International Sales Law: A Handbook 9781509953240, 9783848778010

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Preface to the Second Edition The first edition to this book was published in 2016. After very positive input from the publisher and colleagues, we decided to go forward with a second edition.1 Over the five years since the first edition, a number of developments required an updating of the text. The new edition incorporates these major changes including the enactment of the new French Civil Code in 2016, the new and expanded edition of the UNIDROIT Principles of International Commercial Contracts (PICC) in 2016, the publication of INCOTERMS 2020, and the adoption of the first comprehensive Chinese Civil Code (CCC), which will come into force on 1 January 2021. In addition, the book has been updated to include the constantly developing case law and the rapidly increasing literature on international sales law. The numbers of updates are too many to name but include recent events, such as a discussion of COVID-19 as a force majeure event, more in-depth discussion of agency law. and additional sample or model clauses. The ‘Additional Sources’ section has been updated with references to new secondary sources and scholarship. Another change is that references to the Common European Sales Law (CESL) have been limited to those issues and topics where the CESL offers solutions to practitioners and scholars in resolving practical and theoretical problems. The second edition’s purpose is not only to refresh the contents of the earlier edition, but also to expand topical coverage. However, the limitations of a single volume book continue to require care in selecting the topics to be covered, among the myriad of issues relating to international sales transactions, especially given the vast number of specialized industries. In the end, the book attempts to balance the breadth and depth of coverage in order to provide an erudite single-volume text. As can be seen from the list of contributors, there has been some changes in the circle of authors. We would like to thank the departing authors for their contributions to the first edition and welcome the new authors for bringing a fresh set of eyes to the evolving nature of international sales law. We are hopeful that practitioners, scholars, and students will continue to find the text a useful source on issues relating to transborder sales transactions. The editors’ welcome constructive feedback and suggestions for the next edition. Please send your comments to André Janssen at [email protected] or Larry DiMatteo at [email protected]. Finally, we hope you enjoy reading the new edition of our book! November 2020, Gainesville, Florida (USA) Nijmegen, The Netherlands Hamburg, Germany Münster, Germany

Larry A. DiMatteo André Janssen Ulrich Magnus Reiner Schulze

1 Cf. Ahuja, European Review of Private Law (ERPL) (2017) 469–476; Fuglinszky, 83 Rabels Zeitschrift für ausländisches und internationales Privatrecht (RabelsZ) (2019) 192–199; Patti, Annuario di diritto civile (AdC) (2016) 360–363; Wollenweber, Die Rezensenten (2016), available at: http://dierezensenten.blogs pot.de; somewhat critical however Schwenzer, 83 Rabels Zeitschrift für ausländisches und internationales Privatrecht (RabelsZ) (2019) 190–192.

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Preface This treatise and practitioner guide is the outcome of a meeting of international sales law scholars held 27–28 September 2013. The purpose of the meeting was to provide a foundation for writing a comprehensive book that would be useful to teachers, scholars, and students of international sales law, as well as to act as a single volume reference guide for the international transactional lawyer. The group members set out the ambitious goal of providing a comprehensive and practical treatise on the complex and broad area of international sales law. The contributors come from numerous countries and include in alphabetical order the following international sales law scholars: Orkun Akseli (Durham University Law School), Michael Bridge (London School of Economics and Political Science), Petra Butler (Victoria University of Wellington), Michel Cannarsa (Catholic University of Lyon), Giuditta Cordero-Moss (University of Oslo), Larry A. DiMatteo (University of Florida), Sieg Eiselen (University of South Africa), Edoardo Ferrante (University of Turin), Harry M. Flechtner (University of Pittsburgh), Christian Fleischmann (University of Bayreuth), Claire M. Germain (University of Florida), Rafael Ilescas Ortiz (Carlos III University of Madrid), André Janssen (City University of Hong Kong), Sörren Kiene (Brandi Rechtsanwälte), Qiao Liu (University of Queensland and Xi’an Jiaotong University), Ulrich Magnus (University of Hamburg), Burghard Piltz (Ahlers & Vogel), Willibald Posch (University of Graz), Séverine Sainter (University of Exeter), Martin Schmidt-Kessel (University of Bayreuth), Reiner Schulze (University of Münster), Lisa Spagnolo (Monash University), Bruno Zeller (University of Western Australia), and Wentong Zheng (University of Florida). For the civilians, a restatement or digest is generally a clarification of existing legal rules and principles. However, restating and clarifying existing case law has also been the goal of private law codification in common law countries. Examples include the United Kingdom Sale of Goods Act 1979 and the Real Property Law Statutes found in American state laws. These statutes intended purpose is to clarify an often expansive and chaotic case law. This book, however, follows the lead of the American Restatements of Law, which provides a descriptive summary of existing law while at the same time reaching normative conclusions on divergent approaches or interpretations found across nation states and international legal instruments. The book attempts to transcend divergences in national and supranational sales laws in providing alternative and practical solutions to the issues most relevant to international sales transactions. This restatement of international sales law, by necessity, employs a comparative law approach. But, the comparative analysis goes beyond the traditional nation-to-nation or legal tradition versus legal tradition analyses. Globalization and regionalization in the marketplace has resulted in the production of numerous regional and international hard and soft law instruments. Thus, the book’s work is not so much that of harmonization as it is of synthesis of a plurality of sources. The current undertaking samples legal rules from various legal systems and international instruments. At the same time, the legal analysis in the book is placed in the context of international sales practice. It seeks to educate on alternative legal approaches to sales contract issues in order to provide practical advice on how the international transactional lawyer should address these issues in their contracts. In the end, the book’s immersion of various legal instruments—United Nations Convention on Contracts for the International Sale of Goods (CISG), UNIDROIT Principles of International Commercial Contracts (PICC), Principles of European Contract Law (PECL), the proposal for a Common European Sales Law (CESL), German Bürgerliches VI

Preface

Gesetzbuch (BGB), Spanish Código Civil, French Code Civil, United Kingdom Sale of Goods Act 1979, American Restatement (Second) of Contracts, Uniform Commercial Code (UCC), and Chinese Contract Law—provides the base knowledge needed to understand the nuances of international sale law and to best represent business clients. We would like to thank the sponsors that provided the funding for this endeavor: Levin College of Law (University of Florida), Warrington College of Business Administration (University of Florida), University of Florida Center for International Business Education and Research (CIBER), University of Florida Division of Research, and the Department of Management and Legal Studies at the Warrington College of Business. Finally, we kindly thank Aleksandra Socik and Jonathon Watson for their support in the preparation of this guide. February 2016, Gainesville, Florida Hong Kong, China Hamburg, Germany Münster, Germany

Larry A. DiMatteo André Janssen Ulrich Magnus Reiner Schulze

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List of Contributors Orkun Akseli Associate Professor in Commercial Law at Durham University. His publications include 'International Secured Transactions Law: Facilitation of Credit, International Conventions and Instruments' (Routledge 2011); 'Financial Regulation in Crisis? The Role of Law and the Failure of Northern Rock' (with J. Gray) (Edward Elgar 2011); ‘Availability of Credit and Secured Transactions in a Time of Crisis’ (CUP 2013); ‘Experiencing the Unfair Commercial Practices Directive’ (with W. van Boom and A. Garde) (Ashgate 2014). Michael Bridge Michael Bridge is an Emeritus Professor of Law at LSE. He was an undergraduate and postgraduate student at LSE before starting his academic career. Before coming to the LSE in 2007, he held chairs in law at McGill University, the University of Nottingham and UCL, and was Dean of the Faculty of Laws at UCL. He has been a visiting Professor at the Universities of Leeds, Malaya, Hong Kong, Melbourne, Sydney and Auckland and at Monash University. In 2013, he was elected a Fellow of the British Academy. In 2014 he was called as a Bencher of the Middle Temple, and in 2017 made a QC (honoris causa). Petra Butler Professor at Victoria Wellington University in New Zealand and she was a Holgate Fellow at Grey College, Durham University. Her publications include: Commentary on Articles 53 to 60 CISG in Commentary on the CISG (C.H. Beck/Hart/Nomos 2018) and UN Law on International Sales (co-authored with Peter Schlechtriem, Springer 2009). Michel Cannarsa Michel Cannarsa is a Professor and the Dean of the Catholic University of Lyon Law School. His areas of research are International and European Law, Commercial Law, Comparative Law, Consumer Law, the Law of Obligations and Legal Translation. Giuditta Cordero-Moss Giuditta Cordero-Moss is a Professor at the Department for Private Law, University of Oslo, Norway, in charge of International Commercial Law, International Commercial Arbitration and Private International Law. Larry A. DiMatteo Huber Hurst Professor of Contract Law & Legal Studies at the Warrington College of Business Administration at the University of Florida, as well as an Affiliated Professor of Law at the Levin College of Law. His books include: L. DiMatteo ed, International Sales Law: A Global Challenge (CUP 2014) and L. DiMatteo & Martin Hogg eds, Comparative Contract Law (OUP 2015). Sieg Eiselen Professor Eiselen is a Professor in Private Law at the University of South Africa. He is the Secretary for the CISG Advisory Council. His CISG work includes: Co-author of Volume 4 and 5 with Albert Kritzer in Kritzer, et al, International Contract Manual: Guide to the Practical Application of the United Nations Convention on the International Sale of Goods (Springer 2008).

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List of Contributors

Edoardo Ferrante Professor in Private Law at the University of Turin, Italy, School of Law (‘Dipartimento di Giurisprudenza’). He has been a fellow, researcher and guest at the Centre for European Private Law at the University of Münster, Germany. He has written numerous articles on and provided commentary on the most discussed topics of the current European private law and international sales law e.g. the Italian national report in DiMatteo (ed), International Sales Law: A Global Challenge (CUP 2014). Harry M. Flechtner Professor emeritus at the University of Pittsburgh, School of Law. His publications include the 4th edition (Kluwer 2009) of John Honnold’s Uniform Law for International Sales under the 1980 United Nations Convention. Christian Fleischmann Ass. jur. Christian Fleischmann is a Research Assistant at the Chair of Civil Law, Intellectual Property and Commercial Law (Civil Law VIII) – Prof. Dr. Ruth Janal, LL.M. at the University of Bayreuth and member of the Research Center for Dispute Resolution, Mediation and Arbitration (BayCDMA). Ádám Fuglinszky LL.M. (Heidelberg) PhD (Hamburg) is ordinary Professor of civil law and comparative law at Eötvös Loránd University (ELTE) Law School, Budapest, Hungary. His research interests are contract and tort law (in a comparative perspective), European private law, consumer contract law, legal transplants and mixed legal systems. Besides his books and commentaries he published several papers on Articles 74 and 79 CISG as legal transplants in the recodification processes of civil law in Central and Eastern Europe and on comparative law in general (RabelsZ, ERCL, JICL, ZEuP). Claire Germain Emeritus Prof. Germain was the Clarence J. TeSelle Professor of Law, Associate Dean for Legal Information at the Levin College of Law, University of Florida; Professor of Law, Emerita, Cornell Law School; and Chevalier (Knight), French Legion of Honor recipient. She has served as president of the American Association of Law Libraries, and Chair, Law Libraries Section, International Federation of Library Associations. Her books include the award-winning Germain’s Transnational Law Research (Transnational Publishers 2006). She is an elected member of the International Academy of Comparative Law. Her scholarship focuses on comparative law, French law, and global legal research. André Janssen André Janssen is a chair Professor at Radboud University Nijmegen, The Netherlands. André Janssen is respectively was a visiting scholar/Professor at the Universities of Leuven, Oxford, Turin, Lyon (Catholic University), Verona, and at the Chinese University for Political Science and Law in Beijing and at the City University Hong Kong. Sörren Kiene Sörren Kiene is a lawyer working at BRANDI Rechtsanwälte in Germany. His field of work focuses on international sales law (mainly CISG), distribution and agency law and correlated litigation and arbitration issues. In 2014 Sörren Kiene has also been admitted as Solicitor of England & Wales. His publications mainly focus on aspects of the CISG. He has been a lecturer at the University of Applied Sciences in Bielefeld and continues to

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List of Contributors

lecture at the Academy of Justice of North Rhine-Westphalia (Justizakademie des Landes NRW). Ulrich Magnus Professor Magnus was formerly a Professor of Law at the University of Hamburg; Chair for Civil Law, Private International Law and Comparative Law. He was previously a Judge at the Court of Appeal of Hamburg and Director of the International MaxPlanck-Research School for Maritime Affairs. Francesco Paolo Patti Francesco Paolo Patti is an Associate Professor for Private Law at the University Bocconi in Milan. Burghard Piltz Partner of Ahlers & Vogel Rechtsanwälte, Hamburg, practicing as legal counsel and as arbitrator in international commercial law with emphasis on international sales. Honorary Professor for international law at University of Bielefeld since 1997. Willibald Posch Professor emeritus for Austrian Civil and International Private Law at the University of Graz, Austria. He was the Austrian Member of the Commission on European Contract Law. Severine Saintier Dr Séverine Saintier is an Associate Professor in commercial law at the School of Law at Exeter University. She is the director of the LLM programme as well as co-director of the Centre for Commercial and Corporate Law. She has written widely on issues of agency and commercial agency alike and is currently working on the second edition of the monograph Commercial Agents and the law (Routledge 2005, co-written with JP Scholes). Harriet N. Schelhaas Harriet N. Schelhaas is a full Professor at Erasmus University Rotterdam, The Netherlands. Martin Schmidt-Kessel Martin Schmidt-Kessel has a Chair for German and European Consumer Law, Private Law and Comparative Law at the University of Bayreuth. He is also the Director for the Centre for Consumer Law at the University of Bayreuth and Speaker of the Interdisciplinary Research Priority Field on Innovation and Consumer Protection of the University Bayreuth. Since 2007 he also undertakes regular teaching and research fellowships at the Università degli Studi di Verona. In 2014 he became Associate Member to the International Academy of Comparative Law. Reiner Schulze Reiner Schulze held a Chair in German and European Civil Law at the University of Münster, School of Law and was the Director of the Centre for European Private Law. He has published extensively in the field of contract law with books including European Contract Law 3rd edn (co-written with Fryderyk Zoll, C.H. Beck/Hart/Nomos 2021), Common European Sales Law: Commentary (C.H. Beck/Hart/Nomos 2012); Bürgerliches Gesetzbuch Handkommentar (C.H. Beck, 10th ed. 2019).

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List of Contributors

Lisa Spagnolo Lisa Spagnolo lectures at the Faculty of Law at Monash University, Australia. Her publications include papers on the CISG in the Journal of Private International Law, Melbourne Journal of International Law, and Temple International & Comparative Law Journal and CISG Exclusion and Legal Efficiency (Kluwer 2014). She was Rapporteur for the CISG-AC Opinion No. 16 on Article 6. Qiao Liu Dr. Qiao Liu is Professor at the City University of Hong Kong School of Law. His previous posts include Associate Professor at the TC Beirne School of Law, University of Queensland (Australia); Lee Ka Shing Visiting Professor at McGill University Faculty of Law; specially appointed Tengfei Adjunct Professor at Xi’an Jiaotong University School of Law (China). Professor Liu is an Honorary Professor at the TC Beirne School of Law, University of Queensland (Australia) and holds a Visiting Professorship at Xiamen University School of Law (China). Wentong Zheng Wentong Zheng is a Professor of Law at the University of Florida Levin College of Law. His research has appeared in UCLA Law Review, Georgetown Law Journal, Notre Dame Law Review, Stanford Journal of International Law, Michigan Journal of International Law, University of Pennsylvania Journal of International Law, and the Minnesota Journal of International Law. Bruno Zeller Dr. Bruno Zeller is a Professor of Transnational Law at the University of Western Australia, Australia, Adjunct Professor, School of Law, Murdoch University – Perth, Fellow of the Australian Institute for Commercial Arbitration, Panel of Arbitrators – MLAANZ, Visiting Professor Stetson Law School, Florida, and Humboldt University Berlin.

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Abbreviations AC AcP affd AG AGB AH AJ ALI All ER ALJR ALR Am Bar Ass’n Am Bus LJ Am J Comp L Am Rev Int’l Arb AMJUR Anglo-Am L Review App Cas Arb Int’l Arizona J Int’l & Comp L Art. Aust Aust Fed Ct B&Ald B&S B2B B2C BB BCC Beav BeckRS Begrade L Rev BG BGB BGBl

Appeal Cases (England & Wales) Archiv für die civilistische Praxis affirmed Amtsgericht (District Court) Allgemeine Geschäftsbedingungen (Standard Contract Terms) Appelationshof (Court of Appeal) Actualité Juridique American Law Institute All England Law Reports Australian Law Journal Reports Australian Law Reports American Bar Association Journal American Business Law Journal American Journal of Comparative Law American Review of International Arbitration American Jurisprudence Anglo-American Law Review Law Reports Appeal Cases (England & Wales) Arbitration International Arizona Journal of International and Comparative Law Article Australia Federal Court of Australia Barnewall & Aldersons King’s Bench Reports (England & Wales) Best & Smith’s Queen’s Bench Reports (England & Wales) Business-to-Business Business-to-Consumer Betriebsberater British Company Law Cases Beavan’s Roll Court Reports (England & Wales) Beck online Rechtsprechung Belgrade Law Review Bundesgericht (Switzerland) Bürgerliches Gesetzbuch (Germany) Bundesgesetzblatt XXXV

Abbreviations

BGer BGH BGHZ Bing Bing NC BLR BR Brooklyn J Int’l L Building LR BUL Rev Bull Civ Bus Law Bus LR C&F CA Cal. App Cal. Rptr California L Rev Carolina J Int’l L & Com Reg Case W Res J Int'l L Cass Civ Cass Comm CBNS CC CCC CCL CESL cf CFR Ch Chap. Chinese J Comp L CIETAC CIF CIP XXXVI

Bundesgerichtshof (Switzerland) Bundesgerichtshof (Germany) Entscheidungen des Bundesgerichtshofs in Zivilsachen Bingham’s Common Pleas Reports (England & Wales) Bingham’s New Cases (England & Wales) Building Law Reports (England & Wales) Bankruptcy Reporter Brooklyn Journal of International Law Building Law Review Boston University Law Review Bulletin des arrêts de la Cour de cassation, Chambres Civiles Business Lawyer Business Law Review Clark & Finnelly’s House of Lords Cases (England & Wales) Court of Appeal (England & Wales)/Cour d’appel (France) California Appellate Reports California Reporter California Law Review Carolina Journal of International Law and Commercial Regulation Case Western Reserve Journal of International Law Cour de cassation, Cambre civile (France) Cour de cassation, Cambre civile, Section Commerciale (France) Common Bench Reports, New Series Civil Code Chinese Civil Code Contract Law of the People’s Republic of China Common European Sales Law confer Cost and Freight (INCOTERMS) Law Reports, Chancery Division (England & Wales) Chapter Chinese Journal of Comparative Law China International Economic and Trade Arbitration Commission Cost, insurance, freight (INCOTERM) Carriage and insurance paid to (INCOTERM)

Abbreviations

Cir. CISG CISG-AC CJJA CLC CLJ CLOUT CLR CMLR Cmnd cmt Co. Colum L Rev Colum J Transnat'l L COM Comparative LJ Computer LJ Con LR Cornell Int’l LJ Corp. CPA CPL CPT CUP D/A D/P DAP DAT DB DCA DCFR D.C.N.D. DDP DEQ DES Doc DOCDEX Rules DP

Circuit United Nations Convention on Contracts for the International Sale of Goods of 11 April 1980 CISG Advisory Council Civil Jurisdiction and Judgments Act 1982 (UK) Australian Company Law Cases Cambridge Law Journal Case Law on UNCITRAL Texts Commonwealth Law Reports (Australia) Common Market Law Review Command Comment Company Columbia Law Review Columbia Journal of Transnational Law Communication Comparative Law Journal Computer Law Journal Construction Law Reports Cornell International Law Journal Corporation Civil Procedure Act (Spain) Civil Procedure Law Carriage paid to (INCOTERM) Cambridge University Press Documents against acceptance Documents against payment Delivered at place (INCOTERM) Delivered at terminal (INCOTERM) Der Betrieb District Court of Appeal (US) Draft Common Frame of Reference District Court, Northern Division (US) Delivered duty paid (INCOTERM) Delivered ex quay (INCOTERM) Delivered ex ship (INCOTERM) Document Rules for Documentary Instruments Dispute Resolution Expertise Recueil périodique et critique XXXVII

Abbreviations

DS EC ECJ ECR E.D. Ed(s) EDI edn EEC e.g. Electronics Convention ELI ELR Emory J Int’L Disp Res Emory LJ EP ER ERPL et al etc. et seq. EU EuLR European J Law & Econ EWCA Civ EWHC (Ch) EWHC (TCC) Ex EXW F. F.2 d FAS FCA Fed.Appx FOB Fordham Int’l LJ Fordham L Rev FS XXXVIII

Recueil Dalloz-Sirey European Communities European Court of Justice European Court Report Eastern District Editor(s) Electronic Data Interchange Edition European Economic Community for example UN Convention on the Use of Electronic Communications in International Contracts European Law Institute European Law Review Emory Journal of International Dispute Resolution Emory Law Journal European Parliament English Reports European Review of Private Law and others etcetera and the following European Union European Union Law Reporter European Journal of Law and Economics England and Wales Court of Appeal (Civil Division) England and Wales High Court (Chancery Division) England and Wales High Court (Technology and Construction Court) Law Reports, Exchequer Cases Ex Works (INCOTERM) Federal Reporter Federal Reporter, Second Series Free alongside ship (INCOTERM) Free carrier (INCOTERM) Federal Appendix Free on board (INCOTERM) Fordham International Law Journal Fordham Law Review Festschrift

Abbreviations

FSR F. Supp Global Jur Adv Hag Con Hamburg Rules Harvard L Rev H Bl HCA HG HGB H/L HL HLC HO Houston J Int’l L ICC ICCPR ICJ id. i.e. IEHC IHR ILR ILSU Inc. INCOTERMS Ind L Rev Int Arb LR International Business LJ Int’l & Comp LQ Int’l L Intro IR J JBL JCL JCP

Fleet Street Reports (England & Wales) Federal Supplement Global Jurist Advances Haggard’s Consistorial Reports (England & Wales) United Nations Convention on the Carriage of Goods by Sea Harvard Law Review Henry Blackstone’s Common Pleas Reports High Court of Australia Handelsgericht (Commercial Court) Handelsgesetzbuch (Germany) Heavy lift House of Lords Clark and Finnelly’s House of Lords Reports Hovioikeus (Appellate Court) (Finland) Houston Journal of International Law International Chamber of Commerce International Covenant on Civil and Political Rights International Court of Justice the same place that is High Court of Ireland Internationales Handelsrecht, Zeitschrift für das Recht des internationalen Warenkaufs und Warenvertriebs International Law Reports Italian Legal Scholar Unbound Incorporated International Commercial Terms of the ICC (revised in 2020) Indiana Law Review International Arbitration Law Review International Business Law Journal International and Comparative Law Quarterly International Lawyer Introduction Irish Reports Justice Journal of Business Law Journal of Contract Law Juris Classeur Périodique

XXXIX

Abbreviations

J du Droit Intl JIBL J Int’l Arb J L & Com JW KB KG Law Com LCIA LG LJ LJ Ch LJKB Lloyd’s LR LMCLQ LQR LR LT Ltd. Memphis L Rev Michigan Bar J Mich J Int’l L Mich LR Minnesota L Rev Minn J Global Trade MLR Moo PCC MoU MünchKommBGB MünchKommHGB N NCPC N.D. N.E. New York Convention NIPR N.J. NJW XL

Journal du droit international Journal of International Business Law Journal of International Arbitration Journal of Law and Commerce Juristische Wochenschrift King’s Bench Division (England & Wales) Kantongericht (Switzerland) Law Commission London Court of International Arbitration Landgericht (District Court) Lord Justice Law Journal Reports, Chancery (England & Wales) Law Journal Reports, King’s Bench New Series (England & Wales) Lloyd’s Law Reports Lloyd's Maritime and Commercial Law Quarterly Law Quarterly Review Irish Law Recorder Law Times Reports Limited Memphis Law Review Michigan Bar Journal Michigan Journal of International Law Michigan Law Review Minnesota Law Review Minnesota Journal of Global Trade Modern Law Review Moore’s Privy Council Cases Memorandum of Understanding Münchener Kommentar zum Bürgerliches Gesetzbuch Münchener Kommentar zum Handelsgesetzbuch Note Nouveau Code de Procédure Civile (France) US District Court, Northern District North Eastern Reporter (US) Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 Netherlands Internationaal Privaatrecht New Jersey Reports (US) Neue Juristische Wochenschrift

Abbreviations

NJW-RR N Kentucky LR No. No Carolina J Int’l L & Com Reg NOM NSWLR N.W. N.Y. NYU Ann Survey Am L NZ NZLR ODC OGH OH OHADA OJ OLG OR ÖstJBl OUP p./pp. P&CR Pace Int’l L Rev Para(s) PC PCI PCL PECL PEL MC PICC PIL PL(S) PRC Pt Pub QB

Neue Juristische Wochenschrift – Rechtsprechungsreport Zivilrecht Northern Kentucky Law Review Number North Carolina Journal of International Law and Commercial Regulation No Oral Modification New South Wales Law Reports North Western Reporter (US) New York Reports New York University Annual Survey of American Law New Zealand New Zealand Law Reports Over dimensioned cargo Oberster Gerichtshof (Austria) Outer House L’Organisation pour l'Harmonisation en Afrique du Droit des Affaires Official Journal of the European Union Oberlandesgericht Official Records Juristische Blätter Oxford University Press Page(s) Property and Compensation Reports Pace International Law Review Paragraph(s) Privy Council Pre-contractual Instrument Pre-contractual Liability Principles of European Contract Law Principles of European Law (Mandate Contracts) UNIDROIT Principles of International Commercial Contracts Private International Law Public law(s) People’s Republic of China Part Publication Queen’s Bench Division (England & Wales)

XLI

Abbreviations

RabelsZ Rb Reg Rev crit Rev dr unif RFID RGZ RIW RJDA Rotterdam Rules Russ Rutgers Computer & Technology s(s) SC Sched SCR S.CT S.D. Fla. S.D.N.Y. Sect. Sent. SGA SGCA SGHC SI SIAC SJZ SLR SLT SME South Carolina L Rev SPC Stat. St Thomas L Rev Supp.

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Rabels Zeitschrift für ausländisches and internationales Privatrecht Arrondissementsrechtsbank (Netherlands) Regulation Revue critique de droit international privé Revue de droit uniform Radio Frequency Identification Entscheidungen des Reichsgerichts in Zivilsachen (Germany) Recht der internationalen Wirtschaft Recueil general de jurisprudence de droit administratif et du conseil d’etat UN Convention on Contracts for The International Carriage of Goods Wholly or Partly by Sea Russell’s Chancery Reports (England & Wales) Rutgers Computer and Technology Law Journal Section(s) Session Cases (Scotland) Schedule Supreme Court Reports (Canada) Supreme Court Reporter (US) US District Court, Southern District of Florida US District Court, Southern District of New York Section Sentence Sale of Goods Act 1979 (UK) Singapore Court of Appeal Singapore High Court Statutory Instrument Singapore International Arbitration Centre Schweizerische Juristenzeitung Scottish Law Reporter Scots Law Times Small and Medium-sized Enterprise South Carolina Law Review Supreme People’s Court (China) United States Statutes at Large St. Thomas Law Review Supplement

Abbreviations

Sydney L Rev SZIER

Sydney Law Review Schweizerische Zeitschrift für interationales und europäisches Recht Temp Int’l & Comp LJ Temple International and Comparative Law Journal Tex. App. Court of Appeal, Texas Tex. Civ. App. Texas Civil Appeals Reports Tex Int’l LJ Texas International Law Journal TLR Times Law Reports TR Durnford & East’s Term Reports, King’s Bench Tr A Tribunale d'appello (Switzerland) Tr LR Trading Law Reports (UK) Tulane J Int’l Comp L Tulane Journal of International and Comparative Law UCC Uniform Commercial Code (US) UCC LJ Uniform Commercial Code Law Journal UCC Rep Serv Uniform Commercial Code Reporting Service U Chi L Rev University of Chicago Law Review UCP 600 Uniform Customs and Practice UETA Uniform Electronic Transactions Act 2000 (US) U Ill L Rev University of Illinois Law Review UK United Kingdom UKHL United Kingdom House of Lords UKPC United Kingdom Privy Council ULIS Convention relating to a Uniform Law on the International Sale of Goods 1964 (Hague Convention) UN United Nations UNCITRAL United Nations Commission on International Trade Law UNIDROIT Institute for the Unification of Private Law UNIDROIT Principles UNIDROIT Principles of International Commercial Contracts Unif L Rev Uniform Law Review Uniform Commercial Code LJ Uniform Commercial Code Law Journal UNILEX International Case Law, UNIDROIT UNSW LJ University of New South Wales Law Journal UNTS United Nations Treaty Series U of Texas Law, Law and Econ University of Texas, School of Law, Law and Economics Research Paper Research Paper U Penn L Rev University of Pennsylvania Law Review URC 552 Uniform Rules for Collections, 1995 revision, ICC Publication No. 522 US United States of America XLIII

Abbreviations

U.S. App. U.S.C. U.S.C.A. USD USDC UTSA v VJTL VAT VersR Ves Sen Vindobona J of Int’l Com L & Arb Vol VR VUWLR WAR W.D. William & Mary L Rev WL WLR WM WTO Yale J Int’l Law Yale LJ YB PIL YBCom Arb Ybk Arb ZEuP ZPO ZR ZVertriebsR

XLIV

United States Court of Appeals United States Code United States Code Annotated United States Dollar United States District Court Uniform Trade Secrets Act (US) versus Vanderbilt Journal of Transnational Law Value Added Tax Versicherungsrecht Vesey Senior’s Chancery Reports (England & Wales) Vindobona Journal of International Commercial Law and Arbitration Volume Victorian Reports (Australia) Victoria University of Wellington Law Review Western Australia Law Reports Western District William and Mary Law Review West Law, Database Weekly Law Reports Wertpapier-Mitteilungen World Trade Organization Yale Journal of International Law Yale Law Journal Yearbook Private International Law Yearbook Commercial Arbitration Yearbook Arbitration Zeitschrift für Europäisches Privatrecht Zivilprozessordnung (Germany) Zivilrecht Zeitschrift für Vertriebsrecht

CHAPTER 1 INTRODUCTION Larry A. DiMatteo, André Janssen, Ulrich Magnus and Reiner Schulze A. B. C. D. E. F. G. H. I. J. K.

What is International Sales Law? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sources of International Sales Law: Why the CISG? . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial Practice, Business Custom and Trade Usage . . . . . . . . . . . . . . . . . . . . Ambiguities and Gaps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Restatement Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . International Transactional Lawyering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Drafting Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Sales Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Electronic Contracting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Treatise’s Coverage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Additional Sources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 3 9 16 21 26 28 34 37 42 47

A. What is International Sales Law? The above question is a bit of a misnomer. The answer is that there is no one sales 1 law, but many sales laws. Sales law is found mostly at the domestic level at least in its hard law versions – national contract and sales law, including those countries that have adopted the United Nations Convention on Contracts for the International Sale of Goods (CISG). If one expands the definition of international sales law to include soft law instruments, then numerous other ‘laws’ would have to be considered in any comprehensive study of the subject. Soft law instruments may be divided into two groups – traditional lex mercatoria defined as business usages, customs and practices, as well as more comprehensive rules of law, such as the UNIDROIT Principles of International Commercial Contracts (PICC) or the Principles of European Contract Law (PECL). This single volume treatise takes a comprehensive approach for the benefit of practi- 2 tioners (lawyers, advocates, and solicitors), scholars, and students. However, in order to stay within the confines of a single volume, choices had to be made. Two organizational tools were implemented. First, the CISG was used as the ‘core document’. Second, a representative sample of national sales laws is provided, as well as transnational soft law instruments, including, the traditional lex mercatoria. The best example of the latter source of law is the International Chamber’s INCOTERMS manual. This coverage is a necessity due to the INCOTERMS universal acceptance in international trade and the importance of trade terms in international sales transactions (see Chapter 10 on “Trade Terms”).

B. Sources of International Sales Law: Why the CISG? As stated above, in cases where the CISG covers a topic, an extended commentary 3 is presented. However, samplings of national and soft laws are also provided as a means of comparison and where the CISG lacks coverage of an issue. The need for a comprehensive approach is echoed by the words of Sir Roy Goode: The conception of sources of commercial law governing international transactions is much broader, … encompassing the so-called lex mercatoria and a variety of forms of soft law, including model laws, legislative guides, contractually incorporated uniform rules, trade terms promulgated by international

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Chapter 1 Introduction business organizations and international restatements prepared by scholars from different legal families and jurisdictions.1

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This broader approach is necessitated by the fact that the CISG is not a comprehensive sales law instrument and that parties still often seem to opt-out of its application. Filip de Ly in Sources of International Sales Law notes: [T]he CISG did not envisage a complete harmonization of international sales law. Rather, it took a realistic stand as to compromising the perceived need for unification with the constraints stemming from different factors, which made the unification effort difficult and overall unfeasible if not limited in scope. Diversity was, thus, inherent in the effort in the first place and the CISG did not raise false hopes or unwarranted expectations.2

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A harmonized international sales law has been an elusive quest for the better part of the 20th century. After lengthy deliberations the CISG was adopted on January 1, 1980. The main rationale for the adoption of such a law was the alleviation of the obstacle to trade represented by private international law (conflict of laws). EA Farnsworth discusses the problems presented by private international law and its ‘solution’ (contract clauses): – –

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The uncertainty of the recognition of choice of law and forum selection clauses (‘not every foreign court will conclude that it is ousted from jurisdiction by such clause[s].’3) and the problem of getting to know of even proving the content of the chosen law in a foreign court.

Despite the issues of comprehensiveness and opting-out, any attempt to understand international sales law must begin with an understanding of the provisions and applied meanings of the CISG. It is the singular international hard law instrument that has heavily influenced the harmonization of (international) sales law – either directly through adoptions as national law4 or indirectly as a model for the revision of national sales law or the EU acquis communautaire.5 In the sense of hard law, the CISG will automatically apply in many instances unless the contracting parties expressly exclude its application in a choice of law clause.6 In the early years since the CISG came into force, many practitioners chose to summarily exclude its’ application. Unfortunately, there is little evidence to show that these were educated decisions.7 In fact, surveys have shown that international law practitioners and national courts are overwhelmingly not knowledgeable of the substantive provisions of the CISG. Intentional ignorance of the CISG by practitioners who simply opt-out through a choice of law clause is a mistake; practitioners who routinely exclude the CISG without being informed of its provisions are not doing their clients’ a service and conduct malpractice. For example, when representing an exporter-seller it may be in the best interest of the client to choose 1 Goode, Rule, Practice, and Pragmatism in Transnational Commercial Law, 54 Int'l & Comp LQ (2005) 539, 541. 2 de Ly, ‘Sources of International Sales Law: An Eclectic Model’, 25 J L & Com (2005-06) 1, 11. 3 Farnsworth, ‘The Pitfalls of Making International Contracts (Exporting)’, 4 No Carolina J Int’l L & Com Reg (1978) 97, 101. 4 Most major trading nations have adopted the CISG as part of their domestic law including, Brazil, Canada, China, France, Germany, Italy, Japan, Mexico, Russian Federation, Spain, and United States. 5 By a significant degree, the CISG has influenced or is influencing the enacted or proposed national sales law revisions of France, Germany, Japan, Peoples’ Republic of China, Spain, and The Netherlands. Cf. Janssen & Ahuja, ‘Legal Laboratory CISG: A Successful Hybrid between Common Law and Civil Law?’, 25 Vindobona Journal of International Commercial Law and Arbitration (VJ) (2017) 129, 146. 6 Article 6 CISG. 7 See Spagnolo, CISG Exclusion and Legal Efficiency (2014).

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C. Commercial Practice, Business Custom and Trade Usage

the CISG or not expressly exclude it as applicable law. There are a number of pro-seller rules that a client would likely be inclined to take advantage of – the fundamental breach rule that forces the buyer to receive even substantially defective goods, 8 the right to demand time extensions for deliveries beyond the delivery date in the contract 9 and the strict duties placed on the buyer to examine and to notify of any non-conformity of the delivered goods.10 Without knowledge of these provisions, a practitioner may be acting against the client’s best interests by excluding the CISG as applicable law. This disservice is especially acute given that the CISG is primarily a set of voluntary default rules that only come into play if there is an ambiguity or gap in the contract. The CISG expressly states that contracting parties may derogate from the CISG by simply incorporating contrary terms into their contracts.11 Therefore, the savvy international transactional practitioner could chose the CISG to take advantage of its pro-buyer, pro-seller, or ‘neutral’ provisions, while inserting contract terms that pre-empt the application of ‘unfriendly’ provisions found in the CISG. In the end, the CISG is a good starting point, but, as noted above, it does not 7 comprehensively cover the entire range of issues that are pertinent to international sales transactions.12 Gaps in coverage in the CISG have been distinguished as ‘internal’ and ‘external’ gaps.13 Internal gap is a bit of a misnomer as well since these are cases where the question in issue is within the scope of the CISG, but the CISG fails to provide a specific rule. In these cases, in the first place resort should be to CISG case law and numerous quality commentaries and other scholarly materials to examine the ‘general principles’ on which the Convention is based. The true ‘external’ gaps are those areas of sales or contract law that the CISG expressly or implicitly fails to cover, such as, pre-contractual liability, products liability, assignment and delegation of rights and duties, capacity, validity, and legality. Due to the non-comprehensiveness of the CISG, the book offers a selection of various 8 national laws and international legal instruments, which allows for a comparative law approach in order to show some of the commonality and divergences in sales laws. This sampling of laws is intended to enhance the reader’s knowledge base on how different legal systems treat the traditional issues of sales law. The countries’ laws reviewed include the laws of China, England (United Kingdom), France, Germany, Spain, and the United States.

