currency in which damages are to be paid has become much less valuable? much more valuable? How should a tribunal decide who bears the risk of currency luctuations?

(b) Limits on Damages: Foreseeability, Avoidability, and Certainty here are three principal limits on damages. Although they are sometimes stated in positive terms, they tend to have their bite when stated in the negative: (1) Damages that are not foreseen or reasonably foreseeable cannot be recovered. See CISG art. 74; see also UCC § 2-715(2)(a). his is called the foreseeability limit. (2)  Damages that could have been avoided by reasonable steps, primarily through engaging in substitute transactions like cover or resale, cannot be recovered. See CISG art. 77; see also UCC § 2-715(2)(a). his is called the avoidability limit. Sometimes the law refers to the same concept as the plaintif ’s duty to mitigate damages. (3)  Damages that cannot be proved with reasonable certainty cannot be recovered. his is called the certainty limit. It is not stated explicitly in the treaty or Article 2, but the cases have no hesitation in applying it, as you saw exempliied in Delchi Carrier. Of these three, the one that raises the most diicult issues in international sales is the duty to mitigate. he other two raise issues and arguments that you can probably guess based on common sense and perhaps some experience of these rules from previous studies of domestic law. You may have been surprised not to see a reasonableness limit listed. Tribunals easily translate the foreseeability limit into a reasonableness limit as well; unreasonable damages are not reasonably foreseeable under article 74.103 More commonly, the litigation is simply about what is ordinary and should be expected to result from breach as opposed to what is not and would thus present surprising exposure to the defendant. he emphasis is generally on understanding the contract and the undertakings and liabilities that the parties’ bargain entails. Large liability that is not foreseeable is a signiicant risk for which a defendant will not have been able to plan—unless of course it was informed of it, in which case current law has little sympathy for the defendant. he law is similarly unsympathetic to the defendant who should have foreseen the liability, even if it is very large. he law used to be more solicitous of such defendants, as illustrated by Oliver Wendell Holmes’s famous opinion in Globe Reining Co. v.  Landa Cotton Oil Co., 190 US 540, 543 (1903) (endorsing the tacit agreement test: “extent of liability in such cases is likely to be within his contemplation, and, whether it is or not, should be worked out on terms

103. See CISG Dig. (2012) at 347 ¶ 21.

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which it fairly may be presumed he would have assented to if they had been presented to his mind”). he line of thinking represented by the tacit agreement test, however, has been expressly rejected in favor of the foreseeability test, see UCC § 2-715 cmt. 2, and the CISG follows suit in article 74. We saw the court’s emphasis on that test in the Delchi Carrier case. he certainty limit is more diicult to describe as it is less authoritatively stated. For CISG purposes, the lack of an explicit provision triggers the secondary machinery in article 7 to address problems “not expressly settled” in the treaty. As you saw in Delchi Carrier, the courts are likely to slip quickly, perhaps unconsciously, into their usual standards of proof. See also TeeVee Toons, Inc. v. Gerhard Schubert GmbH, No. 00 Civ. 5189(RCC), 2006 WL 2463537, at *9 (S.D.N.Y. Aug. 23, 2006) (“damages must be capable of computation with ‘suicient certainty’ ”) (citing Delchi Carrier, 71 F.3d at 1029). Not all courts, however, follow the same standards, and some may be fairly horrifying to those unaccustomed to them. To an American, an award of damages ex aequo et bono based on fairness is a bit astonishing. See Rechtbank van Koophandel [Commercial Court] Hasselt, Sept. 20, 2005 (Belg.) (J.M. Smithuis Pre Pain v.  Bakkkershuis) ¶ 7, available at Pace CISG Database:  http://cisgw3. law.pace.edu/cases/050920b1.html (Apr. 15, 2008). In cases involving diiculties of proof with acceptable certainty, one solution is to award the least level of beneit. he plaintif may not be able to ofer suicient proof of its actual damages, but it may be clear enough that it would have at least a certain amount of beneit under the contract, of which the breach has deprived it. hat minimum amount can form the basis for a damages award, as in the CD-R and DVD-R Production Systems Case, China International Economic & Trade Arbitration Commission [CIETAC] Oct. 2007, available at Pace CISG Database: http://cisgw3.law. pace.edu/cases/071000c1.html (Sept. 4, 2009). he duty to mitigate is considerably more complex, both in ways that might be expected and in ways that might not be. We begin with straightforward matters. Most of the litigation, as you would imagine, centers on whether the buyer has covered reasonably or the seller has resold reasonably. Many involve timing. Did the aggrieved party act fast enough? Alternatively, did it act precipitously? hese kinds of issues and arguments are discussed above with respect to cover and resale damages. One complicating factor is oten that there may be a duty to mitigate even before the time for performance in cases of anticipatory repudiation, but the aggrieved party may not be able to act yet because it may have a duty to accept a cure or a performance under a Nachrist notice. Still, the cases boil down to whether the aggrieved party behaved reasonably. Other cases are similarly predictable. Recall from Chapter  4 the duty to inspect and to give notice of breach. These duties are linked to the duty to mitigate (and the right to cure), as you know. A buyer who fails to inspect may miss an opportunity to prevent a loss that occurs from using defective goods. Such a buyer will be found not only to have failed to inspect and give notice but also to have failed to mitigate, and it will be deprived of the damages it could have avoided by hewing to its assigned duties. See Oberlandesgericht [OLG] Köln [Appellate Court of Cologne] Aug. 21, 1997 (Ger.), CLOUT Case No. 284.

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A diferent dynamic is involved when the parties’ relations with each other or with the delivered goods continue and mitigation is claimed. Consider a sale of fabric for printing drapes. he buyer claims that the fabric is inferior and fails to conform to the contract because patterns do not print well on it. Nevertheless, the buyer continues to use it, not—the buyer says—because the fabric is satisfactory, but it is not completely unacceptable, and going forward as best it can is its way of mitigating. he seller will claim that this action shows that the fabric is actually just ine and that there is no breach. A court may hold that the buyer is fulilling its duty to mitigate.104 Before a court decides the issue one way or another, however, there is risk involved. he buyer should perhaps be advised that it is taking a risk by proceeding to print the drapes: a court may cite this action as evidence that the fabric is ine. On the other hand, if the buyer failed to do so, it might have violated its duty to mitigate, which is itself a risk. he buyer—the aggrieved party—is a bit between a rock and a hard place. Good courts will be sensitive to the plaintif ’s position: that it is the victim of breach, that the defendant put it in a diicult spot, and that the beneit of the doubt should go to the victim of the breach, not the party who has breached. his thinking, we believe, underlies a number of holdings, both in simple cases (was cover or resale reasonable? unduly hasty? unduly delayed? for a good price?) and more diicult ones. On the other hand, being the victim of a breach does not forgive all: that is the point of the duty to mitigate, and courts cannot, and do not, ignore it. Oten the cases of continuing but fraying relations between the buyer and seller involve eforts to negotiate a price adjustment in light of problems with the goods. A  court may ind reasonable mitigation where a party accepts a reduction in the purchase price instead of incurring the expense of return shipping.105 If one court inds this to be reasonable mitigation, then it raises the question whether there is such a duty to accept a similar ofer in order to fulill the duty to mitigate. he answer, at least in some cases, is not necessarily. A buyer need not accept goods from the seller on much worse terms than those in the contract, a Dutch court has held. See Rb Arnhem 1 maart 2006 (Skoda Kovarny/B. van Dijk Jr. Staalhandelmaatschappij B.V.) (Neth.), available at Pace CISG Database: http://cisgw3.law. pace.edu/cases/060301n1.html (Sept. 6, 2007); see also China International Economic & Trade Arbitration Commission [CIETAC] Nov. 15, 1996 (Oxytetracycline Case), available at Pace CISG Database: http://cisgw3.law.pace.edu/cases/961115c1.html ( Jan. 23, 2007). he most complex and interesting issues with respect to the duty to mitigate relate to its scope. he duty is stated in article 77 of the CISG, which is placed in Part III, Chapter V, Section II (Damages). Its placement limits its application to damages claims only. When a party seeks a performance remedy rather than damages, article 77 does not apply, at least as a technical matter. his decision raises some of the grand issues discussed above with respect to performance remedies. Recall the hypothetical case of Florian A.G. v. Mueller, involving the attempt to found an artists’ colony in New York (Problem 8.38). If Florian has a duty to mitigate, then it should stop work on the presses—cut its losses, as the saying goes—and sue for

104. he court so held, more or less, in the case on which this example is based. See Schmitz-Werke Gmbh & Co. v. Rockland Indus., Inc., 37 Fed. Appx. 687 (4th Cir. 2002), which you may recall from Chapter 4. 105. See Oberlandesgericht [OLG] Koblenz [Appellate Court of Koblenz] Oct. 19, 2006 (Ger.) (T-Shirts Case), available at Pace CISG Database: http://cisgw3.law.pace.edu/cases/061019g2.html (Nov. 7, 2008).

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those losses and the loss of its anticipated proit. his would make Florian whole on the facts presented. It would also make Mueller considerably better of than forced performance would, as Mueller has to pay much less (in damages) for the presses that are valueless to him rather than much more for completed but still valueless presses. Technically, however, the duty to mitigate does not apply if Florian pursues a performance remedy. Under the CISG, Florian is entitled to have Mueller pay the full price in return for completed presses. Although it could cut its losses at no harm to itself and to the beneit of Mueller, the duty to do so applies only if Florian seeks a damages remedy and not if Florian seeks the performance remedy. Many, however, are uncomfortable with this result. Various solutions have been proposed. To understand the problem and possible solutions, consider the following excerpts from two inluential commentaries.

JOHN O. HONNOLD UNIFORM LAW FOR INTERNATIONAL SALES UNDER THE 1980 UNITED NATIONS CONVENTION § 419.3, at 598-600 (Harry M. Flechtner ed., 4th ed. 2009) The above case [in Example  77E, similar to the Florian A.G.  v.  Mueller hypothetical] presents a common problem of statutory construction: Two general rules that in most circumstances are compatible in unusual circumstances come into conlict. The appropriate response is to adopt the solution that does the least violence to either principle. Giving effect to the mitigation principle in unusual situations like Example 77E does not make a serious inroad in the general rule requiring performance of contracts; on the other hand, failing to give effect to Article 77 in such cases nulliies the mitigation rule when it is specially appropriate. In short, the mitigation rule is lex specialis in relation to the general rule requiring (“speciic”) performance. In some cases a party’s need for requiring (“speciic”) performance may be so strong as to outweigh the mitigation principle of Article 77. Such a case is most likely to result when a buyer needs materials that are not available elsewhere. It is dificult to imagine a comparable need when the seller (as in example 77E) sues to force a buyer to accept goods; in these cases the seller usually can be fully compensated by damages.

(a) A Failed Proposal and the Vienna Conference. The question that remains is whether the above approach to mitigation is foreclosed by the consideration of this provision at the 1980 Conference. The First Committee did not reach this provision (then draft article 73) until the last week of its deliberations. At that stage the Committee took up a suggestion by the present writer prompted by the fact that the irst sentence of the article laid down a general rule requiring reasonable steps to mitigate loss while the second sentence mentioned only one sanction—reduction of damages. Out of concern that the article might be construed to exclude application of the mitigation principle to other remedies, an amendment was proposed to add at the end of the second sentence “or a corresponding modiication or adjustment of any other remedy.” Thirteen delegates addressed the question:  Five supported the measure; three were opposed; ive were concerned with the drafting—primarily because they felt that the

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reference to “any other remedy” was too vague or broad. At the conclusion of this discussion a proposal to set up a drafting party to reine the proposal was defeated (24-8). The above facts present an interesting question concerning the circumstances in which legislative history creates a binding interpretation of the Convention. Some may conclude that the discussion and vote means that in cases like Example 77E a seller’s failure to mitigate loss is irrelevant if the seller sues to recover the price in a jurisdiction where domestic law supports this broad approach to “requiring performance” (Art. 62).106 The discussion of Article 7 at §91, supra, supports the use of legislative history when it reveals the prevailing understanding of the delegates. Did the legislative body face and decide the issue posed by Example 77E? The opinions expressed in the discussion dealt with diverse reasons for not adopting the proposed amendment. This writer (although possibly blinded by interest in the issue) does not see adequate grounds for concluding that a substantial number of delegates would have rejected the mitigation principle in cases like Example 77E. Emerging from this experience is a lesson: Interpretation based on discussions by a large legislative body is more meaningful for decisions of broad issues of policy than for detailed application. The present writer surely overlooked this principle in inviting consideration (particularly in the closing days of a large diplomatic conference) of complex questions concerning the interplay of competing principles of the Convention—questions that are better left to tribunals for consideration in the light of the precise facts of the case. Ars longa vita brevis. If the verdict of history should be that the mitigation principle is inapplicable to cases like Example 77E one may seek comfort in the hope that few will act like the seller in that case and that, if this should occur, the buyer may be able to show that this conduct is inconsistent with applicable trade usage. See Art. 9(2), §§112–122, supra.

HANS STOLL & GEORG GRUBER on ARTICLE 77 in SCHLECHTRIEM & SCHWENZER, COMMENTARY ON THE UN CONVENTION ON THE INTERNATIONAL SALE OF GOODS (CISG) ¶¶ 4–5, at 788–89 (2d English ed. 2005) By permission of Oxford University Press

2. No application to other remedies The requirement that the aggrieved party should mitigate loss is, according to the wording and systematic placement, a corollary to his right to damages and restricts only that

[106]. See Hans Stoll & Georg Gruber, Art. 77 para. 4, in Schlechtriem & Schwenzer, CISG Commentary (2nd English ed. 2005) (stating that Art. 77 restricts only the right to claim damages and is inapplicable to other remedies); UNCITRAL Digest Art. 77 paras. 1 & 2 (indicating that the mitigation principle applies only if a claim for damages is made); Schlechtriem, 1986 Commentary 99. But see Hans Stoll & Georg Gruber, Art. 77 para. 5, in Schlechtriem & Schwenzer, CISG Commentary (2nd English ed. 2005) (suggesting that, in situations resembling Example 77E, a seller does not have “the right to carry out the work and deliver the speciic goods that have become useless to the buyer and when doing so is against the buyer’s wishes”).

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right. Consequently, the injured party’s failure to mitigate loss within the meaning of Article 77 does not prevent him from asserting other remedies. The American delegation’s proposal at the Vienna Conference to apply the mitigation principle contained in Article 77 to the promisee’s other remedies, including his right to claim performance, was rejected.107 Therefore, the promisee’s right to claim performance from the promisor in breach, in principle continues in full force, even where avoidance of the contract and a claim for damages would be less burdensome for the promisor, but the promisee does not take that course of action.108 The CISG does not recognize a general obligation to avoid a contract (cf. paragraph 9 below). Nor, basically, is there an indirect obligation to surrender a right to performance in order to relieve the promisor. Generally the promisee’s insistence on performance of the contract cannot therefore be criticized as a failure to mitigate loss within the meaning of Article 77, even if he subsequently avoids the contract and claims damages. The question of whether the seller may continue to insist on performance if the loss could be decreased by avoiding [the] contract is particularly problematic where a contract for work and materials is concerned. The buyer who had to change his production because of changed market conditions can neither use nor sell machinery made according to his individual speciications and will therefore refuse to take over the goods. Unlike most continental legal systems,109 the CISG does not grant the buyer a statutory right to terminate or withdraw. Therefore, even under these circumstances, the seller is in principle not obliged to avoid the contract in order to relieve the buyer and thus surrender his claim for the price.110 The only reasonable interpretation of the Convention is that the seller’s claim for the price continues to exist; it cannot be inferred, however, that the seller has a right to actually carry out the work and deliver the speciic goods that have become useless to the buyer and when doing so is against the buyer’s wishes.111 To fully satisfy the seller’s interest in proit, it is suficient that he retains his claim to the price; according to the principle of good faith in commerce he is required to deduct only the beneits which he can be shown to have gained by not completing

[107]. See Stoll, third German edition of this work, Art 77, para 2; cf. also Honnold, para 419.3, who advocated expanding the scope of the application at the Vienna Conference; Schlechtriem, Gemeinsame Bestimmungen, p 170; Ziegel, Remedial Provisions, pp 9–42. [108]. Cf. OLG Hamm, 5 April 1979, in Schlechtriem/Magnus, Art 88 EKG, No 3 and Art 60 EKG, No 1 (failure to make a possible substitute sale can be raised as an objection to a claim for the contract price only if trade usage required the seller to make such a sale); more restrictively, however OLG München, 8 February 1995, CISG-online 143, according to which the seller, after the buyer was in delay by refusing delivery, must grant a ixed period of grace and may be required to avoid the contract after its expiry according to Arts 61(1)(a), 63, 64 to prevent a loss of proit, especially if the buyer has signalled that he is willing to accept delivery and the seller is in possession of a bank guarantee to cover the obligation to pay; see also Honnold, para 419.1: no obligation to accept the buyer’s refusal of delivery and enter into a substitute transaction. [109]. Cf. §§651(1), second sentence, 649 BGB; Art 377 OR; §1168(1) Austrian ABGB; Art 1794 French Cc; Art 1671 Italian CC; on English and American law see Stoll, RabelsZ 52 (1988), 617, 638–39. [110]. Neumayer/Ming, Art 77, note 5; disapproving Herber/Czerwenka, Art 77, para 7, relying on Art 7(1). [111]. Witz/Salger/Lorenz/Witz, Art 77, para 4; in the end also Schlechtriem, Gemeinsame Bestimmungen, p 170, who assumes that there is an actual obligation to mitigate loss which can be a basis for a claim to damages; Bamberger/Roth/Saenger, Art 77, para 5; in detail on this problem Stoll, RabelsZ 52 (1988), 617, 639, 640.

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the work or which he could have reasonably gained by employing the resultant free capacity for other uses from the price.112

he next edition of the work just excerpted states a somewhat diferent view. he commentary on article 77, now under the authorship of the editor, Ingeborg Schwenzer, instead of Hans Stoll and Georg Gruber, is excerpted next.

INGEBORG SCHWENZER on ARTICLE 77 in SCHLECHTRIEM & SCHWENZER, COMMENTARY ON THE UN CONVENTION ON THE INTERNATIONAL SALE OF GOODS (CISG) 4–5, at 1042–43 (Ingeborg Schwenzer ed., 3d English ed. 2010) By permission of Oxford University Press Wording, systematic position, and drafting history of Article 77 show that the duty to mitigate damages only applies to claims for damages. Consequently, the prevailing view denies a direct application of Article 77 to other remedies. It follows that Article 77 cannot be invoked against the right to claim speciic performance or to avoid the contract. It is, however, now generally accepted that the principle to mitigate damages laid down in Article 77 and generally accepted in international trade must also have implications for other remedies.113 Hence, delaying the avoidance of the contract for speculative reasons cannot exclude the remedy of avoidance; however, Article 77 then reduces any possible claim for damage. Whether the seller may insist on speciic performance by the buyer in case the loss could be mitigated by avoidance of the contract is particularly problematic with respect to contract for goods to be manufactured. If the buyer refuses to take delivery of the goods before the seller has inished or even begun the manufacturing process, the question arises whether the seller may continue the production and force speciic performance of the contract onto the buyer by demanding the purchase price. Domestic legal systems114 do not arrive at this result, either by granting the buyer a right to cancel or avoid the contract or by excluding the right to speciic performance. There can be no other result under the Convention; two approaches may be taken. Either Article 77—despite is drafting history— is directly applied to the claim for speciic performance and the insistence on this remedy is regarded as a violation of the duty to mitigate damages; or the right of the seller to claim speciic performance is recognized but reduced by his unnecessary production costs.

[112]. Similarly also Staudinger/Magnus, Art 77, para 7; Witz/Salger/Lorenz/Witz, Art 77, para 4. [113]. Stoll/Gruber, 4th German edition of this work, Art 77, para 5; MünchKomm/P Huber, Art 77, para 3; Staudinger/Magnus, Art 77, para 6; Brunner, Art 77, para 2; Münch KommHGB/Mankowski, Art 77, paras 4, 5; Witz/Salger/Lorenz/Witz, Art 77, para 3. [114]. Cf § 2-709(1) UCC; SGA, s 49(1), (2); §§651(1), sentence 3, 649 BGB; Art 377 OR; § 1168(1) ABGB; Art 1794 French Cc; Art 1671 Italian Cc and Art 9:101(2) PECL; with regard to English and US law Stoll, RabelsZ 52 (1988), 617, 638, 639; in regard to the PICC cf Schwenzer, (1998/1999) 1 EJLR 289, 293 et seq.

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Note: Citing article 1794 of the French Civil Code, two editions of the Schlechtriem commentary suggest that domestic French law avoids the wasteful result. French law is not quite so clear to us. he cited article applies to contracts for work to be done, not contracts for sale. his results from its placement in the Code (in louage d’ouvrage, i.e., contracts for work, and not in the section on sale). It could be used by analogy in a sale, perhaps, although this use has been rejected in an old but well-known case that was noted by one of the most famous of French contracts scholars and that is still cited as the primary authority on the scope of article 1794.115 For this reason, we are not certain of the result under current French law. If the revision of the Civil Code is enacted, the result will become clear, just as the commentaries suggest. Avant-Projet de Réforme du Droit des Obligations art. 129 (Oct. 23, 2013).

Question 8.48 On what do the commentaries disagree? Do they disagree on the result in our hypothetical action for performance by Florian A.G. against Mueller (Problem 8.38)?

Question 8.49 If you are the associate for an arbitrator in Florian A.G.  v.  Mueller (Problem 8.38), what would you recommend as a holding? What is your reasoning?

Problem 8.50 Buyer in Switzerland and Seller in Finland had a contract for the sale of 5000 square meters of plastic carpeting. Seller found itself unable to supply the carpeting and suggested that Buyer contact Wholesaler in Denmark. Buyer did not do so but instead covered by buying plastic carpets for 10 percent above the contract price. It seeks that 10 percent as damages. Wholesaler would have sold the carpet for the same price as the contract price with Seller. How should the court rule?

Problem 8.51 (a) Seller in South Korea and Buyer in Switzerland had a contract for the sale of 125 tons of stainless steel wire for €300,000. When it arrives, Buyer inds it in substandard condition and duly notiies Seller. It is only worth €285,000 in its present condition. Buyer has the wire reprocessed, at a cost of €10,000, to get it into standard condition. Buyer then uses the wire as planned. Wire in standard condition is worth €300,000, as relected in the contract price, and is readily available on the market. To how much is Buyer entitled? (b) he facts are the same except that the cost of reprocessing the wire is €20,000, for which Buyer sues. Is it entitled to this amount?

Problem 8.52 Seller in Belarus and Buyer in Croatia have a contract for the sale of a group of speciied used cars for €100,000. In a phone call before delivery, Buyer repudiates the contract. Seller starts looking for alternate purchasers over the course of the next few days. hen Buyer calls back and says it would be able to buy the cars for €90,000 but not more. Seller refuses to have anything to do with Buyer. Two days later, Seller inds another purchaser who agrees to pay €85,000. Seller sues Buyer for €15,000. What result?

115. Civ. 5 janv. 1897: DP 1897. 1. 89, concl. Desjardins, note Planiol, cited in Code civil Dalloz (112e éd. 2014).

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Problem 8.53 Seller in Switzerland custom-makes a machine for Buyer in France for a price of €400,000. Buyer repudiates. Seller looks for other purchasers but can ind none. Seller then disassembles the machine at a cost of €25,000 and sells the parts for a total of €300,000. How much should Seller recover?

2. German Law and French Law on Fault and Damages he law of damages is an area where a short but still useful comparative treatment is more than a bit of a challenge. Two primary points are necessary, and each requires some elaboration. First, both French law and German law follow the expectancy principle. Second, liability in contract is still considered a kind of liability for breach of an obligation or of a duty, just as in tort. Accordingly, liability in damages is linked to a requirement, conceptually, of fault on the part of the defendant. At irst this would seem radically diferent from the common law and the CISG, in which contractual liability does not depend on fault. As explained below, however, the systems are not at all far apart in practice or even in theory.116 To take the irst point, the common law, the CISG, French law, and German law are all committed to the expectancy principle. his means that damages are measured so that the aggrieved party is put in the position where it would be had the contract been kept. he typical formulas of the CISG and UCC, discussed above, aim to do this, and tribunals applying the CISG have found them similar to various domestic laws. he measure of damages, then, is much the same across the systems under examination. A couple of qualiications, however, should be noted. German law, although its commitment to expectancy is clear, approaches damages through a bewildering number of classiications. he bottom line generally seems agreed, but even some ordinary claims like a seller’s delivery of a defective machine that causes the buyer to lose production time has been the subject of considerable debate—not over whether the damages are recoverable but under which of at least four damages theories the award of damages should be based. Given “[t]he frightening level of complexity of this system of rules,”117 we leave the details to the German lawyers to debate and litigate. For planning purposes for international transactional lawyers, or even for lawyers iguring potential recovery or exposure, the expectancy principle allows a rough calculation of damages if not the statement of the appropriate legal argument or the answer to speciic questions that can arise in an individual case. he qualiication from the French way of measuring damages comes from the opposite direction. Instead of presenting an immense and intricately constructed ediice of rules and theories, French law gives little theoretical attention to damages. he measure of damages is within the sovereign power of the trial judge to determine, so the jurisprudence has not built up a rich explanation for damages recoveries. he doctrinal writers have not shown much interest either. Accordingly, there is little discussion of the diference between the expectancy interest, putting the aggrieved party where it would be had the contract been kept, and the reliance interest, which merely aims to put the aggrieved party back to where it was before

116. his explanation draws primarily on Nicholas, supra note 57, at 224–32; Whittaker in Bell et al., supra note 34, at 341–56; Zweigert & Kötz, supra note 66, ch. 36; Zimmermann, supra note 30, at 49–61, 108–21. 117. Zimmermann, supra note 30 at 113.

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the contract. Nevertheless, there is no doubt that an aggrieved party is entitled to recover expectancy and not just reliance. he Civil Code itself allows the recovery of not just losses in the sense of the negative or reliance interest but also lost proits, which would necessarily be part of the expectancy interest. See C. civ. art. 1149. When they notice the distinction, writers on French law have therefore had no trouble concluding that the plaintif is entitled to expectancy. Discussion of fault as part of the framework for damages liability in German law and French law is confusing. It is easy to be misled into thinking that the civil law systems are entirely diferent from the common law. hey are not. he results in all of the systems are much the same, and once the words and rules in each of the systems are understood, the thinking is not very diferent either so far as sales of goods are concerned. here have even been suggestions that in this instance the civil law systems should move closer to the common law approach,118 especially as international law has moved toward the common law idea of liability for contractual breach regardless of fault, unless the breach was caused by an impediment that is beyond the defendant’s control and that the defendant could not have been expected to take into account. See CISG art. 79; see also UCC §§ 2-613 to -616. We hesitate to highlight this point, but appreciating the systemic diference, to the extent there is one, should start by understanding how the law is divided into subjects. Although the common law of contract emerged from the law of tort (also called delict, especially with respect to the civil law), the connection between contract and tort was largely severed centuries ago and was completely cut of well in the past—depending on how you measure, either many decades or, again, centuries ago. Contractual liability has been separate from tort liability at least since the nineteenth century. French and Germanic systems, however, conceive of a law of obligations, including contractual obligations and delictual obligations. hose systems therefore consider liability—particularly for damages—to result from fault, whether on the contractual side or the delictual side. he reason we hesitate to say all of this is that it tends to lead to a belief among those trained in the common law that the fault required for breach of contract is the same as the fault required for recovery in tort. his is not so. Traditionally French jurists have accepted that contractual liability is founded on a contractual faute (fault), but a common lawyer needs to treat this with considerable caution, for in this general sense, faute means no more than a “breach of duty,” the duty in question being the obligation imposed by the contract itself and it is diicult not to agree with those who say that such a broad view is taken simply in order to uphold the idea that all liability (responsabilité) must be based on faute. Whittaker in Bell et al., supra note 34, at 341–42 (footnotes omitted). here is, however, perhaps a bit more to it. For some time, French law has divided contractual obligations into types: obligations de moyens, obligations de résultat, and more unusually, obligations de garantie. (Some other

118. See Zweigert & Kötz, supra note 66, at 511–13; see also Zimmermann, supra note 30, at 53, 98–99.

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categories exist, based on or between these three, but the other categories are not relevant here.) he obligation de moyens involves a duty to take the appropriate care to try to achieve the aim of the contract. It is captured well by its alternative name, the obligation de diligence. he usual example is a doctor who in a typical case breaches his duty to his patient only when he fails to exercise reasonable care; the doctor is not necessarily liable simply because the patient does not get better. In such contracts, fault in contract and in tort are indeed much the same. Sales contracts, however, are not obligations de moyens. For the most part, they are obligations de résultat.119 Such a contract requires a person to achieve a particular result, and it is therefore sometimes called an obligation déterminée. he only excuse for not doing so is a force majeure of the type discussed in Chapter 7 and referred to above in reference to article 79. Obligations de résultat, therefore, are much the same as contractual obligations under the CISG or UCC. If the result is not achieved, then the defendant has breached its duty, and that is fault enough. Moreover, with respect to some parts of a seller’s obligation (e.g., a guarantee against latent defects and title), there is an obligation de garantie, for which not even a force majeure is a defense.120 In the end, then, a breach of a contract of sale for CISG, UCC, or common law purposes will constitute fault for purposes of liability under French law. Another note is necessary, partly with respect to fault and partly with respect to limits (or not) on damages. he foreseeability limit on damages familiar from the discussion above generally applies across systems, but French law makes an exception when the level of fault rises to the level of dol. In the absence of dol, a defendant in contract is ordinarily liable for all damages that arise directly from the breach and that are reasonably foreseeable both in type and extent (although not monetary value). A defendant whose fault rises to the level of dol, however, is not protected by the foreseeability limit. Although dol technically refers to fraud or bad faith, the jurisprudence has given it a wide meaning. Aside from including faute lourde or gross negligence, it includes deliberate breach.121 Also, recall from Chapter 4 that all sellers in business are deemed to know of all defects in the goods they sell, regardless of actual or even constructive knowledge. Finally, realize that as suggested above in the discussion on avoidability, French law sees no duty to mitigate like that in the common law, at least not in such terms. At some juncture a failure to mitigate may be so blatant that a court would see the damage as caused by the plaintif rather than the defendant, and this inding would break the causal link necessary for the damages to come directly from the breach. It is a diferent way of thinking and could lead to some disparate results from those of the common law or even the CISG. Attitudes, however, may be changing, and some eforts have been made to include a duty to mitigate in a revised Code civil, should that eventuality come to pass.