C. Commercial Practice, Business Custom and Trade Usage The CISG recognizes the importance of commercial practice, trade usage, and busi- 9 ness custom (lex mercatoria) as a source of commercial law. Article 9(2) CISG reads: 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.

This provision has generated a debate over the meaning of its terms: (1) how does 10 a court or tribunal determine if a party ‘ought to have known’? (2) What is sufficiently Article 25 CISG. Articles 47, 48 & 63 CISG. 10 Articles 38 et seq CISG. 11 Article 6 CISG. 12 Articles 4 & 5 CISG. 13 Article 7(2) CISG. 8

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‘international’? (3) What is the threshold measure of ‘widely known’? Is a regional usage or custom international enough? By international is a trade usage or custom in the two countries of the contracting parties sufficient? Is a party not in the trade or a new entrant to the trade responsible for knowing the relevant usage and customs at the time of entry? Is a trader doing business in a foreign country responsible for knowing the usage and customs widely observed in that country? An Austrian court took a very liberal view of the admissibility of trade usage and custom due to its importance to daily commercial practice: Art. 9(2) CISG does not mean that, in the future, purely national or local usages can find no application for the interpretation and supplementation of contracts without an explicit reference by the parties. One can still presume an exception for usages, which are in force at certain stock markets, trade fairs or deposit sites, as long as the usage is also regularly observed there in the trade with foreigners. Furthermore, the possibility does not seem to be excluded that a foreign tradesman, who is constantly active in another country and has already formed a number of transactions there, is bound by possible national usages. 14

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Sir Roy Goode notes that the importance of trade usage in international transactions is a normal outcome in the era of free and expanding trade. There has been, for a while an increasing movement away from domestic international trade law to what has become known as ‘transnational commercial law.’ This, according to Goode, is that body of law that ‘result[s] from the harmonisation or convergence of national laws, whether by international convention, conscious or unconscious judicial parallelism, uniform rules.’15 This idea of a transnational commercial law is borne out by the widespread adoption of the CISG, EU incursions into private law, increased specialization and professionalization of trades (more uniform international trade usage), and the use of the CISG as a model in the reforming of national laws. Goode defines transnational commercial law as follows: Transnational commercial law is conceived as law which is not particular to or the product of any one legal system but represents a convergence of rules drawn from several legal systems or even, in the view of its more expansive exponents, a collection of rules which are entirely anational and have their force by virtue of international usage and its observance by the merchant community. In other words, it is the rules, not merely the actions or events that cross national boundaries.16

The sampling of laws in this Treatise reflects the commonality of rules found across legal systems and especially across soft law instruments. 13 The phrase ‘ought to know’ indicates that actual subjective knowledge of trade usage is not needed; such knowledge will be imputed to a party through an objective standard. In determining what the contracting parties ‘ought’ to have known, the legal literature takes a broad view of the admissibility of evidence of trade usage. In the scenario of a new entrant to the market, one asserts that widely known is an independent, objective determination that trumps the subjective lack of understanding of a new entrant and that not all members of a trade need be aware of the usage.17 14 In sum, it is always important to remember, that whether the applicable law is the CISG or a domestic law, practices developed between businesspersons in individual industries and business-types play a powerful role in international business transactions. What seems to be a clear contract term, with a clear dictionary and legal meaning, may 12

14 Appellate Court Graz 9 November 1995, English translation available at http://cisgw3.law.pace.edu/c ases/951109a3.html#cx. 15 Goode, Commercial Law in the Next Millennium (1998), p. 88. 16 Goode, ‘Usage and its Reception in Transnational Commercial Law’, 46 Int’l & Comp LQ (1997) 1, 2. 17 Magnus, Kommentar zum Bürgerlichen Gesetzbuch mit Einführungsgesetz und Nebengesetzen, Wiener UN-Kaufrecht (CISG) (17th edn. 2018) Article 9 CISG paras 21 et seq.

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D. Ambiguities and Gaps

in fact be trumped by an alternative meaning taken from outside of the contract (trade usage and technical meaning). For example, when goods are sold ‘as is’ the common and legal meaning is that the seller is disclaiming any implied warranties of quality. Thus, the buyer takes the goods and assumes any costs related to defects within the goods. ‘As is’ clauses do not disclaim the implied warranty of title. However, a properly worded clause may disclaim defects in title. But, even the generally accepted disclaimer of quality implied by the ‘as is’ term can be questioned. If a very high percentage of the goods prove to be defective, then the question of misrepresentation may be raised: Even in ‘as is’ practice, the seller has a duty to act honestly and reasonably. One gauge of such dishonesty is the representation of quality implied by the price charged. If the ‘as is’ price is half of the normal price (assuming no salvage value for defective goods and 90 percent of the goods prove to be defective), then it can be argued that the seller had misrepresented the quality or value of the goods and therefore a serious downward adjustment of the price paid by the buyer is in order.18

Filip de Ly concludes that ‘even a fully-disclosed, selfish version of a practice is subject 15 to the requirements of honesty, reasonableness, and fairness, especially because more than a fair price was paid by the ‘as is’ purchaser.’19 This argument may be considered weak in dealings between sophisticated parties or where the buyer had a right of inspection, but it does make a valuable point. Trade usage and common legal meaning generally are powerful elements of contract interpretation, but they are also subject to nullification in a given context.

D. Ambiguities and Gaps Numerous contract disputes resolved by arbitrators or judges often entail the over- 16 coming of an ambiguity via interpretation or the filling in of a gap in order to ‘salvage’ the contract. But, at its most rudimentary level, interpretation and gap-filling are the ways of picking a winner or a loser. Gap here is broadly defined and includes cases where the issue (obligation or risk allocation) in dispute is not provided for in the contract or the contract includes an ‘open term’ (‘consensual gap’). An ambiguity, although technically not a gap, requires to seek clarification outside of the written contract as if there was a gap. Of course there are other reasons for a contract dispute, where one party argues that a provision is ambiguous when in fact the arbiter determines it has a clear meaning or where liability is not contested but the amount of damages is in dispute. Different approaches are found in the Common Law and Civil Law jurisdictions in 17 relation to dealing with contractual ambiguities and gaps. In respect of the latter, the interpretation of the contract by an arbitrator and judge is often particularly broad. For example, § 157 of the German Civil Code provides that contracts are to be interpreted as required by good faith, in consideration of customary practice; § 133 of the German Civil Code stipulates that the interpretation of a declaration of intent requires the ascertainment of the true intention rather than adhering to the literal meaning of the declaration. Moreover, case law and doctrine have developed the ‘supplementary interpretation of contracts’: if a contract contains an intentional or unintentional gap that cannot be filled by dispositive legal provisions, the judge or arbitrator is to determine the parties’ ‘hypothetical intent’ in order to fill the gap. Ascertaining such intent necessitates an enquiry into the manner in which fair and reasonable parties would have regulated the matter in 18 Kozolchyk, ‘Drafting Commercial Practices and the Growth of Commercial Contract Law’, 30 Arizona J Int’l & Comp L (2013) 423, 426. 19 de Ly (n 2), p. 426.

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accordance with good faith; in so doing the judge must particularly consider the purpose of the contract and balance the interests of each party. 18 Despite the different theoretical approaches, the judge or arbitrator in a Common Law jurisdiction can probably often come to similar results if he or she considers that filling in gaps is almost never truly due to a contract’s silence. The contract as a whole (textual) and the type of contact (contextual) serve as guides in the filling in the ‘technical gaps’ at issue. In the words of US Supreme Court Justice Stephen Breyer, there is ‘no such answer’ that a contract is ‘truly silent’ ‒ for if ‘it doesn’t say, you try to figure it out.’20 Justice Anton Scalia supports Breyer’s supposition in stating: ‘I really don’t understand what it means to say that the contract does not cover it. (…). If the contract is silent, either the court or the arbitrator has to decide, what is the consequence of that silence, in light of the background, in light of implied understandings.’21 Still, under the Common Law, there is the belief that certain types of gaps can prove to be fatal. In such cases, the Common Law rule is that the contract fails due to indefiniteness and it is not appropriate for the court to make a contract for the parties (hypothetical bargain). But, courts concluding that the parties’ intended to enter a contract, and in many cases have begun performance, can ‘recognize’ that omitted terms are simply not ‘fully specified obligations’ making the contract not sufficiently indefinite to deny a party’s day in court. In contrast, arbitrators do not have such a burden and often can draw from a more abundant amount of sources. Alternatively, there may be a greater array of default rules in international transactions if arbitrators look not only to national law, but also international soft law.22 Therefore, they are often more willing and able to fill in so-called ‘fatal gaps.’23 This Treatise provides numerous sample clauses and practitioner’s tips in the hope that fewer gaps will appear in international sales contracts. 19 The problem of gaps is often the product of the unknowingness or uncertainty of future events. However, a good contract drafter, although not any more prescient than other humans, can provide strategic clauses that provide a means to deal with such uncertainty. For example, contracts often incorporate general clauses (example: renegotiation clause) that diminish the existence of contractual gaps: Almost all areas can be covered under a contract ‘using blanket clauses to cover those [events or issues], which are not foreseeable’ and in such a case an arbitral tribunal would not be ‘faced with the task of gap-filling, but rather with that of interpreting and applying [concretization] the contractual regulations in an equitable manner.’24 Outside of general clauses, the next order of gap-filling comes from the default rules of sales law, some of which act like blanket clauses, such as the duty of good faith, duty to cooperate, excessive unfairness (hardship), and so forth. 20 Another issue is one of evidence. No matter how detailed a contract there is always room (divergence) between the party’s agreement or intent and the written contract: ‘experience shows that despite – sometimes sophisticated and detailed – written agreements, the parties in addition expressly agree on oral terms and intend them to outlast the execution of the written agreement.’25 The CISG recognizes the nonsensical imposition of rules that serve to exclude clearly probative extrinsic evidence from a contract dispute 20 Oral Argument, Stolt-Nielsen S.A. v Animalfeeds Int’l Corp., 2009 WL 4662509, as paraphrased by Rau, “Gap-Filling” by Arbitrators, Energy Center Research Paper No. 2014-03, available at https://reposito ries.lib.utexas.edu/bitstream/handle/2152/28755/2014_06_Gap-Filling-by-Arbitrators.pdf?sequence=2). 21 Id. 22 DiMatteo, ‘Principle of Fair and Equitable Decision-making in International Contract Arbitration and its Affinity to International Soft Law’, 1 Chinese J Comp L (2013) 1. 23 Kröll, ‘Contractual Gap-Filling by Arbitration Tribunals’, 3 IntALR (1999) 9, 13. 24 Nicklisch, ‘Agreement to Arbitrate to Fill Contractual Gaps’, 5 J Int’l Arb (1988) 35, 41. 25 Müller, Protecting the Integrity of a Written Contract (2013), p. 1.

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E. Restatement Approach

resolution. In fact, international contract law instruments generally reject the parol evidence rule and allow for the unrestricted admissibility of extrinsic evidence for the purpose of interpretation.26 Again, commercial arbitrators are less constrained by formal rules and are more adept at using trade usage and soft law instruments in their quest for a fair and equitable decision. In reality, despite a lack of ‘protective rules’ (parol evidence rule, textual interpretation), the written contract, complete on its face, still, at the minimum is strong probative evidence or acts as a rebuttal presumption of the parties’ agreement. Outside of the formalities and interpretive rules provided by law, contracts are commonly protected from contradiction or change by ‘voluntarily’ agreed upon clauses, such as the ‘merger clause’ and the ‘no oral modification clause.’27 In reality, these are standard boilerplate terms that parties are unaware of (no oral modification) or understand (merger clause). The parties often believe that they are not bound by such terms in the fast-paced world of business – where changes in performance obligations are common and the parties need to react quickly to a change of circumstances through oral communications.

E. Restatement Approach International legal practice draws from many different sources. For example, courts 21 and especially arbitrators may draw from different hard and soft law sources. International transactional lawyers may also use such sources as references in the drafting of contracts. By doing so, they invariably affect ‘real world’ commercial practice. This Treatise also draws on numerous laws and provides both descriptive (law interpretation) and prescriptive (best practice) guidance. International commercial law, whether drawn from hard or soft law instruments, 22 is inherently a reflection of domestic laws. The 2008 financial crisis demonstrated the interconnectedness of the world’s economy. The era of free trade has seen the reduction of many barriers to expanding wealth through the vehicle of exporting-importing of goods and services. Both qualitative (lower tariff rates) and quantitative (quotas) barriers to trade have been greatly diminished. The result has been a greater realization of the specialization of labor envisioned by Adam Smith and other philosophers. With the removal of artificial barriers to trade, countries are generally freer to undertake the production of things that they are most efficient at producing for export and meeting the rest of their needs through international trade. However, we do not live in a world of a fully functional free trade regime, that 23 is, barriers remain or even stronger having a comeback as the Chinese-US trade war illustrates. Countries still have a long way to progress in the harmonization of standards (safety, health, environmental, and so forth); the divergence of which continue to restrict the free flow of goods and services. Another barrier is based on the essential function that law, especially contract law, plays in facilitating international business transactions. The necessity for the use of conflict of law or private international law rules produces unwanted uncertainty to transborder transactions. National courts use their own conflicts of law rules to determine the applicable substantial law to be applied to a dispute and at times selecting a law to the surprise of one or both of the parties. The use of a choice of law clause, although common, fails to provide absolute certainty that a court will actually apply the chosen law. The court may decide not to apply the choice of law in

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Id. at 1. Id. at 2.

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cases where they determine the law is not closely connected to the dispute or where the provisions of the chosen law contravene public policies of the forum court. 24 Because of the uncertainty caused by private international law or conflict of laws and the barrier presented by the numerous discrepancies found across national contract and sales laws the goal of a harmonized international sales law took shape. In the early 20th century, most notably in the work of Ernst Rabel,28 a greater recognition of the need for a uniform international sales law came into focus. The culmination of numerous starts and failures in crafting a functional harmonized law of sales was the adoption of the CISG in 1980 and its subsequent entry into force on January 1, 1988. 25 This Treatise takes a ‘CISG plus’ approach to international sales law by focusing on its provisions while providing other legal sources to allow a comparative analysis. The other sources become especially important in areas in which the CISG is silent. The ‘restatement approach’ includes elements of the ‘is’ and the ‘ought.’ It primarily describes the law as it is, but where there are alternative rules or approaches, the restatement approach provides analysis and suggests the better approach. These suggestions include illustrations, sample clauses, and practitioner tips on how best to deal with such issues within the confines of the contract. The terms legal treatise and restatement of law are interchangeable terms. The goal of the American Restatements is given as the distilling of commonly held legal rules, recognition of trends in the law, and recommendations as to what an interpretation of the rules ‘should be.’ The difference with the current undertaking is that the American Restatements deal with discrete areas of law and involve a review of the law of a single legal system. Thus, the goals of the current project are less ambitious than those of the American Restatements. The current Treatise is simply an attempt to inform readers of the general principles and areas of international sales law. However, given the diversity of the legal sources used, it retains the twin elements of the American Restatements – the ‘is and ought’ of international sales law.

F. International Transactional Lawyering Legal systems have rules of conduct or ethical codes that regulate the practice of law, though these rules are not uniform in their views of the appropriate role of lawyers. However, it is universally held that a licensed lawyer or attorney should render competent counsel. The American Bar Association’s Model Rules of Professional Conduct Rule 1.1 on the lawyer’s duty to maintain competence in her field states: ‘[t]o maintain the requisite knowledge and skill, a lawyer should keep abreast of changes in the law and its practice.’29 The complete disregard of a full understanding of the substantive rules of the CISG by an international transactional lawyer (by a perfunctory opting-out) is not within the spirit of Rule 1.1. As noted previously, competent legal practitioners should educate themselves on the law before making a decision on whether or not to opt-out the CISG. 27 The second element in transactional lawyering worth mentioning is the skewered view of the other party’s lawyer as an adversary. American legal education buttresses this view of the adversarial nature of legal representation, which may work well in the American model of litigation, but is a poor approach in the area of transactional 26

Rabel, Das Recht des Warenkaufs, Eine rechtsvergleichende Darstellung, two volumes (1936 and 1957). Model Rules of Professional Conduct Review 1.1 cmt. 8 (2012) (defining competence); see also Resolution Amending the Model Rules of Professional Conduct, Am Bar Ass’n, http://www.americanbar.org /content/dam/abaladministrative/ethics_2020/2012hodannualmeeting_105 a filedmay-2012.authcheckda m.pdf. 28

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G. Drafting Approach

law.30 In several Civil Law jurisdictions, lawyers are, at least in theory, accustomed to a different perspective because good faith and fair dealing play a central role in their domestic law in relation to pre-contractual negotiations, conclusion, and execution of contracts. However, the function of such concepts in domestic law and in domestic practice may be (though this may vary in the latter), that a transactional lawyer cannot solely consider the other party or its counsel as an adversary. She must be more strategic in her approach to the negotiation and drafting of contracts. The adversarial model of drafting sees the lawyer’s job as using its clients bargaining power to draft as one-sided a contract as possible. The contract is viewed as an opportunity to gain as many rights for its client and to allocate as many risks or duties as possible to the other party. This is the wrong approach if the client’s primary interest is to ensure satisfactory performance and outcome rather than posturing itself to be able to more easily declare a breach and seek legal recourse. If the client’s goal is the actual performance of the contract and the preservation of the contractual relationship, then a different approach is needed. If that is the goal, then the job of the transactional attorney is to draft a contract that advances client interest, which includes the mutual interests shared with the other party. The international sales contract, especially long-term, relational ones, need to be more than a simple listing of rights and duties, it should also include deal-preserving provisions. The end goal of contract drafting should be the preservation of the contract relationship rather than a pedantic enforcement of contract rights. This is most important in international transactions where the finding of a trustworthy and reliable foreign party to do business is more difficult, and, hence, the contract should focus on the preservation of that relationship over the allocation and enforcement of rights-duties in a single transaction.

G. Drafting Approach Even though this is not a treatise on contract drafting, the book provides numerous 28 contract clauses and practitioner tips. It is important to understand that these are provided for purposes of illustration and not as ‘model’ terms. The actual terms should be a product of context – type of transaction; type of goods; countries of export-import; applicable law; choice of forum or arbitration clause; characteristics of the parties; discrete versus relational nature of the transaction; and relative bargaining power, sophistication, and informational assets of the parties. One issue of drafting peculiar to international contracting is whether or not to use 29 legal terminology or legalese in the contract. There are two viewpoints on the use of legal language. First, the use of ‘magic’ legal words or phrases is appropriate if they actually simplify the contract.31 This would be the case of phrases that are universally known and provide a shortcut to conveying the intended meaning of the parties. The classic example would be the use of INCOTERMS in which a three-letter acronym is inserted into the contract. That acronym replaces at least a few pages of text that lawyers would need to draft. Without such a short-cut, the drafting lawyer would need to allocate risk of loss, transfer of title, costs of transport, cost of insurance, costs of 30 The distinction between transactional and litigation lawyers is captured in the English legal system’s designations of solicitors and barristers. Often the barrister is hired by a solicitor and may or may not have fiduciary duties toward the solicitor’s client. See Macgregor, Definition and scope of agency law, in: DiMatteo & Hogg (eds), Comparative Contract Law: British and American Perspectives (2015). 31 Johnson, Say the Magic Word: A Rhetorical Analysis of Contract Drafting Choices (2015), available at http://scholars.law.unlv.edu/facpub/897/?utm_source=scholars.law.unlv.edu%2Ffacpub%2F897&utm_me dium=PDF&utm_campaign=PDFCoverPages.

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loading and off-loading of goods, procurement of export licenses, processing of import documents, payments of tariffs and fees, and so forth. The key to the use of such trade terms is that they are universally accepted and understood. Another example, at least in Common Law, is the insertion of a ‘time of the essence clause’ to signal that the delivery date fixed in the contract is a firm and material term. However, the magic words of a given legal system should be avoided in the international sales context, unless a phrase is clearly defined. Again the primary goal of the Treatise is to provide an analysis of different substantive laws relating to issues relevant to international sales transactions. There are some areas of great importance that are not covered in the text, but two will be mentioned here – use of definitions and recitals. The use of recitals or statements of fact and definitions are common in international contracts. The definitions section generally appears very early in the contract, however, sometimes definitions are dispersed throughout the document. It seems that the best strategy is to place the definitions of ‘general terms’ at the front of the contract so that the reader is educated at the beginning on the intended meanings of certain words. More particularized terms that only appear in a given part of the contract should be defined at the beginning of the specific coverage area and whose meaning is restricted to that area. This way the word or term would have a specific or technical meaning for the specific provisions and a general meaning when used elsewhere in the document. The point here is that the time spent drafting clear definitions, especially the defining of words and terms, is time well spent. Given the dangers of translation errors, various levels of foreign language skills, and cross-cultural misunderstanding, the provision of detailed definitions goes a long way in preventing disputes based upon different interpretations of words or misunderstandings of the rights and obligations of the contracting parties. Good contract drafting places a premium on clarity and commonality of meaning. The best way to perform this task is to provide precise definitions of terms, especially technical terms and those terms that may be foreign to one of the parties. Precise definitions, when possible, should be used in place of terms like ‘reasonable’, ‘to be determined’, ‘as needed’, and so forth. The drafting attorney should always ask what is reasonable. What is a reasonable time to provide notice? What is a reasonable time for terminating a contract? What is a reasonable time for the buyer to provide product specifications to the seller? The use of recitals is common in contract practice in some Common Law countries, but in many countries the use of recitals is not commonplace. The recitals are found at the front of the contract to describe the context and the matter to be covered by the contract. Recitals are signaled often by antiquated phrases like ‘Whereas’ or ‘‘Now therefore’. Some courts have held that recitals are not part of the contract. Two points are important to understand. First, recitals should be avoided unless the practice of recitals is common in the law of the country where the contract is to be interpreted and enforced. It is also good practice to ‘repeat’ the recitals where appropriate elsewhere in the contract, to guard against the problem of courts not recognizing recitals as part and parcel to the contract. Second, it is best to keep recitals as concise and clear as possible. They should act as an introduction to the contract; they should not provide information or representations not central to the contract. Recitals are representations that if proved to be false could provide a ground for a cause of action in misrepresentation or fraud.

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I. Electronic Contracting

H. The Sales Contract It was once said that: ‘An oral contract is not worth the paper it is written on.’ 32 This 34 is especially true in the area of international contracts due to the greater likelihood of misunderstanding due to language and cultural differences. EA Farnsworth has argued that generally the language of an international contract should be English because of its widespread use.33 He also recommends that if the contract is written in more than one language then an express provision should state that even though both language versions are original contracts the English version controls in case of conflict (of course he was giving this advice to American practitioners, but an argument can be made that English is the logical choice because of its common use in international business transactions). A further discussion of language issues can be found in Chapter 2 (Language and Translation). Another problem with sales contracting is the contract generally consists of two sepa- 35 rate instruments that make up the offer and acceptance, such as price quotations, pro forma invoices, purchase orders, written confirmations, commercial invoices, and so forth. This leads to the infamous battle of the forms scenario and its tandem of questions: (1) has a contract been formed despite conflicting standard terms? And (2) if a contract is concluded, what are the terms of the contract given the conflicting terms? The problematic nature in the exchange of forms scenario is demonstrated by the American Uniform Commercial Code’s § 2-207, long regarded as one of the most poorly drafted provisions of the UCC. It has spawned an endless number of scholarly commentaries and resulted in three approaches in the state court systems – first shot rule, second or last shot rule, and the knock-out rule. The simplest method of avoiding the battle of forms scenario, but uncommon in 36 practice, is to use a single ‘model contract’ (example: ICC model contracts for sales of good and commercial agency) that both parties sign eliminating the threat of conflicting terms. Given the impracticality of the use of model forms, EA Farnsworth suggests the insertion in the offer of a provision demanding that the other party accept by signing and returning the offer. The issues and problems of the exchange of standard forms will be discussed in Chapter 8 (Formation of Contract) and Chapter 9 (Standard Terms).

I. Electronic Contracting This Treatise does not contain a Chapter dedicated to electronic contracting, al- 37 though issues of electronic contracting are referred to sporadically in the text. This decision was made for the reason of scarcity of space and, more importantly, because the internet is viewed here as a means of communication that does not change the substantive rules of international sales law. Instead, we have elected to provide a brief discussion of e-contracting here. During the drafting of the CISG, the internet was yet to be created and the use of electronic or e-commerce or digital tools in general was just beginning. The closest predecessor to e-commerce was the use of Electronic Data Exchange (EDI) to facilitate transactions in established business relationships. Article 13 CISG only refers to telegrams and telex and shows that the CISG does not have a ‘digital mindset’. However, the CISG’s acceptance of these types of electronic technologies that existed at the time indicates that the new technologies should also be recognized within Goldwyn, reprinted in: Bartlett, Familiar Quotations (14th ed. 1968), p. 967. Farnsworth, ‘The Pitfalls of Making International Contracts (Exporting)’, 4 No Carolina J Int’l L & Com Reg (1978) 97, 97–98. 32

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Chapter 1 Introduction

the scope of Article 13 CISG. Thus, the CISG might not have a ‘digital mindset’, but it has at least an ‘open mindset’ to cover some digital age problems. Nation-states have passed statutes to deal directly with the use of electronic means in the formation of contracts. For example, a majority of US states have adopted the Uniform Electronic Transactions Act (UETA). 38 Due to the influence of EU directives, the domestic laws of the EU member states require that commercial parties satisfy a number of duties in order to create an enforceable (consumer) contract through electronic means. § 312i(1) of the German Civil Code for example lists a number of duties relating to electronic business dealings. The entrepreneur (seller) must ‘provide the customer with reasonable, effective and accessible technical means with the aid of which the customer may identify and correct input errors prior to making his order; notify the customer clearly and comprehensibly of information specified in the statutory order under Article 246 c of the Introductory Act to the Civil Code [Einführungsgesetz zum Bürgerlichen Gesetzbuch] in good time prior to sending his order; confirm receipt of the order without undue delay by electronic means for the customer; and make it possible for the customer to retrieve the contract terms including the standard business terms when the contract is entered into and save them in a form that allows for their reproduction.’ Other national laws of EU member states foresee similar provisions. 39 Other harmonization instruments developed at the international level include: UNCITRAL’s Model Law on Electronic Commerce (1996)34 and Model Law on Electronic Signatures in 2001.35 In 2001, the CISG-Advisory Council was formed and in 2003 it published its first Opinion – Opinion 1: ‘Electronic Communications under the CISG.’ Subsequently a more comprehensive international model law was adopted – the 2005 UN Convention on the Use of Electronic Communications in International Contracts, which entered into force March 1, 2013.36 40 Chapter 7’s coverage of formalities will provide a fuller discussion of electronic contracting in that area. For now, we can say that most domestic laws, for purposes of writing and signature formalities, recognize electronic records as equivalent to the written form and accept electronic signatures, attestation, confirmation, and attribution (uniqueness of every person’s e-mail address) as sufficient to constitute a legal signature. Although technological advancements and the ubiquitous nature of the internet have created new products (informational commodification), they have not been a real obstacle to the formation of contracts under the CISG. In fact, they have provided parties greater flexibility in the formation of contracts, revocation of offers, the modification of contracts, and the ability to provide prompt notice as required under various CISG provisions. This is as it should be since an underlying principle of the CISG is the elimination of formalities in the formation of contracts. However, it is important to note that technology continues to shape the process of exporting and importing in such areas as the tracking of the movement of goods through the use of radio-frequency identification (RFID) tracking chips.37 Tracking chips can be affixed to cargo pallets to allow a multitude of parties (sellers, buyers, freight forwarders, customs officers) to be instantaneously informed of the: Text available at www.uncitral.org/uncitral/uncitral_texts/electronic_commerce.html. Text available at www.uncitral.org/uncitral/en/uncitral_texts/electronic_commerce/2001Model_sign atures.html. 36 See Eiselen, ‘Integration of the UN Electronic Communications Convention and the United Nations Convention on Contracts for the International Sale of Goods’, in: Schwenzer, Atamer & Butler (eds), Current Issues in the CISG and Arbitration (2014), pp. 145–65. 37 They are based upon the wireless use of electromagnetic fields to transfer data, for the purposes of automatically identifying and tracking tags attached to objects. 34

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J. Treatise’s Coverage unit counts of merchandise in the boxes, the geo-location of the boxes, the sealed condition of the containers, the integrity of the hold in the cargo ship and, with all of that information, the projected time of arrival, unloading and transfer velocity, duration of ground transport, and the sufficiency of the crews and personnel scheduled at each location through which the goods will move. Any adverse changes in any conditions, including increased headwinds the cargo ship captain must navigate, are immediately inputted into the data flows, enabling all of the schedules, workloads, and related cost impacts to be instantly calculated and, if suitable, allocated among the different parties.38

Technology has enhanced the means to construct and transmit business records 41 and information in digital forms. It also now plays a significant role in just-in-time contracting and the evolution of network contracting. In the end, the transactional lawyer cannot avoid recognizing the role of new technologies on the supply chain. The lawyer will likely need to draft contract terms that take these technologies into account. In some cases, technological advancements may require the lawyer to ‘work as part of a corporate team that includes information architects, security managers, records managers, auditors, and financial executives, as well as business operations managers.’39 This is merely an extension of an old idea that law and the representation of clients is a lifelong learning experience!

J. Treatise’s Coverage This Treatise’s goal is to provide in a single volume a review of laws, issues, and 42 contract terms related to the international sale of goods. It aims to provide a single reference book for the practitioner, academic, and student. It draws and synthesizes a wide range of materials from hard and soft law instruments, international and national legal instruments, and from practice. The practice material focuses on the legal practice of an international transactional lawyer, but will also look to commercial practice in general. Its approach is international, comparative, and cosmopolitan in nature. International in its use of core materials such as the CISG, the PICC, the PECL, and to a lesser extent the proposed and subsequently withdrawn CESL (reference only if it contains a diverging and innovative approach). It is comparative in that it reviews differences between the Civil Law and Common Law approaches to certain issues through a sampling of national laws. It is cosmopolitan in nature in that it seeks to go well beyond an analysis of what ‘the’ law is or what it should be, but to offer options to the lawyer that can be utilized in the interest of different clients. The book, thusly, is descriptive, normative, and ultimately agnostic in its presentation. The Chapters, more or less, follow in general a ‘template’, which is to be explained 43 here. It is important for the reader to understand the template and its constituent parts before reading the book. This is due to the fact that the table of contents does not repeat the template for each of the Chapters, but, instead, lists the substantive issues found in the commentary, illustrations, and practitioner tips of each Chapter. The template includes the following parts: (1) description of the ‘Topics Covered’; (2) an ‘Introductory Note’; (3) ‘Statement of Issues’ (to be covered in the Chapter); (4) the role or uniqueness of the topic in the ‘International Sales Transaction’; (5) ‘Sampling of Laws’—the following laws or materials have been singled out for coverage when appropriate: (i) CISG, (ii) CISG Advisory Council Opinions, (iii) PICC, (iv) PECL, (v) Proposed CESL (as said before reference only if it contains a diverging and innovative approach), (vi) German 38 Ritter, ‘Designing and Constructing Commercial Agreements in the 21 st Century’, 26 St Thomas L Rev (2014) 506, 506. 39 Id. at 509.

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Chapter 1 Introduction

Bürgerliches Gesetzbuch (BGB), (vii) French Code civil, (viii) Spanish Código civil, (ix) Anglo-American Common Law of contracts, (x) American Uniform Commercial Code (UCC), (xi) UK Sales of Goods Act, (xii) American Restatement (Second) of Contracts, (xiii) Chinese Law (with the main focus on the new Chinese Civil Code, the CCC), and (xiv) Chinese Supreme Court Interpretations;40 (6) ‘Commentary’ beginning with applicable CISG case law and then applying the above listed laws (especially, when the CISG does not cover a certain issue or area of contract law), offering generic differences between Common Law and Civil Law, indicating general international commercial practice, and offering a ‘best view’ of the issues; this analysis is intended to be descriptive, comparative, and evaluative; (7) ‘Illustrations’ offer examples of law in practice, ferrets outs tangential issues, and gives hypothetical examples; (8) ‘Cross References’ to other Chapters in the book, related contract clauses, and additional commentary; (9) ‘Practitioner Tips & Contract Clauses’, and (10) ‘Additional Sources’ for further study. Again, while the above template remains mostly consistent throughout the Treatise, the substantive issues covered are found in the ‘Detailed Table of Contents.’ However, it has to be stresses that the contributors of this Treatise were completely free to derogate from the presented template in form and content when their topics were not best presented by the template. 44 The Treatise attempts to be comprehensive given the practical constraints of page limitations, covering the entire contractual timeline from the negotiation phase to post-contractual obligations. It begins with the preliminary, but important, topic of the role of language in the writing and interpretation of international legal instruments and contracts (Chapter 2), before proceeding to the issue of pre-contractual liability. This area covers duties relating to the negotiation of a contract and the use of preliminary instruments. The later issue seeks to define the line between negotiation and contractually binding agreement. Since Civil Law and Common Law diverge here two separate Chapters are offered (Chapter 3 from a Civil Law perspective and Chapter 4 from a Common Law perspective). The next group of Chapters relate in some way to the conclusion or formation of contracts and their contents, expressed or implied: Chapter 5 reviews the ‘Scope of the CISG’ and Chapter 6 deals with ‘Jurisdictional Issues’; Chapter 7 reviews ‘Contractual Formalities’; Chapter 8 analyzes the rules relating to the ‘Formation of Contract’; Chapter 9 examines the incorporation and enforceability of ‘Standard Terms’; Chapter 10 discusses the vital role played by ‘Trade Terms and INCOTERMS’; and Chapter 11 examines the doctrines and principles that determine the ‘Validity of Contract Terms’. 45 The next group of Chapters relate to the performance phase of the contract: Chapter 12 reviews the duty related to the ‘Delivery of Goods’; Chapter 13 does a similar examination relating to the ‘Delivery of Documents’; Chapters 14 and 15 examine issues of conformity and warranties; Chapter 14 covers ‘Conformity of Goods’ and Chapter 15 ‘Sales and Intellectual Property Rights’ (warranty of title); Chapter 16 reviews the buyers obligations relating to the ‘Examination of Goods and Notice of Non-Conformities’; Chapter 17 delineates where performance ends and breach begins – ‘Performance and Breach of Contract’; Chapter 18 examines the particular case of ‘Anticipatory Breach’; and finally, Chapter 22 examines exemption from liability for lack of performance provided by the excuse doctrines: ‘Excuse: Impossibility and Hardship.’ 46 Another group of Chapters deal with the allocation of liability and remedies: Chapter 19 examines ‘Remedies and Damages’; Chapter 20 covers the right to ‘Avoidance of 40 The Interpretations of the Chinese Supreme Court remain in principles applicable also after the enactment of the new CCC, unless they have been copied into it or are contradicting with one of its provisions.

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K. Additional Sources

Contract’; Chapter 21 examines the crucial determination of when there is a passage of the ‘Risk of Loss’ from the seller to the buyer; and Chapter 24 discusses the issue of ‘Products Liability’. The rest of the Chapters discuss other important areas of contract and sales law including: ‘Contract Interpretation’ (Chapter 23); ‘Assignment, Delegation and Third-Party Rights’ (Chapter 25); ‘Defenses’ (Chapter 26); ‘Agency and Distribution Agreements’ (Chapter 27), as well as, the unique issues presented by ‘Long-Term Contracts: Installment and Supply Contracts’ (Chapter 28); and ‘Post-Contract: Continuing Obligations & Rights’ (Chapter 29), which covers issues of warranties, confidentiality, covenants not-to-compete, and other post-contract restrictions. The book concludes with a discussion of the issues of ‘Choice of Law’ (Chapter 30).

K. Additional Sources Adams, A Manual of Style for Contract Drafting (4th edn. 2018); Adams & Cramer, Drafting Contracts in Legal English: Cross Border Agreements Governed by US Law (2013); Bonell, An International Restatement of Contract Law: The UNIDROIT Principles of International Commercial Contracts (3 rd edn. 2009); Bridge, The International Sale of Goods (4th edn., 2018); Bridge, The Sale of Goods (3rd edn. 2014); Burnham, Drafting and Analyzing Contracts (4th edn. 2016); Burns & Edwin Peel (eds), Contract Terms (2007); Cordero-Moss, International Commercial Contracts (2014); Davies & Snyder, International Transactions in Goods (2014); DiMatteo, International Contracting: Law and Practice (4 th edn. 2016); DiMatteo (ed) International Sales Law: A Global Challenge (2014); Eidson, Contract Drafting: Powerful Prose in Transactional Practice (3rd edn. 2019); Fontaine & de Ly, Drafting International Contracts (2nd edn. 2009); Fox, International Commercial Agreements and Electronic Commerce (6th edn. 2018); Garner, Legal Writing in Plain English (2nd edn. 2012); Garner, The Elements of Legal Style (2nd edn. 2002); Gillette & Walt, The UN Convention on Contracts for the International Sale of Goods: Practice and Theory (2 nd edn. 2016); Goode et al., Transnational Commercial Law (2nd edn. 2015); Klotz, International Sales Agreements: An Annotated Drafting and Negotiating Guide (3rd edn. 2018); Kröll, Mistelis & Perales Viscasillas, UN Convention on Contracts for the International Sale of Goods (CISG): Commentary (2nd edn. 2018); Müller, Protecting the Integrity of a Written Contract (2013); Schulze (ed), Common European Sales Law (CESL) (2012); Schlechtriem & Schwenzer (eds), Commentary on the UN Convention on the International Sale of Goods (CISG) (4th edn. 2016); Shippey, International Contracts: Drafting the International Sales Contract (4 th edn. 2009); Stark, Drafting Contracts, How and Why Lawyers Do What They Do (2 nd edn. 2014); Vagts, Dodge & Koh, Transnational Business Problems (6th edn. 2019); Vogenauer (ed), Commentary on the UNIDROIT Principles of International Commercial Contracts (PICC) (2nd edn. 2015); Whincup, Contract Law and Practice: The English System with Scottish, Commonwealth and Continental Comparisons (5th edn. 2006).

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47

CHAPTER 2 LANGUAGE AND TRANSLATION ISSUES Claire M. Germain & Larry A. DiMatteo Part 1:

The Language of the Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1

A. Topics Covered . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B. Introductory Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C. Statement of Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . D. International Sales Transaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . E. Sampling of Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. CISG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. UNIDROIT Principles of International Commercial Contracts III. Common European Sales Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Principles of European Contract Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. Comment on PICC, CESL, and PECL Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI. National Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VII. Chinese Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F. Commentary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. PICC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Lessons Learned from Translations of Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Plain Language Movement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . G. Illustrations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . H. Practitioner Tips & Contract Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Drafting Considerations: Checklist . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Best Practices: Lawyer-Translator . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. UNCITRAL Guide . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . J. Additional Sources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 2 5 6 7 7 8 9 10 11 13 14 15 28 30 32 34 35 36 37 40 44

Part 2:

Law Written in Multiple Languages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

45

A. Topics Covered . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B. Introductory Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C. Statement of Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . D. International Sales Transaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . E. Sampling of Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. CISG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. UN Vienna Convention on the Law of Treaties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Treaty of the European Union . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F. Commentary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Evolution of Different Meanings within Legal Traditions . . . . . . . . . . . . . . . . . . . . II. Problem of Superficial Transplantation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . G. Practitioner Tips & Contract Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . H. Additional Sources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

45 46 49 50 51 51 53 54 55 65 66 69 70

Part 1: The Language of the Contract A. Topics Covered 1

This part deals with contract problems among the parties when more than one language is used. The topics include the language of the contract, interpretation of declarations of the parties and incorporation of standard terms, translation problems, and documents not understood by the forum of the dispute.1 Part 2 examines the 1 Germain, ‘Reducing Babelism: CISG Translation Issues’ in DiMatteo (ed), International Sales Law: A Global Challenge (CUP 2014) p. 51.

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C. Statement of Issues

problems associated with the publication of law (CISG) in multiple languages and the resulting problem of discrepancies indifferent language versions. It will also discuss the use of foreign language and legal concepts in domestic legislation. Specifically, the use of English terms in non-English legal systems will be examined.

B. Introductory Note In an international contract, seller and buyer usually come from different countries 2 and often speak different languages. Contract language problems among the parties involve the language the contract is written in, statements made by the parties in a different language, errors in translated documents, or documents written in a language not understood by one of the parties or by the forum court of a dispute. A language issue arises when a declaration is written or spoken in a language which the recipient does not or is not expected to understand.2 Such language difficulty can be qualified as potentially preventing the declaration framed in a foreign language from reaching the recipient.3 The CISG has remarkably facilitated commercial transactions across national bound- 3 aries and different legal systems. It has been celebrated as a ‘legal lingua franca’ for drafting international contracts.4 The reason for the expression in the CISG context is to show the universality and common, uniform language produced by the Convention in spite of the variety of countries and languages.5 Unavoidably, however, some difficulties at time may arise, caused by the parties using different languages, or words which might be interpreted differently. The CISG does not contain express provisions on language problems arising during 4 the conclusion or performance of a contract. This is contrary to the PICC, CESL, and PECL which were written later (see infra). However, Articles 8 and 9 contain general principles applicable to declarations and the significance of these acts, and they have been used to address different language issues. In practice, questions related to the language of declarations have mainly arisen in connection with the incorporation of standard terms and conditions into CISG contracts, and they have led to extensive case law.

C. Statement of Issues When engaging in business negotiations with parties who speak different languages, 5 which language should the final contract be written in? If the contract is written in more than one language, which one will be official, and which language will control in the event of a conflict? In order for the standard terms to be effectively incorporated into the contract, in what language must the referring clause and/or the standard terms be drafted? At the litigation stage, what is the best way to deal with contract problems among the parties involving translated documents, documents written in language not

2 Schlechtriem & Schwenzer (eds), Commentary on the UN Convention on the International Sale of Goods (CISG) (3rd edn, OUP 2010) p. 392. 3 Id. 4 The expression is attributed to Hellner, ‘The UN Convention on International Sales of Goods – an Outsider’s View’ in Jayme (ed), Jus Inter Nationes: Festschrift für Stefan Riesenfeld (Müller 1983) pp. 72, 76. 5 Schlechtriem, ‘25 Years of the CISG: An International ‘Lingua Franca’ for Drafting Uniform Laws, Legal Principles, Domestic Legislation and Transnational Contracts’ in Flechtner, Brand & Walter (eds), Drafting Contracts under the CISG (OUP 2007), pp. 167, 168.

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Chapter 2 Language and Translation Issues

understood by the other party, and documents not understood by the forum court of a dispute?

D. International Sales Transaction 6

Language plays a critical role in international commercial transactions and special precautions need to be taken at the three different contract stages – negotiation, execution and interpretation – to avert miscommunication and misunderstandings.

E. Sampling of Laws I. CISG 7 Article 8 (1) For the purposes of this Convention statements made by and other conduct of a party are to be interpreted according to his intent where the other party knew or could not have been unaware what that intent was. (2) If the preceding paragraph is not applicable, statements made by and other conduct of a party are to be interpreted according to the understanding that a reasonable person of the same kind as the other party would have had in the same circumstances. (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. Article 9 (1) The parties are bound by any usage to which they have agreed and by any practices which they have established between themselves. (2) 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.

II. UNIDROIT Principles of International Commercial Contracts6 8 Article 4.7 Where a contract is drawn up in two or more language versions which are equally authoritative there is, in case of discrepancy between the versions, a preference for the interpretation according to a version in which the contract was originally drawn up.

III. Common European Sales Law7 9 Article 61 Where a contract document is in two or more language versions none of which is stated to be authoritative and where there is a discrepancy between the versions, the version in which the contract was originally drawn up is to be treated as the authoritative one. 6 Available online under http://www.unidroit.org/english/principles/contracts/principles2010/ integral versionprinciples2010-e.pdf. 7 Proposal for a Regulation of the European Parliament and of the Council on a Common European Sales Law, COM (2011) 635 final.

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E. Sampling of Laws Article 76 Where the language to be used for communications relating to the contract or the rights or obligations arising from it cannot be otherwise determined, the language to be used is that used for the conclusion of the contract.

IV. Principles of European Contract Law8 10

Article 5:107 Where a contract is drawn up in two or more language versions none of which is stated to be authoritative, there is, in case of discrepancy between the versions, a preference for the interpretation according to the version in which the contract was originally drawn up.

V. Comment on PICC, CESL, and PECL Provisions The PICC, CESL and PECL articles are explicit in mentioning and suggesting a 11 solution to linguistic discrepancies in the language of the contract, which is to prefer the version in which the contract was originally drawn up. They differ in that CESL Article 61 mentions a situation where a contract document is in two or more language versions none of which is stated to be authoritative, whereas PICC Article 4.7 mentions a situation where both language versions of a contract document are authoritative. The previous version of Article 61 CESL was Article II.–8:107 DCFR (Draft Common Frame of Reference), which itself incorporates a revised and updated version of the Principles of European Contract Law (PECL). The original version is preferred as the authoritative one, since it is likely to express 12 best the common intention of the parties.9 Illustration: a French business and a German business make a contract in French and in German. The contract contains an arbitration clause. The French text provides that the arbitrator ‘s'inspire’ from the rules of the ICC, i.e. he may follow them. The German version provides ‘er folgt’, i.e. the arbitrator must follow the ICC rules. The French version was the original and this is the one which should prevail.10

VI. National Laws National laws do not usually contain rules on language issues in contracts unless 13 the country has several official languages. Linguistic misunderstandings may render a contract void under domestic rules on ‘mistake’.11 A narrow exception can be seen in the new French Civil Code: French Code civil created by Ordonnance n° 2016-131 of 10 February 2016 Article 1127-7(3): The languages offered for the conclusion of the contract, which must include the French language.

This provision is found in a sub-section entitled: Special Provisions Governing Contracts made by Electronic Means. It requires that an offer made by electronic means may https://www.law.kuleuven.be/personal/mstorme/PECL.html. Stanivukovic, Comment and Notes: PECL Article 5:107: Linguistic Discrepancies. Generally, see also Stanivukovic, Editorial Remarks on the Manner in Which the PECL May be Used to Interpret or Supplement CISG Article 8, at http://cisgw3.law.pace.edu/cisg/text/peclcomp8.html#er. 10 Id. 11 Schlechtriem (n 2) p. 454 para. 45 concerning German law under the BGB. 8

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be made in different languages but one of those languages must be French. However, it does not expressly give priority to the French language version.

VII. Chinese Law12 14 Article 125 Where a contract is drawn up in two or more languages and it is agreed that all versions are equally authentic, the words and expressions used in all versions shall be presumed to have the same meaning. Where the words and expressions of different language versions are not consistent with each other, they shall be interpreted in light of the purpose of the contract.

F. Commentary There are numerous circumstances law firms may find themselves faced with a multilingual contract. Among the most common types of transactions that involve multilingual contracts include: (1) Sales or purchase agreements between U.S. and foreign entities; (2) representation of manufacturers using foreign sourcing agents to manufacture component parts at a discount; (3) representation of manufacturers exporting goods, who need contracts drafted to foreign distributors or foreign sales agents; (4) representation of distributors or sales agents performing services for foreign manufacturers; (5) employment or independent contractor/service agreements where a party performs services outside the or performs services for a foreign entity; (6) joint venture agreements between and foreign entities; and (7) tort claims against foreign entities where a contract appears to limit liability. 16 The language of the contract is in principle the language used by the party to negotiate and conclude it. If the contract is written in two language versions, it is important to designate which one is the official one and will prevail in case of conflict. If both versions are equally authentic, it is important to ascertain the will of the parties and apply the reasonable person standard. The reason is that the contract law of most nations stipulates that there must be a meeting of the minds in order to establish a binding contract. If this does not exist, there is no contract.13 17 The CISG provides general rules regarding the interpretation of the statements, declarations or conduct of the parties, considering both the subjective intent of the parties and the objective standard of a reasonable person: the statements made by the parties should be interpreted according to their intent, but only if the other party knew or could not have been unaware of that intent (Article 8). If this is not applicable, statements are to be interpreted according to the understanding of a reasonable person similarly situated. In determining the intent or the understanding of a reasonable person, consideration should be given to all relevant circumstances including negotiations, practices between the parties, usages and subsequent conduct of the parties (Article 9). 18 The issue of which party is allocated the risk of differences in the respective languages is referred to as the language risk issue.14 The general rule is that the one making the statement bears the risk of defective formulation.15 If standard terms are formulated in 15

12 http://www.trans-lex.org/601700/. See Zhang, Chinese Contract Law: Theory and Practice (Brill 2006) p. 132. 13 Rozovics ‘Drafting Multiple-Language Contracts’ (2011) 28 GP Solo available online http://www.ame ricanbar.org/publications/gp_solo/2011/april_may/drafting_multiple-languagecontractswhenyouonlyspe akenglish.html. 14 Schlechtriem (n 2) p. 166. 15 Id.

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F. Commentary

a different language from the contract or not understood or ought to be understood, the court will assess the situation depending on the circumstances, and whether the party actually understood the language or not.16 A 2013 CISG Advisory Opinion confirms previous scholarly commentary and case law and indicates that a reference to the inclusion and the standard terms will be regarded to be clear where they are available in a language that the other party could reasonably be expected to understand. Such a language includes the language of the negotiated part of the contract, the negotiations or the language ordinarily used by that party.17 The CISG allows courts that are applying it to consider ‘all relevant circumstances’ of the contract – this would apply to both the original language contract as well as the translation.18 Regarding statements and declarations, the prevailing opinion is that the statement 19 should be in the language of the contract.19 The language could be the language designated by the parties as the language of the contract. It could also be the language used by the parties during their negotiations, following the usages referred to in Article 9. 20 There can be exceptions, i.e., if the recipient actually understood the statement that was made in another language.21 When, by mutual consent a foreign language has been chosen, there is an obligation on the other party to have the contract translated. If in doubt, the principle of good faith would dictate that the party in question would ask for clarifications from the other party or gain understanding through expert translations. 22 In one case, a notice was held effective even though it was not in the language of the 20 contract or of the addressee, because it was an acceptable language from the perspective of trade usages and practices. In addition, the court stated that the recipient of the notice could have been reasonably expected to request a clarification explanations or a translation.23 If the terms are not in the language of the contract, and no translation has been provided, they will not become part of the contract.24 Standard terms have to be drafted ‘either in the language of the contract, or in that of the opposing party or a language that the opposing party knows’ to be a part of the contract.25 Another court ruled that the other contracting party had to be sufficiently notified for the standard terms to be incorporated into the contract either in the language of negotiations or in the party’s native language.’26

Huber, ‘Standard Terms under the CISG’ (2009) 13 Vindobona J of Int’l Com L & Arb 123, 127. CISG-AC Opinion No. 13, Inclusion of Standard Terms under the CISG. January 2013. Rule 6. http://w ww.cisg.law.pace.edu/cisg/CISG-AC-op13.html#1. 18 See, e.g., MCC-Marble Ceramic Center, Inc. v Ceramica Nuova D’Agostino, S.p.A., 144 F.3 d 1384 (11th Cir. 1998). 19 Huber, ‘Some Introductory Remarks on the CISG’ (2006) 6 IHR 228. 20 Id. 21 Id. 22 Zeller, Four-Corners – The Methodology for Interpretation and Application of the UN Convention for the International Sale of Goods (2003) n 131 available at http://www.cisg.law.pace.edu/cisg/biblio/4corners .html#15. 23 United Nations Commission on International Trade Law, UNCITRAL Digest of Case Law on the United Nations Convention on the International Sale of Goods 58 (2012), citing CLOUT Case No. 132 (OLG Hamm 8 February 1995). 24 Id. 58 n 84 citing Rechtbank Koophandel Hasselt 2 June 1999. The General Conditions on the invoice were not valid as they were sent for the first time with the invoice and were written in French, not the language of the contract (Dutch): http://cisgw3.law.pace.edu/cases/990602b1.html. 25 Tribunale di Rovereto 21 November 2007, UNILEX. English translation at http://cisgw3.law.pace. edu/cases/071121i3.html. The standard terms of the Dutch company were not part of the contract, in particular the forum selection clause, since there was no proof that the Italian company had knowledge of the buyer’s standards terms. The forum selection clause in favor of the Dutch Courts could not apply. 26 LG Memmingen 13 September 2000, at http://cisgw3.law.pace.edu/cases/000913g1.html. 16

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Regarding the language used during contract negotiations, the courts focus on the parties and circumstances of each particular case in allocating the language risk.27 If only brief messages are sent in a language different from the one of the negotiations, the standard terms have not been incorporated into the contract.28 In one case, the negotiations between a German seller and an Italian buyer were held almost exclusively in English, but the buyer had sent occasional messages in German. The Court held that these terms had not been incorporated into the contract, because they were written in German.29 22 If the negotiations were held through representatives, they are responsible for the language knowledge to the party who has used them.30 In the Marble case, the negotiations between an Italian seller and a US buyer took place at a trade fair in Bologna and an agent of the seller served as interpreter since the president of the buyer did not speak Italian. The contract was signed during the trade fair on a standard form written in Italian, with standard terms in Italian on the back. The court decided that the standard terms were part of the contract.31 23 Several interesting observations have been made with regard to the prevalence of some languages and the notion of a world language that everyone should understand. Some courts, particularly in Austria, have held that standard terms written in a ‘world language’ generally become part of the contract unless the party objects without any undue delay.32 This position is controversial and several commentators write that this notion should not be followed under the CISG.33 Even English which is often considered the world language for commerce is not always understood in every market.34 It is better to consider the language abilities of the addressee rather than the concept of world language.35 For a multilingual convention of worldwide application, ‘the notion that certain languages must, by definition, be understood by all, is untenable.’36 24 At the performance stage of the contractual relationship, the reasonable person test requires that the recipient make more efforts than when receiving a foreign language standard terms during contract formation.37 For instance, a notice can be effective even if given in a language different from the contract or of the addressee, taking into account the understanding of a reasonable person, and giving due consideration to usages and practices observed in international trade.38 Even if a foreign language has been chosen by the parties by mutual consent, there is an obligation on the other party to have the contract translated.39 A party who agrees to contract in a particular language is bound generally not only by the standard form terms but also by an expectation that the language is understood.40 21

Schlechtriem (n 2) p. 291. Id. p. 289. 29 Id. p. 289 n 284. 30 Id. n 286. 31 MCC-Marble (n 18). 32 See OGH 17 December 2003, at http://cisgw3.law.pace.edu/cases/031217a3.html, according to which German, French and English could possibly be regarded as internationally common languages. 33 Schlechtriem (n 2) p. 292 n 300. CISG Advisory Opinion, note 17, cmt 6.6. 34 Schlechtriem (n 2) p. 292 n 303, 167. 35 Id. p. 292. 36 Id. p. 394. 37 Id. 38 Id. 39 Zeller, ‘The Parol Evidence Rule and the CISG – A Comparative Analysis’, (2003) 36 Comparative Law Journal of South Africa 308, 323. 40 Schlechtriem, ‘Uniform Sales Law – The Experience with Uniform Sales Law in the Federal Republic of Germany’ (1991/92) Jurisdik Tidskrift 1, 12. 27

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F. Commentary

A term in a foreign language cannot necessarily be relied upon if the choice of 25 communicating a term in a foreign language is unilateral. Again, the principle of good faith as well as the reasonable person test pursuant to Article 8(3) CISG will determine this issue.41 A declaration written in German only and that was not understood by the recipient 26 cannot be considered to have reached him. In that case, the term ‘Auftragsbestätigung’ (‘confirmation de commande,’ in French, confirmation of order in English) was sent by a German seller in German to a French buyer who did not sufficiently understand German.42 Documents which are written in a foreign language without any translation cannot be 27 interpreted by the court.43 Courts also ignore obvious translation errors.44

I. PICC The UNIDROIT Principles provides a specific typology relating to language differ- 28 ences in multiple language contracts. Article 4.7 of the UNIDROIT Principles deals with linguistic discrepancies: Where a contract is drawn up in two or more language versions which are equally authoritative there is, in case of discrepancies between the versions, a preference for the interpretation according to a version in which the contract was originally drawn up. Article 2.1.20 of the UNIDROIT Principles deals with the issue of ‘surprising terms’ 29 in standard form contracts. In the area of the use of a foreign term (not the language of the contract) it provides this illustration: A, a commodity dealer operating in Hamburg, uses in its contracts with its customers standard terms containing, among others, a provision stating “Hamburg – Freundschaftliche Arbitrage”. In local business circles this clause is normally understood as meaning that disputes are to be submitted to a special arbitration governed by particular rules of procedure of local origin. In contracts with foreign customers this clause may be held to be ineffective, notwithstanding the acceptance of the standard terms as a whole, since a foreign customer cannot reasonably be expected to understand its exact implications, irrespective of whether or not the clause has been translated into the foreign customer’s own language.

II. Lessons Learned from Translations of Law The issue of translation problems in multi-lingual legal laws or texts, such as EU 30 law and the CISG, has produced a deep literature. Some of the problems and solutions in this area is equally applicable to multi-language contracts. Just as different language versions of a contract may be deemed to be original and equally authoritative, most supranational laws are published in official languages under the principle of equal authenticity of each of the official languages.45 41

Id. CA Paris 10 September 2003, at http://cisgw3.law.pace.edu/cases/030910f1.html. 43 CA Versailles 13 October 2005, at http://cisgw3.law.pace.edu/cases/051013f1.html. 44 CA Grenoble, Commercial Chamber 13 September 1995, at http://cisgw3.law.pace.edu/cases/950913f 1.html. 45 F. Ramos, ‘International and supranational law in translation: from multilingual lawmaking to adjudication’ (2014) 20 The Translator 331. 42

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Chapter 2 Language and Translation Issues 31

Some of the lessons to be learned from the translation of law include: (1) recognition that different sources and procedures for legal drafting, implementation and interpretation cannot be analysed in isolation from each other; (2) efforts should be made to avoid country-specific terms and adopt more neutral or generic ones. The Joint Practical Guide of the European Parliament, the Council and the Commission) recommends that ‘terms which are too closely linked to national legal systems should be avoided’ In spite of the indefinite nature and potential ambiguity of abstract terms; (3) Negotiation of complex or long-term contracts more likely to include vague language in order to facilitate consensus causing interpretation disputes in the future, therefore, neutral conceptual or literal formulations are generally prioritized to avoid misleading national functional equivalents; (4) translation performs the function of quality control if the translators bring errors and ‘obscure’ language to the attention of drafters or legal revisers. The translated draft might serve as a basis to improve the original; (5) sometimes ambiguity in a contract is intentional. In such cases the intention of the parties becomes secondary to interpretation in good faith in accordance with the ordinary meaning given the context and in the light of its object and purpose. Recourse to extrinsic evidence may be needed; (6) interpretations that leads to a result which is manifestly absurd or unreasonable should be rejected; (7) minor discrepancies tend to be resolved through teleological and contextual criteria; and (8) lawyers should co-operate with translators to understand semantic nuance and in the construction of meaning related to the contract terms.

III. Plain Language Movement Businesspeople don’t speak in legalese l, so it is important to draft contracts in terms that are easy to understand, using plain language. For decades in Europe46 and the United States47 there has been a movement to make the law and contracts more understandable to non-lawyers. In international private law the teaching of ‘legal English’ is taught to law students in foreign legal systems, however, this sometimes perpetuates the use of legalese. As a consequence, contracts are still ‘plagued with old-fashioned forms of legalese, particularly adverbs such as hereby, therein or whereof. Yet the problem persists, even in this increasingly globalized world where English is becoming ever more the lingua franca of international business, and where one would imagine the need for clarity of expression using easily understood, everyday terms would be paramount.’48 33 The plain language movement encourages the use of “normal’ words and the limit of the use of legalese. Although, regulatory laws in the area have been directed at consumer contracts (B2C). However, this type of writing should also be employed in commercial contracts, especially, when contract relates to a transborder transaction involving parties from different language and systems. First, some words may not be translatable. In such cases the contracts drafters should look for wards that are more easily translatable. Second, the nature and meaning of legalese may differ across legal systems. 32

46 See e.g., EU Commission, ‘How to Write Clearly’ (2016), https://op.europa.eu/en/publication-detail//publication/725b7eb0-d92e-11e5-8fea-01aa75ed71a1/language-en. 47 Plain Writing Act of 2010, 5 U.S.C. 105, 124 Stat. 2861-63. 48 C. Williams, ‘Legal English and Plain Language: An Update’, 8 ESP Across Cultures 139, 146 (2011).

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I. Drafting Considerations: Checklist

G. Illustrations The President of MCC-Marble negotiated at a trade fair with D'Agostino.49 The 34 negotiations took place in Italian with the help of a translator, as the American buyer did not speak any Italian. The documentation including the standard form clauses were written in Italian. The buyer did not request a translation and signed the contract. The signing took place after the parties agreed orally on price, quantity and other key terms. Under the signature in Italian was a clause stating that the buyer was aware and approved of the clauses printed on the reverse side of the order form. In the months that followed MCC-Marble submitted several orders using the Italian order form. The Court held that: We find it nothing short of astounding that an individual ... would sign a contract in a foreign language and expect not to be bound simply because he could not comprehend its terms. We find nothing in the CISG that might counsel this type of reckless behavior and nothing that signals any retreat from the position that parties who sign contracts will be bound by them regardless of whether they have read them or understood them.50

H. Practitioner Tips & Contract Clauses Complex strategic considerations affecting a prudent lawyer’s choice of contract 35 language in a cross-border contract include a consideration of the likely claims to arise, likely venue for conflict resolution, and collectability and enforceability of any judgments obtained.51 The most common languages for multilingual business contracts are English, Chinese, Korean, German, Spanish, and Russian. Choice of language is crucial from contract drafting through introduction of contracts and other documents into evidence in litigation.52

I. Drafting Considerations: Checklist Clarity in communication and plain language is essential in contract drafting, espe- 36 cially when dealing internationally with a focus on cross-cultural and language differences. –

Avoid dual language contracts if possible (risky when transplanting and adapting foreign legal concepts) Consider both choice of law and jurisdiction at the beginning of negotiations. If the contract provides for dispute resolution, choice of forum (jurisdiction) or international arbitration the contract should be written in the language of the forum, unless the common language of the arbnitrators is in a certain language (often English or Spanish)

– –

MCC-Marble (n 18). Id. 51 M. Rozovics, ‘Drafting Multiple-Language Contracts’ (3 April 2018): https://www.americanbar.org/gr oups/gpsolo/publications/gp_solo/2011/april_may/drafting_multiple-languagecontractswhenyouonlyspe akenglish. 52 For example, all foreign-language documents submitted in U.S. federal court proceedings must be translated into English. Federal Rule of Evidence 604 provides that “an interpreter is subject to the provisions of these rules relating to qualification as an expert.” The rule has been extended to translators, and therefore they can qualify as experts under Federal Rule of Evidence 702. In many cases, the parties offer up differing translators with opinions asserting that the reliability of another’s translation is flawed. 49

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– – – – –

– – –

–

Use an in-house contract manager or legal counsel who understands both languages. Either get external legal advice to review the contract according to local law or hire a translation company or professional with expertise in technical-legal vocabulary. Consider the time and legal fees to be spent in drafting dual language contracts. Remember to state the language version that controls. The controlling language must be stated as the language of subsequent change requests or notices between the parties. Consider using a two-column, side-by-side format in the contract. Conduct a clause-by-clause review to ensure translation quality (undertaken by independent law firms with international network connections and domain in multiple geographies or official translation companies or individuals with demonstrable experience in translating legal terms and conditions). Avoidance of legalese and use of neutral legal language. In a dual-language model, each party should sign each of the versions. Obtain a translator’s certification/affidavit that the foreign-language version is identical in meaning to the English version, and that it is complete and accurate. In the event that you will use the contract in a foreign country, you may require an apostille or other government certification. Depending on the nature of the document, where and how the document is intended to be used, some countries require an apostille53 from a government entity in order to certify, or make a document legal, for use abroad.54 It may be prudent to provide a designated translator or company to resolve translation issues, or a type of mediation or conciliation.

I. Best Practices: Lawyer-Translator A translator who is not an attorney may not fully understand the goods or services being described, the terms of custom and usage in the industry being used, or the significance of being precise in that description. Unless these are taken into account in making the translation and the legal implications of word choices are understood, the impact of the attorney’s carefully drafted contract language will be lost in the translation into another language. 38 A best practice would have a foreign lawyer (of non-drafting language) perform the translation who can provide a legal opinion regarding the proper language to be used in the translation. Alternatively, translation companies with experience in drafting legal documents and explaining the implications in word choice should be used, so that the attorney who does not speak the foreign language will be able to make choices about word selection. If such practices are cost-prohibitive then the lawyer should warn its client of the risks of improper translation and potential effects on the terms of the contract. 39 The parties should take note of the arbitration or forum selection clause in their contract when choosing the drafting language or the language of the controlling version 37

53 Apostille is an international certification comparable to a notarisation in domestic law, and normally supplements a local notarisation of the document. See Hague Convention Abolishing the Requirement of Legalisation for Foreign Public Documents (Apostille Convention), which specifies the modalities through which a document issued in one of the signatory countries can be certified for legal purposes in all the other signatory states. 54 8 International In-house Counsel Journal (Autumn 2014).

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of the contract. The language of the arbitration or of the court system chosen for dispute resolution should be the language version chose as controlling.

II. UNCITRAL Guide UNCITRAL has published a legal guide on drafting an international contract in the 40 construction industry, which is a different field, but which contains helpful provisions on how to deal with language issues. Some of the advice can be used by analogy in drafting an international sales contract.55 The contract may be drawn up in only one language version or in the two languages of the parties where those languages differ. If the contract is drawn up in two language versions, it is advisable to specify which version is to prevail in the event of a conflict between the versions. If the parties provide that both versions are to have equal status, they should attempt to provide guidelines for the settlement of disputes arising out of a conflict between the versions. 56 If in one language only, it would be best if it were understood by the senior personnel of each party who will be implementing the contract, with the appropriate specialized terms, and in a language commonly used in international commerce. Parties are advised to include a jurisdiction clause, i.e., stating that the language chosen is the language in which proceedings are conducted in the selected court.57 If the contract is drawn in more than one language, parties may wish to provide that 41 the version in the language of the negotiations is to prevail. It could be that it is a certain language for specialized documents and another language version for other documents. They may want to clarify the meaning of a particular word in the other language, since the lack of precision in a translation invites problems.58 It is imperative that a contract specifically deal with the issue of conflict between 42 languages in dual or multi-language contracts, it is essential to consider which will have priority. The agreement needs to be extremely clear by stating the original version is in a certain language and if a conflict or discrepancy occurs between the languages, one of them shall prevail and takes precedence. An example of a simple language clause in a dual or multiple language contract is as follows: Language Clause (English) The whole text of the present Contract, as well as the documents derived from it, including those in the Annexes, have been written in _______ and English, both versions being deemed authentic, but for legal purposes the text in ______ is to be given priority of interpretation. Language Clause (Spanish) El texto integro de este contrato, así como los documentos que se deriven del mismo, incluidos los Anexos, han sido redactados en los idiomas ________ y Español, considerándose ambas versiones como oficiales, si bien se fija como prioritaria para. su interpretación la versión en idioma _________.

55 United Nations Commission on the International Trade Law, UNCITRAL Legal Guide on Drawing Up International Contracts for the Construction of Industrial Works (UN 1988) pp. 46–47. 56 Id. 57 Id. at 317–318. 58 Id. p. 46.

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Chapter 2 Language and Translation Issues Language Clause (French) Le texte de ce Contrat, ainsi que les documents qui en découlent, et les Annexes, ont été rédigés en les langues ________ et française, les deux versions étant considérées comme officielles, cependant la langue indiquée comme prioritaire pour son interprétation sera la version en langue ________.

43

When negotiating with parties who speak different languages, several considerations come to mind. If the legal forum is not English-speaking, English is not the best language for the contract, and a foreign language might be a better option as the primary language. If the parties decide to work with a multilingual contract, it is recommended to work with a lawyer who is fluent in both languages. It may be appropriate to hire a local lawyer from the other jurisdiction to review and translate the contract. Professional translation companies may help if they are precise, since disputes arise as to the specific meanings of words, sentences, or paragraphs in a contract.59

J. Additional Sources 44

Bonell, ‘The UNIDROIT Principles of International Commercial Contracts and CISG – Alternatives or Complementary Instruments?’ (1996) 1 Uniform Law Rev 26; Dannemann & Vogenauer, The Common European Sales Law in Context: Interactions with English and German Law (OUP 2013); International Chamber of Commerce, Drafting and Negotiating International Commercial Contracts (ICC Publication No. 671 2008); Greenberg, ‘International Contracts: Problems of Drafting and Interpreting, and the Need for Uniform Judicial Approaches’ (1987) 5 Boston University International Law Journal 363; Kritzer, ‘The Convention on Contracts for the International Sale of Goods: Scope, Interpretation and Resources’ (1995) Cornell Review of the Convention on Contracts for the International Sale of Goods 147; ICC Model International Sale Contract (ICC 2013); McMahon, Drafting CISG Contracts and Documents and Compliance Tips for Traders, Guide for Managers and Counsel (2004) http://www.cisg.law.pace.edu/cisg/con tracts.html; Magnus, ‘Incorporation of Standard Contract Terms under the CISG’ in Andersen & Schroeter (eds), Sharing International Commercial Law across National Boundaries: Festschrift for Albert H. Kritzer on the Occasion of his Eightieth Birthday (Wildy, Simmonds & Hill Publishing 2008) 303–325; King, Sprachrisiken im Privatrechtsverkehr (Mohr Siebeck 2008); R. Poscher, ‘Ambiguity and Vagueness in Legal Interpretation’ in P. Tiersma and L. Solan (eds) The Oxford Handbook of Language and Law (Oxford: Oxford University Press 2012), 128; Tabory, Multilingualism in International Law and Institutions (Sijthoff & Noordhoff 1980); G. R. de Groot, ‘Problems of Legal Translation from the Point of View of a Comparative Lawyer’ in P. Nekeman (ed), Translation, Our Future: Proceedings of the XI th World Congress of FIT (Maastricht: Euroterm 1988), 407; J. Gardner, ‘Brief List of Misused English Terms in EU Publications’ (2013) (Luxembourg: European Court of Auditors 2013); S. Glanert, ‘Speaking Language to Law: The Case of Europe’ (2008) 28 Legal Studies 161; M. Harvey, ‘What’s so Special About Legal Translation?’ (2002) 47 Meta 177; V. Heutger, 2005. “Towards a Common European Legal Understanding.” (2005) 1 London Law Review 205.

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B. Introductory Note

Part 2: Law Written in Multiple Languages A. Topics Covered As a multilingual treaty, the CISG text was drafted in six official versions, and many 45 additional unofficial ones. In spite of the many benefits available to the parties, some linguistic discrepancies have appeared in the different versions, as well as interpretation and translation issues. This part proposes some solutions to minimize language and translation problems.

B. Introductory Note The complex interrelationship of language and the law, as well as the many issues 46 regarding the drafting and interpretation of multilingual treaties and laws have been commented upon by translation theorists, comparative law experts, and trained linguists.60 There is a long tradition of multilingualism in the history of public and private international law,61 and many organizations, such as the European Union, the European Court of Human Rights, or the World Trade Organization, rely on multilingual documents. Countries with several official languages regularly deal with these issues as well, Belgium, Canada, and Switzerland to name a few.62 The European Union currently has twenty-four equally authoritative versions of law, albeit with one court, the European Court of Justice, with the mandate to promote uniform interpretation of the texts. The CISG has successfully cut across legal cultures and national boundaries and 47 fulfilled the dream of its drafters to create uniform international words. 63 The text was drafted by a collaboration of experts from the Civil Law, Common Law and then socialist legal systems, creating a vocabulary and conceptual framework which could be adopted by many countries, and later led to the inspiration for national law reforms and to the PICC and CESL principles. The multilingual convention presents many benefits and enhances the options for parties to an international sales contract. A US and Mexican buyer have the option to use their own language and avoid the conflict of laws within the scope of application of the Convention. The Convention offers equally authoritative texts, regardless of which language they transact their business, English or Spanish, in the official language that corresponds to their legal system.64 This results in better accessibility by parties which undertake transnational commercial and financial matters in the language most familiar to them, within the framework established by the CISG.65 60 Solan & Tiersma (eds), The Oxford Handbook of Language and Law (OUP 2012) p. 7; Tabory, Multilingualism in International Law and Institutions (Sijthoff & Noordhoff 1980). 61 This history is retraced in Shelton, ‘Reconcilable Differences? The Interpretation of Multilingual Treaties’ (1997) 20 Hastings International and Comparative Law Review 611, where she explains that French was the major international language until the twentieth century. 62 Ruth Sullivan discusses the Canada experience, as well as the implications of equal authenticity, in ‘The Challenges of Interpreting Multilingual, Multijural Legislation’ (2004) 29 Brooklyn J Int’l L 986. 63 Honnold, ‘The Sales Convention in Action – Uniform International Words; Uniform Application?’ (1988) 8 J L & Com 207. 64 Del Duca, Choosing the Language of Transnational Deals: Practicalities, Policy, and Law Reform (ABA Book Publishing 2010) p. 212. 65 Id. p. 213.

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Chapter 2 Language and Translation Issues 48

Nevertheless, unavoidably, because of the inherent nature of human language and communication, some language and translation issues in the CISG have come up in a variety of ways due to its multilingual inception and drafting.

C. Statement of Issues 49

If there is a difference in meaning between two of the official language versions, how does a court determine which language version should govern? Has there been any adverse impact from the different CISG official languages? How successful has the CISG been in creating a common language for international merchants?

D. International Sales Transaction 50

It is important for the parties to an international contract to be precise in the drafting of their contract as to avoid ambiguities and misunderstandings. Sometimes the same word has different meanings in different languages, or the text is translated slightly differently.