119. See Zweigert & Kötz, supra note 66, at 501. 120. See generally Mercadal, Droit commercial, supra note 32, at 309–10, ¶¶ 13253–13259, as well as C. civ. art. 1603 (“[the seller] has two principal obligations, to deliver and to guarantee the thing that it sells”). 121. Which, by the way, suggests what French courts would have to say about notions of eicient breach.

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German law, of course, has already been revised, and it has retained the fault requirement for damages, although the revision did not maintain the fault requirement for termination. Fault is not an element of the plaintif ’s claim, but the defendant is relieved of liability for damages if it can prove it “is not responsible for the breach of duty.” BGB § 280(1) 2. Compare id. § 323.122 Other than fault, the story is familiar. he requirements for damages in lieu of performance, as may be expected, match with the requirements for termination, which include the procedures discussed above that give the party in breach a second chance to perform, subject to the usual exceptions and some additional ones applicable to damages claims (e.g., BGB § 440). If the goods are defective, the buyer can obtain damages for substitute goods (i.e., damages for the whole performance) only if the defect is not minor. See BGB § 281(1) 3. If the defect is minor, of course German law also allows damages other than for nonperformance. In such a case, damages would be awarded for the diference in value or for the cost of cure. In addition, there may be damages for delay, as discussed above. he details are complicated, but the results are familiar, and as further discussion would quickly descend into the aptly described “quagmire”123 of the damages classiications, we will forgo further discussion here. It is not necessary for our purposes; we know (roughly) the bottom line. In terms of understanding the fault requirement of German law, as with French law, it is important not to equate the German breach of duty with a common law breach of the duty of care. To be sure, the BGB deinition of the obligor’s duty (§ 276) begins with a deinition that sounds much like the standards in common law torts—“intention and negligence”—but the BGB provision goes on to say explicitly that a greater obligation may be inferred from the subject of the obligation. Courts can therefore infer the giving of a guarantee or the taking on of a risk of procuring goods. his explicit if obscure phrasing is supposed to pick up, respectively, warranties of quality of goods and sales of goods described by class—thus many, many sales.124 It does not, however, jettison the fault element entirely. Whether a seller has made a warranty of quality will be a question of interpreting the individual contract in light of good faith and custom. See BGB § 157. Agreeing to sell generic goods means the seller guarantees that it will be able to procure them, although it does not necessarily warrant a particular quality. Fault is not gone from sales law, then, but as a practical matter the defendant is unlikely to be able to rebut the presumption of fault because ordinarily someone else would be able to perform—meaning that the party in breach should have been able to do so as well. Financial inability is not considered an excuse. In cases of failure to perform in accordance with the contract, therefore, the party in breach is likely to be at fault, as that term is used in German law, or is at least unlikely to be able to rebut that presumption.125 It would be going too far, we think, to say that German law is the same as the common law or the CISG, and that makes 122. Sometimes the primarily applicable section of the BGB may be elsewhere, e.g., § 437 in the case of a buyer aggrieved by defective goods, but the substantive recovery is cross-referenced to the sections cited (except on the occasion where the draters forgot a cross-reference, an oversight that may cause inconvenience but is not understood to restrict the remedies available). 123. Zimmermann, supra note 30, at 108. 124. See id. at 51. 125. See Markesinis et al., supra note 30, at 511. For this description of German law, in addition to the sources cited above, we have relied on Markesinis et al. at 444f. and 510–13.

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the next section, on price reduction, all the more important in German law. Price reduction, like termination, is not a damages remedy and does not require fault.

B. Price Reduction Article 50 of the CISG allows a buyer who keeps nonconforming goods to reduce the price. his price reduction remedy is perhaps the most deceptive and strange in the entire treaty for those not already familiar with it from their domestic law, which is to say it is quite a surprise to those trained in the common law, once they understand how it works.126 It is a monetary remedy in that it is measured in money, but it is not classiied as damages. And its calculation depends on a formula unknown to the common law, leading in some cases to a diferent amount of recovery from what would be available under the damages rules. Neither of these aspects of the remedy is likely to jump out at the reader. he formula is stated blandly, and its classiication as a remedy other than damages results mostly from its (deliberate) placement in a part of the treaty outside the damages articles, so it is not all that easy to notice. On top of which, many lawyers trained in the common law will have a diicult time conceiving the possibility that a monetary remedy is not damages, as monetary remedies and damages are usually coterminous in the common law. If this were not enough, the remedy is generally said to be of ancient origin, being the modern manifestation of the Roman actio quanti minoris. All of this makes the price reduction remedy, depending on one’s tastes, of piquant antiquarian interest or exotically cool, and all the more so because none of this is terribly obvious. he classiication of price reduction as something other than damages is most easily comprehended with the previous section in mind. Damages in civil law systems have traditionally been available only when the defendant was at fault. Although an aggrieved buyer cannot obtain damages from a faultless seller who has failed to perform according to the contract, it seems only fair that the buyer should not have to pay the entire price either. his has been one of the key functions of the price reduction remedy: a monetary allowance for the aggrieved buyer even when the seller is not at fault. As just discussed, the fault element has been worn down over the passage of centuries, particularly with the advent of a more commercial and more global epoch, but fault has not been abandoned. We have seen fault retained in the German obligations revision with respect to damages, which likewise retains price reduction as a monetary remedy available, regardless of fault, as an alternative to damages. See BGB § 441. Price reduction should be less important with the easing of the fault element, however, and the inclusion of price reduction in the CISG is questionable for a number of reasons, including the choice in the treaty to allow damages without regard to fault. If there is no fault requirement, why are both damages and price reduction necessary? here is an answer to this question. Most important, at least from a theoretical standpoint, is the observation that it is an overstatement to say that damages are available without regard to fault under the CISG (and the common law). Both recognize exceptions in cases 126. he common law is not entirely without analogues, however, at least in England. See Sale of Goods Act § 53(1) (1979) (Eng.); Dawood Ltd. v. Heath Ltd. [1961] 2 Lloyd’s Rep. 512 (Q.B.) (apportioning the contract so the buyer can pay for units delivered). Also, while price reduction is most prominent in Germanic systems, it exists in French systems as well and may have more prominence if the currently proposed revision of the French Civil Code is enacted. See Avant-Projet de Réforme du Droit des Obligations art. 131 (Oct. 23, 2013).

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of force majeure. One could say—and many would—that a party who has failed to perform in accordance with the contract is not at fault if it has been prevented from doing so by an impediment beyond its control, assuming the impediment is not something it should have taken into account at the time of making the contract. See CISG art. 79. In such cases, the defaulting party is excused in the civil law, the common law, and the CISG, as discussed in more detail in Chapter 7. On the other hand, if a party has failed to perform and it cannot blame its failure on an impediment beyond its control, or if it should have taken such a potential impediment into account at the time of contract formation, then the breaching party is indeed at fault. hese statements show that there is a fault principle at work in the CISG and the common law; it’s just that the doctrine is conined to forces majeures. (In this way, the CISG and the common law are much the same as the French obligation de résultat.) Consequently, a seller who is excused under article 79 owes no damages, but it is still liable for price reduction under article 50. he buyer cannot recover damages if the seller is not at fault, but the buyer may nevertheless reduce the price. he only real diference is that fault is deined only in reference to force majeure. So much for history and theory. What this means is that under the CISG, the buyer may reduce the price even if the buyer’s claim for damages is barred by a force majeure under article 79. he sui generis nature of article 50, that is, that it is a remedy of its own class and is neither a damages remedy nor an avoidance remedy, has other implications as well. A buyer who has missed its chance to avoid the contract because it has let a reasonable time lapse may still reduce the price.127 If the goods are without value, the price will be reduced to zero, and the buyer will be as well of with price reduction as it would be with avoidance—in fact, even better, as it does not need to make restitution of the goods under article 81(2),128 although this should not matter since the goods, by hypothesis, have no value anyway. he character of compromise that marks article 50 also seems to explain its link to excused notice under article 44. You no doubt remember from Chapter 4 the crucial requirement of giving notice of defects, a requirement that comes up constantly. Failure to give such notice bars the buyer from any remedy at all, including price reduction—in general. If the buyer has a reasonable excuse for failing to give notice, however, the buyer is allowed recourse to price reduction or to damages except loss of proits. See art. 44. hese three rules that arise from the classiication of article 50 as its own remedy may be useful to buyers on occasion. he other remarkable aspect of article 50 is its formula. All of the damages formulas, as you may or may not have noticed above, are based on a diference, which is to say, subtraction (the diference between the market price and the contract price, the diference between the cover or resale price and the contract price, the diference between the value of the goods

127. See Oberlandesgeicht [OLG] Koblenz [Appellate Court of Koblenz] Dec. 14, 2006 (Ger.), CLOUT Case No. 724; Kantonsgericht des Kantons Zug, Aug. 30, 2007 (Switz.), CLOUT Case No. 938. 128. See, e.g., Bundesgerichtshof [BGH] [Federal Supreme Court] Mar. 2, 2005 (Ger.), CLOUT Case No. 774; Ginza Pte. Ltd. v. Vista Corp. Pty. Ltd. [2003] (Austl.), available at Pace CISG Database: http://cisgw3.law.pace. edu/cases/030117a2.html ( July 31, 2009).

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as they were supposed to be and the value of the goods as they are). If you have not yet read article 50, do so now. As you may or may not have noticed, although the concept is ultimately based on a diference in value, the formula is a “proportion,” which means a fraction—which means division. As division and subtraction are diferent mathematical operations, they will sometimes lead to diferent results. Sometimes the proportional calculation will give the buyer a greater recovery than the damages remedy. To cut to the bottom line: the buyer will receive more under the price reduction remedy than under the damages remedy when the market is falling, that is, when market prices for the goods are going down. We will explain with an example. Buyer and Seller have a contract for goods for a price of $1 million, which Buyer has paid and which relects their market value. (Whether Buyer has paid or not makes no diference in the availability of remedies, see CISG arts. 50, 74, but the math will vary a bit to get Buyer to the right bottom line, as you will see). Seller delivers defective goods, but Buyer decides to keep them. he goods as they have been delivered are worth only $750,000. Assume that the market for these goods is perfectly steady at all relevant times: the price has not changed at all. Buyer may collect damages under article 74 of $250,000, that is, the diference between the value of conforming goods and the value of the delivered goods ($1,000,000 – $750,000 = $250,000). Under article 50, should Buyer elect that remedy, the math is diferent but, in this case where prices are steady, the bottom line is the same. Buyer “may reduce the price [of $1 million] in the same proportion as the value that the goods actually delivered had at the time of the delivery [$750,000] bears to the value that conforming goods would have had at that time [$1,000,000].” he proportion of $750,000 to $1,000,000 is $750,000/$1,000,000, which equals three-quarters or 75 percent. hree-quarters of the contract price is $750,000, which leads to the same bottom line. Because on our facts the buyer has already paid the $1 million price, the buyer is entitled to receive $250,000 from the seller, which is the same bottom line as the damages remedy, as we said. (If the buyer had not already paid, then the buyer would simply pay $750,000 instead of $1 million.) Now suppose the market has fallen so that values have decreased between the time of the contract and the time of delivery. At the time of delivery, conforming goods are worth $800,000 and the goods as delivered are worth $600,000. Damages are $200,000 (that is, $800,000 – $600,000). Price reduction is calculated as follows: $600,000 value of goods as delivered at time of delivery/$800,000 value of conforming goods at that time results in a proportion of three-quarters or 75% again. (We kept the numbers the same to keep this as simple as possible. It still works if you change the numbers more, which you may want to try.) hree-quarters of the price of $1 million is $750,000. As the buyer has already paid, the buyer is entitled to receive $250,000 from the seller. Buyer is better of under article 50 by $50,000 and will prefer the article 50 remedy to the article 74 remedy. In this case and any case involving a falling market, however, the buyer may prefer avoidance to either article 50 or article 74. In many cases, the buyer will want to avoid the contract entirely if it can (which will depend on whether Seller’s breach is fundamental). Avoidance relieves Buyer of its duties under the contract. See art. 80. Buyer will reject the nonconforming goods, obtain a refund of the $1 million it had paid, and buy conforming goods for $800,000 (assuming Buyer actually wants conforming goods). hen Buyer will have conforming goods at the current, lower

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market price, rather than nonconforming goods at a price that, though reduced, relects market conditions when prices were higher. Whether the buyer will prefer avoidance to price reduction will depend on the individual case: whether there is a fundamental breach, whether buyer is just as happy (or nearly as happy) with nonconforming goods, whether buyer is in a rush and does not have time to cover, and what the actual numbers are. As is probably apparent now, in a rising market the buyer will prefer damages to price reduction. Suppose that conforming goods at the time of delivery would be worth $1.2 million and the goods as delivered are worth $900,000. Damages are $300,000. he proportion (because we are keeping the numbers so easy!) is again three-quarters, which when multiplied by the price of $1 million yields, again, $750,000. he buyer will prefer to receive $300,000 in damages rather than $250,000 in price reduction. So far we have presented price reduction and damages as completely alternative remedies, and on the facts given, they are. Sometimes, though, a buyer will be entitled to both price reduction and damages. To be sure, a tribunal will be careful to award damages only for losses that are not covered by the price reduction, but many commercial cases will involve losses both with respect to the value of the goods, which would be covered by article 50, and delay damages or other consequential damages. Consider a buyer who receives nonconforming goods that are worth less than conforming goods and who must delay production, losing business because of the delay, as it readies the nonconforming goods for use. If there is a falling market, such a buyer should sue for price reduction under article 50 and for consequential damages under article 74 and should recover both. Despite the undoubted interest of the price reduction remedy—it has something for everyone, from the ancient historian to the avid comparatist to the applied mathematician to the moral philosopher—it would be easy to overstate its practical importance. True, it gives the buyer a remedial option it would not have in the common law. his option will be of value only in a falling market, though, and in such cases, the buyer will oten prefer to avoid the contract instead of reducing the price. True, price reduction allows recovery to a buyer whose damages claim is barred by force majeure under article 79. But forces majeures, we believe, are more likely to lead to cases where either no goods are delivered at all or such goods as can be delivered will be rejected by the buyer, either of which prevents recourse to article 50. Perhaps the greatest utility of price reduction is to the buyer who has missed the “reasonable time” for avoiding the contract when valueless goods are delivered. Such a buyer can obtain much the same result as avoidance by reducing the price to nothing. One might hope that such cases are rare, but that will depend on how many careless buyers are out in the world receiving valueless goods and sleeping on their rights.

Question 8.54 May a buyer reduce the price under article 50 if the seller cures the problem? What if the buyer refuses the cure? See CISG art. 50. Problem 8.55 (a) Bentham Boots in the United States employs a chemical known as PEC to treat the leather it will use. Bentham has made a contract with a new supplier, Chimes Comercial S.A. de C.V. in Mexico, which warrants that the cadmium content of the PEC is no more

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than 50 parts per million (ppm). Each shipment from Chimes Comercial costs $120,000, which relects the market price when the contract was made some time ago and which Bentham has already paid. When the PEC arrives, Bentham discovers that it is 70 ppm cadmium, and it notiies Chimes Comercial. Bentham also notiies its State Department of Environmental Quality (DEQ) because possession of PEC over 50 ppm cadmium is prohibited in the state. With the permission of DEQ, Bentham sells the Mexican PEC to a shoe manufacturer in a neighboring state where the regulatory maximum is 75 ppm (the same as in Mexico). Before the delivery, world PEC prices fell because the largest PEC manufacturer, which had been oline because of a strike, reached a deal with its workers and resumed manufacturing. PEC with 50 ppm cadmium or less now costs $100,000. Because of the 70 ppm measurement and the fall in the market, however, the most Bentham could get for the Mexican PEC is $75,000. Because Bentham was anxious to get the PEC of its premises, it has already made this sale and delivered the Mexican PEC to the shoemaker. Bentham can quickly get substitute PEC from its old US supplier so that it won’t lose any work time. Advise Bentham on its monetary remedies. Is price reduction better than damages? Compare the numbers for each. Assume for now that the contract cannot be avoided because Bentham has sold the Mexican PEC to the shoemaker and thus will be unable to return the goods to the seller. See arts. 81(2) and 82(1) (discussed in more detail below, when we will return to this problem). (b) What if Bentham had been unable to obtain cover rapidly and had to shut down its manufacturing for three days? And what if Bentham had to pay a ine to DEQ of $250,000—a ine which might have been lower, except that this was Bentham’s third environmental violation?

C. Interest and Attorneys’ Fees Some attention to seemingly collateral matters is necessary before leaving the subject of monetary remedies. he CISG provides speciically for interest, although it is notoriously coy on how the rate is to be chosen and how interest is to be calculated. See arts. 78, 84. As interest is always part of a claim, the calculation issue has come up in countless cases. Although the results and reasoning diverge widely, it is worth knowing the principal lines of thought, the diferent possible results, and the current weight of authority. Attorneys’ fees present a similar picture. hey are not part of the primary claim and, unlike interest, are not speciically allowed by the CISG. Although they are collateral to the main claim, parties oten seek them, and we suspect that readers of this book need no convincing that at least some treatment of attorneys’ fees is warranted. We begin with interest. As always, it is easiest to start with the clearest points. Interest is recoverable from the date on which the price was paid if the seller is bound to refund the price. See CISG art. 84(1). More generally, interest may be recovered “[i]f a party fails to pay the price or any other sum that is in arrears.” Art. 78. So much we know from the treaty. he case law129 has made it reasonably clear that damages are subject to interest once they are due.

129. Our descriptions of the case law are drawn from the CISG Digest (2012) at 376–77.

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Damages, the reasoning goes, are a “sum that is in arrears” if not paid when due. Less clear is whether any particular notice is necessary for interest to be recoverable and to start accruing. You will recall that some domestic systems have a long legal tradition of various notices to trigger delay damages. A couple of CISG decisions hold that notice must be given in order for interest to begin to accrue. Other cases hold that the treaty allows for interest without regard to notice. We believe these cases, which we think slightly outnumber the others, are correct, given the speciic treaty provisions for the recovery of interest without any requirement of notices, see arts. 78, 84, the general dispensation with formal requirements, see art. 11, and the undeniable fact that the treaty never hesitates to say so when a notice is necessary, see, e.g., arts. 26, 39, 43, 79. he rest of the interest rate case law is about how to set the interest rate and how to calculate interest. Although it is hardly as clear as the previous points, the majority of the cases consider the interest rate to be outside the scope of the treaty and subject to domestic law under article 7(2). Which domestic law to use is not settled. Article 7(2) says it should be “the law applicable by virtue of the rules of private international law,” and some cases so hold. his would seem to be the correct answer under the treaty if domestic law is to be used, and the cases tend to point in this direction. Other cases, however, use the law of the creditor’s country, the law applicable to the currency of payment (lex monetae), the law of the debtor’s country, or the law of the forum (lex fori). Some cases choose particular well-known interest rates, such as LIBOR, EURIBOR, or the US Treasury Bill rate. Arguably, however, none of these cases are quite right; ater all, article 7(2) states that matters not governed by the Convention should be decided in accordance with the principles on which the Convention is based, and only in the absence of such principles should tribunals resort to domestic law. Some tribunals have heeded this rule. hey emphasize that the remedial provisions of the treaty are based on full compensation to the aggrieved party and use this principle to derive an appropriate interest rate, such as short-term deposits in the plaintif ’s country for the currency of payment. We would observe that none of this need be an issue, as the contract can set interest rates, how they are to be determined, and how interest is to be calculated. For instance, many contracts set a contract rate of interest and a default rate of interest. We give such an example above. Even without express provision, a court may ind such an agreement, for example, through usage of trade under article 9. Attorneys’ fees, if not governed by the parties’ agreement, are the subject of disparate decisions just as they are the subject of disparate rules in domestic law. Under the so-called American Rule, each party bears its own attorneys’ fees and costs of suit (except for usually minimal costs shited to the losing party) unless a contract or a statute provides otherwise. In commercial cases, statutes rarely provide otherwise. Most of the statutory provisions allowing for recovery of attorneys’ fees are in areas like consumer protection, civil rights, and antitrust. Generally speaking, then, if the American Rule applies, each party must pay its own attorneys’ fees and costs unless the contract provides otherwise. Many standard contracts do. he competing rule, generally known to Anglophones as the English Rule, provides that the losing party pays all the costs and attorneys’ fees of both parties. No express contractual or statutory

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provision is necessary under this rule. Many countries follow this “loser pays” rule, although the way it works may not cover all of the actual attorneys’ fees and costs of litigation. here have been many debates about whether the English Rule or the American Rule is better, and those debates are oten hotly charged as the rules are thought to be linked to access to justice (as one side puts it) or litigiousness (as the other side says), as well as the permissibility of contingency fees. hose debates are well beyond the scope of this book. he question here is primarily whether any of the damages provisions of the CISG, most notably article 74, which provides for recovery of “the loss . . . sufered by the other party as a consequence of the breach,” allow for greater recovery than domestic law would provide, whether under the American Rule or a loser-pays rule of the relatively stingy variety. here is some case support for the proposition that the treaty does displace domestic law, but other cases rule the other way, and the leading US commentators agree130 with these other authorities that attorneys’ fees are outside the scope of the treaty and are let to domestic law. In short, authority is divided, but the great weight of authority treats the recovery of attorneys’ fees and costs as a matter for domestic law. Some of the chief arguments for doing so are stated in the following case by a famous American judge.

Zapata Hermanos Sucesores, S.A. v. Hearthside Baking Co. United States Court of Appeals for the Seventh Circuit, 2002 313 F.3d 385 Posner, Circuit Judge. Zapata, a Mexican corporation that supplied Lenell, a U.S. wholesale baker of cookies, with cookie tins, sued Lenell for breach of contract and won. The district judge ordered Lenell to pay Zapata $550,000 in attorneys’ fees. From that order, which the judge based both on a provision of the Convention on Contracts for the International Sale of Goods, Jan. 1, 1988, 15 U.S.C.App., and on the inherent authority of the courts to punish the conduct of litigation in bad faith, Lenell appeals. The Convention, of which both the U.S.  and Mexico are signatories, provides, as its name indicates, remedies for breach of international contracts for the sale of goods. Zapata brought suit under the Convention for money due under 110 invoices, amounting to some $900,000 (we round liberally), and also sought prejudgment interest plus attorneys’ fees, which it contended are “losses” within the meaning of the Convention and are therefore an automatic entitlement of a plaintiff who prevails in a suit under the Convention. At the close of the evidence in a one-week trial, the judge granted judgment as a matter of law for Zapata on 93 of the 110 invoices, totaling $850,000. Zapata’s claim for money due under the remaining invoices was submitted to the jury, which found in favor of Lenell. Lenell had iled several counterclaims; the judge dismissed some of them and the jury ruled for Zapata on the others. The jury also awarded Zapata $350,000 in prejudgment interest with respect to the 93 invoices as to which Zapata had prevailed, and the judge then tacked on the attorneys’ fees—the entire attorneys’ fees that Zapata had incurred during the litigation. 130. See Honnold, supra note 40, § 408. he case law and the weight of authority are discussed in the cited section. See also CISG Digest (2012) at 348 ¶ 27 and at 369 ¶ 11 and sources cited therein.

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Article 74 of the Convention provides that “damages for breach of contract by one party consist of a sum equal to the loss, including loss of proit, suffered by the other party as a consequence of the breach,” provided the consequence was foreseeable at the time the contract was made. Article 7(2) provides that “questions concerning matters governed by this Convention which are not expressly settled in it are to be settled in conformity with the general principles on which it is based or, in the absence of such principles, in conformity with the law applicable by virtue of the rules of private international law [i.e., conlicts of law rules].” There is no suggestion in the background of the Convention or the cases under it that “loss” was intended to include attorneys’ fees, but no suggestion to the contrary either. Nevertheless it seems apparent that “loss” does not include attorneys’ fees incurred in the litigation of a suit for breach of contract, though certain prelitigation legal expenditures, for example expenditures designed to mitigate the plaintiff’s damages, would probably be covered as “incidental” damages. The Convention is about contracts, not about procedure. The principles for determining when a losing party must reimburse the winner for the latter’s expense of litigation are usually not a part of a substantive body of law, such as contract law, but a part of procedural law. For example, the “American rule,” that the winner must bear his own litigation expenses, and the “English rule” (followed in most other countries as well), that he is entitled to reimbursement, are rules of general applicability. They are not ield-speciic. There are, it is true, numerous exceptions to the principle that provisions regarding attorneys’ fees are part of general procedure law. For example, federal antidiscrimination, antitrust, copyright, pension, and securities laws all contain ield-speciic provisions modifying the American rule (as do many other ield-speciic statutes). An international convention on contract law could do the same. But not only is the question of attorneys’ fees not “expressly settled” in the Convention, it is not even mentioned. And there are no “principles” that can be drawn out of the provisions of the Convention for determining whether “loss” includes attorneys’ fees; so by the terms of the Convention itself the matter must be left to domestic law (i.e., the law picked out by “the rules of private international law,” which means the rules governing choice of law in international legal disputes). U.S. contract law is different from, say, French contract law, and the general U.S. rule on attorneys’ fee shifting (the “American rule”) is different from the French rule (loser pays). But no one would say that French contract law differs from U.S. because the winner of a contract suit in France is entitled to be reimbursed by the loser, and in the U.S. not. That’s an important difference but not a contract-law difference. It is a difference resulting from differing procedural rules of general applicability. The interpretation of “loss” for which Zapata contends would produce anomalies; this is another reason to reject the interpretation. On Zapata’s view the prevailing plaintiff in a suit under the Convention would (though presumably subject to the general contract duty to mitigate damages, to which we referred earlier) get his attorneys’ fees reimbursed more or less automatically (the reason for the “more or less” qualiication will become evident in a moment). But what if the defendant won? Could he invoke the domestic law, if as is likely other than in the United States that law entitled either side that wins to reimbursement of his fees by the loser? Well, if so, could a winning plaintiff waive his right to attorneys’ fees under the Convention in favor of domestic law, which might be more or less generous than Article 74, since Article 74 requires that any loss must, to be recoverable, be foreseeable, which beyond some level attorneys’ fees, though reasonable ex post, might not be? And

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how likely is it that the United States would have signed the Convention had it thought that in doing so it was abandoning the hallowed American rule? To the vast majority of the signatories of the Convention, being nations in which loser pays is the rule anyway, the question whether “loss” includes attorneys’ fees would have held little interest; there is no reason to suppose they thought about the question at all. For these reasons, we conclude that “loss” in Article 74 does not include attorneys’ fees. . . . [The portion of the opinion addressing “the question of a district court’s inherent authority to punish a litigant or the litigant’s lawyers for litigating in bad faith” is omitted.]

Question 8.56 Consider the following statement from Judge Posner’s opinion: “On Zapata’s view the prevailing plaintif in a suit under the Convention would (though presumably subject to the general contract duty to mitigate damages, to which we referred earlier) get his attorneys’ fees reimbursed more or less automatically (the reason for the “more or less” qualiication will become evident in a moment). But what if the defendant won?” Would the defendant be entitled to attorneys’ fees? Could it be true that the Convention provides that plaintifs who prove a breach of contract are entitled to attorneys’ fees as a “loss” in consequence of breach under article 74 but that defendants who prove that there was no breach are not entitled to attorneys’ fees?

Question 8.57 In your job clerking for an arbitrator in an international sales case, you are asked your opinion on whether to set an interest rate based on domestic law or in some other way. What do you recommend? Why?

Question 8.58 If you were to follow the “full compensation” or “expectancy” principle in setting an interest rate, what interest rate would you use? (If you are unfamiliar with interest rates, simply consider this a conceptual question: of all possible interest rates—for seller, for buyer, for plaintif, for defendant, in diferent countries, for borrowers with good credit and bad, etc.—what should a tribunal use?)