E. Sampling of Laws I. CISG CISG Witness Clause: Authentic languages of text. Done at Vienna, this day of eleventh day of April, one thousand nine hundred and eighty, in a single original, of which the Arabic, Chinese, English, French, Russian and Spanish texts are equally authentic.66 52 Comment: The Witness Clause (Testimonium) is the final clause of an instrument that indicates when it was signed and before what witnesses. The UNCITRAL Digest mentions that textual discrepancies are possible among the various authentic versions, given the nature of language, and that they are subject to the rules of interpretation of the Convention on the Law of Treaties.67 The UNCITRAL Digest which covers cases interpreting the CISG does not cover this final clause on languages, which might have been helpful, as it has raised some controversial issues. 51

II. UN Vienna Convention on the Law of Treaties68 53 Article 31 1. A treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose. 2. The context for the purpose of the interpretation of a treaty shall comprise, in addition to the text, including its preamble and annexes: (a) any agreement relating to the treaty which was made between all the parties in connection with the conclusion of the treaty; (b) any instrument which was made by one or more parties in connection with the conclusion of the treaty and accepted by the other parties as an instrument related to the treaty

‘Witness Clause to the Convention’ in UNCITRAL Digest (n 23) p. 453. Id. 68 https://treaties.un.org/. Ch. XXIII. Vienna Convention of the Law of Treaties. Vienna, 23 May 1969. 66

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E. Sampling of Laws 3. There shall be taken into account, together with the context: (a) any subsequent agreement between the parties regarding the interpretation of the treaty or the application of its provisions; (b) any subsequent practice in the application of the treaty which establishes the agreement of the parties regarding its interpretation; (c) any relevant rules of international law applicable in the relations between the parties. 4. A special meaning shall be given to a term if it is established that the parties so intended. Article 32 Recourse may be had to supplementary means of interpretation, including the preparatory work of the treaty and the circumstances of its conclusion, in order to confirm the meaning resulting from the application of article 31, or to determine the meaning when the interpretation according to article 31: (a) leaves the meaning ambiguous or obscure; or (b) leads to a result which is manifestly absurd or unreasonable. Article 33 1. When a treaty has been authenticated in two or more languages, the text is equally authoritative in each language, unless the treaty provides or the parties agree that, in case of divergence, a particular text shall prevail. 2. A version of the treaty in a language other than one of those in which the text was authenticated shall be considered an authentic text only if the treaty so provides or the parties so agree. 3. The terms of the treaty are presumed to have the same meaning in each authentic text. 4. Except where a particular text prevails in accordance with paragraph 1, when a comparison of the authentic texts discloses a difference of meaning which the application of articles 31 and 32 does not remove, the meaning which best reconciles the texts, having regard to the object and purpose of the treaty, shall be adopted.

III. Treaty of the European Union69 Article 3 1. The Union’s aim is to promote peace, its values and the well-being of its peoples. […] 3. […] It shall respect its rich cultural and linguistic diversity, and shall ensure that Europe’s cultural heritage is safeguarded and enhanced.

Comment: Multilingualism is embedded in the European Union treaties, in Article 3 54 of the Treaty of the European Union, and many other provisions. The European Court of Justice (ECJ)’s approach to the interpretation of language issues is inspired by Article 33 of the CISG, as follows: if comparison of different language versions reveals differences, the interpretation should be chosen which best reconciles the text and the purpose. 70 In the words of Advocate General Francis Jacobs, ‘[but] in fact the principle that all language versions are equally authentic means that no single version is authentic.’71 He then adds that linguistic discrepancies can rarely be resolved just by comparison of different versions, and that national courts should apply the ECJ's approach to interpretation and seek an effective and appropriate solution with regard to the context and the purpose of the provision.72

69 ‘Consolidated Version of the Treaty of the European Union in Consolidated Treaties, Charter of Fundamental Rights (Publication Office of the European Union 2010). 70 Advocate General Francis Jacob, How to interpret legislation which is equally authentic in twenty languages Lecture, Brussels 20.10.2003 (Summary report), available at http://ec.europa.eu/dgs/legal_servic e/seminars/agjacobs_summary.pdf. 71 Id. 72 Id.

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F. Commentary 55

56 57

58

59

The CISG was drafted and adopted in the six official languages of the United Nations – Arabic, Chinese, English, French, Russian, and Spanish – and further translated into additional languages. These other translations have no binding effect and can only assist courts in the respective countries where one of the official languages is not spoken. The CISG was drawn up as a single original instrument, written in the six official languages.73 In case of discrepancies among the six official language versions, recourse is to be made to the rules of interpretation of the Vienna Convention on the Law of Treaties. The rules include three well-known interpretation approaches. The first approach is to interpret the treaty in good faith, and examine the text’s ordinary meaning (Article 31). For the multilingual CISG, it means exploring which versions are authentic, and also the different shades of meanings of terms in different languages. The second approach is to use supplementary means, the travaux préparatoires (negotiating history), to ascertain the intent of the drafters (Article 32). The third approach, if the previous methods fail, is to explore the meaning which best reconciles the texts, having regard to the object and purpose of the treaty (Article 33). The concordance of the six official language versions was a shared responsibility of the delegates, the UNCITRAL Secretariat and the translation service of the United Nations.74 The negotiations and diplomatic conference were held in English and French, and the representatives from the different countries represented weighed in on the meaning of a particular term or concept in different languages.75 The multilingual convention has withstood the test of time and can be declared mostly successful, with a few errors here and there. One small discrepancy was knowingly included with regard to the Chinese translation.76 The Spanish and Arabic version were the subject of some criticism.77 Some of the authentic language versions, the Arabic and Russian texts, were officially rectified, requiring a formal procedure to amend the text called procès-verbal. The Secretary-General of the United Nations deposited rectifications of the authentic Arabic and Russian text versions of the Convention.78 Additional translations from the official to unofficial languages occurred in the different signatory countries. Some countries sharing the same language, such as German, agreed on a common text at a conference in 1982, but because of small linguistic disUNCITRAL Digest (n 23) p. 294. Bergsten, ‘Methodological Problems in the Drafting of the CISG’ in Janssen & Meyer (eds), CISG Methodology (Sellier 2009) p. 19. 75 United Nations Conference on Contracts for the International Sale of Goods (Vienna) 10 March– 11 April 1980, Official Records, Documents of the Conference and Summary Records of the Plenary Meetings and of the Meetings of the Main Committees. United Nations, New York, 1991. Document A/CONF.97/12. See English language user-friendly version of Legislative History of the 1980 Vienna Diplomatic Conference at http://www.cisg.law.pace.edu/cisg/conference.html. Official French text at http://www.uncitral.org/pdf/french/texts/sales/cisg/a-conf-97-19.pdf; English text at http://www.uncitral. org/uncitral/en/uncitral_texts/sale_goods/1980CISG_travaux.html. 76 Bergsten (n 67) pp. 19–20. 77 See Barrera Graf, ‘The Vienna Convention on International Sales Contracts and Mexican Law: A Comparative Study’ (1982) 1 Arizona J Int’l & Comp L 122, 142 n 117. The English and Spanish versions speak of ‘formalities,’ whereas the Spanish version refers to ‘requisitos,’ a more imprecise term. The errors in the Arabic version are commented by El-Saghir, ‘The Interpretation of the CISG in the Arab World,’ in Janssen & Meyer (eds), CISG Methodology (Sellier 2008) p. 355. 78 Depositary notification C.N.862.1998.TREATIES-5 of 19 February 1999 (rectification of the authentic Arabic text); C.N.233.2000.TREATIES-2 of 27 April 2000 (rectification of the Russian authentic text); and C.N.1075.2000.TREATIES-5 of 1 December 2000 [rectification of the original of the Convention (Arabic authentic text)]. 73

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crepancies, three separate presentations are offered for Germany, Austria, and Switzerland.79 Some issues arose with the Norwegian text, another unofficial translation, which was incorporated into domestic Norwegian law, creating its own problems because it sets itself apart.80 A problem was noted with the translation of “notice” in the SerboCroatian text of the CISG.81 Many commentators have expressed their views on which language version should be preferred in case of discrepancies among the six official versions.82 The majority favors the English and French versions, because these were the languages of negotiations, and the official languages of the travaux préparatoires, sometimes even preferring the English language version.83 However, since the six authentic languages are equally authoritative, there should not be any preference for a particular language version. One may also wonder about the purpose of that preference. The main linguistic achievement of the CISG was the creation of a specific set of independent, neutral legal terms in order to avoid the influence of pre-existing domestic legal concepts in the interpretation of the treaty. The terminology of the CISG, as contained in the travaux préparatoires, is in principle the same in the six languages. One decision by a Swiss Court favoring, in the case of ambiguity, a reference to the English version, and, secondarily, the French version is thus regrettable.84 The translations were done carefully and are for the most part accurate. When one looks at the different language versions synoptically,85 one notes a few instances where some words are translated differently. An often-mentioned example can be found in Article 3(2) where the French version refers to a ‘part essentielle’ (essential part) and the English version refers to a ‘substantial part.’ The unofficial German text refers to a ‘wesentlicher Teil,’ which corresponds to the French version, and would be translated as ‘essential part.’ It is instructive to go back to the travaux préparatoires, where it appears that ULIS contained both ‘substantial and essential,’ but the English version removed ‘essential’ and the French version removed ‘substantial.’86 The Yugoslav (Serbo-Croatian) official translation of Article 39 on notice of non-conformity suggests that the notice must be in writing, whereas oral notice is sufficient.87 The discrepancies observed and debated here do not seem to have created particular practical problems for courts and arbitral tribunals.88 This is probably due to the excellent work of UNCITRAL translators in the preparation of the texts, and the various methods available and used for comparing wording among the various versions. The most substantive success of the CISG was to bridge the gap of understanding and create ‘uniform international words.’89 In spite of some criticism, the CISG has been particularly successful. It is true that even when the CISG is found textually uniform, http://cisg7.institut-e-business.de/pdf/Textsammlung/textsammlung-deutsch.pdf. See Neumann, ‘The Continued Saga of the CISG in the Nordic Countries: Reservations and Transformation Reconsidered’ (2013) Nordic Journal of Commercial Law 1–16. 81 Djordjević & Pavić, ‘The CISG in Southeastern Europe’ in DiMatteo (ed), International Sales Law: A Global Challenge (CUP 2014) pp. 403, 419. 82 These views are reported in Germain (n 1) pp. 52–53. 83 Id. 84 BG 13 November 2003, CLOUT Case No. 885. 85 For a synoptic display of CISG convention articles in ten languages, see Friehe & Huck, Uniform Sales Law (CISG): Synopsis of Selected Texts (2011), http://web.law-and-business.de/cisg7/index2.php?lang=2. 86 Schlechtriem (n 2) p. 62. See also Zeller (n 22) n 131. Generally on the problems raised by the different languages versions under CISG, see Bergsten (n 67) at 18–21. 87 Djordjević (n 74) p. 434. 88 Schwenzer & Hachem, ‘The CISG – Successes and Pitfalls’ (2009) 457 Am J Comp L 457, 465–466. 89 Honnold, ‘The Sales Convention in Action – Uniform International Words: Uniform Application?’ (1988) 8 J L & Com 207. 79

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60

61

62

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the contracting states may read it and apply text in different ways. As an example, the term of ‘reasonable time for notice’ Article 39, goes from 4 days being untimely to four months being timely.90 However, it seems that a rule requiring an average period of one month for giving notice is now gaining ground in most legal systems, inspired by scholarly commentary.91 Language issues also come up when domestic courts distort the principle of uniformity in application, known as the homeward interpretation trend, as contrasted with a uniform and transnational shared approach. 64 The uniform interpretation of the CISG presupposes the accessibility and availability of foreign legal materials in each contracting state, in a language that they can understand. It is especially important to have access to case law and scholarly writings from each country. The CISG has a solid foundation in that regard, and is already one of the most fully documented international conventions, with several major databases, such as UNCITRAL Clout,92 and self-contained libraries, such as the award-winning Pace website, created thanks to Professor Albert Kritzer’s vision. 93 CISG websites now exist, covering different parts of the world. The current international network of correspondents function well, and projects such as a Global Sales Law Thesaurus, and a Global Jurisconsultorium are progressing.94 The opinions of the CISG Advisory Council are particularly useful in promoting uniform interpretation. The dissemination of multilingual information needs to continue, in different languages, as well as translations of texts and cases, so that each country can avail themselves of case law, scholarly writings and commentaries.95 Much has been written about the CISG having created a common language and common legal concepts for parties to draft an international sales contract coming from different legal systems and traditions.96 For the future, one can only hope that the more people form similar concepts given similar experiences, the less it will matter which language they speak and the better multilingual legislation can work.97

I. Evolution of Different Meanings within Legal Traditions 65

There are numerous problems presented by the transplantation of laws from one legal system to another. Such transplantations often fail because the legal concepts become indeterminate when taken out of the legal tradition and structure in which they were developed. This can also be the case between countries of the same legal tradition. This is because that subsequent developments vary over time when the law is no longer subject to the same court system. Gordon Woodman, for example, note that the use of English phrases (“heirs and assigns”) in deeds in Ghana, even thou the purposes of

90 See Andersen, ‘Reasonable Time in Article 39(1) of the CISG – Is Article 39(1) Truly a Uniform Provision’ (1998) Review of the CISG 63. 91 Schlechtriem (n 2) p. 469. 92 http://www.uncitral.org/uncitral/en/case_law.html. 93 http://www.cisg.law.pace.edu/. 94 Baasch Andersen, ‘The Uniform International Sales Law and the Global Jurisconsultorium’ (2005) 24 J L & Com 159. 95 See Germain (n 1) pp. 57–59. For an excellent research guide, see Stefanini Newman, ‘CISG Sources and Researching the CISG’ in DiMatteo (ed), International Law Sales: A Global Challenge (CUP 2014) p. 51. 96 Professor Schlechtriem has written eloquently on the subject. See Schlechtriem (n 40). 97 Solan, ‘Interpretation of Multilingual Statutes’ (2009) 34 Brooklyn J Int’l L 277, 294.

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such phrases had subsequently changed in English law.98 Despite the enormous degree of commonality between English and American Common Law, major divergences have developed during the second half of the 20th century such as, American courts embracing contextual interpretation of contracts, while some English courts continue to adhere to formalistic interpretation of contracts; American courts recognize the implied duty of good faith, while English courts reject such a duty (but may allow implication of good faith in fact); American contract recognizes the doctrines of unconscionability and impracticability (hardship), while English law does not.

II. Problem of Superficial Transplantation A more recurring problem has been the borrowing or words and legal concepts in the 66 language of a foreign country into the domestic law of another country with a different language. This has been the case with the use of English words into domestic law of foreign countries. This phenomenon is likely due to English as the lingua franca and the reputation of American and English law as being more highly developed in some areas of law. In recent years, an unseemly trend has appeared in European law – the borrowing of 67 English legal terminology without legal support or guidance. One example has been the use of English terminology in Italian statutes. This borrowing is especially troublesome when there are perfectly good domestic words, with known meanings, that could eliminate the confusion generated by the use of English terms without definition or context. The use of superficial foreign terminology transplantation in order to connect with a developed and recognized legal regime is misplaced and doomed to fail. Cordero-Moss notes that often the reason for some transplantation is simply the ‘prestige’ of the law being transplanted. Thus, by default, contract drafters will be forced to contend with the ‘meaningless’ of 68 such transplanted English terms. Other then, using domestic language equivalents, when a law uses foreign language terms, the legislature or regulatory bodies must provide proper guidance to aid in the interpretation and application of the new concept. In order to increase the chances of a successful transplantation, the following best practices should be followed. (1) lawmakers should acknowledge that transplanting requires a deep understanding of the law being transplanted (2) lawmakers should make sure the law being transplanted is a proper fit for the existing law of the transplanting country: (3) lawmakers must provide proper guidance in the new law, such as detailed definitions and cross-referencing; and (4) lawmakers should carefully study the similarities and differences between the borrowing country's law and the law of its own country.99 This this is often not done, it is important to think of this issue when contemplating the choice of law. If the chosen law incorporates undefined foreign language terms that relate to the subject matter of the contract, then it falls to the contract drafters to provide adequate definitions of the terms as agreed to by the parties.

98 Woodman, ‘English Terminology and Ghanaian Intentions in Deeds of Conveyance’ (1974) 6 Rev. Ghana L. 251 (there has been a mixing of English phraseology with customary law in strict accordance with the native law and custom relating to the enjoyment of and succession to family property). 99 Ferreri and DiMatteo, 'Terminology Matters: Dangers of Superficial Transplantation' (2019) 37 Boston J. Int’l Law 35.

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G. Practitioner Tips & Contract Clauses 69

One way to limit the risk of surprise is for the parties to agree that one of the language versions of a supranational law, like the CISG, shall govern in case of differences in the six authentic language versions.

H. Additional Sources 70 ‘Creating and Interpreting Law in a Multilingual Environment’, Symposium (2004) 29 Brooklyn J Int’l L

978–1220; Fennelly, ‘Legal Interpretation at the European Court of Justice’ (1996) 20 Fordham Int’l LJ 656; Ferreri, Coggiola & Migliore, Study on Language and Translation in International Law and EU Law, Studies on translation and multilingualism (Publications Office of the European Union 2012); Pasa & Morra (eds), Translating the DCFR and Drafting the CESL: A Pragmatic Perspective (Sellier 2014); Urban, ‘One Legal Language and the Maintenance of Cultural and Linguistic Diversity?’ (2000) 8 ERPL 51; Silvia Ferreri, ‘Law, Language and Translation in Multilingual Contexts’ (2014) 25 King’s L.J. 271.

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CHAPTER 3 PRECONTRACTUAL LIABILITY IN THE CIVIL LAW Ádám Fuglinszky Part I:

Precontractual Conduct and Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1

A. Topics Covered . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B. Introductory Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Contractual Negotiations and the ‘Grey Area’ towards Final Agreement . . . . II. Fundamental Principles: Contractual Freedom v. Good Faith in Negotiations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Evaluation of Precontractual Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. General Acceptance in Civil Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Reluctance of Common Law Regarding Precontractual Good Faith . . . . . . IV. Classification of Precontractual Liability: Contract, Tort or sui generis? . . . . . V. Didactic and Regulatory Approaches . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Objects and Scope of the Protection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Integrity of the Other Party’s Person and Assets . . . . . . . . . . . . . . . . . . . . . . . . . b) Mutual Trust and Reliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Decision-making Autonomy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d) Other Protected Values . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Enumeration of Precontractual Duties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Duty of Protection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Duty of Loyalty and Consistent Behaviour . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Duty of Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d) Duty of Confidentiality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . e) Other Duties in Accordance with Good Faith . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. The Outcome: Faith of the Contract – Overlaps with Invalidity and Non-conformity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Overlap No. 1: Invalidity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Overlap No. 2: Non-conformity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. Good Faith as an Umbrella Principle v. Particular Duties . . . . . . . . . . . . . . . . . a) General Clauses: Pros and Cons . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Variations on (Precontractual) Good Faith: Objective or Subjective? . . . . C. Statement of Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . D. International Sales Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . E. Sampling of Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. CISG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. UNIDROIT Principles of International Commercial Contract (PICC) . . . . . . III. Principles of European Contract Law (PECL) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. German Bürgerliches Gesetzbuch . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. French Code Civil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI. Spanish Código Civil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VII. Italian Codice Civile . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VIII. Netherlands Burgerlijk Wetboek . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IX. Chinese Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . X. Interpretation II of the Supreme People’s Court of Several Issues concerning the Application of the Chinese Contract Law (prior to the New Civil Code) F. Commentary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. The CISG and Precontractual Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Is Precontractual Liability Covered by the CISG? . . . . . . . . . . . . . . . . . . . . . . . . . a) Reasons in favour of CISG’s Coverage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Reasons against the CISG’s Coverage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Precontractual Liability and the CISG: Interrelationship and Connecting Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Having Regard to Precontractual Negotiations . . . . . . . . . . . . . . . . . . . . . . . . . . b) CISG Supersedes Domestic Law on Precontractual Liability . . . . . . . . . . . . c) Duties of Protection not Covered by the CISG . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Precontractual Duties and Their Breach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Breaking Off Negotiations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Chapter 3 Precontractual Liability in the Civil Law a) General Findings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Soft Law and Country-Specific Observations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Duty of Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) General Findings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Country-Specific Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) DCFR and CESL: Consumer Protection Based on Information Duties . . 3. Confidentiality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Confidentiality is the Exception . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Overlap with Trade Secret Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Express or Implied Confidentiality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. General Findings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Negative or Reliance Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Positive or Expectation Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Contributory Fault . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Soft law and Country-Specific Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) PICC and PECL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) German Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) French Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d) Law of Netherlands . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . e) Chinese Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . G. Illustrations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Enter or Continue Negotiations without True Intent to Conclude the Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Enter into Negotiation in order to get Previous Loan Paid Back . . . . . . . . . . 2. Entering into Negotiations in order to prevent an Agreement with a Third Party . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Entering into Negotiations with Aim of Obtaining Information . . . . . . . . . . 4. Continue Negotiations despite having concluded a Contract with a Third Party . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Breaking off Negotiations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Perception of Conclusion of Contract followed by New Terms . . . . . . . . . . . 2. Higher Investments Suddenly Requested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. No Authority to Sign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. Uncertainty of the Owners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5. Discretion to Disagree on Open Essential Terms and Late Stage Termination of Negotiations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6. Advance Payment and Reasonable Reliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7. A Borderline Case . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8. A Liberal Approach in favour of Contractual Freedom . . . . . . . . . . . . . . . . . . . 9. Public Bidding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Duty of Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Harvester’s Capacity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Duty to Inform Does Not Require Disclosure of Value . . . . . . . . . . . . . . . . . . . . 3. Hostile Villagers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. Lost Governmental Subsidy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5. Missing Import Licence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Confidentiality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. No General Duty of Confidentiality in Absance of Indication, Implication or Applicable Trade Secret Provisions . . . . . . . . . . . . . . . . . . . . . . . . 2. Implied Confidentiality: Sensitivity of the Information . . . . . . . . . . . . . . . . . . . 3. Implied Confidentiality: Conspirative Communication . . . . . . . . . . . . . . . . . . . V. Missing Planning Permission . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . H. Cross References & Additional Commentary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Practitioner Tips & Contract Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . J. Additional Sources (Bibliography) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Part II:

142 142 144 146 148 150 150 152 154 156 158 160 162 164 166 168 168 170 172 174 176 178 178 180 182 183 185 186 187

Precontractual Instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 188

A. Topics Covered . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B. Introductory Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Why Are Precontractual Instruments Needed? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. What is a Precontractual Instrument? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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A. Topics Covered III. Legal Effects of Precontractual Instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Types of Precontractual Instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C. Statement of Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . D. International Sales Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . E. Sampling of Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. UNIDROIT Principles of International Commercial Contract (PICC) . . . . . . II. Principles on European Contract Law (PECL) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. French Code Civil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Spanish Código civil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. The Interpretation of the Supreme People's Court on Issues Concerning the Application of Law for the Trial of Cases of Disputes over Sales Contracts in Chinese Contract Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F. Commentary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Agreement to Negotiate and to Negotiate in Good Faith . . . . . . . . . . . . . . . . . . . . . II. Provision on the Non-binding Character of Negotiations . . . . . . . . . . . . . . . . . . . . III. Final Contract within the Discretion of One Party . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Exclusivity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. Confidentiality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI. Distribution of Costs and Limitation of Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VII. Dispute Resolution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . G. Illustrations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . H. Cross References & Additional Commentary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Practitioner Tips & Contract Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Binding and Non-binding Parts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Confidentiality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Exclusivity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Reallocation of Costs, Limitations of Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . J. Additional Sources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

197 200 203 204 204

205 206 209 211 214 217 218 223 224 232 233 234 236 238 240 247

Part I: Precontractual Conduct and Liability A. Topics Covered The first part of Chapter 3 covers precontractual liability as it is known and provided 1 for in the respective legal systems based either on statutory law or on case law that relies on general principles and some codified institutions other than the explicit culpa in contrahendo (such as abuse of rights, venire contra factum proprium, torts, etc.). 1 In Section B. (Introductory Note) – among the fundamental and structural issues of 2 precontractual liability – the need for and the justification of precontractual liability is presented first (B.I.) based on the protracted nature of negotiations and on the fact that both parties give each other the increasing possibility of affecting the other’s rights and interests in the course of negotiations. The two fundamental principles, contractual freedom and (negotiating in) good faith are tackled next (B.II., → mn. 9 f.): meanwhile, the legislator or the judge keeps trying to find the right balance, i.e. the freedom to contract bounded by good faith. The evaluation of precontractual liability follows, including a brief analysis on the differences between the Civil Law and Common Law perspective (B.III., → mn. 11 ff.). Attention is given next to the evergreen classification of precontractual liability as underlying contracts or torts or being a sui generis liability regime (B.IV., → mn. 19 ff.); followed by the enumeration of didactic and regulatory approaches in jurisprudence and practice (scope of protection; particular precontractual duties; pro1 The language review of this Chapter was supported by ELTE Eötvös Loránd University, Budapest, Hungary.

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visions – remedies in particular – adjusted to the faith of the negotiated contract as nonconcluded, concluded but invalid, concluded but disadvantageous) as reflected in the respective legal systems and soft laws (B.V., → mn. 24 ff.). 3 Section E. (Sampling of Laws) is not restricted to the mere presentation of the texts but also short explanations are added at a general level regarding the structures and characteristic features of the statutory (or soft law) regimes in order to put the laws into context. The features discussed here are not repeated subsequently in the commentaries section. 4 The Commentary section (F.) contains analyses of the best-known and prevalent groups of cases that can trigger precontractual liability. The analysis starts with the relationship of CISG with precontractual liability including references to those Articles that supersede the culpa in contrahendo liability of the applicable domestic law (F.I.). The particular precontractual duties and their breach are next elaborated on (F.II., → mn. 88 ff.), with detailed analyses on the breaking off negotiations, information duties and confidentiality. Within each subsection, soft law- and country-specific issues follow the presentations of general findings. The Commentary section ends with the remedies available, in general terms and with special regard to damages (F.III., → mn. 121 ff.). 5 Finally, illustrations contribute to a deeper and practice-oriented understanding of the subject matter (G).

B. Introductory Note I. Contractual Negotiations and the ‘Grey Area’ towards Final Agreement 6

Contractual negotiations and the formation of the contract can constitute a ‘more or less lengthy process in the course of which both parties give each other the possibility of affecting the other’s rights and interests.’2 Though this may less apply to staples and commodities, it definitely does to large-scale or complex transactions, where negotiations ‘may take place in stages’ moving gradually towards a formal agreement and parties ‘becoming increasingly committed in terms of time and expense’.3 Therefore, ‘agreement is not often given at a single, sudden moment in time’; it is frequently reached ‘in a piecemeal fashion after several rounds with a succession of drafts’.4 The ‘magic moment’5 or ‘on-off view’6 of offer and acceptance is replaced by the disappearance of the sharp borderline between the precontractual and contractual stage, by the integration of the precontractual and contractual stage:7 where the final phase of negotiations merges into the contract.8 2 Looschelders, ’Pre-Contractual Obligations and the Concept of Culpa in Contrahendo in German Law’, in: Schulze & Viscassilas, The Formation of Contract (2016), p. 31. 3 Giliker, ’A Role for Tort in Pre-Contractual Negotiations – An Examination of English, French and Canadian Law’, 52 International & Comparative Law Quarterly (2003) 969, 970. 4 Nedzel, ’A Comparative Study of Good Faith, Fair Dealing and Precontractual Liability’, 12 Tulane European & Civil Law Forum (1997) 97, 117. 5 Lehmann, ’Die Zukunft der culpa in contrahendo im Europäischen Privatrecht’ 17 Zeitschrift für Europäisches Privatrecht (2009) 693, 702. 6 Nedzel, 101. 7 Zoll, ’Culpa in Contrahendo in European Private Law – A Useful Concept?’ in: Schulze & Viscassilas, The Formation of Contract (2016), p. 46, 47. 8 With reference to Dutch law Cartwright & Hesselink, Precontractual Liability in European Private Law (2008), p. 468.

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B. Introductory Note

The procedure starts with obtaining and exchanging information, and identifying 7 the needs and interests of the parties, and their similarities and differences regarding expectations from the contract to be concluded. The parties try to test the feasibility and forecast the profitability of the anticipated transaction (and to hold out if the circumstances, or their changes make it unprofitable).9 After having found compromises on the essential points, refining the contract terms follows. The documents drafted during this process are far more than an offer (counter-offer) and acceptance. 10 When parties enter into contractual negotiations, they are in a ‘grey area’ of the 8 agreement ‘in the making’,11 which means that they are no longer strangers underlying the expectation of neminem laedere only, nor are they yet parties to a contract that would trigger ‘all the rights and duties envisaged for contractual relationships.’12 The intensity of their relations is weaker compared with where there is an existing contract and therefore their expectations and duties are also weaker and ‘less definitive as regards the content’.13 However, as they get closer and their mutual vulnerability increases due to opening themselves up to the other in the course of negotiations, the increased risks necessitate a higher duty of care (than those of general tort law):14 a contract-like relationship of trust therefore comes into being, from which mutual protective obligations arise, i.e. duties to have reasonable regard for the legitimate interest of the other party. 15 It is not unusual that a party starts preparations for the performance of the contract or even commences production in order to meet the deadline already negotiated or to demonstrate commitment. This happens often as a result of the other party’s express or implicit inducement.16 This vulnerability and mutual trust of the parties justifies judicial control and deserves (an increased level of) protection in Civil Law, regardless of whether a (valid) contract is concluded in the end.17 As negotiations progress, instead of the once ‘binary system’ (of contract-liability, no contract-no liability) Civil Law is characterised by a ‘trinary system’ of three zones: the no liability zone, the precontractual liability zone and finally the contractual liability zone.18 In the Dutch scholarship, the progress of contractual negotiation has been compared to an invisible magnetic field ‘where parties may inadvertently lose the possibility of avoiding obligations.’19

9 Melato & Parisi, A law and economics perspective on precontractual liability, in: Cartwright & Hesselink, Precontractual Liability in European Private Law (2008), p. 431. 10 Farnsworth, Precontractual Liability and Preliminary Agreements: Fair Dealing and Failed Negotiations, 87 Columbia Law Review (1987) 217, 219. 11 Stathopoulos & Karampatzos, Contract Law in Greece (3rd edn. 2014), p. 78. 12 Schwenzer, Hachem & Kee, Global Sales and Contract Law (2012), p. 275. 13 Cartwright & Hesselink, 454. Accordingly, the form and the scope of protection will not be the same either, id. 451. 14 Dietrich, Classifying precontractual liability: a comparative analysis, 21 Legal Studies (2001) 153, 186. 15 Zuloaga, Reliance in the Breaking-off of Contractual Negotiations (2019), p. 24. 16 Giliker, 970. 17 Zuloaga, 74. Cartwright & Hesselink, 454; Looschelders, 40. 18 Cohen, ’From the Common Law to the Civil Law: the experience of Israel’, in: Cartwright & Hesselink, Precontractual Liability in European Private Law (2008), p. 428. 19 Pannebakker, Letter of Intent in International Contracting (2016), p. 38.

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II. Fundamental Principles: Contractual Freedom v. Good Faith in Negotiations Contractual freedom, a fundamental principle of contract law, 20 also includes (besides the freedom to enter into negotiations, conclude contracts and conduct parallel negotiations) the freedom from contract, i.e. the freedom to break off negotiations. The simple fact that the parties started negotiations ‘cannot tie them together’. 21 They are generally also free to decide ‘how and for how long to proceed with their efforts to reach an agreement’;22 they may enter into negotiations even if they feel uncertain as to whether they will eventually make a contract.23 Contractual freedom is also efficient from the law and economics’ point of view: it allows testing the feasibility of a mutually beneficial transaction while enabling the parties to consider more valuable alternative options (business partners) and to make up their mind, if needed, due to the ever changing market circumstances.24 10 However, contractual freedom may collide ‘with the mutual reliance in the honesty of the negotiating parties that stems from the duty to bargain in good faith’.25 Parties engaged in negotiations therefore owe each other certain duties and must take some account of each other’s interest.26 A core issue of this Chapter is ‘how far the freedom to break off negotiations goes and at which point the creation of the negotiating partner’s confidence in the perfection of the deal attains dominance’.27 Having regard for the other party’s interest does not mean denying or foregoing one’s own interest,28 even less preferring the other party’s interest;29 therefore, realistic commercial self-interest is generally a legitimate reason for breaking off contractual negotiations.30 The other party’s legitimate interest shall be safeguarded as long as this does not unfairly limit the legitimate interest of the acting party.31 Therefore, a healthy balance between freedom of contract and precontractual good faith should be maintained.32 Finding this balance, i.e. ‘freedom to contract bounded by good faith’ lies – for example – at the ‘heart of European soft law texts’ (PECL, DCFR) and this compromise ‘is now almost commonplace’.33 9

20 With reference to French law cf. Pannebakker, 78: freedom of contract is a constitutional principle, implying in particular freedom of commerce. 21 Schwenzer, Hachem & Kee, 280. 22 UNIDROIT Principles of International Commercial Contracts (2016), ad Article 2.1.15(1), p. 60. 23 Lando & Beale, Principles of European Contract Law (2000), p. 189. 24 Kovac, ’Culpa in Contrahendo, Promissory Estoppel, Pre-Contractual Good Faith and Irredeemable Acts’, 10 Asian Journal of Law and Economics (2019), electronic version without page numbers, Section 2. 25 Cartwright & Hesselink, 453. 26 Kötz, European Contract Law (2nd edn. 2017), p. 33. In Italy, for example, social solidarity, one of the constitutional values serves as the fundament of precontractual good faith. Cf. Febbrajo, ’Good Faith and Pre-Contractual Liability in Italy: Recent Developments in the Interpretation of Article 1337 of the Italian Civil Code’, 2 Italian Law Journal (2016) 291, 297-98. 27 Cartwright & Hesselink, 453. 28 With reference to French law cf. Zuloaga, 162. 29 With reference to DCFR and CESL Giliker, ’Pre-contractual Good Faith and the Common European Sales Law: A Compromise Too Far?’, 21 European Review of Private Law (2013) 79, 102. One should exercise a basic level of consideration and not act out of pure malice. 30 With reference to French and Dutch law cf. Pannebakker, 236. With other words: The proper economics of the negotiating process should be preserved. Cartwright & Hesselink, 482. 31 Febbrajo, 298. 32 Ding, ’The Doctrine of Precontractual Liability Under Chinese Contract Law: A Comparative Outlook’, 27 European Review of Private Law (2019) 485, 513. 33 Sefton-Green, ’Formation of Contract: Negotiation and the Process of Agreement’, in: Cartwright & Whittaker, The Code Napoleon Rewritten – French Contract Law after the 2016 reforms (2017), p. 60.

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III. Evaluation of Precontractual Liability 1. General Acceptance in Civil Law Besides the considerations presented above, the idea of precontractual liability (as 11 a consequence of a breach of the requirement to negotiate in good faith) reflects an emphasis on morality,34 and social solidarity.35 Moreover, law and economics also provides some support in stating that the protec- 12 tion of precontractual investments can be very efficient, especially with regard to complex projects.36 It is argued that the requirement to negotiate in good faith contributes to curbing opportunistic behaviour and thereby enables the parties to save contracting costs and write shorter contracts than their Common Law colleagues,37 because the statutory rules or case law on precontractual liability promotes efficient precontractual investment (by protecting those investments in the event of the other party’s wrongdoing) without ‘imposing on the parties the transaction costs of making a collateral contract.’ In other words, ‘unrestrained right to terminate negotiations or conduct them in bad faith might induce cheating, retaliation and instances of opportunistic behaviour,’ which again increases transactional costs and ‘deadweight social loss’.38 Precontractual reliance protected by the law is mutually beneficial, since contributes to saving transactional costs and thereby increases the contractual surplus.39 Appropriately dosed precontractual liability can fine-tune reliance investments in the course of negotiations; while the complete lack of such liability puts the whole risk on the parties, creating an incentive to under-invest, while excessive or strict liability leads to excessive reliance and over-investment. Neither corresponds to the requirement of efficiency. Hence, precontractual liability should be adjusted to trigger and support efficient reliance investments in the precontractual stage, i.e. as far as the potential benefit (in proportion to the chance that the contract will be formed) exceeds the potential loss (in proportion to the chance that the contract will not be formed).40 Having some rules on precontractual liability seems to be more efficient than leaving 13 its regulation completely to the parties, because most negotiations – with special regard to sales contracts – are basically not covered or structured by preliminary agreements (precontractual documents agreed upon by the parties).41 Scholars warn however that relying on statutory rules or established case law on precontractual liability can be a double-edged sword since, if the applicable standard is not clear and coherent, it

Cohen, 401. Febbrajo, 297-98. 36 von Hein, ‘Culpa in Contrahendo’, in: Basedow, Hopt, Zimmermann & Stier, The Max Planck Encyclopaedia of European Private Law – Volume I (2012), p. 431. 37 Pargendler, ’The Role of the State in Contract Law: The Common-Civil Law Divide’, 43 Yale Journal of International Law (2018) 143, 152. 38 Kovac, Subsection 2.2. 39 McFarlane, ’The Protection of Pre-Contractual Reliance: A Way Forward’, 10 Oxford University Commonwealth Law Journal (2010) 95, 100. Additionally, if the transactional costs are lower, the party is willing to invest more time and money into finding the most beneficial transaction, which again increases the level of exchange of goods and services and thereby that of welfare. See Kovac, Subsection 2.1. 40 Melato & Parisi, 432-33. 41 Schwenzer, Hachem & Kee, 276. However, exaggerated precontractual liability may have a chilling effect on the commercial community and the contracting parties. Wei & Yu, ’Rethinking Pre-Contractual Liability in China – One Step beyond China’s Latest Judicial Interpretation’, 43 Hong Kong Law Journal (2013) 279, 305. 34

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‘obfuscates the contractual process and is itself an obstacle to business’. 42 Uncertainty is the source of disutility and is responsible for increased transactional costs. 43 14 A thorough comparative analysis revealed that two core elements of precontractual liability can be considered the common core of – at least – the European Civil Law tradition: first, the existence and acceptance of the general precontractual good faith requirement; and second that remedies are basically restricted to the reliance interest. 44

2. Reluctance of Common Law Regarding Precontractual Good Faith Traditional Common Law is generally reluctant to accept the good faith requirement at the negotiating (and formation) stage and is characterised by the ‘aleatory view’, which means that parties enter into contractual negotiations at their own risk and therefore they bear all consequences and losses if no contract is entered into. Any limitation of the freedom of contract ‘might discourage parties from entering negotiations’ 45 (chilling effect).46 Misrepresentation, duress, undue influence and unconscionability serve as general limitations on improper (pre)contractual behaviour,47 but, apart from them, a party enjoys absolute freedom to walk away at any time for any reason or even without indicating any reason. The moment that freedom of contract is lost is when the contract itself is formed.48 16 In contrast with the moralising Civil Law approach, the Common Law approach is governed by individualism and by the primacy of certainty; predictability is preferred to absolute justice.49 The good faith principle and its extension to the precontractual phase is also criticised for its uncertain character and vagueness. The enactment or application of such an elastic standard can encourage unnecessary litigation and again: hesitancy to engage in business.50 17 Nevertheless, it is highlighted in scholarship that the Civil Law and the Common Law approach converge in a way. Besides misrepresentation, a couple of other institutions have been developed or retuned in Common Law in order to cover cases that underlie precontractual good faith in the Civil Law tradition. Promissory or equitable estoppel in the USA and Australia,51 implied ancillary contract in anticipation of an incomplete main contract, constructive trust, restitution, tort law and unjust enrichment are highlighted.52 In sum, the principles, rules and standards under Civil Law defining the duty to act in good faith have a similar content as the ‘exceptions to the no duty rule’ at Common Law;53 as if the two approaches were the inverses of each other but pointing at the same conclusion: Civil Law ‘postulates an a priori assumption of limitation of freedom of action in the bargaining process subject to excuses or justifications exempting from liability’, while Common Law seems to be based on ‘a priori freedom in the bargaining process, subject to special rules imposing liability’.54 15

Nedzel, 157. Kovac, Subsection 2.1. 44 Cartwright & Hesselink, 485; Dietrich, 180. 45 Farnsworth, 221; Melato & Parisi, 433. 46 McFarlane, 99. 47 Farnsworth, 221; Giliker, 82. 48 Cartwright & Hesselink, 451. 49 Zuloaga, 3-4. Ideas of morality shall not be confused with legal principles, see the overview provided by Nedzel, 109. 50 Nedzel, 157. 51 Schwenzer, Hachem & Kee, 275. 52 Dietrich, 155. 53 Dietrich, 180. 54 Cohen, 401. 42

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As a result, there is a greater need in the Common Law tradition for private ordering 18 of the precontractual stage by drafting and using precontractual documents.55 (See Part 2 of this Chapter). For further details on the Common Law approach see Chapter 4.