VI. he Place of the Goods hemselves in the Remedies Scheme: Security Interests and Preservation Duties We have discussed, at some length now, remedies for breach of a sales contract. he remedies are about enforcing performance or obtaining damages, legally avoiding the contract, and obtaining other forms of legal redress. Yet scant attention has been paid to the goods. To be sure, they have come up on occasion. If the buyer keeps the goods, the buyer will have to pay for them, although if they do not conform to the contract the buyer is entitled to damages or price reduction. If the buyer does not want to keep the goods, the buyer must be legally entitled to avoid the contract. But is that all? he short answer is No. Even in a brief treatment, three ideas deserve notice: (1) the duty to preserve goods, even when something goes wrong; (2) the duty to return (make restitution of ) the goods, as well as the price, upon avoidance,

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subject to various exceptions, one of which may be (3) an aggrieved party’s security interest in the goods, or a functional equivalent of it. his part of the chapter addresses each. he discussion will be very much clearer if you irst put down this book, pick up the CISG, and read articles 81 to 88. Preservation duties are the most convenient starting point. Realize that when something goes wrong in a contract for the sale of goods, in many cases there will be goods with some value somewhere or another, very likely not in a very convenient place, and it is better for both parties and for society in general if that value is not wasted. he seller may have the goods destined for the buyer when the buyer repudiates. Or the seller may have control over them but not possession, for example, if they are in the hands of a carrier on the high seas. What is the seller to do with the goods? Alternatively, the buyer may reject nonconforming goods that still have value, but the seller may be across an ocean and unable quickly to pick up the goods that the buyer has rejected but that are nevertheless in the buyer’s possession. What now? Articles 85 to 88 answer those questions. As you see, the basic idea is that even an aggrieved party—the victim of the breach—has duties to preserve the goods. his should not come as a surprise given the mitigation rule of article 77 as well as the more general policies in favor of mitigation, discussed above. Domestic law oten has similar provisions. See, e.g., UCC § 2-603; see also id. § 2-515. Articles 85 to 88, in basic concept, are just a speciic iteration of the general mitigation principle. Once you know the mitigation principle, you can probably guess what the rules must be—preserving the goods in general, selling them quickly if they are perishable, and so on. hat is the simplest part. he next part involves restitution, which is covered by articles 81 to 84 on the “[e]fects of [a]voidance.” he idea here is that when the contract is avoided, if one or both parties have already performed, each should give back to the other whatever it has received, that is, make restitution. If the buyer has the goods from the seller, the buyer should not keep them as the buyer is relieved of its duty to pay as well as its other contractual duties. he same is true with respect to the seller and the price. his sensible idea has many implications, but not all of them are immediately apparent. As noted above, although these issues are not unimportant, they tend to be linked closely to the facts of individual cases, and we pretermit detailed treatment. he most signiicant implication of the idea is stated expressly in the Convention: if the party wishing to avoid the contract cannot make restitution, then avoidance is foreclosed as a remedy. See CISG art. 82(1). As might be expected, however, exceptions are provided when the inability to make restitution of the goods “is not due to [the buyer’s] act or omission,” when the inability is caused by inspection under article 38, and when the goods were sold in the ordinary course of business before constructive discovery of the nonconformity. See CISG art. 82(2). he inal part requires putting together the irst two parts. he aggrieved party is supposed to take care of the goods. his might well occasion some cost on the part of the party who has already been the victim of breach and who is probably already owed various obligations by the breaching party (e.g., the payment of damages). he aggrieved party might be heard with sympathy if it were to say, “I’m already owed a bunch of money, and now you want me to incur even more costs? I know you say I’ll get reimbursed, but that’s hardly much assurance when I already know the other party is untrustworthy.” he treaty’s sympathy, such as it is, can be found in the aggrieved party’s right to sell the goods under article 88(1) “if there has

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been an unreasonable delay by the other party in taking possession of the goods or in taking them back or in paying the price or the cost of preservation.” he aggrieved party in such a case gives reasonable notice, makes a reasonable sale, and then is entitled to retain enough of the sale proceeds to pay for the costs of preservation and sale. See CISG art. 88(1), (3). he treaty notably does not allow the aggrieved party to retain enough of the proceeds to defray other amounts the aggrieved party may be owed, like damages. We will come to that question in a moment, but irst it is helpful to understand a deeper point. Functionally, the right to sell the goods and to retain some of the proceeds to satisfy the other party’s (we will say defendant’s) obligation to the agreed party (plaintif ) is a security interest. he goods, in other words, are serving as collateral for the defendant’s obligation to pay for the costs of preservation. Speaking simply and a bit roughly, if the defendant defaults on that obligation, then the plaintif can sell the goods and keep enough of the money to satisfy that obligation. hat is exactly what a security interest is: a right to sell property to satisfy an obligation on which there has been a default.131 From a practical standpoint, then, the CISG gives the aggrieved party a security interest in the goods in its possession to secure the defendant’s obligation to pay for preservation.132 It is not a full-blown consensual security interest of the type used in the United States. For one thing, it is triggered only under the conditions stated in article 88(1), like unreasonable delay in paying what is owed or picking up the goods. Sometimes the parties—generally the seller—will want a security interest so the aggrieved party (again, generally the seller) can retrieve and sell the goods if it is not paid. his is perfectly possible under US law. Security interests are governed by UCC Article 9, a large and complex statute that is itself the subject of many volumes and that is outside the scope of this book. But you should know that it is possible under US law, and to some extent under other laws, but you should also know that some systems are relatively hostile to security interests, and in any event, security interests are generally outside the scope of the treaty as they are interests in property excluded under article 4(b). Because of these cross-border issues, international law has generally solved credit problems not with security interests but with letters of credit and the like, as discussed in Chapter 6. Nevertheless, with the idea of the security interest in mind, we can take up the question posed earlier: Does the aggrieved party have the right to retain the proceeds of an article 88 sale to cover costs other than the costs of preservation (and of the sale itself )? We believe the practical answer is yes, because of another provision in the treaty: article 81(2) says that

131. If the idea is unfamiliar to you, consider the typical example in the United States. If you buy a car on credit (so that you do not pay the whole purchase price at the time of the sale), you will make monthly payments to cover the rest of the price, along with interest. You will be required to sign a document evidencing your promise to pay as well as a document allowing the seller, if you fail to pay when you are supposed to, to take the car from you and to sell it. he seller is allowed to keep enough of the proceeds of the sale to satisfy your obligation to the seller. hose documents you signed grant the seller a security interest in your car, permitting it to do all of these things. How all of this happens is subject to extensive regulation. See UCC Art. 9. 132. In usual US parlance, this is more like a statutory lien than a security interest. he usage varies; these terms sometimes have applicable technical deinitions and sometimes do not. In ordinary usage, lawyers usually say “security interest” when referring to an interest granted by the debtor consensually and usually say “statutory lien” when the same kinds of rights arise not from the debtor’s consent but from the law.

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if both parties are to make restitution, then they are to do so at the same time. Although what we are discussing (the right to retain some proceeds and the duty to pay the rest to the other party) is not exactly restitution, as a practical matter the aggrieved party who has the proceeds of the sale is entitled to keep part of them (to pay preservation and sale costs) and is unlikely to turn over the rest until the defendant satisies its obligations to the aggrieved party. If the party in breach does not do so (and it probably will not), then the aggrieved party can sue the defendant. he defendant may make a claim for return of the sale proceeds that are in excess of the preservation and sale costs, but the defendant will be making that demand at the same time the aggrieved party is making its demands. In the end, as a practical matter, the aggrieved party should come out ine, assuming there are no issues of bankruptcy or insolvency involved. We have not yet given an answer, though, to the question we posed, which was a question of “right.” In the previous paragraph we observed that the plaintif, if it is at all practically minded, would not just send excess money to the defendant that owes the plaintif money. Who would do that? he question of right does not matter on our simple facts. But it does matter if bankruptcy or insolvency issues come into play. In those cases, other creditors of the defendant will be involved and will want the money that is in the plaintif ’s hands. True, the plaintif is entitled to the money, at least to the money for costs of preservation and sale. But those other creditors of the breaching party may have their own entitlements, and other questions arise: Does our aggrieved party in the sale contract have rights good against not only the breaching party but against others? Rights that are good against third parties— good against the world—are property rights, excluded from CISG coverage per article 4(b), as just noted. Even if our aggrieved party has property rights, some of those other creditors may also have property rights, and there will be a question of priority. his is the subject of bankruptcy law and the law of security interests, and to some extent, the law of civil procedure with respect to what may be claimed in setof or recoupment. You should understand the questions, but how they are resolved will have to be let to other (very substantial, sometimes multi-volume) works. Again, if these issues are foreseeable, a letter of credit or other performance guarantee may well be worth the money. To say the issues are excluded from the CISG is not to say they go away, and we do not wish to leave the question entirely unanswered by referring to scary multi-volume treatises. We can give a reasonably simple answer with respect to an aggrieved buyer under US law, which takes a friendly attitude to security interests. Under UCC § 2-711(3), an aggrieved buyer who has rejected the goods but still has possession of them is given a security interest (not just functionally, but legally) to secure the price paid and costs of “inspection, receipt, transportation, care and custody.” Again, the buyer is not given a security interest for everything it is owed, but it does have a security interest for these readily ascertainable amounts. he buyer may hold the goods until the seller pays, and if the seller does not pay, the buyer may itself sell the goods and keep the proceeds to satisfy the obligations secured.133

133. For a recent case discussing similar issues—although not quite the same, and involving the complication that the aggrieved party could not sell the goods without a court order because they bore the other party’s trademark— see Doolim Corp. v. R Doll, LLC, No. 08 Civ. 1587(BSJ)(HBP), 2009 WL 1514913 (S.D.N.Y. May 29, 2009).

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Question 8.59 Return to Problem 8.55. May Bentham avoid the contract given that it has sold the chemicals? See CISG arts. 81 to 84.

Question 8.60 Your client, a buyer who has rightfully rejected goods and avoided the contract, nevertheless has those goods in its possession. What must it do? Can it sell the goods immediately? Must it?

Question 8.61 If you were a seller in the United States, would you take a security interest in goods that you were selling internationally? Why or why not?

VII. Contractual Remedies Leaving the last word to the parties and their contract is perhaps appropriate. Frequently parties will include a clause, and sometimes elaborate provisions, governing remedies. he parties may agree to limit damages or to liquidate them (i.e., give a speciic number for them or specify a way to calculate them) or even to penalize the party in breach. he conventional view is that the parties, as far as the treaty is concerned, are free to do what they will because of the autonomy granted by article 6, and such contractual provisions survive breach and even avoidance under article 81(1). If the parties wish to limit the damages recoverable, they may. See Hovioikeus Turku [Court of Appeal]Apr. 12, 2002 (Finland) (Forestry Equipment Case), available at Pace CISG Database: http://cisgw3.law.pace.edu/cases/020412f5.html ( Jan. 14, 2014). From the standpoint of both planning and doctrine, the drating and the analysis may go one of two ways. For present purposes, consider a clause that restricts damages for breach to refund of the purchase price. his clause is a restriction on remedy, and in particular, a limitation of damages. If the goods fail to conform, the seller has breached, and the seller owes damages, but they are restricted to refund of the price. his sort of clause, or a clause disclaiming incidental and/or consequential damages, may be particularly important. Recall that consequential damages caused by the breach are recoverable as long as they are reasonably foreseeable. See CISG art. 74. If a party is told about potential consequentials at or before the time of contracting, it will be liable for them if its breach causes them: they were not only foreseeable but foreseen. Foreseeable and foreseen damages can be very large, and there is no requirement that a party (it is usually the seller who cares about such things) agree, even tacitly, to be responsible for them, as discussed earlier in the chapter. Because it is so easy for a buyer in many cases to show quite large foreseeable or foreseen consequential damages, many sellers regard a consequential damages disclaimer as one of the more important terms of the contract. Alternatively, a seller may choose a diferent route:  to disclaim representations with respect to the goods (what would probably be called a warranty disclaimer under domestic law). In that case, as long as the seller delivers the goods, the seller is not in breach. here is no question of remedy because there is no liability because there is no breach. hese sorts of disclaimers and questions with respect to their validity are discussed in Chapter 4.

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Remedies provisions, however, are not necessarily limitations; they may be more about assuring an adequate or perhaps generous or maybe even penal level of damages, and this chapter is the place to discuss those provisions. he conventional view is that the parties under their article 6 power may include such clauses, but their enforceability is a matter of validity excluded from the Convention by article 4(a). A couple of dissents have recently been voiced, suggesting that such clauses are indeed governed by the treaty or at least international standards and should generally be enforced,134 but the orthodox view remains staunchly (and we think correctly) defended.135 Accordingly, the validity of such clauses is subject to domestic law, although perhaps with international standards of reasonableness to be kept in mind.136 If the clauses are a good faith estimate of damages, all systems generally enforce them.137 he questions arise when the parties seek to set damages that are more than compensatory; such damages are oten seen as penalties for nonperformance. On this question systems difer. Penalties, including disguised penalties, are disallowed by the common law. Penal clauses, however, are allowed by the civil law, but as usual the diferences between the systems may not be as great as at irst appears. As before, we will take US law, French law, and German law as exemplars. he common law of course has a history with penal clauses. In earlier days, contractual liability was arranged through penal bonds. If you loaned me £450 and our agreement was that I would repay it and a bit more, let us say £500 total, in one year, we might have documented this obligation to say that I pay you £1000 unless I paid you £500 by one year from the date of the bond. his arrangement would give me a good incentive to pay you on time. As long as I did so, then the condition would be fulilled and my duty to pay the £1000 would be discharged. If I failed to pay on time, my obligation to pay you £1000 would be enforceable against me in a court of law. To some, at least, this arrangement could seem rather unfair to me, particularly if I were just a day late. I might seek relief in equity, and the courts of equity would relieve me against this forfeiture. Why should I forfeit so much money if my lateness caused you only a few pounds of harm? Eventually, the courts of law started following the equitable rules too. Penalties came to be prohibited. On the other hand, all of the courts recognized the beneits of having the parties make a real, good faith estimate of their damages (as opposed to penalties). Damages can be quite diicult to measure, especially for a jury, and the parties are in a better position to know the actual damages. Paying heed to how the parties themselves estimate the damages, pre-dispute, would therefore seem wise—assuming that they were in fact trying to estimate the damages

134. See Pascal Hachem, Fixed Sums in CISG Contracts, 13 Vindobona J. Int’l Com. L. & Arb. 217 (2009); Pascal Hachem, Agreed Sums in CISG Contracts, 3 Belgrade L.  Rev. 140 (2011); Bruno Zeller, Penalty Clauses: Are hey Governed by the CISG?, 23 Pace Int’l L. Rev. 1 (2011). 135. See Jack Graves, Penalty Clauses and the CISG, 30 J.L. & Com. 153 (2012). 136. CISG Advisory Council Opinion No. 10, Agreed Sums Payable upon Breach of an Obligation in CISG Contracts ¶ 4 (Aug. 3, 2012), available at Pace CISG Database: http://www.cisg.law.pace.edu/cisg/CISG-ACop10.html. 137. Schlechtriem & Schwenzer, supra note 41, at 93 ¶ 44.

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and not trying to set a penalty. Plus, it would be nice to save judicial resources so such matters could be settled as a matter of course, simply by looking at the contract, instead of having to subject a dispute to trial. Such clauses can even obviate questions of mitigation.138 So the law needed a test to distinguish valid liquidated damages from invalid penalties. his took some time, with the most recent development occurring during the twentieth century. he current test for sales of goods is now a matter of statute and appears in UCC § 2-718. Read it now. Subsection (1) is the general test; subsection (2) provides a special rule for deposits, and subsections (3) and (4) provide some rules for particular applications of subsection (2). You should realize that a deposit that is said to be non-refundable is in operation either a valid liquidation of damages or an invalid penalty, so deposits are subject to policing. Deposits are so common, however, and have such special characteristics (i.e., that they have already been paid, as opposed to being a mere claim that is supposed to be paid), that the statute gives a rule that applies particularly to them. he concept is clear enough with respect to all of these issues: good faith estimates of damages are valid, penalties are invalid, and courts will snif out a penalty that is masquerading as something else. In addition, the courts can use §§ 2-718 and -719 to police against damages that are too low. he details of many of these issues are a problem, especially because of faulty drating in § 2-718, but we will not go into them. he civil law concept is clear enough too, but in its usual formulation, we think it is a bit misleading to lawyers trained in the common law. “German law has no diiculty giving full efect to penalty clauses,” says a leading English-language treatise (citing BGB §§ 336–345).139 his seems quite diferent from the common law rule. he treatise then adds, though, that a disproportionate penalty can be reduced to a “ ‘reasonable’ amount” under § 343. A common lawyer might then ask how it could be said that “full efect” is given to penalty clauses. We have no answer to that question but instead observe that a diference in attitude and thinking leads to a German lawyer saying one thing and a common lawyer understanding another. In any event, once the § 343 rule on reduction is taken into account, as well as the common law rule that the breaching party bears the burden of proving that a contractual remedy is in fact a penalty, “it may well be that the apparently substantial diference in starting points between English and German law is in practice signiicantly reduced.”140 We cannot say that the results are the same; we do not know. But it does appear that the usual statements suggest much greater disparity between the systems than there actually is. Here are the most pertinent rules from German law:141

138. For discussion and implications, see Wassenaar v. Towne Hotel, 331 N.W.2d 357 (Wis. 1983) (Abrahamson, J.), which seems generally to be in accord with Crudex Chemicals Oy v. Landmark Chemicals S.A., Hovioikeus hovrätt [HO] Helsinki [Appellate Court of Helsinki], May 31, 2004 (Finland), available at Pace CISG Database:  http://cisgw3.law.pace.edu/cases/040531f5.html (Nov. 23, 2009); Gerectshof ’s Arnhem, Aug. 22, 1995 (Diepeveen-Dirkson B.V. v. Nieuwenhoven Vichandel GmbH) (Neth.), available at Unilex Database: http:// www.unilex.info/case.cfm?id=156. 139. Markesinis et al., supra note 30, at 444. 140. Id. 141. We have omitted the rules on earnest money, which is analogous to but not the same as a deposit under the UCC.