IV. Classification of Precontractual Liability: Contract, Tort or sui generis? The highly controversial classification of precontractual liability is mainly based on 19 historical factors in each legal system and on the variety and complexity of cases56 subsumed under the respective precontractual regime. Classification is a significant issue, because prescription (limitation) periods and the burden of proof often depend on the contractual or extracontractual nature of the remedy in several legal systems. One of the best examples to demonstrate what is at stake is the solution of German 20 law, wherein the doctrine of culpa in contrahendo was invented and extended in order to overcome the weaknesses of the law of delict and thereby to cover major gaps in legal protection.57 The 2001 reform of the German law of obligations clearly put the concept on the contractual track with reference to the similarity between the duties of care arising in the precontractual stage and those arising in a contractual relationship already entered into,58 despite the fact that at least the protection of the party’s person (life and health) and property (i.e. personal injury and property damage) are covered by the law of delict in most legal systems,59 while the duties of disclosure and the (exceptional) liability for breaking off negotiations are contract-like.60 This division seems to be confirmed also by Recital 30 of the Rome II Regulation on the law applicable to non-contractual obligations, according to which culpa in contrahendo ‘should include the violation of the duty of disclosure and the breakdown of contractual negotiations.’ Article 12 of the Regulation covers ‘only non-contractual obligations presenting a direct link with the dealings prior to the conclusion of a contract.’ Therefore, if a person suffers personal injury while a contract is being negotiated, it is not Article 12 of the Regulation on culpa in contrahendo, but the general rules on torts/delicts (or other relevant provisions) of the Rome II Regulation that should apply. Meanwhile, precontractual liability is conceptualised within a contractual framework in both PICC and PECL.

Pargendler, 188. Culpa in contrahendo covers a great range of disparate cases. With reference to German law cf. Looschelders, 29. 57 Cf. the lack of liability for pure economic losses or the possibility of exemption from liability in case of damages caused by the negligent conduct of a vicarious agent; Looschelders, 30; von Hein, 430. 58 Looschelders, 31; Zoll, 41. Austria follows the German approach to similar reasons with the difference that no special rules were enacted, cf. Cartwright & Hesselink, 458. 59 Lehmann, 695; Ersoy, Die culpa in contrahendo im europäischen Internationalen Privat- und Verfahrensrecht (2020), p. 78. 60 von Hein, 431. 55

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Precontractual liability is subsumed under the law of delict in some legal systems, for example in Italy,61 France (also after the 2016 reform of the law of obligations)62 and Israel.63 In others there is no uniform view on its affiliation. The respective Articles 197 and 198 of the Greek Civil Code are considered as either quasi-contractual, or as quasi-delictual or as a sui generis liability regime (that forms a special kind between contractual and delictual liability), though the latter view is followed by most academics.64 In Dutch law, where there is no explicit statutory rule on precontractual good faith, court decisions are based either on tort or on bona fides (reasonableness and fairness) or on both (or on any combination of the two); sometimes the duty to act in good faith is understood in the case law as a duty of contractual nature.65 Chinese scholars classify four groups of cases as primarily tortious (no genuine intent to make a contract; fruitless negotiations resulting from one party’s fault; conclusion of a void or voidable contract; conclusion of a valid but disadvantageous contract), while the category of breaking off negotiations is understood as a genuine reliance liability (a sui generis notion of fault) based on venire contra factum proprium.66 Others in China consider all aspects of culpa in contrahendo as a special, independent basis for liability, being neither contractual nor delictual.67 22 Whatever the official or predominant classification in the given legal system is, as far as the genuine nature of precontractual liability is concerned, it is located somewhere between contract and tort as an intermediate area, representing the ‘many shades of grey’ in liability law. It is certain that the respective remedies cannot be drawn upon contract law, since the contract is not yet formed and the relevant duties are not dependent on the formation of the contract anyway; however the precontractual duties (of care, of information, etc.) go beyond tort liability too; first, since they are not owed to the public in general (i.e. to everyone) but only to the party it is in negotiation with; and second, delictual liability to provide for damages arises only once the wrongful act is committed, while precontractual liability is triggered as soon as the negotiations commence.68 The interim nature of precontractual liability is acknowledged even in those legal systems where there is a firm approach on culpa in contrahendo, such as in German law: it is about a statutory obligation (a contract-like but not contractual legal relationship, a self-standing non-contractual right) without primary performance 21

61 Zoll, 43; Magri, ‘Pre-Contractual Liability in Italy between Tort and Contract Law. Some Comparative Remarks’, 23 Revista Brasileria Direito Civil (2020) 101, 112, 114, 117-18, 124. Some scholars in Italy however strike a blow for the contractual classification with reference to a so-called ’social contact’ (contatto sociale) upon which precontractual liability is based (even the Corte di Cassazione takes recourse to contract law in some judgments). However, the prevailing view supports the delictual affiliation, since it concerns a general duty to act in good faith based directly on the general (statutory) duty to act in good faith. 62 Zoll, 43; Zuloaga, 4, 57-58, 144: though Article 1112 of the Code Civil does not specify delictual liability as the basis of the applicable remedies, but it is unanimously held in legal scholarship that liability attached to the breach of precontractual duties remains delictual. 63 According to Cohen, 402 Article 12 of the 1973 Contract Law is substantially tortious, because the duty to act in good faith is imposed by law and the remedy is basically restricted to reliance damages. Remarkable is however the chameleon-like nature of precontractual liability, because in the exceptional event of expectation damages being awarded, liability changes colour and becomes contractual. Seemingly, the remedy retroactively determines the nature of liability. 64 Cartwright & Hesselink, 38, 459; Stathopoulos & Karampatzos, 78. 65 Pannebakker, 67-78. 66 Ding, 509-10. 67 Han, ‘Culpa in Contrahendo in Chinese Contract Law’, 6 Tsinghua China Law Review (2014) 157, 165. 68 Dietrich, 174-75; Ersoy, 65-66.

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duties, whereupon relative protection duties arise by the commencement of contract negotiations, the initiation of a contract or by similar business contacts.69 The interim nature of precontractual liability between contract and tort can be made 23 into a virtue, since ideas can be drawn from both.70 Sometimes liability is based more on ‘fundamental principles at the core of contract law’ (and is therefore more contract-like), sometimes the other way round (and is more tort-like): but the liability-producing factors of both in combination are sufficient to ‘substantiate liability in some form’,71 in a way that a ‘broader than usual contractual liability may be justified by further factors normally associated with establishing a claim in tort’ and vice versa. This viewpoint might support practitioners in interpreting the respective statutory rules or the applicable case law on precontractual liability and in identifying the scope of the respective duty and the appropriate remedy.72

V. Didactic and Regulatory Approaches Though the root of precontractual duties (of care to have reasonable regard for the 24 legitimate interest of the other) and precontractual liability if in breach thereof lies in the parties’ increasing mutual vulnerability, culpa in contrahendo applies to a very heterogeneous array of cases that are difficult to classify.73 Different criteria apply and the various criteria become mixed up with each other as part of the historically-conditioned statutory (or judge-made law) frameworks. The first criterion is the object and scope of protection, i.e. which values acknowledged by society are covered and protected by the respective rules or case law. Another path is to sort according to the types of duties required to be fulfilled in the course of (pre)contractual negotiations. Another perspective is provided by listing the outcome of the negotiations, above all the consequence of the one party’s breach of its precontractual duties (no contract; contract not effective; invalid contract; valid but disadvantageous contract). It is worth paying attention to the legal institutions and doctrines applied by the legal systems to cover precontractual duties and to observe the differences between the solutions according to their abstractness. In some legal systems, precontractual liability is based on the general principle of good faith (or on its explicit subcategory of precontractual good faith), while particular duties are enumerated elsewhere and a combination of these various approaches is also quite common. Legal systems vary regarding the level of abstraction of the solutions developed, how many and what particular points of reference have been specified and decided upon by the legislator and to what extent does the law in action have to be reliant on the interpretation and discretion of the judge. Since all legal systems have their own historical development, it leads to diversity in how precontractual liability (or its case groups) is covered by which legal institution. Regarding German law, the principle of good faith, venire contra factum proprium (prohibition of going against one’s

69 With an overview on scholarship Ersoy, 67. The remedies are contractual or a least contract-like. With reference to the DCFR cf. Pannebakker, 292. 70 Dietrich, 175. 71 Dietrich, 184. 72 Dietrich, 186-87. The contract-like or tort-like character of a particular duty can assist in finding the scope of the respective duty and also the appropriate remedy; for example, if the reasons for liability lie closer to contract and the parties were very near to the conclusion of contract then a remedy ’protecting the plaintiff ’s positive or contractual expectations may be appropriate’. However, if liability seems to be based on tort law concepts and factors then probably only reliance losses shall be compensated. 73 Dietrich, 176.

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own earlier actions),74 abuse of rights; and regarding French law, croyance (confiance) légitime, legitimate expectations (attente légitime); theory of appearance (l’apparence), the prohibition of venire contra factum proprium, the principle of coherence, abuse of rights (abuse de droit) and good faith (bonne foi) can be mentioned.75

1. Objects and Scope of the Protection 25

Being aware of the object and scope of protection and of the protected values is essential, since there is a correlation between the scope of precontractual duties and the extent of liability.76 The scope of liability should be adjusted to and limited by the protective purpose of the breached duty.77 The scope can also serve as a basis while applying and interpreting one precontractual duty or another. By and large, the protected scope can be generalised as the reliance and trust between the parties in negotiations, because all objects of protection can be traced back and are related thereto. However, several subcategories can be identified. a) Integrity of the Other Party’s Person and Assets

26

First, one of the protected scopes is the integrity and safekeeping of the other party’s person, property, other assets and economic (financial) interests. Besides taking care of person and property, other duties and their infringements belong here too; for example, the breach of confidentiality of information provided during negotiations. The disclosure or improper use of confidential information can definitely harm the other party’s economic interests, mainly causing pure economic losses.78 b) Mutual Trust and Reliance

27

The second object of protection is the mutual trust and reliance of the parties in the narrower sense, which covers the requirement of consistency (consistent behaviour during negotiations) and loyalty towards each other. The most important group of cases is that of breaking off negotiations (without a justified reason after having induced a reasonable reliance on the certain or at least highly likely formation of the final contract). Protection of reliance is not restricted to the one-to-one relationship between the negotiating parties but also possesses macro dimension at the gross level of the overall economy and society. Reliance, confidence, is a key element of smooth commercial intercourse and contributes significantly to the operability and efficiency of business. 79 Only if mutual reliance is present, respected and, if needed, protected at the micro level can the big mosaic of reliance on reasonable and honest commercial intercourse be postulated at the macro level. c) Decision-making Autonomy

28

Third, one of the core protected values of precontractual duties and liability is decision-making autonomy,80 i.e. the free and informed decision of the parties to transact. Zuloaga, 42-46. Zuloaga, 68-87. 76 Schwenzer, Hachem & Kee, 284. 77 Dietrich, 188 with reference to the theory of protected purpose in German law. 78 As highlighted above, the protection of the other party’s person and property is covered in the majority of the legal systems by the law of delict and not by culpa in contrahendo. Germany is different for historical reasons and for the gaps in German tort law. 79 Zuloaga, 25; Ersoy, 73-74. 80 Ding, 510. 74

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Their right ‘to know and to want’,81 in order the final agreement reflects their ‘healthy and genuine’ will to conclude the contract with the appropriate content and terms.82 The information (disclosure) duties are connected to this object of protection, which is also called as the transparency requirement during negotiations. d) Other Protected Values Besides the three core scopes of protection above, other values and policy goals are 29 also assisted by precontractual duties and liability. Some authors highlight the social values behind protecting the reliance and mutual trust between the parties, ‘be it desirable from the parties’ perspectives or not’.83 Others underline the contribution to general economic welfare through the security of transactions.84 First, the greater and closer the trust, the less transactional costs arise, since there is no need to spend on investigating the other party’s real intentions and to litigate expenses arising through breach of trust; in this way, time and money can be saved and invested for other purposes.85 Second, only agreements based on informed decisions can contribute to the efficient allocation of resources.86 Again others emphasise European and national regulatory policies. As far as information duties are concerned – as with regard to many other areas – an internal market can only be achieved if the same standards of protection apply.87 Besides individual informed transaction decisions, information duties also serve general market transparency,88 and they support the smooth transition between the precontractual phase and the conclusion of the final contract.89

2. Enumeration of Precontractual Duties Another approach frequently referred to is listing several particular precontractual 30 duties. Some of them can be one-to-one assigned to one of the protected scopes, while others are related to several of them or overlap each other or overlap the protected scopes themselves. For example, the breach of the duty not to behave inconsistently during negotiations, in particular not to break off negotiations (without a justified reason after having induced a reasonable reliance on the certain or at least highly likely formation of the final contract) can also be seen as an infringement of the information duty: the party in breach misleads the other party about its willingness to contract or fails to disclose that the contract cannot, will not be concluded.90

81 Serrano & López, ’Misleading and Aggressive Commercial Practices and the Defects of Transactional Consent’, in: Schulze & Viscassilas, The Formation of Contract (2016), p. 91. 82 De Vincelles, ’Validity of Contract: Dol, Erreur and Obligation d’Information’, in: Cartwright & Whittaker, The Code Napoleon Rewritten – French Contract Law after the 2016 reforms (2017), p. 81. 83 Pargendler, 153. 84 Li, ’The Legal Status of Pre-Contractual Liability: Contrasting Responses from German and English Law’, 12 National Taiwan University Law Review (2017), 127, 165. 85 Ersoy, 73. 86 Lehmann, 701 with reference to law & economics scholarship. 87 Lehmann, 702. 88 Von Hein, 431. 89 Schulze, ’The Formation of Contract: New Features and Developments in Contracting’, in: Schulze & Viscassilas, The Formation of Contract (2016), p. 16. 90 Looschelders, 35.

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a) Duty of Protection 31

In some legal systems (for example in Germany and Austria), precontractual liability involves the duty to exercise proper care in protecting the other party’s person, property and assets, in sum: protective obligations (Schutzpflichten, Obhutspflichten). b) Duty of Loyalty and Consistent Behaviour

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The obligations connected to the protection of mutual trust and reliance are often referred to as the duties of mutual care based on reliance; in other words duty of loyalty and duty of consistent behaviour, i.e. duty not to behave inconsistently (such as breaking off advanced negotiations without good reason despite having induced the reasonable reliance that the contract will certainly or at least is highly likely to be concluded; this is why it is also called the duty of consistency or coherence). c) Duty of Information

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All legal systems analysed here acknowledge some sort of duty to inform (disclosure). The breach of the duty to inform can be twofold: either an omission, a passive conduct, i.e. not disclosing any information that is covered by the duty; or the supply of misleading (imprecise, incorrect or inadequate) information (thus an active conduct). The consequences are different if the breach results in the invalidity of the contract, and if the contract remains valid but contains disadvantageous terms from the one party’s point of view.91 If the one party does not inform the other party that it made up its mind and does not intend to continue negotiating, this omission also qualifies as a breach of the duty to inform; however, it overlaps with the former category, because such circumstances necessarily lead to the breaking off of negotiations. d) Duty of Confidentiality

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The duty of confidentiality is also explicitly highlighted in many legal systems. If the party discloses confidential information or uses it improperly for its own purposes, its conduct can also be classified as the breach of the first category, that of the duty to safeguard the other party’s assets and economic interests. e) Other Duties in Accordance with Good Faith

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ea) As it is explicitly provided for in many legal systems and soft law instruments, it is bad faith in particular for a party to enter into or continue negotiations when having no intention to reach an agreement with the other party (at all). The party doing so is certainly led by some malice aforethought, such as manipulating the price; obtaining some confidential information; preventing the other party from negotiating with other market players, etc.92 It is, for example, contrary to good faith to request an offer that is expensive to prepare if it has already decided to reject it.93 A bank acted in bad faith (according to a published Chinese judgment) when it offered a loan provided that the client carried out the restructuring agreed upon and paid off an earlier loan (in a smaller amount). The client carried out the restructuring and paid back the loan, but the bank broke off the negotiations. The bank’s true intention was to force the client to restructure 91 Illescas Ortiz, ’Pre-contractual Liability in the Civil Law’, in: DiMatteo, Janssen, Magnus & Schulze, International Sales Law – Contract, Principles & Practice (2016), p. 49. 92 Ersoy, 47-48; Pannebakker, 89 with reference to French law. 93 Kötz, 33. This conduct overlaps however with the case group of breaking off negotiations.

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and get the earlier loan paid back.94 It is contrary to good faith to encourage the other party to make investments already in the precontractual stage if the party inducing the other one to do so lacks a firm intention to contract.95 eb) Another conduct in bad faith is to delay some action required to go ahead with 36 the negotiations and in this way causing additional costs and other kind of losses to the other party.96 ec) In Italy and China97 another group of cases is highlighted, namely that of public 37 tendering cases, where the tendering procedure is set aside by the court or the project can no longer be realised for technical reasons or the contract cannot be concluded due to lack of funds.98 This group of cases however overlaps with breaking off negotiations and therefore with culpa in contrahendo. The same stands true for Germany (as in several other countries in the EU and beyond). § 181 of the German Act against Restraints of Competition (GWB) provides for a special claim ‘for damages arising from reliance.’ According to this special provision: ‘If the contracting authority has violated a provision intended to protect undertakings, the undertaking may claim damages for the costs incurred in connection with the preparation of the tender or the participation in a procurement procedure if, without such violation, the undertaking would have had a real chance of being awarded the contract after assessment of the tenders, and provided that such chance was impaired as a consequence of the violation. Further claims for damages shall remain unaffected.’ The last sentence opens the floor to the application of culpa in contrahendo besides the special provision for other fact patterns that do not underlie § 181 GWB. Such case groups include unjustified suspension of the public procurement; infringement of the provisions on selection of the best bid for irrelevant ‘reasons’; the public authority’s failure to inform the bidders on the lack of financial background for the contractual works; application of the national regime instead of the EU-wide, etc. The remedies are basically restricted to negative interest, unless the claimant can prove that it would have obtained the assignment but for the infringement of public bidding rules.99

3. The Outcome: Faith of the Contract – Overlaps with Invalidity and Nonconformity When the remedies are explained, the faith of the contract matters in particular. The heads and amount of damages can be different if the negotiations were broken off, i.e. no contract was entered into; if the contract was concluded but did not become effective; if the contract was concluded but it is invalid; and finally if the contract was (validly) formed but with disadvantageous terms from one party’s perspective. Information duties are linked mainly to cases where a contract was concluded, but is either invalid or valid but disadvantageous from one party’s point of view. Claims based on breaking off negotiations are consequently connected to cases where the contract was not concluded in the end.100 Finally, there are duties for which, if they are broken, the remedies (damages) do not depend on the outcome: they have to be obeyed and fulfilled regardless of whether the contract is concluded or not. The heads and amount of damages depends only on the Ding, 491. Pannebakker, 89. 96 Cf. for a notable and undue delay in Italian law, Febbrajo, 299. 97 Ding, 497. 98 Febbrajo, 308-309. 99 Emmerich, § 311 BGB, in MüKo BGB online edition (2019), para. 54-57. 100 Similarly, Zuloaga, 162; Han, 166; Ersoy, 46-56. 94

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losses suffered, such as the duty to protect the other party’s person and property and the duty of confidentiality. a) Overlap No. 1: Invalidity In those legal systems wherein causing the invalidity of the contract fraudulently or negligently by not disclosing any essential circumstances or in any other way, is covered by precontractual liability, there is necessarily an interference with the applicable rules on invalidity (nullity, voidability, etc.) of contracts, based mainly on the absence of or vitiated consent. This interference can be manifold. In some legal systems, precontractual liability is evaluated as a supplement to those rules on defects in consent that were felt too narrow.101 For example, negligent misrepresentation is not a vitiating factor that renders a contract voidable under Chinese law and therefore precontractual liability fills the gap. The same stands true if the party fails to rescind the contract (though they could) before the deadline provided for in the law or does not want to rescind the contract, but still wishes to be compensated for the losses suffered. In cases of fraud and duress, damages based on the void contract and precontractual liability provide concurrent liabilities and the party can rely on both.102 43 Elsewhere, the bypass of some restrictive invalidity rules is feared in the jurisprudence: for example, rescission of the contract in German law is conditional on wilful deceit and can only be exercised within a statutory deadline. Nonetheless, precontractual liability can also be relied on in the event of negligent deceit and regardless of the deadline, according to the prevailing view in the jurisprudence and case law.103 44 By contrast, the commentators on PECL drew a sharp line between misrepresentation and precontractual liability. If the contract is concluded, misrepresentation entails consequences for its validity; however, if the contract is not concluded, the conduct falls within the scope of precontractual liability (Article 2:301 PECL). Misrepresentation and other vitiation of consent aims to obtain a contract while the improper conduct that underlies precontractual liability follows other aims than reaching an agreement.104 45 As French scholars underline: the breach of information duties can be (must be) negligent only, since fraudulent information-giving is covered by Articles 1137 ff. Code Civil. The relationship between precontractual duties and mistake (Articles 1130 ff. Code Civil) is unclear.105 Article 1112-1(6) Code Civil clarifies, however, that, in addition to imposing precontractual liability, the failure to fulfil the information duty may lead to annulment of the contract under the conditions provided by Articles 1130 Code Civil and following. 42

101 Lohsse, Information Duties and Defects in Consent, in: Schulze & Viscassilas, The Formation of Contract (2016), p. 81. With reference to French law. 102 Ding, 500-501. Scholars in China report interference with tort law too and highlight the uncertainty regarding the recoverability of pure economic losses (like in German tort law) and promote the reference to precontractual liability instead. See Ding, 502-503, 510-11. Similarly, Han, 166-67. 103 Ersoy, 54-55. However, the status quo is highly controversial (the reference to culpa in contrahendo in particular), with special regard to the relationship of precontractual liability and the voidability of contract due to wilful deceit according to §§ 123-124 BGB. Cf. Emmerich, para. 77-78. 104 See the analysis by Pannebakker, 303; and the commentaries themselves: Lando & Beale, 189. However this separation did not succeed entirely, see the critical analysis by Harke, ’Irrtum und culpa in contrahendo in den Grundregeln des Europäischen Vertragsrechts: Eine Kritik’, 14 Zeitschrift für Europäisches Privatrecht (2006) 326. 105 Sefton-Green, 64, 65. Even more problematic it is that fraud does not presuppose an obligation of information either; see in this respect id. 66-67; and that mistake as to value is excluded from the scope of the duty to inform but it seems to be included in the context of fraud, cf. de Vincelles with accurate analysis on the (potential) contradictions, 104-105.

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B. Introductory Note

b) Overlap No. 2: Non-conformity A similar issue arises on the relationship between precontractual liability and the 46 provisions on impossibility, defective performance and warranty, if the party in breach provided false information on the quality or characteristic of the performance, i.e. of the contractual goods and the other party’s expectations became part of the contract due to the respective provisions. The prevailing view in German law, for example, is that warranty (Gewährleistung) is paramount for culpa in contrahendo, so that the deadlines and other restrictions cannot be circumvented by reference to precontractual liability. 106 Summary on the correlation between the protected scope, the respective duty and the 47 impact on the contract: The protected value / Scope and object of protection

The respective precontractual duty

Impact of the breach on the faith of the contract

Integrity of the other party’s person, property, assets and economic interests

Duty to exercise proper care in protecting the other party’s person, property and assets

This duty applies regardless of whether the contract is concluded or not.

Duty of confidentiality

Mutual trust and reliance, honesty and loyalty (in negotiations)

Duty of loyalty and duty of consistent The contract is not behaviour, (in particular not to break concluded. off advanced negotiations without good reason despite having induced the reasonable reliance that the contract would certainly or highly likely be concluded)

Decision-making autonomy, free and informed transaction decision

Duty of information (disclosure)

The contract is invalid. The contract is valid but disadvantageous.

4. Good Faith as an Umbrella Principle v. Particular Duties In some legal systems, due to their traditions, there are specific statutory rules on pre- 48 contractual liability (such as Greece, Portugal and Italy, Germany since 2001 and France since the 2016 reform of obligations). Precontractual duties and the consequences of their breach are derived from the general principle of good faith elsewhere (such as in Spain and the Netherlands), requiring an increased level of judicial activism.107 The codification techniques vary according to the abstraction level, from the general clause of good faith to the provisions of particular precontractual duties including sometimes also some hints on the applicable remedies. a) General Clauses: Pros and Cons aa) General clauses, such as the requirement of good faith (and fair dealing), are 49 praised for openness, flexibility and dynamics, and for being able to reflect the diversity and many shades of life and legal relationships. Good faith is unsurprisingly an umbrel106 107

Ersoy, 56. Emmerich, para. 75, 79-80. Cartwright & Hesselink, 473.

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la principle, a vehicle ‘for adaptation of the codified law to changing social values’, simultaneously channelling the moralisation of law,108 or a ‘big empty envelope into which a lot of concrete circumstances can be folded.’109 The duties of information, confidentiality, loyalty (i.e. to refrain from inconsistent behaviour) and transparency (of the risks of non-conclusion) were also hived off from (precontractual) good faith and can be identified as deriving from it,110 therefore good faith can still play a role in their interpretation. Some particular rules are singled out from the good faith requirement in legislation ‘because of the judicial experience in handling similar cases.’111 50 ab) On the other hand, the general requirement of good faith and fair dealing is criticised as being vague and too elusive: having a fluid content and different meanings ‘as we move from a context to another’,112 and being responsible for the uncertainty and unpredictability of the law, both on the judiciary’s and on the contracting parties’ side, since general clauses like this create ‘a potential for an incoherent, uneven application’. The requirement of good faith and fair dealing is a standard ‘easy to create, difficult to apply’ in contrast with particular rules (precontractual duties) that are difficult to create and easier to apply; and if there are lacunae between the rules, they can be still filled by general principles. Rules also have the advantage of being easy to predict.113 Certainly, the flexibility and elasticity of the general clause on good faith is a Janus-faced phenomenon, but there are scholars who accept or even appreciate the lack of stability as the fair price for reflecting the many ‘shades of grey’.114 Others accept the indispensability of good faith as a general clause but urge its concretisation.115 However, this takes place on a case-by-case basis, using the ‘judgement, prudence and wisdom of the judge’ and herewith the snake swallows its own tail: there is a high risk of diverging interpretations and uneven application.116 Latin American legal systems – though strongly influenced by German and Italian law on precontractual liability – strove to achieve the enactment of more specific norms instead of the well-known general clauses in order to meet the demands of correct market operation for legal certainty and predictability. Rescinding limits, objective criteria and the enumeration of ‘disloyal actions’ are provided for in their respective laws.117 The same can be observed in some Central and Eastern European countries that codified or recodified their Civil Laws much later than when the classic civil codes of Western Europe entered into force and could therefore build on ‘western’ experiences and court practice.118

Pannebakker, 270. Sefton-Green, 60. 110 Zuloaga, 83, 162. 111 With reference to Article 42(1) and 42(2) of the former Chinese contract law (now Article 500 (1) and (2) Chinese Civil Code) Wei & Yu, 285. 112 Quagliato, ’The duty to negotiate in good faith’, 50 International Journal of Law and Management (2008) 213, 215. Cartwright & Hesselink, 474. 113 Cohen, 423, 428-29. According to him, this is the price for the inclusion of a standard of moral behaviour into the contractual arena. 114 Dietrich, 185. 115 Lehmann, 711 with reference to Article II.-7:201 and II.-7:205 DCFR. 116 Zuloaga, 161. 117 Monsalve-Caballero, ’The Legal and Historical Panorama of Culpa in Contrahendo at Contractual Negotiations – An Approach from European and Latin American Law’, 39 Revista Derecho Universidad del Norte (2013), 127, 143, 145-46 (with special reference to Cuba and Columbia). 118 See for example the Civil Code of Lithuania (2000), Article 6.163-6.164 and Section 14 of the Law of Obligations in Estonia (2001). 108

109

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b) Variations on (Precontractual) Good Faith: Objective or Subjective? ba) The scope and margin of judicial discretion regarding good faith appears in 51 several issues and they need clarification. The first is whether the subjective or the objective sense prevails. Subjective good faith requires honesty in fact (state of mind of not knowing certain facts or believing they are acting correctly and obeying the rules), while objective good faith refers to the compliance with standards of fair dealing, i.e. a standard of conduct that is required or expected from an individual.119 In this sense, good faith and fair dealing is a moral standard; a normative concept ‘that contains generic reference to normative ideas spontaneously shared in society about what is right,’120 and ‘what is expected of a reasonable person on the basis of moral, social and commercial norms prevailing in the community in which the transaction takes place.’121 The relevant laws and soft laws vary in their emphasis on the objective or subjective 52 aspect. As summarized in the scholarship,122 PICC focuses on the objective approach, requiring an autonomous and restrictive interpretation according to the goals and characteristics of international trade; moreover, it is content with the absence of bad faith. 123 The commentaries on PECL clarify that ‘good faith and fair dealing’ as a complex formulation converges on the French bonne foi and the German Treu und Glauben, and the two parts also have their own meanings: good faith is honesty and fairness in mind, while fair dealing refers to an objective test of fairness.124 DCFR rather seems to refer to the subjective aspect,125 wherein honesty and openness aim to prevent dishonest conduct, cheating and acting out of malice. PECL and DCFR set a positive requirement of negotiating in good faith. The objective approach prevails in Greek law,126 Italian law127 and in French law,128 where three requirements are derived from good faith: loyalty (prohibition of causing harm during negotiations or by withdrawal from negotiations); consistent behaviour and transparency (providing each other with information).129 bb) The notion and content of good faith reflects the constitutional, social and even 53 political background of the legal system in question, too. The requirement of good faith can be traced back to the constitutional principle of social solidarity in Italy.130 The yardstick of good faith in China includes the potential impact of the respective conduct on society at large. The goal is to strike a balance between the individual interests of the negotiating parties and the interest of society.131 Another aspiration of the Chinese legislator by means of good faith is to find the balance between the ‘Good Samaritan and the adversarial businessman’.132

Zuloaga, 160 and Quagliato with reference to PICC and PECL, 215. Zuloaga, 161. 121 Wei & Yu, 285. 122 Pannebakker, 340-41. 123 UNIDROIT Principles, 19-20. 124 Lando & Beale, 115-16. 125 ‘I. – 1:103: Good faith and fair dealing (1) The expression “good faith and fair dealing” refers to a standard of conduct characterised by honesty, openness and consideration for the interests of the other party to the transaction or relationship in question.’ 126 Stathopoulos & Karampatzos, 79. 127 Febbrajo, 297. 128 Zuloaga, 84. 129 Zuloaga, 80-83; Pannebakker, 299-300. 130 Febbrajo, 297. 131 Novaretti, ‘General Clauses and Practice: The Use of the Principle of Good Faith in the Decisions of Chinese Courts’, 18 European Review of Private Law (2010) 953, 970, 980. 132 Li, 165. 119

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C. Statement of Issues 54

The issues covered by this Chapter can be raised at two levels. The first refers to the general and theoretical aspects on the roots, justification and features of precontractual liability. Among many others, the following questions shall be asked and answered as far as possible (see section B. – Introductory note). – –

–

– –

– –

55

At what stage, under what circumstances and in what level of intensity of exchange is judicial control necessary and justified by issues of mutual trust and vulnerability emerging during the precontractual negotiations? How and to what extent does the general or precontractual good faith requirement counterbalance contractual freedom? How can this compromise (checks & balances) be identified and shaped while having morality, social values (sometimes constitutional principles) and also economic efficiency in mind? Can the classification of precontractual liability in the respective legal systems and soft law instruments be traced back to historical factors only? Does the classification as a tort, contract or sui generis liability regime matter beyond theoretical and didactical considerations, with special regard to the heads and scope of recoverable losses, prescription, etc.? Do any supplementary legal institutions apply to losses suffered at the precontractual stage (abuse of rights, venire contra factum proprium, etc.) and, if yes, which ones and why? Does the interim nature of precontractual liability (lying between contract and tort) enable the legislator or the judge to develop innovative crossover solutions, sometimes inspired by contract law and sometimes by tort law? Does which pattern is followed by the respective legal system in shaping precontractual liability have an impact on the merits and on the outcome of legal disputes? Does it matter whether the concept of precontractual liability is structured alongside the protected scope and interests (i – integrity of the other party’s person, property, assets and economic interests; ii – mutual trust and reliance, honesty and loyalty in negotiations; iii – decision-making autonomy, free and informed transaction decision); or according to the respective precontractual duties (i – duty to exercise proper care in protecting the other party’s person, property and assets; ii – duty of confidentiality; iii – duty of loyalty and duty of consistent behaviour; iv – duty of information); or pursuant to the faith of the contract if the respective precontractual duty is broken (i – not concluded; ii – invalid; iii – valid but disadvantageous)? If the respective legal systems mix those approaches, why and how does this impact the outcome of legal disputes? How does whether precontractual liability is explicitly provided for in statutory law or, on the contrary, it is shaped by judge-made law with reference to general principles and already existing legal institutions influence the results? What does precontractual good faith mean including its nature as being objective or subjective or both? What kind of explicit precontractual duties hived off the good faith principle?

The second level focuses on the substance, details and peculiarities of precontractual liability in an analytical and comparative perspective. The issues discussed here (see section F. – Commentary) are as follows: –

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Does the CISG cover precontractual liability? Where the CISG regulates or reflects some particular aspects that can arise in the precontractual stage or subject matters that necessarily interfere with precontractual liability (such as Articles 1(2), 2(a),

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C. Statement of Issues

–

–

– –

8(3), 15(2), 16, 35, 40 CISG), do these provisions supersede the precontractual liability of the applicable law or can they coexist in one way or another? What combinations of circumstances trigger precontractual liability in the event of breaking off negotiations – not only having the good faith principle in mind but also the statement that no altruistic transactions are required by law? Is precontractual liability the rule or the exception in the event of breaking off? If reliance is accepted to be the reason for liability, which factors raise this to a reasonable reliance induced by the party that subsequently broke off? Which factors and at which level of intensity justify the reasonableness of reliance (duration, agreement on a smaller or bigger proportion of essential terms, certainty of the future contract’s coming into being, status of the parties being professionals or laypeople, etc.)? Which reasons are accepted as good and reasonable for breaking off negotiations, despite having reached an advanced level and agreement on most of the essential terms? Is precontractual liability a fault-based or a strict liability? How do formality requirements influence the application of the respective provisions related to breaking off contractual negotiations? What is the relationship between precontractual duties of information and the rules on invalidity and the provisions on non-conformity due to false statements or failure to provide information? Do the latter overrule the former or are these regimes complementary? On what circumstances do the existence and level (intensity) of information duties depend, since the rule is that both parties have to obtain the information needed at their own expense? How do the professional status of the parties, the B2B or B2C character of the anticipated contract, how easily each party can obtain the information and whether the information is essential from the perspective of the contractual goal to be achieved by the party, inter alia, influence the scope and strictness of information duties? Does the information duty only exist on demand; or are there situations in which the party is obliged to provide information automatically at its own initiative and, if so, what are they? Is only actual knowledge (the party already has) covered or can the party be expected to obtain information (does not yet know) if this party can access the information in a simpler way (or at a lower cost)? Where does the information duty end in order not to loose the possibility to make a good bargain? What kinds of information qualify as confidential? What are the legal bases of confidentiality (reference by the parties, trade secret laws, implied confidentiality)? Is the confidentiality requirement binding for a definite or indefinite period of time? Do the remedies correlate with the scope of precontractual duties and expectations and if so how? Besides damages, are other types of remedies available, for example injunctions (related to confidentiality) or specific performance (such as a court order to negotiate)? Can several remedies be activated cumulatively? What is the relationship between the scope and type of remedies and the faith of the negotiated contract (concluded, non-concluded, concluded but invalid, etc.)? Under what preconditions can compensation be provided for expectation interest? Does expectation interest limit reliance interest? If the coverage of reliance interest only is the rule, which heads of losses are to be compensated for thereunder? Does the contributory fault of the other party matter?