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GERMAN CIVIL CODE (BGB) Bundesministerium der Justiz (Langenscheidt Translation Service, Neil Mussett trans.) © 2012 juris GmbH, Saarbrücken http://www.gesetze-im-internet.de/englisch_bgb/englisch_bgb. html#p0430 Section 339 Payability of contractual penalty Where the obligor promises the obligee, in the event that he fails to perform his obligation or fails to do so properly, payment of an amount of money as a penalty, the penalty is payable if he is in default. If the performance owed consists in forbearance, the penalty is payable on breach.

Section 340 Promise to pay a penalty for nonperformance (1) If the obligor has promised the penalty in the event that he fails to perform his obligation, the obligee may demand the penalty that is payable in lieu of fulilment. If the obligee declares to the obligor that he is demanding the penalty, the claim to performance is excluded. (2) If the obligee is entitled to a claim to damages for nonperformance, he may demand the penalty payable as the minimum amount of the damage. Assertion of additional damage is not excluded.

Section 341 Promise of a penalty for improper performance (1) If the obligor has promised the penalty in the event that he fails to perform his obligation properly, including without limitation performance at the speciied time, the obligee may demand the payable penalty in addition to performance. (2) If the obligee has a claim to damages for the improper performance, the provisions of section 340(2) apply. (3) If the obligee accepts performance, he may demand the penalty only if he reserved the right to do so on acceptance.

Section 342 Alternatives to monetary penalty If, as penalty, performance other than the payment of a sum of money is promised, the provisions of sections 339 to 341 apply; the claim to damages is excluded if the obligee demands the penalty.

Section 343 Reduction of the penalty (1) If a payable penalty is disproportionately high, it may on the application of the obligor be reduced to a reasonable amount by judicial decision. In judging the appropriateness,

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every legitimate interest of the obligee, not merely his inancial interest, must be taken into account. Once the penalty is paid, reduction is excluded. (2) The same also applies, except in the cases of sections 339 and 342, if someone promises a penalty in the event that he undertakes or omits an action.

he situation with French law is much the same as with German law: close attention must be paid in order to avoid misunderstanding. Under the Code civil as originally drated, clauses pénales were valid: “Where an agreement provides that a party who fails to perform will pay a certain amount as damages, the other party cannot be awarded a greater or lesser amount.” C. civ. art. 1152 (our translation). his was quite a broad validation of contractual damages provisions. hat clauses pénales were upheld should not come too much as a surprise, though, because a clause pénale in French law includes any stipulation aimed at assuring performance, which is a meaning considerably wider than what the common law means by a penal clause.142 hat such clauses would generally be valid makes sense in any system permitting a reasonable degree of contractual freedom; the problem is those clauses pénales that stipulate a large amount unrelated to the plaintif ’s injury. Indeed, the broad validation of clauses pénales in article 1152 did lead to such abuses, and eventually the article was amended so now the judge can reduce or increase the agreed amount if the amount agreed “is manifestly excessive or derisory.”143 Although these decisions rest in the sovereign power of the trial judge, the Cour de cassation has asserted careful control in a series of cases, and most notably, has required that the trial judge show how the diference between the damages sufered and the agreed amount is of suicient magnitude in order to meet the “manifestly excessive or derisory” test in the Code.144 In the end, the civil law systems respect contractual penalties but in some cases will reduce them. his is a real diference from the common law, in which penalties are prohibited. How diferently the rules operate in practice given the possibility of judicial reduction in the civil law is an empirical question to which we wish we had an answer. It is a question that would be diicult to research and diicult to answer. We are let with the hunch, although it is only a hunch, that the diferences are not as great as they may at irst seem, but that chances in litigation, and thus settlement values before decision, will difer appreciably. A  party who wishes to include an enforceable penalty would in all likelihood fare better under French or German law than under US law.

Question 8.62 (a) Buyer is in France and the Seller is in the United States. hey make a contract for the sale of 10,000 barrels of standard low-sulfur No. 2 diesel fuel for $2 million FOB US Gulf Coast with the following clause: “Damages are agreed as follows: (a) if the fuel does not pass laboratory tests for sale as low-sulfur No. 2 diesel but it can be reprocessed

142. Whittaker in Bell et al., supra note 34, at 356–57. 143. C. civ. art. 1152 as amended by L. nº 85-1097 du 11 oct. 1985 and by L. nº 75-597 du 9 juill. 1975. 144. See Nicholas, supra note 57, at 234–36.

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to meet the contract speciications, damages shall be twice the cost of reprocessing; (b) if the delivery is late, damages shall be one percent (1%) of the purchase price for each day late; (c) in the case of all other nonconformities, damages shall be twice the purchase price.” he fuel is delivered seven days late, and it needs reprocessing, which costs $500,000, including transportation to the reprocessing plant. Without the reprocessing, there would have been no market for the fuel. Buyer argues that the fuel as delivered was worthless for that reason, although the Seller argues that its value was essentially the market price of conforming fuel minus the cost of reprocessing. he fuel was supposed to arrive February 2, it actually arrived February 9, the reprocessing took until February 21, and on February 21 the Buyer resold the reprocessed fuel, which by then qualiied as low-sulfur No. 2 diesel, to someone else for $1.5 million FOB the reprocessing plant. he $1.5 million price is consistent with the market price throughout February. Buyer does not try to avoid the contract because the contract deines fundamental breach to require either nondelivery, delivery over 30 days late, or delivery of nonconforming fuel incapable of reprocessing. To what extent is the contractual remedy enforceable? (b) If the contractual clause is invalidated, how much should the plaintif recover?

Question 8.63 (a) Which system is better, the civil law or the common law? Would you go further? How do these rules relate to freedom of contract? Should the law take a paternalistic stance to commercial parties engaged in international sales? (b) How do the ideas of eicient contracting and eicient breach afect your analysis? (With respect to eicient contracting, suppose you have poor credit but are certain that you can perform a particular contract that, if you can only enter into it, will have great beneit to you. How can an enforceable penalty clause help you?) If you reach the end of any law book, you have accomplished something. Congratulations! At this point in any book, though, you would correctly think that you have the right to know whodunit. What good book would leave that out? It was not the butler with a lead pipe in the library. his is an excellent place, having considered the parties’ eforts in their contract to provide the rules, and more concretely, the remedies, that would apply to them and their deal, to note that the parties “done it.” hemselves. With the contract, not the lead pipe. heir legal relationship is governed by the terms they have agreed, and they have very great freedom of contract, even to the extent of choosing which law will apply. he parties are responsible, and the instrument of their freedom is their contract. At that juncture you think the book would end, on a satisfying note, having pulled the threads together in a way that you knew would come but could not quite articulate. Still, you would be let with a niggling suspicion that one strand wriggled dangerously loose. And you would be right. It is true that the parties done it with their contract (in the library, perhaps, or more likely, the closing room, or more likely still, over the telephone, or most likely, through some electronic communication). But the powerful accomplice

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still lurks. Who? he law. he law is what gives binding force to the parties’ agreement, whether it is about their speciications for the goods, or the issues they let out of their inevitably incomplete contract, or most important, the remedies the law is prepared to enforce against the breaching party. he parties’ have great power, given them by the law, to set their own terms. But that power is not unlimited. he power, and the limits of that power, are all set by the law. It is your job to harness that power, even as you understand its limits.

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Bills of Exchange Act 1882 (U.K.), 314, 318 § 38, 318 Bürgerliches Gesetzbuch (BGB) – German Civil Code § 126a, 155 § 150(2), 117-19, 120-21, 122 § 154, 121 § 155, 121 § 241 § 241(1), 403 § 241(2), 75 § 242, 75 § 275, 394, 403, 404 § 280, 379 § 281, 380 § 281(1), 384 § 286, 380–81 § 311, 75 § 313, 323, 404n80 § 323, 393 § 323(2), 394 § 323(3), 394 § 323(5), 384 § 325, 397 § 326, 394 § 349, 394 § 434, 236 § 444, 234, 236 Carriage of Goods by Sea Act (COGSA), 259 Code civil – French Civil Code Art. 1101, 119 Art. 1104, 76 Art. 1104-1, 76 Art. 1104-2, 76 Art. 1108, 119

462

Table of Stat u t es Art. 1126, 401n71 Art. 1134, 240 Art. 1138, 401 Art. 1139, 381 Art. 1142, 401n71 Art. 1146, 381 Art. 1156, 120 Art. 1184, 395 Art. 1316-1, 155 Art. 1316-3, 155 Art. 1382, 107 Art. 1582, 29, 401 Art. 1583, 29, 120, 247, 401 Art. 1589, 94, 401 Art. 1591, 94 Art. 1592, 94 Art. 1610, 396 Art. 1612, 395 Art. 1613, 395 Art. 1641, 236 Art. 1642, 236 Art. 1643, 236 Art. 1653, 395 Art. 1654, 396 Art. 1657, 396 Art. 1794, 435–36 Common European Sales Law (CESL), 35 Convention on the International Sale of Goods (CISG) Art. 1, 43, 48, 51 Art. 1(1)(a), 2, 42–43, 46, 69–70 Art. 1(1)(b), 379 Art. 2, 48, 145 Art. 2(a)-(f ), 48 Art. 3, 48, 49, 50, 51 Art. 4, 55, 57, 98, 141, 156, 186–87, 209, 233–34 Art. 4(b), 247 Art. 5, 55, 209, 428 Art. 6, 2, 32, 42, 64, 70, 98, 136, 160, 326 Art. 7, 33, 81, 430 Art. 7(2), 33-34, 55, 66, 113 Art. 8, 93, 136, 157, 160, 162, 174, 176–77, 193, 382 Art. 8(3), 363 Art. 9, 93, 97, 139, 174–75, 177, 190, 193, 235, 363, 382 Art. 10, 43 Art. 11, 61, 90, 109, 142, 145–46, 156, 234–35, 374 Art. 12, 146, 234 Art. 13, 154 Art. 14, 91–95, 97-98, 103, 139 Art. 15, 92, 110 Art. 16, 109, 112–13, 156, 177 Art. 17, 117 Art. 18, 91–92, 104, 111–13, 116, 138, 177 Art. 19, 9, 111, 114, 117, 122, 136

Table of Stat u t es Art. 21, 112 Art. 22, 112, 116 Art. 23, 112–13, 116, 117, 139, 156 Art. 25, 244, 244, 349, 367, 387 Art. 26, 244, 350, 351, 367, 379, 383, 385, 394 Art. 27, 232 Art. 29, 61, 141–42, 146, 156, 374 Art. 30, 51 Art. 31, 178 Art. 31(a), 254 Art. 34, 363 Art. 35, 115, 179, 185–86, 193, 233, 235, 242 Art. 35(1), 185, 188 Art. 35(2), 58, 186–87, 190-91, 194–95, 209, 234–35 Art. 35(2)(b), 368 Art. 36, 195 Art. 37, 363–64 Art. 38, 212–13 Art. 39, 213, 220, 231, 232, 351, 385 Art. 40, 220 Art. 41, 179, 186, 427 Art. 42, 186 Art. 43, 351 Art. 44, 213, 219–20, 232 Art. 45(1), 326 Art. 46, 409 Art. 47, 360, 379 Art. 47(1), 372 Art. 47(2), 361, 372 Art. 48, 364, 385, 388 Art. 49, 244, 367, 379, 385, 388 Art. 49(1)(b), 372 Art. 49(2), 351 Art. 50, 193, 219 Art. 51, 384–86 Art. 53, 51 Art. 55, 91, 97–98, 178 Art. 57, 428 Art. 61(1), 326 Art. 62, 418 Art. 63, 360 Art. 63(1), 372 Art. 63(2), 361, 372 Art. 64, 367 Art. 64(1)(b), 372 Art. 64(2), 351 Art. 67, 178 Art. 67(1), 254, 256 Art. 68, 178 Art. 69, 178 Art. 70, 178 Art. 71, 353, 356 Art. 71(1), 383 Art. 72, 355, 356 Art. 72(1), 383

463

464

Table of Stat u t es Art. 73, 382, 383 Art. 74, 34, 179, 414, 417, 418, 428, 429 Art. 75, 379, 415 Art. 76, 416 Art. 76(2), 416 Art. 77, 429, 430, 431 Art. 78, 55, 56, 419 Art. 79, 326–27, 332–33, 336–37 79(1), 327, 331 79(2), 335, 340 79(3), 331 Art. 81, 391 Art. 81(2), 391 Art. 82, 409 Art. 93, 47 Art. 95, 46 Art. 96, 146, 234 Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 9 U.S.C. Ch. 2 (1958) (Arbitration Convention), 125 United Nations Convention on the Use of Electronic Communications in International Contracts (CUECIC), 155 E-SIGN Act in the United States (2000) §101(a), 92 E-SIGN, 15 U.S.C. § 7006(9), 155 E-SIGN, 15 U.S.C. § 7006(5), 155 E-SIGN, 15 U.S.C. § 7001(a), 155 EU Products Liability Directive Art. 1, 211–12 Art. 2, 211–12 Art. 3, 211–12 Art. 6, 211–12 Art. 12, 211–12 Federal Arbitration Act 9 U.S.C. §§ 3 & 206, 69 Federal Bills of Lading Act, 268 General Agreement on Tarifs and Trade (GATT) Article XX, 36 International Organization for Standardization (ISO) ISO 9000, 237 ISO 26000, 241 ISO 14000, 241 Law Reform (Enforcement of Contracts) Act 1954 (UK), 145 N.Y. General Obligations Law § 5-1401.1, 70 § 1402.1, 70–71

Table of Stat u t es Pomerene Act. See Federal Bills of Lading Act Principles of European Contract Law (PECL), 41–42 Restatement (First) of Conlict of Laws (1934) § 332, 113 Restatement (Second) of Conlict of Laws (1971) § 188, 113 Restatement (Second) of Contracts (1981) § 26, 74 § 58, 119 § 59, 119 § 87(2), 107, 108 § 90(1), 107 § 201(1), 162 § 201(2), 162 § 241, 365 Restatement (Second) of Torts (1965) § 402A, 210 Restatement (hird) of Torts: Products Liability (1998) § 1, 210–11 § 2, 210–11 § 3, 210–11 Sale of Goods Act (1979) (U.K.) § 17, 263 § 20(1), 246, 263 § 53(1), 441n126 Social Accountability International (SAI) SA 8000, 241 UNCITRAL Model Law on Electronic Commerce (1996) Art. 5, 92, 155 Art. 6, 92, 155 Art. 7, 92, 155 Art. 15(2), 116 Unidroit Principles of International Commercial Contracts (PICC), 34–35, 41-42, 333 Uniform Commercial Code (UCC) § 1-103, 29, 160 § 1-103(b), 337 § 1-105, 69 § 1-201, 174 § 1-201(b)(3), 363 § 1-201(b)(16), 265 § 1-203, 54