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D. International Sales Transactions 56

According to the prevailing view, the CISG does not cover precontractual liability and so the parties are exposed to the uncertainties of this area and to the volatile case law of the applicable domestic law, unless they draft and agree upon a precontractual instrument (see the second part of this Chapter).

E. Sampling of Laws I. CISG Article 1 (2) The fact that the parties have their places of business in different States is to be disregarded whenever this fact does not appear either from the contract or from any dealings between, or from information disclosed by, the parties at any time before or at the conclusion of the contract. Article 2 This Convention does not apply to sales: (a) of goods bought for personal, family or household use, unless the seller, at any time before or at the conclusion of the contract, neither knew nor ought to have known that the goods were bought for any such use; Article 7 (1) In the interpretation of this Convention, regard is to be had to its international character and to the need to promote uniformity in its application and the observance of good faith in international trade. (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. 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. Article 15 (2) An offer, even if it is irrevocable, may be withdrawn if the withdrawal reaches the offeree before or at the same time as the offer. Article 16 (2) However, an offer cannot be revoked: (a) if it indicates, whether by stating a fixed time for acceptance or otherwise, that it is irrevocable; or (b) if it was reasonable for the offeree to rely on the offer as being irrevocable and the offeree has acted in reliance on the offer. Article 40 The seller is not entitled to rely on the provisions of articles 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.

II. UNIDROIT Principles of International Commercial Contract (PICC) Article 1.7 (Good faith and fair dealing) (1) Each party must act in accordance with good faith and fair dealing in international trade. (2) The parties may not exclude or limit this duty.

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E. Sampling of Laws Article 1.8 (Inconsistent behaviour) A party cannot act inconsistently with an understanding it has caused the other party to have and upon which that other party reasonably has acted in reliance to its detriment. Article 2.1.15 (Negotiations in bad faith) (1) A party is free to negotiate and is not liable for failure to reach an agreement. (2) However, a party who negotiates or breaks off negotiations in bad faith is liable for the losses caused to the other party. (3) It is bad faith, in particular, for a party to enter into or continue negotiations when intending not to reach an agreement with the other party. Article 2.1.16 (Duty of confidentiality) Where information is given as confidential by one party in the course of negotiations, the other party is under a duty not to disclose that information or to use it improperly for its own purposes, whether or not a contract is subsequently concluded. Where appropriate, the remedy for breach of that duty may include compensation based on the benefit received by the other party.

III. Principles of European Contract Law (PECL) Article 1:201: Good Faith and Fair Dealing (1) Each party must act in accordance with good faith and fair dealing. (2) The parties may not exclude or limit this duty. Article 2:301: Negotiations Contrary to Good Faith (1) A party is free to negotiate and is not liable for failure to reach an agreement. (2) However, a party who has negotiated or broken off negotiations contrary to good faith and fair dealing is liable for the losses caused to the other party. (3) It is contrary to good faith and fair dealing, in particular, for a party to enter into or continue negotiations with no real intention of reaching an agreement with the other party. Article 2:302: Breach of Confidentiality If confidential information is given by one party in the course of negotiations, the other party is under a duty not to disclose that information or use it for its own purposes whether or not a contract is subsequently concluded. The remedy for breach of this duty may include compensation for loss suffered and restitution of the benefit received by the other party.

PICC and PECL follow a similar pattern. The general (mandatory) requirement of 57 good faith and fair dealing is set in both soft law instruments and certainly applies in the negotiation process,133 though PICC restricts its scope to international trade. PECL does not explicitly provide for the prohibition of inconsistent behaviour, with 58 an understanding induced by the party and reasonably relied on by the other party, as with Article 1.8 PICC (one of the illustrations regarding Article 1.8 PECL refers explicitly to the precontractual phase);134 this is nonetheless presented as a part of the general good faith requirement in the official commentary of PECL.135 According to the commentaries on PECL, good faith is presumed: the burden of proof lies with the party that alleges the non-compliance therewith.136

UNIDROIT Principles, 18; Lando & Beale, 113. UNIDROIT Principles, 22: During negotiations over a lengthy period the one party – induced to do so by the other party by letting the party understand that the negotiations were completed – started to demolish the old building on the other party’s premises and to build the new one. The other party – being aware all of this – indicated later that there were still additional terms to negotiate. 135 Lando & Beale, 114. 136 Lando & Beale, 116. 133

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As far as the specific rules on the precontractual stage and liability are concerned, the usual approach applies: PICC and PECL do not specify any particular duties137 (apart from confidentiality); the freedom of contract is counterbalanced by the general good faith and fair dealing requirement that also applies to negotiating and breaking off negotiations. The lack of real intention to reach an agreement is a genuine example of acting in bad faith. The respective articles also cover contentually the substance of not disclosing or misrepresenting facts and in this way misleading the other party as to the nature or terms of the contract to be concluded.138 60 As is referred to in the scholarship, Article 2.1.15(2)-(3) PICC are not mandatory rules and may be waived or limited by the parties, if the disclaimer is not ‘grossly unfair’ according to Article 7.1.6 PECL and does not infringe the requirement of consistent behaviour according to Article 1.8 PECL.139 61 These provisions are supplemented with a strict rule on confidentiality, whereas even benefit-based remedy can be triggered in the event of breach. 59

IV. German Bürgerliches Gesetzbuch 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 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. Section 311: Obligations created by legal transaction and obligations similar to legal transactions (2) An obligation with duties under section 241 (2) also comes into existence by 1. the commencement of contract 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 an obligation comes into existence in particular if the third party, by laying claim to being given a particularly high degree of trust, substantially influences the pre-contract negotiations or the entering into of the contract.

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The German approach is very much characterised by the pioneering idea composed by Rudolf von Jhering, who came to the conclusion that ‘obligations of loyal and considerate conduct’ can arise even without the conclusion of a valid contract. Jhering focused mainly on the gap in legal protection of one party, if the other caused the invalidity of the contract.140 Later on the idea of culpa in contrahendo was referred to in order to counterbalance the cautious and restrained coverage of the German law of delict, basically not including compensation for pure economic loss and allowing the exculpation of the principal in the event the vicarious agent caused losses to a third party, if the principal could prove that they had chosen and supervised the agent with

Cf. Pannebakker, 299 with reference to other sources. UNIDROIT Principles, 60. 139 Pannebakker, 302. 140 For the English translation of the respective terms see Looschelders, 29. For the original see Jhering, ‘Culpa in contrahendo oder Schadensersatz bei nichtigen oder nicht zur Perfection gelangten Verträgen’, 4 Jherings Jahrbücher (1861), 1. 137 138

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E. Sampling of Laws

all reasonable care.141 Precontractual duties and liability have been codified law since the reform of the law of obligations in 2001. The (now contractual) liability is fault-based and fault is presumed.142 According to some scholars, a timely gradation of the negotiation process is reflected 63 by the statutory regime, in line with the progression of the negotiations. Section 311 Para 2 No. 3 BGB (similar business contact) matches the beginning stage of negotiations, wherein only duties of protection arise, while No. 1 (commencement of contract negotiations) is a more advanced stage wherein further duties of protection and care and additionally duties of information evolve. (No. 2 – initiation of a contract – provides for duties of protection regarding the other party’s person and interests with the same intensity during the whole process of negotiation, regardless of their progression.)143 Other scholars point out that the relationship between the three provisions is unclear and controversial, since (for example) the initiation of a contract involves commencement of contract negotiations.144 –

– –

Similar business contacts (No. 3) are not mere social contacts; however, they do not have to be aimed at the conclusion of any particular contract: even if there is a contract in sight but it is not yet initiated, just prepared, this also qualifies as a business contact. The notion of business contact covers also situations wherein no conclusion of contract is considered at all. The commencement of contract negotiations (No. 1) presupposes mutual intent to conclude a contract. It is sufficient if bilateral preparatory negotiations have begun, even if no offer is yet made. 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’ (No. 2) is considered to be a small general clause that shall be interpreted broadly and also applies if the parties do not have a firm intention to conclude a particular contract, but they consider to conclude a contract in general, such as the one party enters the other’s shop having the conclusion of some contract in mind.145

The analyses on Section 311 Para 2 BGB in the jurisprudence either draw upon 64 the respective duties including their breach (duties of protection and care of the other party’s person and interests; breaking off negotiations; duty to inform; duty of confidentiality)146 or are provided in accordance with the faith of the contract, emphasising the conclusion of an invalid or of a valid but disadvantageous contract147 whereas this perception is the other side of breaching the duty to inform. The faith of the contract (not concluded, invalid, valid but disadvantageous) is often coupled with the applicable remedies, i.e. damages in particular. –

The volume and heads of damages do not depend on the faith of the contract as far as the duty of protection of the other party’s person and interests or the duty of confidentiality are breached.

Looschelders, 30. Ersoy, 56. 143 Bergjan, ‘Die Haftung aus culpa in contrahendo beim Letter of Intent nach neuem Schuldrecht’, 25 Zeitschrift für Wirtschaftsrecht (2004) 395, 397. 144 Emmerich, para. 42. 145 Looschelders, 32; Ersoy, 42-43; Emmerich, para. 43-47. 146 Bergjan, 398-400; Schulze, 15-16. 147 Looschelders 36-37. 141

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–

65

There is however a correlation if the contract was finally not concluded (breaking off negotiations); or was concluded but is invalid: damages are restricted to negative (reliance) interest unless the party can prove that the contract would have been (validly) concluded in the absence of the breach of precontractual duties. The same applies to the group of cases where the contract was concluded but is seen as disadvantageous from the one party’s perspective.148

Injunctive relief can be granted if the disclosure or inappropriate use of confidential information (obtained during the negotiations) threatens.149

V. French Code Civil Art. 1104. Contracts must be negotiated, formed and performed in good faith. This provision is a matter of public policy. Art. 1112. The commencement, continuation and breaking-off of precontractual negotiations are free from control. They must mandatorily satisfy the requirements of good faith. In case of fault committed during the negotiations, the reparation of the resulting loss is not calculated so as to compensate the loss of benefits, which were expected from the contract that was not concluded nor the loss of the chance to obtain such benefits. Art. 1112-1. The party who knows information which is of decisive importance for the consent of the other, must inform him of it where the latter legitimately does not know the information or relies on the contracting party. However, this duty to inform does not apply to an assessment of the value of the act of performance. Information is of decisive importance if it has a direct and necessary relationship with the content of the contract or the status of the parties. A person who claims that information was due to him has the burden of proving that the other party had the duty to provide it, and that other party has the burden of proving that he has provided it. The parties may neither limit nor exclude this duty. In addition to imposing liability on the party who had the duty to inform, his failure to fulfil the duty may lead to annulment of the contract under the conditions provided by articles 1130 and following. Art. 1112-2. A person who without permission makes use of or discloses confidential information obtained in the course of negotiations incurs liability under the conditions set out by the general law. Art. 1116. An offer may not be withdrawn before the expiry of any period fixed by the offeror or, if no such period has been fixed, the end of a reasonable period. The withdrawal of an offer in contravention of this prohibition prevents the contract being concluded. The person who thus withdraws an offer incurs extra-contractual liability under the conditions set out by the general law, and has no obligation to compensate the loss of profits, which were expected from the contract. Art. 1240. Any human action whatsoever which causes harm to another creates an obligation in the person by whose fault it occurred to make reparation for it.

148 149

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E. Sampling of Laws Art. 1241. Everyone is liable for harm, which he has caused not only by his action, but also by his failure to act or his lack of care.150

The 2016 reform of the law of obligations completely reshaped precontractual liabili- 66 ty. The aim was to have a more certain and market-friendly regime.151 The set of rules presented combines general clauses (good faith, precontractual good faith) and particular precontractual duties (duty of information, confidentiality – the latter inspired by PICC, PECL and DCFR152). Precontractual liability is still considered part of the law of delict (tort law), therefore Articles 1240-1241 Code Civil apply to damages. The general and the precontractual good faith principle and the information obligation are mandatory rules. Four special distinctive features of the reconsidered French approach shall be highlight- 67 ed here: –

– – –

First, in the event of fault during negotiations, awarding expectation interest related to the anticipated contract that was finally not concluded (i.e. loss of benefits and loss of chance in this respect) is explicitly excluded. This is in line with the approach of other legal systems; remarkable is, however, the explicit codification of this restriction. Second, the duty to inform does not apply to an assessment of the value of the act of performance. This is not different to the approach of other legal systems, though the statutory fixing of it seems to be unique. Third, unpermitted withdrawal of an offer explicitly triggers a claim for damages (Article 1116 Code Civil), but again, excluding the loss of profit expected from the contract. Fourth, scholars also emphasise the independence of the information duty (Article 1112-1 Code Civil) from both the good faith requirement and from defects in consent (fraud, etc.).153

Article 1112 Code Civil is still considered as an open norm that accommodates the 68 ‘ethics of negotiation’, including the requirements of loyalty (conduct with the intent to harm is prohibited), consistency of conduct (obligation to be coherent, i.e. expectation of acting in a manner consistent with one’s own previous behaviour) and transparency (obligation of information crucial to the decision on the negotiated contract).154 From a slightly different perspective, precontractual fault means a conduct not in line with 150 As far as Articles 1240 and 1241 are concerned, when closing this Chapter, there is an ongoing reform on extracontractual liability in France. The English translation of the first draft bill submitted by the minister of justice back in 2017 can be accessed here: http://www.textes.justice.gouv.fr/art_pix/ref orm_bill_on_civil_liability_march_2017.pdf . Another draft bill submitted to the Senate in July 2020 by senators can be accessed (in French) here: http://www.senat.fr/dossier-legislatif/ppl19-678.html. The English translation of the proposed new text of Articles 1240-1241 are as follows: Article 1240: A person is liable for the harm caused by his fault. Article 1241: A violation of a legislative requirement or a failure in the general duty of care or diligence constitutes a fault. Draft Article 1241 ‘which is intended to provide a definition of fault for the first time’ seems to be in line with earlier academic writings on the nature and content of fault. See Dugué, ‘The Definition of Civil Fault’, in: Borghetti & Whittaker, French Civil Liability in Comparative Perspective (2019), p. 80, 84. The author thanks Michel Cannarsa for the kind support and information on the status quo of the reform and for the resources indicated. 151 Sefton-Green, 60. 152 De Vincelles, 91. 153 De Vincelles, 80, 86-87. 154 Pannebakker, 80.

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the standard of the reasonable negotiator. In scholarship, three main types of wrongful behaviour are specified: entering into or continuing negotiations without a real intention to conclude the contract; behaving wrongfully during negotiations; and suddenly breaking off the (advanced) negotiations without legitimate reason when the other party had good reason to expect the imminent conclusion of the contract.155

VI. Spanish Código Civil Article 7 1. Rights must be exercised in accordance with the requirements of good faith. 2. The law does not support abuse of rights or antisocial exercise thereof. Any act or omission which, as a result of the author’s intention, its purpose or the circumstances in which it is performed manifestly exceeds the normal limits to exercise a right, with damage to a third party, shall give rise to the corresponding compensation and the adoption of judicial or administrative measures preventing persistence in such abuse. Article 1101 Persons who, in the performance of their obligations, should incur in wilful misconduct, negligence or default, and those who in any way should contravene the content of the obligation shall be subject to compensation of any damages caused. Article 1902 The person who, as a result of an action or omission, causes damage to another by his fault or negligence shall be obliged to repair the damaged caused.

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The precontractual stage is not explicitly covered in the Spanish Civil Code. Precontractual duties are derived from the general requirement of good faith and from the prohibition of the abuse of rights. If (precontractual) liability is triggered, then the faultbased general clause of tort law applies. Commentators remark that if the negotiations were advanced and the probability of a successful outcome was so high that it induced a legitimate confidence that a contract would certainly be concluded, Spanish courts tend to find that the contract had already been concluded orally instead of awarding damages for breach of the general duty of good faith.156

VII. Italian Codice Civile Article 1337 Negotiations and Precontractual Liability The parties in the conduct of negotiations and the formation of the contract shall conduct themselves according to good faith. Article 1338 Knowledge of the Reasons of Invalidity A party who knows or should know the existence of a reason for invalidity of the contract and does not give notice to the other party is bound to compensate for the damages suffered by the latter in relying without fault, on the validity of the contract.

70

The Italian approach mixes the technique of a general clause (buona fede nelle trattative: to act in good faith in negotiations, which covers the requirements of correttezza – duty of fair play; serietà – reliability and solidarietà – cooperation) 157 and of a particular duty, namely that of information on the reason for invalidity. Damages shall be paid Zuloaga, 63, 84. Zimmermann & Whittaker, Good Faith in European Contract Law (2000), p. 244-45. With reference to tort law and to the abuse of rights cf. Cartwright & Hesselink, 54, 61. 157 Cartwright & Hesselink, 45. 155

156

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if the other party relied on the validity of the contract without fault. Remarkable is that the duty to inform is restricted to potential invalidity; however, a broad (extending) interpretation can be based on the general good faith requirement. If the party terminates the negotiations without good reason (recesso ingiustificato dalle trattative – unjustified withdrawal from negotiations), this can trigger liability as provided for in Article 1337 Codice Civile, and, according to the traditional approach, only these two groups of cases were covered by the Italian statutory regime.158 The conclusion of a valid contract precluded precontractual liability,159 because the misbehaviour of the party was considered to have been absorbed by the concluded (and valid) contract160 until this wall was broken through with reference to delay during the negotiations and to valid but disadvantageous contracts due to the party’s omission to provide all relevant information (or to any other conduct in bad faith) causing ‘decrease in profitability’ and ‘increase of economic burden’ (such as the loss of a tax benefit).161 Case law thus extended the scope of Article 1337 Codice Civile significantly, and it now covers a variety of cases, such as the impossibility to conclude the contract caused by fault or unfairness of one of the parties.162 Compensation is basically restricted to the negative interest (interesse negativo), at least if there is no contract or the contract is invalid.163

VIII. Netherlands Burgerlijk Wetboek Article 3:296 Legal action to claim specific performance 1. Where a person is legally obliged towards another person to give, to do or not to do something, the court shall order him, upon a request or claim of the entitled person, to carry out this specific performance, unless something else results from law, the nature of the obligation or a juridical act. Article 6:2 Reasonableness and fairness within the relationship between the creditor and debtor 1. The creditor and debtor must behave themselves towards each other in accordance with the standards of reasonableness and fairness. 2. A rule in force between a creditor and his debtor by virtue of law, common practice or a juridical act does not apply as far as this would be unacceptable, in the circumstances, by standards of reasonableness and fairness. Article 6:248 Legal effects arising from law, usage or the standards of reasonableness and fairness 1. An agreement not only has the legal effects which parties have agreed upon, but also those which, to the nature of the agreement, arise from law, usage (common practice) or the standards of reasonableness and fairness. 2. A rule, to be observed by parties as a result of their agreement, is not applicable insofar this, given the circumstances, would be unacceptable to standards of reasonableness and fairness.

The Dutch Civil Code does not specify any particular precontractual duty; precon- 71 tractual liability is based on the requirement of reasonableness and fairness (redelijkheid en billijkheid). Nevertheless, Dutch law seems to have the most expansive approach since, according to the (since then heavily criticised and finely graduated) Plas/Valburg case, at the very late (third stage) of negotiations, the parties are no longer free to break Febbrajo, 291-92; Cartwright & Hesselink, 44-45. The request for compensation based on precontractual liability was denied if the contract was concluded but the seller did not inform the buyer of the requirement to obtain an import licence; the seller failed to disclose that no building works could be carried out on the piece of land sold; the seller did not mention that the used cars were imported from abroad. See Febbrajo, 294. 160 Febbrajo, 292-94. 161 Febbrajo, 298-301. Magri, 114-16. 162 Magri, 113. 163 Febbrajo, 293, 306. 158

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off negotiations and therefore, besides awarding compensation for expectation interests, even specific performance – i.e. the continuation of negotiations – can be ordered.164 The misuse of confidential information is however qualified as tort.165

IX. Chinese Law Article 7 All civil subjects engaging in civil activities shall observe the principle of good faith, adhere to honesty and keep their commitments. Article 157 After a juridical act is void, revoked, or determined as having no binding force, the property obtained by the actor as a result of the act shall be restituted; if restitution is impossible or unnecessary, indemnification shall be made at an estimated price. The party at fault shall compensate the other party for any loss suffered as a result of the act; or if both parties are at fault, they shall assume corresponding liabilities respectively, except as otherwise provided for by any law. Article 500 A party shall be liable for compensation if it falls under any of the following circumstances when concluding a contract, thereby causing any losses to the other party: 1. Negotiating the contract in bad faith under the pretext of concluding a contract; 2. Deliberately concealing important facts relating to the conclusion of the contract or providing false information; 3. Having any other act in violation of the principle of good faith. Article 501 Trade secrets known by the contracting parties in the course of concluding the contract; or other confidential information shall not be disclosed or improperly used, no matter the contract has been concluded or not. Whoever discloses or improperly uses such trade secrets or information and thus causes losses to the other party shall be liable for compensation.

X. Interpretation II of the Supreme People’s Court of Several Issues concerning the Application of the Chinese Contract Law (prior to the New Civil Code) 72 Article 8 After the formation of a contract which does not become effective until it is approved or registered under a relevant law or administrative regulation, if the party which has the obligation to apply to go through the approval or registration formalities fails to do so under the relevant law or contractual provisions, such failure shall fall within the scope of ‘taking any other act contrary to the principle of good faith’, and the people’s court may, as the case may be, and upon the request of the opposite party, rule that the opposite party shall go through the relevant formalities by itself. However, the other party shall be liable for compensating the opposite party for the expenses incurred thereof and the losses actually caused to the opposite party.

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Scholars emphasise that Italian and German law significantly influenced the Chinese legislator; however, the enacted rules tend to reflect the reception of PICC and PECL. 166 164 Cartwright & Hesselink, 468-69. The controversial and sometimes bracketed Plas/Valburg judgment from 1995 distinguished three stages. The parties are free to break off at the first stage. The party breaking off at the second stage owes the other party the expenses incurred during negotiations. If the party wants to walk away in the third – final – stage (without a justified reason) then remedies include expectation interest and also a negotiation order can be awarded, id. 48. 165 Pannebakker, 50-51. 166 Durovic, ‘Harmonization of Contract Law in Eastern and South-Eastern Asia: What Can Be Learned from the CISG and the ECL Experience?’, 7 Global Journal of Comparative Law (2018) 207, 228; Ding, 487.

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Articles 500 and 501 of the CCC contain the identical text as Articles 42 and 43 of the former Chinese Contract Law. The general requirement of good faith is provided for in Article 7 and is referred to 74 regarding the precontractual phase in general in Article 500(3). The latter is a catchall provision. Article 500(1) and 500(2) of the CCC specify a contrario two particular precontractual duties; first not to negotiate in bad faith, i.e. not to purport the conclusion of the contract in particular (prohibition of sham);167 and second, within the frame of the duty to inform: to provide information on all important facts and provide only true and accurate information (i.e. not to conceal important facts and not to provide false information, which requirement is equal to the prohibition of intentional misrepresentation and of intentional non-disclosure to induce the other party to conclude the contract).168 Both provisions cover fraudulent misrepresentation: one about the intent (to make a contract) and the other one about any material information relevant to the conclusion of the contract.169 Another particular duty is provided for in Article 501 of the CCC, the duty of confidentiality. Article 157 of the CCC covers those cases where the contract is void, revoked or does 75 not have binding force – among other things – as a result of breaching the information duty. Articles 157 and 500(2) of the CCC provide concurrent liabilities, but there is no hierarchy between the two; the plaintiff can rely on both simultaneously.170 The catchall provision of Article 500(3) of the CCC is concretised in both case 76 law and by professional background organisations supporting legislative bodies. The Research office of the Standing Committee of the National People’s Congress summarised the conducts that are not in line with the requirement of good faith. There are also such duties and circumstances on the list that are however covered by Article 500(1) and (2) of the CCC too.171 Scholars generally report five groups of cases, whereas the groups cited there overlap again in part with the misrepresentation-centred preceding Articles. The five groups are as follows: – – –

–

negotiation in bad faith with no genuine intent to make a contract; breaking off negotiations without justification; fruitless negotiations resulting from one party’s fault (the party failed to comply with the procedural requirements of public bidding; or has intentionally or negligently caused ab initio impossibility of performance; or failed to apply for planning permission; one party fraudulently or negligently misrepresented or has failed to disclose a relevant fact); conclusion of a void or voidable contract (again, fraudulent misrepresentation and duress);

Li, 166. Li, 166. 169 Ding, 488. 170 Ding, 500-501. 171 The list is as follows: arbitrary withdrawal of an offer in particular when the other party relied on the offer; failure to fulfil a notice obligation; infringement of personal or property right resulting from failure to fulfil the obligation of protection; failure to make a contract; the contract is void due to the negligence of the parties; liability arising from the rescission of the contract; liability arising from unauthorized representation of an agent. Wei & Yu, 283. The doctrine extends the enumeration: obligation not to withdraw an offer without due course; obligation not to conceal material information such as the party’s financial situation; obligation to operate and provide necessary assistance; obligation to be faithful; obligation to keep secret all confidential information; obligation not to abuse the freedom of contract. Id, 284 and the list is not even exhaustive. 167

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–

conclusion of a valid but disadvantageous contract (because negligent misrepresentation does not render the contract void in Chinese law).172

F. Commentary I. The CISG and Precontractual Liability 1. Is Precontractual Liability Covered by the CISG? 77

The CISG generally does not regulate contractual negotiations, i.e. the precontractual stage as such,173 apart from a couple of specific provisions specified below in the next subsection. The CISG does not contain an explicit provision or general requirement to act in good faith, neither in general, nor in particular related to precontractual negotiations. Article 7(1) CISG includes good faith only as a factor to have regard to in the interpretation of the Convention. Article 7(2) CISG offers the general principles on which the Convention is based to settle questions governed by the Convention but not expressly regulated by it. This is the result of a hard-won (awkward or statesmanlike) compromise between the opposing views of Civil Law and Common Law.174 Unsurprisingly, the controversies (pros and cons, discussion, etc.) during the preparation and drafting of CISG de lege ferenda, survived and continued to affect de lege lata. Article 7 CISG is only the mere illusion of compromise.175 The question asked in the course of the drafting – whether the CISG shall cover the precontractual stage and contain a general duty to act in good faith to be also projected to the negotiations – was transformed into the issue of whether the CISG does cover precontractual liability and a general duty to act in good faith during the negotiations. According to the prevailing view with reference to the plain wording and drafting history, the answer is a firm no.176 The CISG (if it applies) supersedes the applicable (domestic) law in all matters regulated by the CISG from a functional perspective177 but, as far as culpa in contrahendo in general (i.e. apart from the particular issues yet covered by the CISG) is concerned, the applicable (domestic) law prevails, since precontractual liability as such is not governed by the CISG at all.178 a) Reasons in favour of CISG’s Coverage

78

Nonetheless, several arguable and justifiable views other than the prevailing one are represented in scholarship; for example, although as long as the offer can be revoked according to the CISG, there is no precontractual liability, but if the one party induced a bond of trust that the contract would be concluded and the other party relied on Ding, 491-503. Pannebakker, 282. Magnus, Art. 4 CISG, in Staudinger BGB (Ed. 2018), para. 42. 174 Farnsworth, ‘The Eason-Weinmann Colloquium on International and Comparative Law: Duties of Good Faith and Fair Dealing under the UNIDROIT Principles, Relevant International Conventions, and National Laws’, 3 Tulane Journal of International and Comparative Law (1995) 47, 54. 175 Spagnolo, ‘Opening Pandora’s Box: Good Faith and Precontractual Liability in the CISG’, 21 Temple International and Comparative Law Journal (2007) 261, 274. For the presentation of all views grouped in four main approaches see id. 293-305. 176 Schwenzer, Hachem & Kee, 279; Schroeter, Internationales UN-Kaufrecht (6 th edn. 2016), p. 76. For a detailed presentation of legislative history cf. Spagnolo, 268-74; Djordjević, Article 4 CISG, in: Kröll, Mistelis & Perales Viscasillas, UN Convention on Contracts for the International Sales of Goods (2 nd edn. 2018), para. 10. 177 Magnus, para. 43. 178 Spagnolo, 266 with reference to external gaps in general. 172

173

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that in fact then the latter is entitled to be compensated for the reliance interest based on the CISG itself, even if the contract was not concluded in the end, since a general principle can be drawn upon a couple of articles of the CISG wherein the protection of trust and reliance is involved (such as Articles 16(2)(b), 29(2) second sentence and 35(2)(b) CISG).179 More or less the same pros and cons are considered to this day as were while the CISG was in the making. The pros can be summarised as follows: the precontractual stage is considered by some supporters as an internal gap that can be filled by the general principles of CISG, i.e. by good faith, inter alia; the issues dealt with in negotiations are inseparable from the contract formation, therefore the scope shall be extended to cover the former; precontractual liability is pulled in under the CISG if Article 16(2)(b) CISG applies: according to this, an offer cannot be revoked if it was reasonable for the offeree to rely on the offer as being irrevocable and the offeree has acted in reliance on the offer (venire contra factum proprium);180 good faith is universally recognised as a fundamental principle and allows flexibility while encourages a high standard of behaviour for reducing unfair trade practices, omitting good faith is therefore a wrong signal to parties.181 Moreover, the CISG shall not be captured as ‘a prisoner of the past’.182 b) Reasons against the CISG’s Coverage Opponents highlighted the vagueness of good faith, which increases uncertainty, and 79 if good faith is indeed implicit in all business laws and international trade then it is superfluous to create an explicit provision on it anyway.183 Moreover, broad and extensive interpretation can be seen as ‘overstepping the spirit of international consensus’.184 It is incorrect to utilise general principles of the CISG to decide upon whether an issue is in fact an external or internal gap;185 this is a kind of Munchausen-stunt. Instead, recourse to domestic law is obligatory as far as external gaps are concerned, otherwise anything ‘within the potential reach’ of internal interpretive methods ‘is by definition internal to the CISG’.186 Article 7(2) CISG ‘gives no mandate to stretch the CISG beyond matters governed by it.’187 One of the most convincing points against the extension of CISG and of the good 80 faith requirement to the negotiating stage is that the immanent uncertainty can discourage the contracting parties from keeping their contract under the CISG, because clarity and certainty about rule outcomes is ‘much more important to commercial parties at the drafting stage than the particular legal shape of outcomes’, as whatever the outcome, it can be dealt with through pricing or insurance. If the scope of CISG were extended to the precontractual stage, the parties would be tempted to opt out due to the vagueness of precontractual good faith. If the risk allocation of liability (and the value of the contractual bargain) cannot be predicted then no rational decisions can be made due to the uncertainty, which causes further inefficiencies and the increase of transaction costs. Therefore the narrower scope (excluding precontractual good faith) encourages more frequent use of the CISG.188 Magnus, para. 42, 43. Pannebakker, 282-284. 181 Spagnolo, 270. 182 Spagnolo, 288. 183 Spagnolo, 270. 184 Spagnolo, 287. 185 Spagnolo, 305. 186 Spagnolo, 305-306. 187 Spagnolo 308. 188 Spagnolo, 285-86, 290, 292, 309. 179 180

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2. Precontractual Liability and the CISG: Interrelationship and Connecting Factors a) Having Regard to Precontractual Negotiations aa) The interconnected relationship between the CISG and the precontractual stage (though basically not covered) is twofold. First, there are some provisions of the CISG that order the precontractual negotiations to be taken into account to some extent. Article 8(3) CISG requires – among other things – the consideration of the negotiations in determining the intent of a party. The same applies to the recognisability of the international character of the contract according to Article 1(2) CISG and of the fact that the buyer is a consumer (Article 2(a) CISG).189 This phenomenon can be called pulling in or considering the precontractual negotiations in interpreting and evaluating the awareness of the parties of some specific aspects related to the transaction. 82 ab) In the previous edition of this book, Article 40 CISG was also referred to in this context: this provision deprives the seller of the reliance on Articles 38 and 39 CISG (i.e. that the buyer omitted their duty to examine the goods and to notify the seller of the lack of conformity) if the lack of conformity relates to facts of which the seller knew or could not have been unaware and which he did not disclose to the buyer. Though there is no explicit reference to precontractual negotiations, since Article 40 generally lacks a precise reference to time, therefore it could also refer ‘to a moment prior to formation’. 190 However, if the contract was concluded then there is no doubt that the CISG pre-empts domestic law and the CISG prevails (provided the CISG is applicable at all), though not because a precontractual duty underlies the CISG (or not), but because the situation (circumstances, facts) referred to in Article 40 CISG underlie the CISG. This also seems to be an example of the CISG’s superseding domestic law (on precontractual liability) as specified in the next subsection.191 81

b) CISG Supersedes Domestic Law on Precontractual Liability Second, as referred to above: the CISG supersedes the applicable (domestic) law in all matters regulated by the CISG from a functional perspective, therefore some CISG provisions definitely and explicitly squeeze out the reference to domestic culpa in contrahendo. This is remarkable, because the CISG does not cover precontractual liability in a positive sense, but can deactivate domestic rules on the same matter in a negative sense.192 This can be called (domestic) precontractual liability overridden by the CISG. 84 ba) According to Article 15(2) CISG ‘An offer, even if it is irrevocable, may be withdrawn if the withdrawal reaches the offeree before or at the same time as the offer.’ Therefore breaking off negotiations is explicitly allowed and, according to the prevailing view, this clear position of the CISG can neither be circumvented with reference to the protection of trust and reliance based on the CISG itself, nor to culpa in contrahendo as provided for in the (applicable) domestic law.193 83

Magnus, para. 42. Illescas Ortiz, 46. 191 Huber, Art 4 CISG, in: MüKo BGB online edition (2019), para. 29. Regarding this situation, the priority of the CISG over domestic law (cf. subsection I.2.b. below) is twofold. First, because of the general approach that the CISG supersedes the applicable domestic law regarding all subject matters within its scope. Second, as it is referred to above (B.V.3., → mn. 46.) regarding German law, contractual remedies on non-conformity override precontractual liability anyway, also within the domestic law. 192 Saenger, Article 4 CISG, in: Hau & Poseck, BeckOK BGB (55 th edn. 2020), para. 16. 193 See the different view represented by Magnus, para. 42-43. In our understanding, there could and should be room for a more sophisticated and graded view. The consequence as such, that the offer 189

190

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bb) In the same way, Article 16 CISG also supersedes any recourse to the precontrac- 85 tual liability regime of the (applicable) domestic law. If the revocation of the offer was in line with Article 16 CISG, no liability arises whatsoever. If revocation was not possible then the contract is concluded by the acceptance of the other party, and if the party that made the offer rejects performance, that triggers contractual liability according to the CISG. There is no room for recourse to domestic culpa in contrahendo in this case either.194 bc) Another example is Article 35 CISG (conformity of the goods, providing false 86 information on the features of the goods or not mentioning defects in the goods): precontractual liability based on the applicable domestic law is understood to be superseded; in other words, the contractual good is defective and contractual liability under the CISG absorbs precontractual liability (governed by the applicable domestic law), unless the seller’s misrepresentation was intentional (which opens the possibility of recourse to the culpa in contrahendo of the applicable domestic law that is frequently covered by tort law).195 c) Duties of Protection not Covered by the CISG Since the CISG does not cover the duty of protection during negotiations regarding 87 the person and property of the other party, culpa in contrahendo (or tort law) of the applicable domestic law governs this issue.196

II. Precontractual Duties and Their Breach 1. Breaking Off Negotiations a) General Findings As analysed above (B.II., → mn. 9.) contractual freedom and, as a part of it, freedom 88 from contract or freedom not to contract prevails, breaking off negotiations in itself therefore does not justify any (precontractual) liability. Parallel negotiations are not forbidden per se either (unless the parties themselves agree upon exclusivity for the period of negotiations).197 The basis of liability is the disappointment of the reasonable (legitimate) reliance of the one party on the imminent (and in some legal systems such as Germany: certain) conclusion of the negotiated contract induced or encouraged by the other party’s conduct or omission of revealing the change of mind, heart or circumstances as quickly as possible, through an unexpected breaking off (or refusing to continue) the negotiations for no good (justifiable) reason (or not indicating any reason can be revoked or withdrawn and therefore no contract comes into being, is only one side of the coin that doubtlessly deprives the other party of the contractual performance and gain but is allowed and justified by the CISG. It is however not obvious why this rule automatically releases the party having revoked or withdrawn the offer from precontractual liability (provided all other domestic preconditions of precontractual liability are met), with special regard to the difference in the remedies: precontractual liability for breaking off negotiations is basically restricted to the compensation of reliance interests. 194 Schroeter, 79, 130; Ferrari, Article 16 CISG, in: Kröll, Mistelis & Perales Viscasillas, UN Convention on Contracts for the International Sales of Goods (2nd edn. 2018), para. 24. But if the offerer committed an intentional tort then the recourse to domestic tort law is the only way to be awarded damages; such conducts do not belong to the scope of the CISG. Id. para. 25. 195 Huber, para. 29; Magnus, para. 43. Similarly Schroeter, 79. See also Perales Viscasillas, Article 7 CISG, in: Kröll, Mistelis & Perales Viscasillas, UN Convention on Contracts for the International Sales of Goods (2nd edn. 2018), para. 36. 196 Schroeter, 79. 197 Pannebakker, 293, 299 with reference to PECL.

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89

90

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92

or just a fictitious or irrelevant reason).198 The combination of inducing (intentionally or negligently) and then disappointing that legitimate expectation triggers (a fault based) liability that is – according to comparative experience – exceptional, since the mere fact that the parties entered into negotiations does not, cannot, tie them together. 199 Frustrated expenses and perhaps foregone opportunities have to be compensated for, provided the expenses and other decisions of the ‘innocent’ party were reasonable and proportional to the status and degree of the negotiations.200 This combination of facts justifies the shifting of economic risk (of the failure of negotiations) from the innocent party to the party that breaks off the negotiations201 as soon as the innocent party is entitled to rely on the future conclusion of the contract created or encouraged by the party subsequently breaking off.202 Clearly, the details are elaborated on either in commentaries and doctrinal treatises or in case law; however, there is a soft law instrument, the European Contract Code drafted by the Academy of European Private Lawyers (AEPL Code), Article 6(3) of which explicitly lays down the cornerstones of precontractual liability in the event of breaking off negotiations in such detail as no other statute or soft law instrument: ‘If in the course of negotiations the parties have already considered the essentials of the contract whose conclusion is predictable, either party who breaks off negotiations without justifiable grounds, having created reasonable confidence in the other, is acting contrary to good faith.’ This provision highlights factors that are indeed significant in all legal systems concerned; however, they do not have such an accentuated, special status as in the cited provision (such as having considered the essentials).203 The key element is however the reasonable reliance induced by the party subsequently breaking off negotiations and doing so without a justifiable reason.204 The approach is strongly fact-based at the discretion of the trial judge.205 aa) The party’s conduct creating or at least encouraging the reliance includes conducts in a wide sense, i.e. express or implied declarations or behaviour, such as making promises, statements or assurances of the imminent success of the negotiations; adopting certain attitudes, even towards third parties, indicating the conclusion of the future contract (i.e. signs of commitment given).206 On the other hand, inaction or omissions can have the same effect, such as ‘failing to warn, inform or explain’ the other party that it is still open and uncertain whether the contract will be concluded or not providing the information as quickly as possible on the circumstances, considerations, etc. that have changed. A spectacular example is the failure to notify the other party that the party (subsequently) breaking off has already concluded a contract with a third party (parallel negotiations as such are not generally prohibited by law).207 For a summary cf. Zuloaga, 1, 153-54; Kötz, 37. Schwenzer, Hachem & Kee, 280. 200 Dietrich, 177-78. 201 Dietrich, 181. 202 Zuloaga, 155-56. with reference to Chinese case law, Ding, 496. 203 The AEPL code can be accessed here: http://www.eurcontrats.eu/site2/newdoc/Norme%20_Libro% 20I-inglese_.pdf, p. 3. 204 Similarly, in the Italian case law, cf. Febbrajo, 292; Magri, 112. Also in the Chinese case law based on Article 500(3) of the Civil Code – identical to the former Article 42(3) Chinese Contract Law, cf. Ding, 492-93. 205 Cf. Ding, 496 with reference to Chinese law. 206 Cf. Pannebakker, 45-46 with reference to Dutch case law (the party introduced its would-be dealer as its dealer already, although the final contract was not yet concluded). Similarly, Zuloaga, 89 with reference to French law. 207 Zuloaga, 153-54. 198

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It is controversial whether the party breaking off subsequently is necessarily expected to be aware of the reliance it induced or not: this question is answered partly in the negative, partly in the affirmative. According to the latter view, the reliance shall not just be reasonable, but also foreseeable to the other party.208 However it is difficult to imagine circumstances wherein the other party’s reliance is not obvious to the party. Knowing that the contract cannot be (will not be) concluded anyway, because there is no real intention to do so or there is a non-recoverable obstacle to conclude (and to perform) the contract, but still negotiating equals to fraud, deceit, etc. There must be direct causal connection between the reliance and the party’s (later breaking off) encouraging conduct.209 ab) Reasonable reliance is understood objectively: i.e. it depends on whether a reasonable person in similar circumstances ‘would be justified to expect the future conclusion of the contract’ induced by conduct of the other party who then later breaks off. Personal hopes, desires, feelings or beliefs are not sufficient,210 otherwise each party would be bound from the beginning of the negotiations as if the contract had already been concluded.211 The conduct of the party subsequently breaking off, and of the other (innocent) party and objective circumstances matter while judging on the reasonableness. As it is indicated in scholarship, more or less the same circumstances are taken into account in all (Civil Law) legal systems, although their relevance and the degree of intensity required is different.212 –

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Among other things, previous contractual relations, advertising activity and the parties’ professions (and whether they are businesspeople or individuals) matter. Professionals and businesspeople – between themselves in particular – can claim damages only exceptionally and with more difficulty than consumers.213 The degree of advancement of the negotiations is an important indicator (being correlated, but not in lockstep with the length and level of intensity of the negotiations): the more advanced they are, the more reasonable the reliance is (‘the advancement of negotiations in substance – and not in time – is relevant’:214 in this sense, short and intense negotiations can also be seen as advanced if the parties agree quickly upon the majority of the essential terms and, for example, this is accompanied by the payment of 10% of the price).215 Although agreement on all essential elements is not required (since this can equal the final contract), once more, the higher the level of agreement reached on the terms (in particular if there is already an agreement on the majority of the essential terms), the more reasonable the reliance is. 216 Even a ‘lesser expectation’ can suffice if the party (breaking off later) requests specific tasks or explicitly that expenses should be incurred217 or directly instructs the party to commence with the performance of the contract although not yet

Zuloaga, 71, with reference to French law. Zuloaga, 155. 210 Zuloaga, 152. 211 Cartwright & Hesselink, 455. 212 Zuloaga, 157. 213 Zuloaga, 157-58. With special regard to French law. 214 Cf. Pannebakker, 44 with reference to Dutch case law; and in the same way with reference to French law, 85 and to PICC, 301. Zuloaga, 69-70 with reference to French law. In the same way in the Chinese case law, cf. Ding, 493. 215 Cf. with reference to French case law, Pannebakker, 85. 216 Zuloaga, 157. With reference to German law in particular, 38, and to French law 88. See also Pannebakker, 302 with reference to PICC. 217 Cf. Ding, 494 with reference to Chinese case law. 208

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concluded, or even if the ‘innocent’ party starts to perform the anticipated contract by its own decision, of which the other party is aware but does not intervene or indicate its doubts on the future of the contract,218 or even accepts the partial performance.219 The reliance is not justifiable (reasonable) if ‘the party expressly manifested its doubt or unwillingness to commit’; if there are still many issues pending (some essentials too); obstacles to conclude are present and the parties are aware of them; or parallel negotiations with other parties take place simultaneously and the other party knows of that, etc.220 The passage of time is a double edged sword, since the length of the negotiations – in particular in connection with their advancement – is an indicator for the reasonableness of the reliance; however, if there is no improvement after a reasonable time, the negotiations have become stuck, then the longer the ‘no-load running’ goes on, the less justified the reliance can be.221 General or sector-specific business usage also matters if it is about the reasonableness of the reliance.222

ac) The more sudden, abrupt and unexpected the party breaks off sans raison légitime, brutalement et unilatéralement223 (in combination with the circumstances analysed above), the higher the likeliness of precontractual liability. The party breaking off the negotiations can still exempt themselves from liability by showing a justifiable and good reason for having broken off, since following commercial self-interest is still legitimate, altruism is not required in commercial intercourse. As such, no over-stringent requirements on the reason (being good or justifiable) shall be imposed,224 in order to avoid the indirect enforcement of the conclusion of the contract by imposing a harsh liability that would undermine contractual freedom.225 This approach makes it obvious again that precontractual liability for breaking off negotiations is an exceptional phenomenon. 99 The more advanced the negotiations, the more necessary it is to provide a serious and objectively justified (i.e. substantial) reason for breaking off.226 However, even very advanced negotiations can be broken off if there is a well-justified serious reason. The more the reason relates to any objective circumstance of the case, the more it qualifies as justified and legitimate; less so if the reason referred to is particular to the party breaking off.227 98

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The changing economic circumstances (such as the unpredictable increase of the costs of performance of the anticipated contract), changes in the relevant market, the (negative) results of feasibility studies (such as the party not meeting certain technical requirements or the results of a legal or financial audit not giving confidence), deterioration of the financial background of the other party (permanent lack

218 Similarly, Dietrich, 181. However, the mere knowledge that the other party has incurred expenses in itself does not trigger precontractual liability for breaking off in German law, cf. Zuloaga, 38. 219 Zuloaga, 69 with reference to French law. 220 Zuloaga, 158. Similarly, Emmerich, para. 178. 221 Emmerich, para. 177. 222 Cf. Ding, 494 with reference to Chinese case law. 223 Kötz, 37 citing French judgments. 224 Bergjan, 398 with reference to German law. Good reason exempts the party having broken off from liability even if it was at fault in awakening the other party’s expectation, cf. Zuloaga, 35. 225 Emmerich, para. 177. Similarly, with reference to Dutch law Pannebakker, 41. 226 Zuloaga, 69, 91, 92 with reference to French law. The same way Pannebakker, 87. 227 Zuloaga, 91 with reference to French law.

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of funding necessary to perform the anticipated contract) or just a better offer from a third party (enticing with more profitable conditions) justify the walking away, while changes in the internal policy of the party generally do not.228 However, the result can be different, if although a better offer was made, but negotiations extended over a long period of time or the party (breaking off later) requested the other party to incur specific expenses.229 Circumstances that would also justify the rescission of a (concluded) contract or that can be traced back to impediments within the other party’s sphere (or at least they are not within the withdrawing party’s sphere) also justify breaking off,230 such as physical or legal impossibility of performance (for example the law changes and renders the object of the contract untradeable).231 The same way, the inflexible and unreasonable attitude of the other party (such as not providing the documents reasonably required by the other party several times in order to check financial situation and the technical conformity; or rejecting numerous subsequent offer from the party later breaking off), any profound disagreement of the parties or the sudden major modification of the proposals (for example the party in charge for the drafting of the final document unexpectedly reflects its own position therein instead of that agreed upon earlier) can also justify the breaking off.232

ad) The liability is fault-based and fault corresponds with the (intentional or negli- 100 gent) creation and subsequent disappointment of ‘an expectation on which the other party legitimately relied’.233 Fault is understood in an abstract and objective manner; negligence suffices, i.e. no qualified fault is required. It is generally the party breaking off that has to exempt itself from liability, either because the fault is presumed (as being contractual as in German law), or even if it is not presumed, but is framed as an exemption to prove a good reason for breaking off (as in French law).234 The fault requirement is projected either to the creation of the reasonable reliance or to the breaking off (to be precise, to the circumstances of and reasons for breaking off) or to the combination of the two. Whichever statutory precondition fault is connected with, the case law of the respective legal systems show convergence.235 ae) Expenses are only recoverable if they were substantial in extent (to the defendant’s 101 actual or possible knowledge) and a reasonable man would have made them under the circumstances.236 Reliance plays a double role related to breaking off negotiations: besides imposing liability, it is also a defining element of the scope of liability (reliance interest, cf. subsection F.III. on remedies below).237 228 Pannebakker, 88-89, 236. See also id. 46-47: a general worsening of the economic situation in the hotels market was regarded as a justified reason in the Dutch case law. With reference to the better offer from a third party in German law cf. Emmerich, para. 177. Similarly, with reference to French law Zuloaga, 92-93. 229 Zuloaga with reference to German law, 40. 230 Dietrich, 179. With reference to German law see Zuloaga, 40. 231 This example is drawn upon Chinese case law, cf. Ding, 493. 232 Pannebakker, 46, 88-89 with reference to Dutch and French case law and also Zuloaga, 91, 92 with reference to French law. 233 Zuloaga, 153. With reference to German law see Emmerich, para. 182, rejecting the opposite view on strict reliance-liability. See also Sefton-Green, 60 with reference to French law. 234 Zuloaga, 145, 149. With reference to French law id. 64, 66. With reference to German law also Bergjan, 399. 235 Zuloaga, 145-46. With reference to German law 35-36, and to French law 66-67. 236 Kötz, 37. 237 Cartwright & Hesselink, 454.

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b) Soft Law and Country-Specific Observations ba) Article 1.8 PICC (prohibition of inconsistent behaviour), based on the reasonable reliance of the other party, definitely applies to the negotiation stage, as is confirmed in the official commentary.238 In compliance with the general findings above, the party’s understanding may result from any representation made, from conduct or silence of the party in breach, provided in the latter case there was reasonable expectation to speak (to correct a known error, etc.). The interpretation of this duty and its breach is obviously fact-based.239 Though not covered explicitly, the commentaries on Article 1:201 PECL (Good Faith and Fair Dealing) include reasonable reliance.240 Once an offer has been made, it can only be revoked within the limits of Article 2.1.4. PICC. Apart from that, abrupt breaking off negotiations is prohibited and triggers precontractual liability if there is no justification.241 Breaking off contrary to good faith triggers precontractual liability as well, according to Article 2:301 PECL, this is confirmed by the official commentary.242 103 bb) The German approach seems to be slightly more rigorous than other legal systems. The reliance is considered as reasonable only if the certain conclusion of the (particular) anticipated contract can be expected among the circumstances. 243 German scholars emphasise that the reliance shall be reasonable, from both a subjective (the party’s personal belief in the conclusion of the contract) and objective perspective (the belief must be founded on objective circumstances).244 If a contract is binding only if some statutory formal requirements are met (such as the notarial authentication of a contract on sales of land), the prevailing view is that the reliance on the other party’s conduct can never be justified, because everyone is expected to know that there will be no binding contract until the formality requirement is met, otherwise the purposes of the formality would be undermined (protection from over-hasty decisions, prevention of difficulties regarding proof). As far as formalities are concerned, any precontractual liability is only triggered if there is a particularly grave breach of the other party’s trust (such as pretence of the willingness to contract in the lack of such intent) and intentional conduct is presupposed.245 102

238 See Illustration No. 1. The parties negotiated over a lengthy period of time, the one party wishes to lease the other party’s land. The lessor reasonably understands that the negotiations are completed and commences to demolish an old building and engages contractors to build a new one as discussed earlier. The lessee is aware of this and does not stop it, but later indicates that there are additional terms to be discussed. Cf. UNIDROIT principles, 22. 239 UNIDROIT Principles, 21-22. 240 Lando & Beale, 114. 241 UNIDROIT Principles, 62, see also illustration No. 5: the one party assures the other one to grant a franchise if the former makes extensive preparations and is ready to invest a concrete sum. When all is ready for the signing of the final agreement, the franchisor indicates that the would-be franchisee must invest a substantially higher sum. The would-be franchisee is entitled to be compensated for the expenses incurred so far. 242 See also Illustration No. 3. The one negotiating party invites the other one to develop software. In the course of the negotiations, the would-be supplier provides the other party with drafts, calculations and other documents. Shortly before the expected conclusion of a contract, the party breaking off invites a third party to make a bid and places all the precontractual documentation provided by the would-be supplier at the disposal of this third party, who can therefore give a better offer. The party breaking off is liable for the negotiating party’s expenses. Cf. Lando & Beale, 190. 243 Zuloaga, 28, 31, 36, 152-53. 244 Cf. the summary given by Zuloaga, 38. 245 Emmerich, para. 179. Zuloaga, 47-49. More complicated is the event of the final agreement is being reached but without fulfilling the formality requirement, in particular if one party induced the reliance of the other that no form was required or the form requirement would be fulfilled. Cf. the analysis provided by Zuloaga, 49-54 on the pendular case law developed by the German Bundesgerichtshof (and

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bc) French courts clearly put a stronger emphasis on the status of the parties, and 104 if they are professionals (businesspeople) then the courts seem to be more reluctant to impose liability; breaking off negotiations among professionals rarely leads to liability, unless there are some significant justifying circumstances, such as the long period of time and a particular level of intensity of the negotiations. (In contrast to the claims of laypeople towards whom the professional’s superior knowledge awakens a higher level of confidence.) From a professional’s perspective, precontractual risks are part of the risque d’entreprise.246 This view is reflected in the attitude of the courts in ‘imposing more stringent requirements for the configuration of fault where the claimant is a professional.’247 The inducement and disappointment of the party’s reasonable reliance is covered by various concepts – criticised in scholarship as lacking clear-cut definitions and conceptual clarity – such as legitimate belief (croyance légitime) and legitimate confidence and trust (confiance légitime).248 However their content and application converges to the general findings above. In French law, duties imposing standards of honesty and loyalty instead arise when negotiations have reached a more advanced level, in contrast with German law, where they emerge from the very moment when the parties commence negotiations.249 French courts seem to attribute higher importance to the suddenness of breaking off (regarding this in contrast to the advanced level of negotiations) than their colleagues in other legal systems.250 It is reported as a peculiarity of the French approach that the mere loss of confidence can qualify as a legitimate reason to break off negotiations.251 In contrast with German law, formality requirements (if at all) do not change the general approach to breaking off negotiations.252 bd) As already referred to above (E. X., → mn. 72) the Chinese Supreme People’s 105 Court provided an interpretation on the special situation if a contract does not become effective until it is approved or registered. If the party that is obliged to take care of approval or registration fails to do so then the court may, as the case may be and upon the request of the opposite party, rule that the opposite party shall go through the relevant formalities by itself. ‘However, the other party shall be liable for compensating the opposite party for the expenses incurred thereof and the losses actually caused to the opposite party.’ Since formality requirements are significant in Chinese private law,

on the criticism of legal scholarship thereupon). Specific performance may be ordered – even in the event of serious breach of the duty of loyalty – only if the invalidity would create an absolutely unbearable result, i.e. would seriously endanger the innocent party’s economic viability. If insisting on invalidity is not unbearable but ‘only’ harsh then ‘only’ damages have to be awarded: including however expectation interests. The circumvention of the formality requirement is still feared. 246 Zuloaga, 89-90. 247 Zuloaga, 65. 248 Zuloaga, 68. 249 Zuloaga, 82-83. French courts seem to exclude liability more easily at the beginning of the negotiations than when negotiations lasted for a longer period, cf. Pannebakker, 85; but this is apparently not different in the other legal systems analysed here. 250 Zuloaga, 70, 73, 89. With numerous examples on ‘rude and abrupt break off ’ cf. Pannebakker, 86-87: negotiations lasted more than a year and included a feasibility study; however, the one party refused three final proposals without giving an explanation and broke off the negotiations; breaking off after four years of negotiations without any reason; negotiations were broken off on the same day as when signing the final contract was due to take place; the one party thought that the other party had lost its willingness to contract and broke off without indicating this suspicion towards the other party. 251 Zuloaga, 92. 252 Zuloaga, 93-96.

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the same approach applies if there is no duty to obtain approval or registration but the contract cannot become effective while it is not formalised as required by law. 253

2. Duty of Information a) General Findings The precontractual obligation of information or disclosure (and the consequences of its breach) is a complex issue. Its interference with invalidity and warranty rights has already been pointed out (B.V.3., → mn. 42 ff.), and can be traced back to the cross-connection of the failure to fulfil the information duty (concealment of relevant information or providing false information) and the conclusion of an invalid contract or a valid, but obviously disadvantageous contract. False or incomplete precontractual statements (with special regard to the features of the contractual goods) can influence contractual expectations, become part of the sales contract and trigger remedies for non-conformity. 254 Moreover, there are two lines that come together in legislative policy; on the one hand, the intensive expansion of (European) consumer contract law with quite a few peculiarities and a genuine matrix of legal sanctions; and on the other hand the ‘ordinary’ duty to inform towards everyone, i.e. not limited to the weaker party, private persons or consumers. 107 Though the scope, intensity and depth of information duties are different according to the status (consumer, professional, trader, etc.) of the receiving party, there are some common roots of information duties of all kinds. These duties are all the more important since products become increasingly complex and some products (such as software) exist only virtually. Additionally, the more specific the respective good is, the more there is superior knowledge on the supplier’s or provider’s side. Finally, even if there is a mutual lack of (specific) information, the supplier or provider can obtain the necessary information much more easily and at significantly lower cost (because it is a ‘repeat player’, in contrast with the buyer for whom the contract is frequently ‘one off ’). Having this in mind, standards of social ethics and the constant striving for economic welfare also justify the imposition of information duties.255 108 aa) The status of the parties indeed matters, hence there is a lower level of required information in B2B contracts, since traders and professionals are presumed to be familiar with the contractual goods and to have sufficient levels of expertise and professional advisory background (of lawyers, accountants, technical specialists, etc.).256 As such, they clearly do not owe information duties towards each other as far as ordinary products – familiar to both – are concerned. In borderline cases, the parties’ respective competencies need to be balanced regarding the product’s characteristics. Information duties can arise, for example, if the contract will cover innovative and newly developed products and therefore not even a professional buyer has sufficient competence to assess that particular product’s features.257 106

253 Ding, 495, 496-97. The author refers to contracts for the transfer of urban-land use rights separated from the ownership of the building; to contracts for the transfer of exploration or mining rights and to types of transactions with foreign participation. 254 Schwenzer, Hachem & Kee, 279. Contractual remedies prevail in German law, thus precontractual liability applies only if the respective information did not become part of the contract, cf. Emmerich, para. 75, 79-82. 255 Lehmann, 700-701. 256 Illescas Ortiz, 50. 257 Cf. Pannebakker, 83 with reference to French case law. The author highlights that the other party also has a duty to inform: i.e. is expected to unveil its exact expectations regarding the product.

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ab) Apart from the particular (European) rules on broad information duties in B2C 109 contracts, the prevailing view is that there is no general precontractual information duty:258 each party is responsible for obtaining the information needed (and generally accessible such as market conditions, etc.) in order to make a reasonable transaction decision. (The duty to tell the truth, i.e. not to provide false information remains unaffected.)259 This restriction applies in two aspects: first it impacts the events and situations wherein a duty to inform arises at all; and second, it clearly determines the scope and depth of the information to be provided. ac) However, a duty to inform can arise if the information needed clearly influences 110 the one party’s decision to conclude the contract or not (and this is or should be obvious to the other party),260 but this party does not have access to the respective information, while the other party is already aware of it or can access it and easily obtain the information without any significant costs. (The latter scenario is controversial and the outcome is rather fact-based, as to whether any duty to inform only exists if the party has actual knowledge of the respective information or it can also be expected to obtain information.261) A contrario, there is no duty to inform if the party itself can also obtain the information needed without any major inconvenience.262 Superiority of expertise on the one party’s side is also an indication regarding the duty of information, just like the general and commercial public view on whether the provision of information can reasonably be expected from the other party.263 Long-term contractual cooperation and the higher (extraordinary) economic volume of the contractual transaction can also indicate the duty to inform.264 A duty to inform also arises if the one party indicates that it needs counselling or guidance, or the other party realises that the party intends to incur expenses or demonstrates reliance on the statement of the other party, and the latter knows or should be aware of that the party lacks some further important details 265 or that the previous statement was false or just incomplete or inaccurate; 266 in other words, the party is or was acting under some misapprehension; it cannot be allowed by law that the other party knowingly takes advantage of the first party’s ignorance or mistake.267 ad) On the scope and depth of the information duty, Article II.-3:101 DCFR is remark- 111 able. Respectively, not all information needs to be provided but only those ‘concerning the goods, other assets or services to be supplied as the other person can reasonably expect, taking into account the standards of quality and performance which would be normal under the circumstances.’ If the other person is also a business – so Article II.-3:101(2) DCFR – the reasonable expectation depends on ‘whether the failure to provide the information would deviate from good commercial practice.’

258 Cf. Pannebakker with reference to PICC, 294; and Febbrajo, 311 with reference to Italian law: there is no general duty to inform in all situations and regarding all information. Similarly, Emmerich, para. 64 with reference to German law. 259 Emmerich, para. 65. 260 Emmerich, para. 66; Bergjan, 399. 261 Looschelders, 36-37. This question is answered in the negative in the German case law, cf. Emmerich, para. 70. 262 Emmerich, para. 79. 263 Ersoy, 52-53; Emmerich, para. 79; Bergjan, 399. 264 Cf. Emmerich, para. 68 with reference to German law; Bergjan, 399. 265 Schwenzer, Hachem & Kee, 279. 266 Cf. Emmerich, para. 66; Bergjan, 399. 267 Lohsse, 85-86. This however interferes with the specific duty to warn on the potential invalidity of the future contract. Emmerich, para. 77.

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As mentioned above, the duty to inform only covers information that is crucial from the other party’s perspective in deciding whether to contract or not. Information on the feasibility of performance, including the special risks attached to the planned transaction, certainly belongs here.268 The legal systems analysed here expect the parties to warn the other if the contract would be invalid, provided the cause of invalidity falls within their sphere of responsibility (risk). General statutory requirements, such as formalities, need not be disclosed explicitly, since those kinds of information are generally accessible to everyone, unless one party induced the other to rely on the validity of the future contract or one party can have a more accurate and up-to-date knowledge on the (potential) cause of invalidity269 (even more so if only one party – having its seat in the respective country – is aware of the need for a special official permit to proceed with the performance of the planned contract,270 but not the other – foreign – party).271 The information duty definitely does not cover the party’s calculation, i.e. the value (profitability) of the transaction and the party does not have to update or rectify the other party’s imaginations in this respect. In some legal systems – such as German law – this conclusion can be drawn from the published judgments,272 while it is explicitly provided for (i.e. is statutory law) in others, such as France in Article 1112-1(2) Code Civil: ‘However, this duty to inform does not apply to an assessment of the value of the act of performance.’ This has to do with the common understanding that the parties shall not be deprived of the possibility to make a bargain. A remarkable exception applies in the court practice of public bidding in some legal systems. In the event of miscalculation by the bidder, the recipient of the bid has to warn the bidder of the mistake, provided the miscalculation was recognisable.273 b) Country-Specific Issues

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ba) The French approach to the duty to inform since the 2016 reform is remarkable: the explicit and detailed formulation of Article 1112-1 Code Civil is autonomous, i.e. independent from the general requirement of good faith, and also from fraud and has a mandatory character.274 The duty applies to all types of contracts (i.e. to negotiations regarding all types of contracts) and to all parties (i.e. the scope is not restricted to B2C contracts). The main characteristics of these new provisions are as follows. –

Only actual (positive) knowledge triggers the information duty, thus there is no such duty if the party is not aware of the respective information (but could obtain it). The scholarship is divided on this point; some spot therein the legislator’s intent to ‘lessen the burden of the information giver’ in order to make the regime more

268 Emmerich, para. 70, 74-75, 83-84 with a couple of examples: water inrush into the mine with a negative impact on the shares’ value; the way the house under sale was used so far has recently been prohibited by authorities; construction works were performed without the necessary building permit; high likelihood of the neighbours’ chicanery; the fact that the tenants refused to move out of the flat; the existence of odour nuisance due to a sewage plant; the car does not have any insurance coverage; the plant is working without the necessary official permit; the revenues from the land will significantly decrease in the foreseeable future; the tentative time for delivery was frequently exceeded; etc. 269 Cf. Looschelders, 36; Ersoy, 50; Emmerich, para. 71-72 with reference to German law. Magri, 113 with reference to Italian law. Illescas Ortiz, 49. 270 Emmerich, para. 73. 271 Cf. Pannebakker with reference to PICC, 294. 272 Emmerich, para. 84. 273 With reference to German law cf. Emmerich, para. 58. 274 Sefton-Green, 61; De Vincelles, 81, 86.

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market-friendly,275 while others are of the view that ‘constructive knowledge’ or ‘implied knowledge’ is still part of the system, hence the text does not prevent the courts from upholding their earlier case law based on them.276 The information must be of decisive importance, ‘which means if it has a direct and necessary relationship with the content of the contract or the status of the parties.’ The relationship of the information being decisive with the text of Article 1130(1) Code Civil (Defects in Consent: ‘without them, one of the parties would not have contracted or would have contracted on substantially different terms’) is unclear. 277 An additional precondition of the duty is that the other party ‘legitimately does not know the information or relies on the contracting party’, which is called (and translated) in French scholarship as the ‘legitimate ignorance or legitimate reliance’. Ignorance is legitimate – and this is in line with the general findings presented above – if it is more difficult (from a physical or financial point of view) for one party to obtain the information than the other, on whom the duty to inform is conferred.278

bb) The duty of information (or disclosure) is understood in a broad sense in Chinese 113 law. Besides the duty not to conceal the truth and to ensure accuracy of representation, it includes the duties to reply to any inquiries and to give reminders of any circumstances within the party’s knowledge that would frustrate the purpose of the future contract. If one party incurs or increases a risk, it shall notify the other party immediately.279 The disclosure of any material facts relevant to the conclusion of the contract is required. The duty is breached, for example – – –

if the party does not disclose that it did not receive permission to sell the property or did not apply for planning permission;280 or concealed that hostile local villagers earlier committed violence at the construction site and therefore there is still a risk of violence (and they subsequently destroyed the plaintiff ’s excavation machine); or did not inform the other party that the government subsidy (granted to first-hand buyers of residential properties) that the latter reasonably expects will not be due, because the seller already sold the property at an earlier occasion (but failed to execute the contract) and this has resulted in the loss of the subsidy (since the buyer cannot qualify as a first-hand buyer).281 c) DCFR and CESL: Consumer Protection Based on Information Duties

Though DCFR and CESL are not dealt with in detail in this Chapter, they are worth 114 a brief mention, since they reflect a unique approach compared to those of PICC, PECL and the respective legal systems. They are both distinctive for including very detailed provisions on precontractual information duties282 and on a bundle of various remedies attached to various precontractual situations if the information duty is not fulfilled, in line with the previous European consumer contract law directives (prolongation of the withdrawal period; consumer-friendly rules on restitution; self-adjustment of the

See the summary provided by Sefton-Green, 63. De Vincelles, 83. 277 De Vincelles, 82. 278 De Vincelles, 91. 279 Li, 167. 280 Ding, 498. 281 Ding, 501-502. 282 Illescas Ortiz, 48. Cf. Articles II-3:101 – II-3:109 DCFR and Articles 13-29 CESL. 275 276

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contract to the precontractual statements of the parties and specified third parties; additional charges cannot apply if the party was not informed).283 115 DCFR includes specific rules on consumer contracts and extends these to all types of contracts here and there, but does not relinquish the general principle of precontractual good faith either. Chapter 3 consists of detailed duties to inform and provisions to prevent input errors and on acknowledge of receipt, which is followed by the general good faith requirement.284 By contrast, there are no general duties of negotiations in the CESL;285 the focus is on the specific rules on information obligation, inspired by the consumer contract legislation of the EU.286 116 Both DCFR and CESL received heavy criticism regarding the internal incoherence 287 of the rules on information duties (lack of accuracy and misguided policy decisions288) and the external incoherence and incompatibility of those rules with other institutions provided for in other parts of the same instrument (for example, the remedies). 289

3. Confidentiality 117

The majority of European civil codes do not include an explicit provision on confidentiality; however, Article 2.1.16 PICC; Article 2:302 PECL; Article 1112-2 Code Civil, and Article 501 CCC have such a specific rule. In the lack of such a specific provision, the duty of confidentiality regarding information obtained during negotiations can be derived from the general or precontractual good faith requirement.290 The duty of confidentiality lies with the parties independently from whether a contract is subsequently concluded or not. The breach of this duty is if the party discloses (confidential) information or uses it improperly for its own purposes. The respective soft law instruments highlight that the period of time during the duty of confidentiality applies cannot be too long, otherwise the applicable laws on the prohibition of restrictive trade practices might intervene.291 In most legal systems, parallel regimes protect confidential information: Zoll, 51-55; Lohsse, 87. Cf. the structural overview at Giliker, 86. 285 However, the very general requirement of good faith and fair dealing is present in CESL (see Article 2 and also in other articles such as 23, 48, 49) and this involves a genuine uncertainty, because courts could feel tempted to extend the good faith requirement to the precontractual stage and then there could be a significant divergence in the domestic courts’ interpretation. Cf. Giliker, 94, 96, 99-101. 286 For a summary cf. Giliker, 90-94. 287 Cf. Lehmann, 705: the situations covered by Article II-3:103 DCFR are imprecise, not at the same level of abstraction, the term ‘nature of the transaction’ in particular raises more questions than it answers. Article II-3:102 DCFR is not in line with the other provisions in the same Chapter, with special regard to Article II-3:103; however, the remedies are largely identical; see id. 707. Article II-3:109 is vast, since it includes remedies applicable to completely different situations (extension of the withdrawal period, adjustment of the contract to the reasonable expectations of the party, damages and finally all these without prejudice to any remedy that may be available under the rule of mistake), id. 712. 288 Article II-3:101 DCFR applies only to businesses. According to Lehmann, 709, this is one-sided and biased. Giliker, 96-99 makes objection to the CESL’s focus on information duties as the sole tool to deal with inequality of bargaining power. 289 Lehmann, 706 complains about a chaos of remedies with reference to the relationship between precontractual duties and non-conformity. Moreover, the author stresses that the detailed rules on information duties do not supersede good faith as a general clause with indeterminate content, id. 711. Additionally, see the criticism on the relationship of precontractual duties to avoidance based on vitiated consent, Article II-7:201 ff. DCFR, id. 713; moreover, the shorter deadlines of avoidance can be circumvented through reference to precontractual liability, id. 714. Giliker, 95 raises that CESL does not apply if the contract is finally not concluded and in this event the applicable domestic law on precontractual liability prevails. 290 However, there are legal systems wherein the inappropriate use of confidential information does not underlie precontractual liability, but general tort law. Cf. Pannebakker, 38 with reference to Dutch law. 291 UNIDROIT Principles, 64. 283

284

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alongside precontractual (or, in general, civil) liability unfair competition rules apply, which can also serve as the basis of damage claims. a) Confidentiality is the Exception Not all pieces of information qualify as confidential; therefore, there is no general 118 duty to keep all information exchanged during the negotiations as confidential,292 quite the opposite: the rule is originally to consider such information as non-confidential, therefore disclosing it to third parties or using it for other purposes (and for its own profit) is generally permitted. Disclosure to third parties can serve as a tactic in negotiations.293 The illustrations attached to PICC and PECL confirm this: the offer for installation of air-conditioning systems can be shared with other bidders in order to motivate them to provide a better offer.294 b) Overlap with Trade Secret Rules However, this preliminary finding is significantly shaded by the fact that the duty 119 of confidentiality is not restricted to protected intellectual property rights, and there is a correlation with the regimes on the protection of trade secrets in the respective legal systems.295 In the Directive (EU) 2016/943 on the protection of undisclosed know-how and business information (trade secrets) against their unlawful acquisition, use and disclosure was to be implemented, therefore the harmonised rules on the protection of know-how and business information apply accordingly and the kinds of information within the scope of the implementing laws certainly qualify as confidential (well beyond IP rights, such as production processes and inventions not covered by patents, client lists, sales techniques, commercial know-how, etc.).296 Business secrecy is also explicitly protected in China in the respective unfair competition legislation.297 c) Express or Implied Confidentiality Besides trade secret protection laws being able to indicate or imply confidentiality, 120 information is confidential if the party providing it expressly declares so (and the other party at least implicitly agrees to treat it as confidential); or additionally – at least the official commentaries on PICC and PECL indicate so – if the confidential character is implied by the particular nature of the information (as being highly business-sensitive, relating to the core of the parties’ business activity)298 or by the professional qualification of the parties (even in the absence of an explicit declaration), and the other party is or should be aware of these circumstances. Implied confidentiality applies if, for example, leading car manufacturers plan to establish a joint venture and one of them reveals it is planning a new car design;299 or the one party gives some information to the other during negotiations on the essential features of the know-how to be transferred if the final contract is concluded, but sends the documents by registered mail to the private address 292 Illescas Ortiz, 50; De Vincelles, 91 with reference to French law, and the author expresses concern that the French legislator did not define the scope of confidential information, therefore the courts will have to specify it in the absence of confidentiality clauses. 293 Pannebakker, 308-309. 294 UNIDROIT Principles, 63. See Lando & Beale, 194 with reference to PECL. 295 Pannebakker, 84 with reference to French law: secret des affaires. See also Ding, 489 with reference to Chinese law. 296 See the Italian report in Cartwright & Hesselink, 351. 297 Han, 160. 298 Pannebakker, 310. 299 UNIDROIT Principles, 63-64.