465

466

Table of Stat u t es Former § 1-105/Revised § 1-301, 35, 42, 66–67, 69–71 Former § 1-105(1)/Revised § 1-301(a), 257 § 1-302, 244 Former § 1-205/Revised § 1-303, 257 § 1-303, 190, 205, 363 § 1-305(a), 414n91 § 2-105, 48 § 2-106, 48 § 2-107, 48, 50, 51 § 2-201, 90, 92, 125, 145 § 2-202, 160, 236 § 2-204, 91, 94–95, 122 § 2-205, 109, 156 § 2-206, 92, 113–15 § 2-207, 122–24 § 2-209, 61, 141–42, 156 § 2-305, 91, 95, 178 § 2-306, 100 § 2-308, 178 § 2-106, 350 § 2-312, 179, 186 § 2-312(1)(a), 427 § 2-313, 185, 190 § 2-314, 179, 186, 190, 194, 235 § 2-315, 179, 186, 235 § 2-316, 179, 234, 235 § 2-318, 209 § 2-319, 259 § 2-319(1), 261 § 2-320, 259 § 2-321, 259 § 2-401, 247, 401n72 § 2-501, 400n70 § 2-508, 365–66 § 2-508(2), 392 § 2-509, 178, 247, 257 § 2-510, 178, 247, 257 § 2-601, 365, 391, 392 § 2-602(1), 351 § 2-607, 392 § 2-607(3)(a), 351, 392 § 2–609 § 2-609(1), 352 § 2-609(4), 352–53 § 2-610, 350, 355 § 2-612, 244, 350, 392 § 2-612(1), 383 § 2-615, 322, 326, 336 Cmt. 5, 340 § 2-704(1), 400n70 § 2-706, 419 § 2-706(1), 415, 418

Table of Stat u t es § 2-708, 419, 426 § 2-708(1), 416, 418, 419 § 2-708(2), 419–20 § 2-709, 400, 409, 418 § 2-710, 418 § 2-711(1), 417 § 2-712, 418, 426 § 2-712(2), 415, 418 § 2-713, 418, 426 § 2-713(1), 416, 418 § 2-714, 418 § 2-714(2), 417 § 2-714(3), 418 § 2-715, 179, 418 § 2-715(1), 418 § 2-715(2)(a), 429 Cmt. 2, 430 § 2-716, 400, 409 § 2-716(3), 401n72 § 3-103(a)(1), (4)-(5), 314 § 3-104, 314 § 3-204, 314 § 3-302, 314 § 3-302(a)(2), 318 § 3-408, 314 § 3-415(a)-(b), 315 § 4-103(a), 276 § 4-202(a)(1), 276 § 5–103 § 5-103(c), 286 § 5-103(d), 298 § 5-108(a), 287, 288 § 5-109, 300 § 5-109(a)(1)(iv), 319 § 5-116(c), 286, 288 Uniform Customs and Practice for Documentary Credits (UCP 400), 284, 289 Uniform Customs and Practice for Documentary Credits (UCP 500), 284, 289 Uniform Customs and Practice for Documentary Credits (UCP 600), 284–86, 287, 288–89, 290, 292, 299, 316–17, 319 Art. 1, 284 Art. 2, 284–85, 317 Art. 4, 299 Art. 5, 299 Art. 7, 285, 315 Art. 8, 285–86 Art. 12(b), 319 Art. 14, 288 Art. 14(c), 287 Art. 16, 288–89

467

468

Table of Stat u t es Uniform Electronic Transactions Act (1999) (UETA) § 2(8), 92, 155 § 2(13), 92, 155 §7, 92, 155 Uniform Rules for Bank-to-Bank Reimbursements (URR 725), 284 Uniform Rules for Collections (1995 Revision) (URC 522), 273, 274–76, 280, 315, 316 Art. 1, 274 Art. 2, 316 Art. 3, 274 Art. 4, 274–75 Art. 5, 275 Art. 6, 275, 316 Art. 7, 274 Art. 9, 275 Art. 26, 275–76 Art. 26(b)(iii), 280 Documents Against Acceptance (D/A), 274, 315 Documents Against Payment (D/P), 274, 315 United States Constitution Art. I, § 8, cl. 3, 28

Table of Cases

A R B I T R AT I O N C O U RT O F T H E I N T E R N AT I O N A L C H A M B E R O F C O M M E R C E

Arbitration Court of the ICC – Zurich, Jan. 1997, Arbitral Award No. 8786, 360n4 Arbitration Court of the ICC – France, 2004, Arbitral Award No. 12173, 413n90 Arbitration Court of the ICC – Basel, 1995, Arbitral Award No. 8128, 416n98 AU S T R A L I A

Downs Investments v Perwaja Steel [2000], 372n18, 415n93 Downs Investments v Perwaja Steel [2001], 415n93 Downs Investments v Perwaja Steel [2002], 46 Hannaford (t/as Torrens Valley Orchards) v. Australian Farmlink Pty Ltd., 47 Roder Zelt-Und Hallenkonstruktionen GmbH v. Rosedown Park Pty Ltd., 55 AU S T R I A

Oberlandesgericht [OLG] Innsbruck [Appellate Court of Innsbruck] July 1, 1994, 56 Oberlandesgericht [OLG] Innsbruck [Appellate Court of Innsbruck] Feb. 1, 2005, 180n56 Oberlandesgericht [OLG] Innsbruck [Appellate Court of Innsbruck] Dec. 18, 2007, 93 Oberlandesgericht [OLG] Linz [Appellate Court of Linz] Mar. 23, 2005, 175 Oberster Gerichtshof [OGH] [Supreme Court] July 2, 1993, 55 Oberster Gerichtshof [OGH] [Supreme Court] Feb. 2, 1995, 48 Oberster Gerichtshof [OGH] [Supreme Court] Apr. 28, 2000, 425 Oberster Gerichtshof [OGH] [Supreme Court] Jan. 14, 2002, 414n91 Oberster Gerichtshof [OGH] [Supreme Court] June 21, 2005, 49 BELGIUM

J.M. Smithuis Pre Pain v. Bakkkershuis, 430 Scaform International BV v. Lorraine Tubes S.A.S., 332 Hof van Beroep [HvB] [Appellate Court] Antwerp, Apr. 24, 2006, 415n92 Hof van Beroep [HvB] [Appellate Court] Gent, May 15, 2002, 132 Rechtbank van Koophandel [Kh.] [Commerce Tribunal] Tongeren, Jan. 25, 2005, 175 Rechtbanken van Koophandel [Kh.] [Commercial Tribunal] Veurne, Mar. 19, 2003, 111n12 CHINA

CD-R and DVD-R Production Systems Case, 416n99, 430 Ferrosilicon Case, 416n100 Lanthanide Compound Case, 383n39 Oxytetrecycline Case, 431

470

Table of Ca ses China International Economic & Trade Arbitration Commission [CIETAC] Aug. 18, 1997, 367n10 China International Economic & Trade Arbitration Commission [CIETAC] Jan. 1, 2000, 368n11 DENMARK

Københavns Byret [Copenhagen District Court] Oct. 19, 2007, 368n15 FRANCE

Brassiere Cups Case, 115, 415n96 Pierre Cardin Shoes rom Spain Case, 111n12 Telecommunications Products Case, 47 Cour d’appel [CA] [Court of Appeal] Grenoble, Apr. 26, 1995, 390n52 Cour d’appel [CA] [Court of Appeal] Paris, Jan. 14, 1998, 48 Cour d’appel [CA] [Court of Appeal] Paris, Jan. 20, 2004, 381n32 Cour de cassation [Cass.] [Supreme Court for Judicial Matters] 1e civ., Jan. 15, 1963, 120n15 Cour de cassation [Cass.] [Supreme Court for Judicial Matters] Jan. 23, 1996, 368n14 Cour de cassation [Cass.] [Supreme Court for Judicial Matters] com., Nov. 26, 2003, 76n2 Cour de cassation [Cass.] [Supreme Court of Judicial Matters] 1e civ., May 24, 2005, 120 Cour de cassation [Cass.] [Supreme Court for Judicial Matters] 3e civ, June 28, 2006, 76n2 Tribunal de grande instance [TGI] [Ordinary Court of Original Jurisdiction] Strasbourg, Dec. 22, 2006, 373n22 GERMANY

Acrylic Blankets Case, 231–32 Automobile Case, 373n20 Cobalt Sulfate Case, 387n46, 390 Designer Shoes Case, 389–90 Frozen Pork Case, 255–56 Frozen Venison Case, 416n99, 426 Hardware and Sotware Case, 49 Italian Shoes Case, Oberlandesgericht [OLG] Düsseldorf [Appellate Court of Düsseldorf ] Apr. 24, 1997, 367n10 Italian Shoes Case, Oberlandesgericht [OLG] Koblenz [Appellate Court of Koblenz] Nov. 21, 2007, 386 Mussels Case, 206 Powdered Milk Case, 133–36 Standard Sotware Case, 96 Tinned Cucumbers Case, 385n44 T-Shirts Case, 431n105 Used Printing Press Case, 373n18 Vine Wax Case, 335–36 Wall Tiles Case, 385n45 Bundesgerichtshof [BGH] [Federal Supreme Court], Sept. 26, 1973, 121 Bundesgerichtshof [BGH] [Federal Supreme Court] Mar. 30, 1985, 121 Bundesgerichtshof [BGH] [Federal Supreme Court] Apr. 3, 1996, 368n11 Landgericht [LG] Bielefeld [District Court of Bielefeld] Jan. 18, 1991, 373n21 Landgericht [LG] München [District Court of München] Feb. 8, 1995, 49 Landgericht [LG] Trier [District Court of Trier] Oct. 12, 1995, 368n13 Oberlandesgericht [OLG] Düsseldorf [Appellate Court of Düsseldorf ] Jan. 14, 1994, 415n94 Oberlandesgericht [OLG] Düsseldorf [Appellate Court of Düsseldorf ] Feb. 10, 1994, 385n43 Oberlandesgericht [OLG] Frankfurt a.M. [Appellate Court of Frankfurt] Jan. 18, 1994, 368n16 Oberlandesgeright [OLG] Frankfurt a.M. [Appellate Court of Frankfurt] May 25, 1995, 114 Oberlandesgericht [OLG] Hamburg [Appellate Court of Hamburg] Feb. 28, 1997, 326 Oberlandesgericht [OLG] Hamburg [Appellate Court of Hamburg] Nov. 26, 1999, 425 Oberlandesgericht [OLG] Hamm [Appellate Court of Hamm] Sept. 22, 1992, 133n23, 415n97 Oberlandesgericht [OLG] Koblenz [Appellate Court of Koblenz] Sept. 17, 1993, 49 Oberlandesgericht [OLG] Köln [Appellate Court of Köln], Mar. 19, 1980, 121

Table of Ca ses Oberlandesgericht [OLG] Köln [Appellate Court of Köln] Aug. 26, 1994, 49 Oberlandesgericht [OLG] Köln [Appellate Court of Köln] Aug. 21, 1997, 430 I TA LY

Bielloni Castello S.p.A. v. EGO S.A., 425 Trib. di Vigevano, 12 luglio 2000, 56 N ET H E R L A N D S

Rb Arnhem 30 december 1993 (Nieuwenhoven Viehandel GmbH/Diepeveen-Dirkson B.V.), 48 Rb Arnhem 1 maart 2006 (Skoda Kovarny/B. van Dijk Jr. Staalhandelmaatschappij B.V.), 431 Rb Breda 16 januari 2009 (Person of Greece/Ed Fruit & Vegetables B.V.), 57 Condensate Crude Oil Mix Case, 196–204, 227–28 Rotten Fish Case, 213–14 Rynpoort Trading & Transport NV v. Meneba Meel Wormerveer B.V., 368–71, 387 RU S S I A

Tribunal of International Commercial Arbitration at the Russian Federation Chamber of Commerce, Nov. 23, 1994, Arbitral Award No. 251/1993, 385n43 SINGAPORE

Credit Agricole Indosuez v. Banque Nationale de Paris, 318 SWEDEN

Beijing Light Automobile Co., Ltd. v. Connell Limited, Partnership Arbitration Institute of the Stockholm Chamber of Commerce, June 5, 1998, 220–27, 228 SWITZERL AND

Oven Case, Tribunal Cantonal [Appellate Court] Valais, Apr. 27, 2007, 98n10 Watches Case, Bundesgericht [BGer] [Federal Supreme Court] Dec. 17, 2009, 425–26 Bundesgericht [BGer] [Federal Supreme Court] Oct. 28, 1998, 368n11 Bundesgericht [BGer] [Federal Supreme Court] May 18, 2009, 367n9 Handelsgericht des Kantons Aargau Sept. 26, 1997, 426 Kantonsgericht Zug, Dec. 12, 2002, 415n95 UNITED KINGDOM

Banco Santander S.A. v. Bayfern Ltd., 318 Bank of Nova Scotia v. Angelica-Whitewear Ltd., 310 Channel Tunnel Group Ltd. v. Balfour Beatty Construction Ltd., 39 Chemco Leasing S.p.a. v. Redifusion plc, 89 Dickinson v. Dodds, 105 Equitable Trust Co. of New York v. Dawson Partners Ltd., 287 Inlatable Toy Co. Pty Ltd v. State Bank of New South Wales Ltd., 310 Kingston v. Preston, 349n1 Krell v. Henry, 322 Scholl v. Hartzell, 401n72 Stora Enso Oyj v. Port of Dundee, 263–64 Taylor v. Caldwell, 322 United City Merchants (Investments) Ltd. v. Royal Bank of Canada, 310 Voest Alpine Intertrading G.m.b.H. v. Chevron International Oil Co., 25 Walford v. Miles, 74n1 U N I T E D S TAT E S

Alred Marks Realty Co. v. Hotel Hermitage Co., 322 Allied Chemical International Corp. v. Companhia Navegacao Lloyd Brasileiro, 266–67

471

472

Table of Ca ses Amco Ukrservice v. American Meter Co., 52–54 America’s Collectibles Network, Inc. v. Timlly (HK), 47 Asante Technologies, Inc. v. PMC-Sierra, Inc., 43 Banco General Runinahui v. Citibank International, 289 Beyene v. Irving Trust Co., 283, 290–91 Boston Hides & Furs, Ltd. v. Sumitomo Bank, Ltd., 292–94 BP Oil International Ltd. v. Empresa Estatal Petroleos de Ecuador, 64–65, 66, 249–50 Buenger v. Pruden, 261–62 Cedar Petrochemicals, Inc. v. Dongbu Hannong Chemical Co., 157n45 Chateau des Charmes Wines Ltd. v. Sabaté USA Inc., 142–44 Chicago Prime Packers, Inc. v. Northam Food Trading Co., 56, 214–18, 235, 254–55 CNA International Inc. v. Guangdon Kelon Electronical Holdings, 47 DBJJJ, Inc. v. National City Bank, 289 Delchi Carrier SpA v. Rotorex Corp., 188, 191–93, 368n12, 414n91, 421–25, 429–30 Drennan v. Star Paving Co., 108 Eastern Air Lines v. Gulf Oil Corp., 101, 400 ECEM European Chemical Marketing B.V. v. Purolite Co., 170–74 Ecology Services, Inc. v. Granturk Equipment, Inc., 340 Electrocrat Arkansas, Inc. v. Super Electric Motors Ltd., 61–64 Evolution Online Systems, Inc. v. Koninklijke PTT Nederland N.V., 49 Filanto, S.p.A. v. Chilewich International Corp., 111n12, 125–32 Filley v. Pope, 365 First Empire Bank-New York v. Fed. Deposit Ins. Corp., 311 First Union National Bank v. Paribas, 319 Forestal Guarani S.A. v. Daros International, Inc., 146–53 Gathercrest Ltd. v. First American Bank & Trust, 276 Geneva Pharm. Tech. Corp. v. Barr Labs, Inc., 141n29 Globe Reining Co. v. Landa Cotton Oil Co., 429–30 Golden Valley Grape Juice and Wine, LLC v. Centrisys Corp., 180–83 GPL Treatment, Ltd. v. Louisiana-Paciic Corp., 146n33 Hanwha Corp. v. Cedar Petrochemicals, Inc., 137 Harriscom Svenska, A.B. v. Harris Corp., 326, 344–45 Howard v. Fed. Crop Ins.Co., 185 In re Hamada, 312 Innotex Precision Ltd. v. Horei Image Products, Inc., 47 Inox Wares Pvt. Ltd. v. Interchange Bank, 277–80 James Baird Co. v. Gimbel Bros., 108 Larsen v. A.C. Carpenter, Inc., 260–61 Lazard Freres & Co. v. Protective Life Ins., 113n13 Lenawee County Bd. of Health v. Messerly, 401n72 Macalloy Corp. v. Metallurg, Inc., 344 Magellan International Corp. v. Salzgitter Handel GmbH, 357–59, 410 MCC-Marble Ceramic Center, Inc. v. Ceramica Nuova D’Agostino, S.P.A., 162–69 McDowell Valley Vineyards, Inc. v. Sabaté USA Inc., 43–45 Medical Marketing International, Inc. v. Internazionale Medico Scientiica, S.R.L., 207–08, 237 Mid-America Tire, Inc. v. PTZ Trading Ltd., 300–10 MWL Brasil Rodas & Eixos Ltda v. K-IV Enterprises LLC, 67 Nester v. Michigan Land & Iron Co., 401n72 Norfolk Southern Ry. Co. v. Power Source Supply, Inc., 59–60 Pestana v. Karinol Corp., 257–59 Power Engineering & Mfg. v. Krug International, 337 Raw Materials, Inc. v. Manred Forberich G.m.b.H. & Co., K.G., 328–31 Rockland Industries, Inc. v. E+E (US), Inc., 340 Roto-Lith, Ltd. v. F.P. Bartlett & Co., 123n19

Table of Ca ses San Lucio, S.r.l. v. Import & Storage Services, L.L.C., 57 Schmitz-Werke Gmbh & Co.v. Rockland Indus., Inc., 228–31, 431n104 Sherwood v. Walker, 401n72 Shuttle Packaging Systems v. INA Plastics Corp., 218–19 Shuttle Packaging Systems v. Jacob Tsonakis, 141 SRS Products Co., Inc. v. LG Engineering Co. Ltd., 313 Supermicro Computer Inc. v. Digitechnic, S.A., 235n4 Sztejn v. J. Henry Schroder Banking Corp., 300 TeeVee Toons, Inc. v. Gerhard Schubert GmbH, 430 Transatlantic Financing Corp. v. United States, 337–40 Trident Center v. Connecticut General Life Ins. Co., 175n55 United Aluminum Corp. v. BOC Group, Inc., 323 Valero Marketing & Supply Co. v. Greeni Oy, 374–78 Vitex Manufacturing Corp. v. Caribtex Corp., 420, 421 Voest-Alpine Trading USA Corp. v. Bank of China, 295–98, 298 Wilson v. Scampoli, 366n8 Zapata Hermanos Sucesores, S.A. v. Hearthside Baking Co., 34, 447–49 WO R L D T R A D E O R G A N I Z AT I O N

Shrimp-Turtle Case (Appellate Body Report, United States—Import Prohibition of Certain Shrimp and Shrimp Products, WT/DS58, WT/DS61 (adopted Nov. 6, 1998))

473

Index

Abmahnung, 393–94 abus de droit, 74 acceptor, 314–15 actio quanti minoris, 441 action en résolution, 395 action for the price, 400, 417 adequate assurance, 352–53, 354–56, 360 aggrieved party, avoidance of the contract by, 367, 383 demand for cure or remedy by, 360–62 exceptio non adimpleti contractus (the defense of the unperformed contract), 395 Nachrist notice, 372–73, 394 remedies for, 348, 349–50 suspension of performance by, 354–56 air waybill, 269 American Rule, 446–47 anticipatory repudiation, 350, 354–55, 430 applicant. See credit astreinte, 402 attorney’s fees, 445, 446–47 autonomy principle, 298 avoidability limit. See limits on under damages See also duty to mitigate avoidance, 349–50, 355, 367, 373, 387–89, 391 of installment contract, 383 battle of the forms, 118–24 last shot rule, 118–24, 133 with standard terms, 170, 180 beneiciary. See credit beneiciary’s certiicate, 311–13 bill of exchange, 21, 273, 314–18 See also time drat under drat bill of lading, 6, 265–69, 272–73, 282 negotiable bill of lading, 6, 13, 265–69 Notify Party, 265, 291 order bill of lading, 265, 272 straight bill of lading, 268, 269 booking out, 24–25

broker, 7 bulk, 2–3, 22–24, 254, 374 cancellation, 350–51, 355, 391–92 certainty limit. See limits on under damages certiicate of origin, 12, 282 CFR. See Incoterms 2010® CIF. See Incoterms 2010® CIP. See Incoterms 2010® Clearing House Automated Payment System (CHAPS), 4 Clearing House for Interbank Payment System (CHIPS), 4 choice of law. See conlicts of laws clauses pénales. See penal clauses collateral, 281, 349, 451 collecting bank, 274, 283 collection instruction, 273–76 commercial invoice, 5, 282, 288 commercial letters of conirmation (conirmation letters), 138–39 commercial letter of credit. See letters of credit conirmation letters. See commercial letters of conirmation conirmed letter of credit. See letters of credit conirming bank. See credit conlicts of laws (rules of private international law; choice of law), 26, 39, 46, 55–57, 98–99, 113, 155 choice of law clause, 28, 29, 68, 71 lex loci contractus, 113 consideration, 140–42, 155–56 contractual delivery, 245–51, 256, 262, corporate social responsibility (CSR), 240–44 costs, direct costs, 420 ixed costs, 420 indirect costs, 420 overhead costs, 420 variable costs, 420 cover, 350, 414, 415, 429–31 CPT. See Incoterms 2010®

476

In dex credit, 5 See also letters of credit cumulation of remedies, 350 cure, 360, 387–89, 430 daisy chain. See string sale damages, 350, 413–47 consequential damages, 418–19, 453 delay damages, 349, 361, 381, 413, 446 direct damages, 418 expectancy damages, 107, 414 See also expectancy principle incidental damages, 418 limits on, 429–37 avoidability, 429 certainty, 429–30 foreseeability, 429–30, 439 reliance interest (damages), 76, 107–08, 437–38 restitution interest (damages), 391, 409, 449–52 under CISG and UCC, 413–37 under German and French law, 438–41 DAP. See Incoterms 2010® default, 362N5 default rule(s), 178–80, 361, 362N5 See also gapillers deferred payment letter of credit. See letters of credit délai de grace, 396 deliberate breach, 439 delict, 75, 438 destination, 251 destination contract, 251, 259 dies interpellat pro homine, 379 discounting, 315 dissolution, under French law, 394–98 distributor, 7–8 distributorship, 8, 52 documentary collections, 272–73, 281, 315 documentary payment, 272–73 dol, 439 donner obligations, 401 drat, 273, 314 time drat, 20–21, 272, 313–18 drawee, 273, 314–15 drawer, 314–15 duty of examination, 213 duty to inspect, 213, 430 duty to mitigate, 429–32, 439 eicient breach, 406–09 electronic funds transfer (EFT), 4, 271, 311 end user, 7, 209 English Rule, 446–47 equitable showings, 399 EURIBOR rate, 446 exceptio non adimpleti contractus. See aggrieved party exception d’inexécution, 395 expectancy principle, 34, 413, 414–17, 420, 437 See also expectancy damages under damages export license, 282

exposure, 347 extraordinary remedy, 400 EXW. See Incoterms 2010® FAS. See Incoterms 2010® fault, under German and French law, 438–41 faute lourde, 439 FCA. See Incoterms 2010® Fedwire, 4 irm ofer, 104–11 irst carrier, 254, 256 FOB. See Incoterms 2010® force majeure, 325–26, 333–34, 341–46, 413, 439, 442, 444 ICC Force Majeure Clause 2003, 341–43 forced performance, 350 foreseeability, 367–68 foreseeability limit. See limits on under damages forfaiter, 315–19 fraud exception, 298–300, 310, 317–19 in comparative context, 310 frustration, discharge by, 321–22 fundamental breach, 188, 243, 349–50, 364, 366–68, 372, 387–89 under installment contracts, 383 futures market, 25–26 gapillers (suppletive rules; default rules), 2, 98, 157, 178–80, 362N5, 363 majoritarian default rules, 179 penalty default rule, 179 good faith, 33, 74–76, 81–87 gross proit, 420–21 guarantee, 312 hardship clause, 325–26, 341–46 ICC Hardship Clause 2003, 343 holder in due course, 314–15, 318 holdup problem, 140 impediment, 327, 331–35 impossibility, 321–22 under German law, 394, 403–04 impracticability, 321–22, 336 Incoterms 2010® “C” Incoterms, 417 CFR (Cost and Freight), 248, 250, 254 CIF (Cost, Insurance and Freight), 250, 254, 256 CIP (Carriage and Insurance Paid To), 12, 250, 254 CPT (Carriage Paid To), 250, 254 “D” Incoterms, 417 DAP (Delivered At Place), 251 EXW (Ex Works), 256 “F” Incoterms, 417 FAS (Free Alongside Ship), 250 FCA (Free Carrier), 250, 252–53, 254 FOB (Free On Board), 250, 252, 253, 254, 256, 261

In dex independence principle, 298–99, 312 installment contracts (sales), 139, 382–84, 392 insurance certiicate, 282 intent, 34, 93–94, 157–62, 175–76 electronic signatures, 155 objective, 161 subjective, 161, 164–66 interest, 418–19, 445–46 issuing bank, 5, 281, 286 See also issuer under letters of credit Kündigung, 397N67 legal realism, 247 letter(s) of credit, 4–21, 281–90 advising bank, 5 applicant, 5, 281–85 beneiciary, 5, 281 buyer-seller trust problem, 5 commercial letter of credit, 311 conirmed letter of credit, 283–84 conirming bank, 5, 7, 284, 286 contract of carriage, 6 deferred payment letters of credit, 20, 316–19 inspection certiicate, 6 intermediary, 7, 283 See also collecting bank issuer, 5 standby letter of credit, 21, 311–13 unconirmed letter of credit, 284 lex fori, 446 lex loci contractus. See conlicts of laws lex monetae, 446 LIBOR rate, 446 limits on damages. See damages Llewellyn, Karl, 247 lost-volume seller, 419–20 Mahnung, 379–83 mailbox rule, 111–12, 366 material breach, 364–65 medium neutrality, 155 mirror image rule, 116–25, 133 mise en demeure, 381, 397 modiications of a contract, 139–42 monetary remedies, 413–49 mora debitoris, 379 mutual assent (meeting of the minds), 90 Nachrist notice, 360–61, 367, 372–74, 379, 381–82, 393–94, 430 negotiable document of title, 265 negotiation credit, 317 nominated bank, 283–86 non-vessel-owning common carriers (NVOCC), 12 no replacements clause, 366 notice and cure clause, 362 notice of breach, 351, 356, 430 notice of nonconformity, 212–13 Notify Party. See bill of lading

obligations, law of, 438 obligation de diligence, 439 obligation déterminée, 439 obligation de garantie, 438–39 obligation de moyens, 438–39 obligation de résultat, 438–39, 442 objective theory of assent, 161–62 open account, 21, 271 See also sale on open account opportunistic rejection, 365 option contract, 106 output contract, 51 overhead, 419–21 ownership (title), 246 packing list, 282 pacta sunt servanda, 321, 325, 401 parol evidence rule, 157–60, 166–69 complete integration, 158 integration (merger) clause, 170 parol evidence, 159 partial integration, 159 penal clauses, 454–57 under German law, 455–57 under French law, 457 penalties, 454–57 See also astreinte perfect tender rule, 349, 362, 365–66, 391–92 performance remedies, 398–413 phytosanitary certiicate, 282 precontractual liability, 74, 77–86 preexisting duty rule, 141 presenting bank, 273–76 preservation duties, 449–52 preshipment inspection (PSI), 213 price escalation clause, 332–35 price reduction, 350, 413, 441–45 principal, 273–76 privity, 209–10 horizontal, 209 vertical, 209 products liability, 209–12 promissory estoppel, 107–09, 156 proof of fault, 323 redhibition, 236 remitting bank, 273–76 repair, 360 See also cure; speciic performance replevin, 401N72 requirements contract, 100, 102–03, 162–69 res pereat domino, 246 resale, 22, 350 résiliation, 397N67 résolution, 394N56 restitution, 391 revocation, of acceptance, 392 wrongful, 107–08 rules of private international law. See conlicts of laws

477

478

In dex said to contain (STC), 282 saisie-revendication, 402 sale on open account, 271–72, 281 sea waybill, 268–69 security, 271–72, 281–82 349 standby letter of credit as, 311–13 See also collateral security interest, 54, 451–52 shaken faith doctrine, 386 sight drat, 314 Society for Worldwide Interbank Financial Telecommunications (SWIFT), 4, 12, 281 speciic performance, 350, 360, 405–08 in comparative context, 398–404 under the CISG, 409–10 statute of frauds, 145–54 statutory lien, 451N132 standby letter of credit. See letters of credit strict compliance, doctrine of, 286–88 strict liability, 413 strict preclusion, doctrine of, 287–88 string sale (daisy chain), 24–25 subjective intent. See intent substantial impairment test, 392

substitution, 416 substitutional remedy, 413 suppletive rules. See gapillers surprise rejection, 365–66 survey report, 282 suspension of performance, 351–55 tacit agreement test, 429–30 time drat. See drat trade credit, 3–4 trader, 7, 23, 25 US Treasury Bill rate, 446 Verzug, 379 warning notice, 379 warranty, 185 express, 185 disclaimers of, 58–60, 179, 187, 209, 233–35, 453 of itness, 185–86, 194–95, 206–09 of merchantability, 185–86, 194–95, 200–03, 235 of title, 185–86 under French and German law, 236