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of the party and talks about the know-how only when they are alone.300 The essence of these considerations on the implication of the confidential nature is abstracted in Article II.-3:302(2) DCFR: ‘In this Article, “confidential information” means information which, either from its nature or the circumstances in which it was obtained, the party receiving the information knows or could reasonably be expected to know is confidential to the other party.’ In other words, entrusted business-sensitive information with obvious economic significance (irrespective of whether protected by other provisions of the law) are generally treated as confidential,301 and that again converges to the general protection of trade secrets.

III. Remedies 121

The presentation of remedies is the same way as diverse as the enumeration of case groups according to the protected interests (scope), particular duties and the outcome of the negotiations (no contract; invalid contract; valid but disadvantageous contract, see B.V.). It is sometimes unclear whether one or more statements in the available analyses apply only to one of the relevant case groups or to precontractual liability as a whole. A good starting point is however that the extent of liability (heads and amount of damages) shall correspond with the scope of the precontractual duty that has been breached.302 Besides damages, analysis shall be provided next on whether other remedies (such as injunctions, specific performance, etc.) can apply. Convergence can be discovered in many aspects among the legal systems and soft law instruments analysed here, but the same or very similar result is shaped differently or at different levels of abstraction or in different sources of law. Article 1112(2) Code Civil expressly excludes the compensation of the expectation interest of the parties: ‘the reparation of the resulting loss is not calculated so as to compensate the loss of benefits that were expected from the contract that was not concluded.’ In other legal systems, there is no such explicit statutory provision, but the same result is achieved in case law by means of general restrictions on damages to be paid or with a high standard of proof.

1. General Findings 122

Compensation in terms of money, i.e. damages is the primary remedy. Besides being much more in line with the principle of party autonomy and contractual freedom, awarding ‘only’ damages instead of specific performance, i.e. judicial enforcement of the conclusion of the contract, is more efficient from an economic perspective too: since most of the goods are standardised, at least the (would-be) buyer of standard goods can easily cover itself in the market from the compensation paid by the (would-be) seller and in this way the conclusion of unwanted and often inefficient contracts can be avoided.303 a) Negative or Reliance Interest

123

Damages are basically restricted to the negative or reliance interest (Vertrauensschaden) in most cases. This finding is made either in a general manner304 or is attached to the events of breaking off negotiations and of the one party’s contribution to the invaLando & Beale, 194. Cf. the Greek report in Cartwright & Hesselink, 348. 302 Schwenzer, Hachem & Kee, 284. 303 Lehmann, 703-704. 304 UNIDROIT Principles, 60, Kötz, 36; Ding, 504 and Han, 167 both with reference to Chinese law.

300 301

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lidity of the contract or not disclosing the reasons for invalidity (breach of information duties).305 The distinction between negative and positive interest is not crucial if the duty of confidentiality has been breached or if personal injury and property damage are subsumed under the culpa in contrahendo regime in the respective legal system; 306 compensation does not depend on the existence or validity of the contract regarding these groups of cases.307 Apart from the latter finding, the restriction of compensation to the reliance interest seems to be a common denominator in the respective (Civil Law) legal systems and soft law instruments.308 The reason is that the contractual expectation is generally not created until the contract has been formed and therefore no such remedy that indirectly protects the future contract or even indirectly enforces its performance can be awarded.309 Compensation for the reliance interest means that the (innocent) party is to be put 124 into as good a position as it was in before the contract was made or in the position it would have been if the contract had never been made,310 or if there had not been negotiations regarding it, no duties had been breached or the other party had not relied on the conclusion of the contract at all.311 The negative or reliance interest includes on the one hand –

–

125

the expenses incurred during negotiations in view of the future conclusion of the contract, such as travel and accommodation costs, expenses of preparatory and feasibility studies (legal, financial and technical and also marketing research), third-party consultancy services (legal, technical, etc. experts), costs of obtaining authorisation from public authorities and the costs of works or services already performed in reliance of the future contract.312 On the other hand, lost profit and lost opportunity to conclude an alternative contract with a third party is also mostly recognised as recoverable, but the standard of proof differs from one legal system to the other, and is generally high;313 however, if the party succeeds, reliance interest likely converges with expectation interest and the distinction loses its significance.314

Finally, it is controversial whether the amount of expectation interest shall be consid- 126 ered as a cap on compensation for reliance interest or not. Convincing views support this; for example, if the negative interest exceeds the contractual expectation then it prima facie makes no economic sense to enter into this contract.315 Nonetheless, compensation is basically not capped by the value of expectation interests in the respective legal systems.316 Looschelders, 39. With reference to German law see also Emmerich, para. 201 and Ersoy, 51. Schwenzer, Hachem & Kee, 285. 307 Italian scholars are sceptical regarding the possibility of exact distinction between negative and positive interest, which is in particular difficult to maintain as far as valid but disadvantageous contracts are concerned, according to which the losses are to be assessed on a case-by-case basis. Cf. Febbrajo, 305-306. 308 Similarly, Zuloaga, 8. 309 Cartwright & Hesselink, 469; Looschelders, 39; Zuloaga, 180 with reference to Article 1112(2) Code Civil, Emmerich, para. 201. 310 Zuloaga, 171. 311 Looschelders, 39. 312 Schwenzer, Hachem & Kee, 286; Zuloaga, 171; Lando & Beale, 191; Pannebakker, 261. 313 Zuloaga, 171; Emmerich, para. 213 with reference to German law. 314 Similarly, Febbrajo, 305-306. 315 Wei & Yu, 298. 316 Zuloaga, 172. This is the prevailing view in Germany, cf. Ersoy, 51. See also Febbrajo, 305-306 with reference to Italian law. This issue is extremely controversial in China; see Ding, 504 with reference to 305

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b) Positive or Expectation Interest 127

Expectation losses (related to the negotiated but not concluded or concluded but invalid contract) are extremely rarely awarded.317 As referred to above, Article 1112(2) Code Civil explicitly excludes their compensation. Where not explicitly excluded, a high standard of proof applies, i.e. it must clearly be proved that the (valid) contract would have been concluded (at all) and on different, more advantageous terms if no precontractual duty (primarily: information duty) had been breached.318 Consequently, expectation interest is very rarely compensated for, but there are some published cases, for example those of breach of public bidding rules, because the offeror can sometimes prove that it would have certainly been awarded the contract if the correct tendering procedure had been followed.319 Even if the party succeeds in proving these circumstances, reductions due to future uncertainties apply in some legal systems, because the contract – even if it had been concluded in line with the innocent party’s expectations – would be exposed to general changes and risks created in the economy.320 Expectation interest is remedied indirectly if the expectations induced by the false representation of the party become part of the contract and therefore non-conformity triggers ‘normal’ contractual remedies.321 c) Contributory Fault

128

Contributory fault of the party who suffers losses justifies proportional deductions from damages.322 If the party is not cautious about spending money related to the future contract, for example overstocks the goods to be supplied (provided the contract is concluded) in an excessive amount that risks its financial stability and forces the party to commence reorganisation proceedings. In the case law, this was considered a contributory fault justifying the reduction of damages by 50%.323

2. Soft law and Country-Specific Issues a) PICC and PECL 129

Article 1.8 PICC prohibits inconsistent behaviour; its consequence can be the creation, loss, suspension or modification of rights. The official commentary on Article 1.8 PICC provides for a peculiar approach on the remedies for breach of the duty to act consistently and not to the contrary of the other party’s reasonable reliance. Being precluded to do so is only one way to preserve the other party’s interests; alternative remedies include giving reasonable notice before changing course or to compensate the other party for costs and losses suffered by the inconsistent behaviour.324 The remedy – both in PICC and PECL – if the duty of confidentiality is broken is remarkable: doctrinal opinions and some court practice in favour of this limitation, but the cited author omits the legal basis of this practice. See also Han, 167-168: the prevailing view is that no such cap applies. 317 ’Only granted exceptionally’, see Kötz, 39. Very controversial, see Emmerich, para. 201 with reference to German law. 318 Schwenzer, Hachem & Kee, 286-87; Bergjan, 400 and Ersoy, 53-54, 57 with reference to German law; Stathopoulos & Karampatzos, 81-82 with reference to Greek Civil Law. 319 With reference to the German case law Zuloaga, 181 and Ersoy, 52. 320 Stathopoulos & Karampatzos, 82 with reference to Greek law. 321 Schwenzer, Hachem & Kee, 286-87. 322 Zuloaga, 174. with reference to French law; Ding, 506-507 with reference to Chinese law; Emmerich, para. 204 with reference to German law, however the author reports the case law as to be reserved and mild towards the injured party. 323 See Pannebakker, 107 with reference to the French case law. 324 UNIDROIT Principles, 21, 23.

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it may include compensation based on benefits received regardless of the other party suffering any loss or not. According to the commentaries: the injured party may seek an injunction (in accordance with the applicable law) if the confidential information has not yet been disclosed.325 b) German Law One peculiarity of the German case law is that specific performance is sometimes 130 granted by the courts with reference to the principle of venire contra factum proprium in the so-called lack of formality cases, which is tantamount to specific performance of an invalid contract. If one party induced the reliance of the other that no form was required or the form would be fulfilled, specific performance may be ordered, if the invalidity would create an absolute unbearable result.326 Injunction is also conceivable if no confidential information has been disclosed yet, but there is a reasonable threat of it.327 Another distinctive feature is the presumption of a causal connection between the breach of the duty to inform and the losses suffered.328 c) French Law French law329 does not differentiate between reliance (negative) and expectation 131 (positive) interest. Total compensation (réparation intégrale) applies, provided the losses were direct and certain consequences of the breach of the respective precontractual duty. Nonetheless, the result is not different from the mainstream presented above. Some French judgments differentiate between general costs that always arise if 132 someone negotiates with others and specific costs connected to the particular future transaction and tend to restrict damages to the latter category. Imprudently incurred costs are excluded from compensation, as are those expenses that remain useful for the party. Article 1112(2) Code Civil expressly excludes compensation of the expectation inter- 133 est of the parties from the negotiated contract. Scholars however draw attention to two restrictions in interpreting this provision. – –

First, they suggest it should not be understood broadly, because the restriction is attached to ‘fault committed during the negotiations’, but not to the breach of other particular precontractual duties, such as the duty of confidentiality. Second, the restriction shall not be misunderstood in a way that no loss of profit or loss of chance from an alternative contract with a third party (i.e. other than the negotiated contract) can be awarded either.330 The standard of proof is high, even if the claim is about loss of chance: the existence of an interested third party and the seriousness of the chance to enter into contact with that party must be proved.331 If this applies, the court calculates the compensation in proportion with the probability of success.

325 UNIDROIT Principles, 64; Lando & Beale, 194. Article II.-3:302(3) DCFR explicitly provides for this remedy: ’A party who reasonably anticipates a breach of the duty may obtain a court order prohibiting it.’ 326 Zuloaga, 49-54, 182. 327 Ersoy, 58-59. 328 Emmerich, para. 207-210. 329 See the summary presented by Zuloaga, 172-74 and Pannebakker, 103-108. 330 Pannebakker, 105, 263. With reference to the latter issue see Sefton-Green, 60, 65. 331 Pannebakker, 106 reports cases however wherein the plaintiff successfully claimed its losses (of chance) while having been locked out of the market during the (subsequently failed and broken) negotiations and therefore not being able to enter into contract with another party – for example – to find another investor.

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French courts are definitely reluctant to award specific performance, 332 which is in line with the constitutional significance of contractual freedom. d) Law of Netherlands

Dutch law333 differs slightly from the mainstream regarding the recoverable costs incurred during negotiations: namely only those costs that could have been reflected (discounted) in the price of the failed contract can be compensated for. The recoverable losses are theoretically not limited to the negative interest; however, damages rarely if ever include loss of profit from the negotiated contract in court practice. 334 136 Another distinctive feature of Dutch law is specific performance, i.e. if breaking off is unacceptable, the court can issue a court order that the parties shall continue negotiations. This injunction can be coupled with a judicial penalty, with a prohibition of negotiations with third parties or with the appointment of a mediator. However, the order is limited in time and is considered to require a reasonable, real and open exchange between the parties and providing each other sufficient time to react. The court does not issue an order to negotiate if it no longer makes sense, for example because the parties’ relationship became hostile, the contract could be terminated unilaterally anyway immediately or shortly after conclusion or the party who broke off already concluded the contract with a third party. The court imposes a best effort duty (obligation de moyens) on the parties to negotiate and to reach an agreement if possible, if such an order is issued.335 137 The prima facie generosity of the remedies is counterbalanced by the fact that Dutch courts apply a high threshold for precontractual liability to be triggered at all.336 135

e) Chinese Law Chinese law is characterised by the controversies over whether the expectation value shall be considered as a cap on reliance damages (see above III.1.a.) and by a kind of hesitation on the recoverability of the so-called indirect loss, which includes the lost gain as a result of loss of opportunity to contract with a third party; the prevailing view in the case law is in favour of recovering this head of loss.337 139 Another specificity of the Chinese approach is the substituted specific performance 338 provided for in Article 8 of Interpretation II of the Supreme People’s Court of Several Issues concerning the Application of the Chinese Contract Law, which means the court entitles the opposite party to go through the relevant formalities needed for the contract to be effective by itself, if the party in breach fails to do so. In this way, the party entitled to self-help in turning to the competent authorities for permission or registration by itself can transform the concluded but (without permission or authorization) ineffective contract into an effective one, i.e. save the contract and make it survive and in doing so the party can enjoy expectation interest upon performance.339 138

Pannebakker, 106. See the summary given by Pannebakker, 64-66. See also Zuloaga, 182. 334 Cartwright & Hesselink, 469. 335 For the details see subsection F.I. in the second part of this Chapter. 336 Pannebakker, 70. 337 Ding, 504-506. 338 Han, 169. Ding, 506-507. 339 Ding, 507. This finding nuances the general statement that Chinese law does not recognise expectation interest in precontractual liability. 332

333

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In the event of the breach of confidentiality duties, Chinese courts also award benefit- 140 based compensation.340

G. Illustrations This Section presents illustrations from and beyond sales law. Cases related to other 141 types of contracts are inserted too because the controversies and legal issues that arise can also appear in sales contract disputes.

I. Enter or Continue Negotiations without True Intent to Conclude the Contract 1. Enter into Negotiation in order to get Previous Loan Paid Back Based on the Chinese ‘Nong’an Shengxiang Yumi Co Ltd (Shengxiang) v. Jilin Branch 142 of Agriculture Development Bank of China (ADBC Jilin Branch) and Changchunshi Kangrun Shengwu Keji Co Ltd (Kangrun)’ case as presented by Ding:341 the parties ‘were negotiating a RMB 200 million loan contract. ADBC Jilin Branch preliminarily agreed to provide a loan to Shengxiang if the latter restructured Kangrun and paid off a RMB 21.2 million loan that Kangrun owed to ADBC Jilin Branch. After Shengxiang carried out the restructuring and paid off the due loan for Kangrun, ADBC Jilin Branch broke off negotiations with Shengxiang.’ The court decided that the bank was liable for ‘negotiating in bad faith under the 143 pretext of concluding a contract’ (now Article 500(1) of the CCC). The bank never wanted to reach an agreement on the new loan, but only to eliminate its non-performing loan.

2. Entering into Negotiations in order to prevent an Agreement with a Third Party Based on Illustration No. 1. on Article 2.1.15 PICC:342 ‘A learns of B’s intention to sell 144 its restaurant. A, who has no intention whatsoever of buying the restaurant, nevertheless enters into lengthy negotiations with B for the sole purpose of preventing B from selling the restaurant to C, a competitor of A’s.’ According to the official commentary, A is liable to B for B’s losses that may include 145 the difference in price and whatever other losses may be established. A similar hypothetical is the first one elaborated on by Cartwright and Hesselink343 wherein a third party is negotiating with B to buy B’s premises located opposite A’s bookshop (for €1.2 m) in order to open a bookshop, and therefore A, who does not want to have a competitor so close by, pretends to buy the premises for a higher price (€1.5 m). After the withdrawal of the competitor, A also breaks off negotiations and B can sell the premises for only €1 m. As the editors report, all legal systems concerned granted damages as a remedy, restricted however to the reliance interest. There is also diversity regarding which circumstance the liability is based upon: the starting of negotiations, the party’s conduct

Han, 170. Ding, 491. 342 UNIDROIT Principles, 190. 343 See Cartwright & Hesselink, 21ff (Case 1: Negotiations for premises for a bookshop). 340

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during negotiations, the breaking off, a particular state of mind or the misrepresentation of the party, etc.

3. Entering into Negotiations with Aim of Obtaining Information Based on Illustration No. 1. on Article 2:301 PECL:344 ‘A intends to enter the trade as a competitor of B. He enters into negotiations with B claiming to be interested in becoming B’s sales manager. B pays A’s travel expenses and the cost of a short training programme for A, which A wished to join, before signing the contract. When A has got the information about B’s sales and production methods, which he can use as a future competitor of B’s, he breaks off negotiations and starts his own enterprise.’ 147 According to the official commentary on PECL, A is liable to B for the costs B incurred in paying A’s travel and tuition. The same applies if A originally wanted to become B’s sales manager but made up their mind later on and from that very moment wanted only to access that information. Besides, this case can trigger A’s liability for breach of confidentiality if the confidential nature of the sales and production methods was indicated by A or could be implied or falls within the scope of the applicable trade secret regulations. 146

4. Continue Negotiations despite having concluded a Contract with a Third Party Based on the French ‘Manoukian’ case as presented by Pannebakker:345 ‘In spring 1997, a design company, Alain Manoukian, entered into negotiations with X and Y, both shareholders of the company Stuck, regarding the sale of Stuck’s shares. The negotiations proceeded until November 1997, but on November 24, Alain Manoukian learned that on November 10, X had consented to sell the shares in Stuck to a third party, the company Les Complices. Alain Manoukian made a claim against X for a fault in negotiations. It claimed damage resulting from a late communication by X of his decision to conclude a contract with a third party.’ 149 The Cour de cassation held X liable, because he only informed Manoukian that he was not willing to conclude the contract after having concluded a contract on the same matter with a third party. 148

II. Breaking off Negotiations 1. Perception of Conclusion of Contract followed by New Terms 150

Based on Illustration No. 1 on Article 1.8 PICC:346 ‘A has negotiated with B over a lengthy period for a contract of lease of B’s land under which B is to demolish a building and construct a new one to A’s specification. A communicates with B in terms that induce B reasonably to understand that their contract negotiations have been completed, and that B can begin performance. B then demolishes the building and engages contractors to build the new building. A is aware of this and does nothing to stop it. A later indicates to B that there are additional terms still to be negotiated.’

Lando & Beale, 61. Pannebakker, 85-86. 346 UNIDROIT Principles, 22. 344

345

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Though this hypothetical illustrates Article 1.8 PICC on inconsistent behaviour and 151 the remedy is that ‘A will be precluded from departing from B’s understanding’; the hypothetical nevertheless also fits as a breaking-off case, justifying B’s claim for damages.

2. Higher Investments Suddenly Requested Based on Illustration No. 5 on Article 2.1.15. PICC:347 ‘A assures B of the grant of 152 a franchise if B takes steps to gain experience and is prepared to invest USD 300,000. During the next two years B makes extensive preparations with a view to concluding the contract, always with A’s assurance that B will be granted the franchise. When all is ready for the signing of the agreement, A informs B that the latter must invest a substantially higher sum.’ If B refuses to invest more and A rejects the conclusion of the contract, then B is 153 entitled to recover from A the expenses incurred with a view to the conclusion of the contract. The same case, but slightly more elaborate can be found under illustration 4 to Article 2:301 PECL. Joining the franchise network means operating a grocery shop and the would-be franchisee makes the requested investment, sells its small bakery store, moves to another town and buys a lot to set up the new business. The outcome of the hypothetical is the same.348

3. No Authority to Sign Based on Illustration No. 3 on Article 2.1.15 PICC:349 ‘A enters into lengthy negoti- 154 ations for a bank loan from B’s branch office. At the last minute the branch office discloses that it had no authority to sign and that its head office has decided not to approve the draft agreement.’ A could in the meantime have obtained the loan from another bank. According to the PICC commentary, A is entitled to recover the expenses entailed by 155 the negotiations and the profits it would have made during the delay before obtaining the loan from the other bank. A similar case from Sweden was reported in Zimmermann’s and Whittaker’s treatise:350 a Swedish businessperson started negotiations with the main shareholder of a Colombian company on employment post as a manager. On 30th June the main shareholder sent a cable message and asked the would-be manager to serve from 1st July. The businessperson moved to Colombia and took up the post. However, the approval of the general meeting for the employment was needed by the 15th July, but that did not happen due to the conflict between the two main shareholders. The court granted the expenses of the businessperson incurred in relation with the move to Colombia. The main reason was that the shareholder who sent the message should have known that there could be some doubt on the engagement of the new manager; nevertheless, the businessperson was instructed to come to Colombia and to take up the post.

4. Uncertainty of the Owners351 ‘B enters into negotiations with A about a piece of land that B wants to buy from A on 156 which to build a house. A thinks he is the sole owner of the land. When the parties have UNIDROIT Principles, 62. Lando & Beale, 191. 349 UNIDROIT Principles, 61. 350 Zimmermann & Whittaker (Swedish report), 253-54. 351 Based on Case 3 (Mistake about ownership of land to be sold) in Cartwright & Hesselink, 93ff. 347

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reached agreement they make an appointment to sign the sale contract on 2 December. On 1 December A finds out that the land of which he thought he was the sole owner by inheritance from his father is in fact owned jointly by him together with his two sisters who do not agree to the sale of it. A therefore does not sign the sale contract. B has incurred expenses in negotiations (estate agents’ fees, travel tickets to visit the land) and has had an architect make drawings for the house. What liability (in contract, tort, restitution, or any other form of liability), if any, does A have to B?’ 157 Cartwright and Hesselink report significant differences regarding this hypothetical. The one issue is how formality requirements influence the outcome (cf. the different approaches thereon, for example in Germany and France, above F.II.1.b). Another controversial aspect is whether A’s misbelief that he was the sole owner does constitute fault or not and therefore whether liability shall be imposed on A or not. Some legal systems deny liability due to lack of fault while others grant it (Greece, Italy, the Netherlands, etc.), because A did not clarify the ownership before entering into negotiations on the sale. There is also divergence on the scope of recoverable losses; in some legal systems, the recoverability of the architect’s fees is rejected with reference to the lack of proximate cause (such as Greece). B’s contributory fault is also considered in some legal systems (Italy, Portugal).

5. Discretion to Disagree on Open Essential Terms and Late Stage Termination of Negotiations Based on the Chinese ‘Liu’ case as presented by Novaretti:352 ‘Having decided to open a pharmacy, a company signed a letter of intent for the employment of Liu, defining the latter’s role and tasks to be performed in the pharmacy. The letter, however, failed to specify details such as remuneration and starting date, details, which were left to be identified in the employment contract. Following the signature of the letter of intent, the company identified the premises for the pharmacy and obtained the necessary licenses while Liu, as agreed, set out to obtain his certification as a pharmacist. However, following a number of attempts and mediation by competent authorities, the negotiating parties failed to agree on the issues left undefined, particularly the remuneration aspect and the duration of the employment. Asserting bad faith on the part of the company, Liu withdrew from the negotiations, forcing the company to find another pharmacist, thus delaying the pharmacy’s opening. The company sued Liu, seeking the reimbursement of incurred expenditures (Liu’s training, certification fees, and medical expenses) as well as for the losses associated with the delayed opening.’ 159 The court rejected the claim. Since some essential elements were still open, the letter of intent does not qualify as the final employment agreement. Liu did not infringe the good faith requirement, since he only exercised his right based on contractual freedom. The withdrawal of Liu was justified both from his personal view and from the societal perspective. 158

6. Advance Payment and Reasonable Reliance 160

Based on the Lithuanian ‘V. Š. v A. N. and A. N.’ case as presented by Kiršienė and Leonova:353 ‘the claimant had concluded a preliminary contract with the defendant. Under the preliminary contract, the defendant undertook to sell to the claimant a part of a plot of land for LTL 32,000. Before the conclusion of a contract, the claimant had Novaretti, 969-70. Kiršienė & Leonova, Qualification of Pre-contractual Liability and the Value of Lost Opportunity as a Form of Losses, 11 Jurisprudencija – Jurisprudence (2009), 221, 235-36. 352

353

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transferred an advance payment and undertook to pay the remaining part of the price upon the conclusion of the main sale-purchase contract, validated by a notary. When the set term has run out, the defendants refused to conclude the main sale-purchase contract because it was unprofitable for them to sell the plot for the agreed price. The claimant then asked the court to confirm the conclusion of the main sale-purchase agreement.’ The courts (including the Supreme Court of Lithuania) stated that the final contract 161 was not yet concluded and the preliminary contract was not binding, in the sense that there was no absolute certainty about concluding and executing the main contract. The court thus did not attribute binding force to the preliminary contract in itself, by which the court could have declared the existence of a contract. However, the existence of the preliminary contract (together with other circumstances such as the advance payment) can be considered as a ‘proof of a serious intention to conclude the contract’ and the non-performance of the preliminary agreement is contrary to good faith, because the reasonable reliance of the other party was induced.

7. A Borderline Case354 ‘A, the country’s leading department store, is negotiating with B for B to build a new 162 shopping centre in which A is to rent substantial premises for a new flagship store. During the negotiations, before the contract for A’s lease is concluded, B begins the building of the shopping centre, including elements of design and construction which follow the indications which A has given of the layout it will wish to have. A knows that B has begun the building works. When the building work is far advanced, A breaks off negotiations because it has then done a survey of the likely client base, and has decided that a store in that location would not, in fact, be sufficiently profitable. B is left with a shopping centre which he would not have built without a tenant such as A to form the focus for the centre; and he now has a building which is so constructed and organised that he cannot find any alternative department store as the tenant. What liability (in contract, tort, restitution, or any other form of liability), if any, does A have to B?’ Whatever the decision of the respective court is, there would be a controversial and 163 probably split decision. On the one hand, the circumstances that A indicates the layout, connives at the commencement of construction works (and does not warn B to stop until the survey is evaluated), breaks off at a late stage of negotiations and first and foremost postpones the survey to a later date after providing B with the requested layout, speak for A’s liability. On the other hand, good economic reasons justify breaking off in all legal systems concerned and the parties are both professionals. Unsurprisingly, Cartwright and Hesselink detect a wide range of scatter in the results. The majority – they report – would award remedy, but restricted to the reliance losses (and granting compensation for reinstating the building or loss of chance for having lost other possible tenants is the exception). Reduction due to B’s contributory fault also appears in the reports.

8. A Liberal Approach in favour of Contractual Freedom Based on the German ‘Newspaper’ case as presented by Dietrich:355 ‘The plaintiff 164 was negotiating with the defendants for the sale of two newspapers published by the defendants. Approval of the purchase by the plaintiff ’s parent company was necessary 354 355

Based on Case 8 (A shopping centre without a tenant) in Cartwright & Hesselink, 233ff. Dietrich, 180-81. The ‘official’ number of the judgment is this: BGH, 22.02.1989 – VIII ZR 4/88.

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before a contract could be finalised and, pursuant to gaining such approval, a ‘detailed offer’ from the defendant seller was sought by the plaintiff. The defendants provided such an ‘offer’ on 3 March 1986. On 7 April 1986, the parent company gave its approval to the plaintiff to go-ahead with the purchase. The plaintiff informed the defendants of this approval on 10 March 1986. Consequently, the plaintiff ’s lawyer drafted a notice of intended purchase required by a regulatory body, and prepared a draft agreement. After a further draft agreement was prepared by the plaintiff ’s lawyers, incorporating amendments made by the defendants, a meeting was held on 18 April 1986 at which the parties reached agreement on the outstanding essential terms of the contract. Consequent upon this meeting, a third draft of agreement was prepared by the plaintiff ’s lawyers. On 28 April 1986, the plaintiff informed the defendants in writing of its intention to accept their ‘offer’ of 3 March 1986. On the same day, the defendants replied by telephone that they were no longer prepared to sell. The plaintiff proceeded to claim nearly DM 106,000 in damages, consisting mostly of legal fees and accountants’ fees.’ 165 While damages would probably have been granted in the majority of the legal systems, the German Federal Supreme Court (Bundesgerichtshof) rejected the claim. The court underlined that ‘generally, each party has to carry its own expenses incurred in the course of negotiating a prospective contract. The risk that the contract does not later ensue and that the expenses incurred thus prove to be wasted lies with each negotiating party.’ The mere expectation does not suffice, despite the parties having agreed upon outstanding matters. ‘Instead, the plaintiff had to show that the defendants had induced the belief the contract would, with certainty, be finalised.’ The judgment represents the German approach very well, insisting on the reasonable reliance induced by the party breaking off on the certain conclusion of the contract.

9. Public Bidding356 ‘A, a private company, wants to have a swimming pool built and organises a public bidding for the construction contract. A’s published statements include the rules of the bidding process A proposes to follow for submission of bids, and its method of acceptance, and a statement that A will give the contract to the lowest bidder. B submits a bid, which follows the rules of the bidding process, but A awards the contract to C. B had incurred expenses in preparing its bid. What liability (in contract, tort, restitution, or any other form of liability), if any, does A have to B if: (i) B’s bid was the lowest, but either (a) A failed properly to consider the bid, because an administrative error within A’s organisation led to the bid not being considered by those within the company who were taking the decision; or (b) A always intended to give the contract to C; (ii) B’s bid was not the lowest, but A had failed properly to consider it because an administrative error within A’s organisation led to the bid not being considered by those within the company who were taking the decision.’ 167 In Cartwright’s and Hesselink’s treatise, most of the reporters presented the implementation of EU directives on public bidding and the special remedies related thereto. Besides, as far as the residual application of precontractual liability matters (if the case is not within the scope of special public procurement rules), remedy was given if the bid was the lowest, regardless of the grade of fault (except France where the reporter expressed doubts on faute if ‘only’ an administrative mistake occurred) and was rejected if the bid was not the lowest due to lack of proximate cause. The analysed legal systems diverged over awarding only reliance or also expectation damages. 166

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III. Duty of Information 1. Harvester’s Capacity357 ‘A contracts to sell a harvesting machine to B, a farmer, which B requires to enable 168 him to harvest his asparagus crop. In the pre-contractual negotiations, A told B that the machine would be able to harvest one acre a day, but when B comes to use it he discovers that it can only harvest half an acre a day. B is unable to obtain an alternative machine in time to save the half of the crop that cannot be harvested before it is ruined. He now also has a machine, which he knows will be inadequate for next year’s harvest. What liability (in contract, tort, restitution, or any other form of liability), if any, does A have to B? Would it make a difference if A had made no statements about the capacity of the machine, but instead during the negotiations B told A that he expected that the machine would be able to harvest one acre a day?’ This hypothetical makes the reader aware of the Bermuda triangle of precontractual 169 information duties, invalidity based on mistake or misrepresentation and breach of contract with regard to non-conformity and warranty of quality. According to Cartwright’s and Hesselink’s analysis, all legal systems referred to give a remedy to A (in Germany, however, only specific performance in sales law applies unless the misrepresentation was fraudulent) and the contractual remedies seem to override precontractual liability. They do not identify a difference between active false representation and passive failure to inform (except in Germany, where duty to inform is not imposed to the seller among the circumstances of the hypothetical).

2. Duty to Inform Does Not Require Disclosure of Value Based on the French ‘Baldus’ case as presented by Sefton-Green:358 ‘a seller sold 170 some negatives to a buyer who was aware of the identity of the photographer (of some renown) and the corresponding value of the negatives, whereas the seller was not. The buyer kept this valuable information to himself. The seller attempted to annul the contract on the basis of fraudulent concealment by the buyer as to the value of the subject matter of the sale, but failed.’ This case can be seen as the predecessor of Article 1112-1(2) Code Civil after the 171 2016 reform, according to which the duty to inform does not apply ‘to an assessment of the value of the act of performance.’ The same approach prevails in other legal systems, such as Germany.

3. Hostile Villagers Based on the Chinese ‘Zhou v. Huang’ case as presented by Ding:359 ‘the parties 172 made a subcontract for service under which Zhou carried out excavation work at a construction site by using his own excavating machine. Zhou’s machine was subsequently destroyed by local villagers who had land disputes with the construction operator, from whom Huang undertook the excavation work. Although Huang noticed that local villagers had committed violence at the construction site before, he negligently failed to inform Zhou of the potential risk during the negotiations. Zhou therefore sued Huang for precontractual liability for the failure of disclosure.’

Based on Case 13 in Cartwright & Hesselink, 362 ff. Sefton-Green, 67 fn. 44. 359 Ding, 501-502.

357

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The claim was upheld by the court. The reasoning underlined that had the defendant disclosed to the plaintiff the potential risk of violence committed by local villagers at the construction site, the plaintiff might have tried to negotiate a better deal by requesting a countermeasure to address this risk.

4. Lost Governmental Subsidy Based on the Chinese ‘Lin and Yang v. Chengdu Chenguang Fangdichan Kaifa Co Ltd’ case as presented by Ding:360 ‘the defendant failed to disclose to the plaintiffs during negotiations the fact that the defendant had intended to sell the same real estate property to a third party but failed to execute it. Because the name of the buyer was changed from the third party to the plaintiffs in the record of the local administration of real estate, the plaintiffs could not enjoy a certain amount of government subsidies to buyers of first-hand residential properties according to the local administrative regulations. After concluding a real estate property sale contract with the defendant, the plaintiffs noticed the defendant’s non-disclosure and claimed damages under the doctrine of precontractual liability.’ 175 The court awarded damages but reduced the amount due to the plaintiff ’s contributory fault. There was a somewhat similar case in Italy wherein the seller informed the buyer that the planned sale of an industrial machine fell within the scope of a tax benefit, but in fact that benefit had been suspended by the government a few months earlier. The Corte di Cassazione awarded the amount of the ‘lost’ tax benefit as ‘decrease in profitability.’361 174

5. Missing Import Licence Based on Illustration No. 2. on Article 2.1.15 PICC:362 ‘A, who is negotiating with B for the promotion of the purchase of military equipment by the armed forces of B’s country, learns that B will not receive the necessary import licence from its own governmental authorities, a pre-requisite for permission to pay B’s fees. A does not reveal this fact to B and finally concludes the contract, which, however, cannot be enforced by reason of the missing licences.’ 177 A is liable to B for the costs incurred after A had learned of the impossibility of obtaining the required licence. 176

IV. Confidentiality 1. No General Duty of Confidentiality in Absance of Indication, Implication or Applicable Trade Secret Provisions 178

Based on Illustration No.1 on Article 2.1.16 PICC:363 ‘A invites B and C, producers of air-conditioning systems, to submit offers for the installation of such a system. In their offers B and C also provide some technical details regarding the functioning of their respective systems, with a view to enhancing the merits of their products. A decides to reject B’s offer and to continue negotiations only with C. Is A free to use the information contained in B’s offer in order to induce C to propose more favourable conditions?’ Ding, 502. Febbrajo, 302. 362 UNIDROIT Principles, 61. 363 UNIDROIT Principles, 63. A very similar hypothetical (though on the design of a new form of computer chips) is elaborated on under case 12 at Cartwright & Hesselink, 336. ff. 360

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In the absence of agreement on confidentiality or indication by B on the confidential- 179 ity of the offer and if the content does not qualify in itself as trade secret (know-how), then A is free to use the information included in B’s offer. There is a similar hypothetical attached to Article 2:301 PECL (illustration 3),364 with the difference that the subject matter of the negotiated contract is software development and B and C are not invited in parallel, but first B and C only after the documentation had been submitted by B to A. The commentary on PECL underlines that if considerable expenses are incurred during the negotiations in supplying detailed documentation and the negotiations are broken off shortly before the conclusion of the contract is expected to take place, then A is liable – if not for breach of confidentiality but – for B’s expenses in preparing the documentation.

2. Implied Confidentiality: Sensitivity of the Information Based on Illustration No. 3 on Article 2.1.16 PICC:365 ‘A is interested in entering into 180 a joint venture agreement with B or C, the two leading car manufacturers in country X. Negotiations progress with B in particular, and A receives fairly detailed information relating to B’s plans for a new car design. B does not expressly request A to treat this information as confidential. Is A under a duty not to disclose it to C or to use those plans for its own production process should the negotiations not result in the conclusion of a contract?’ According to the official commentary, the business-sensitive information related to 181 the new car design is deemed to be confidential even without explicit indication, because it is directly affiliated with the core professional business activity of the party; i.e. confidentiality is implied.

3. Implied Confidentiality: Conspirative Communication Based on Illustration on Article 2:302 PECL:366 ‘A has offered to acquire B’s know- 182 how for the use of special plastic bags in the dyeing industry. During negotiations B must give A some information about the essential features of the know-how in order to enable A to assess its value. Although B has not expressly requested A to treat the information given as confidential, he has sent the written documentation to A at A’s personal address and by registered mail, and B has only talked to A about it when they were alone.’ Is the information given confidential? Yes it is, according to the official commentary on PECL. The receiving party ought to know under such circumstances that the providing party treats the information given as confidential and expects the same from the other party.

V. Missing Planning Permission Based on the Chinese ‘Zhang Shao’an v. Zhou Wei’ case as presented by Ding:367 183 ‘the plaintiff Zhang paid RMB 150,000 to the defendant Zhou after they came to a preliminary agreement on the sale of real estate property. However, the negotiations failed because Zhou had negligently failed to apply for planning permission for the construction of that property.’ Lando & Beale, 190. UNIDROIT Principles, 64. 366 Lando & Beale, 194. 367 Ding, 497-98. 364

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The court held that Zhou should bear precontractual liability, since he had breached his precontractual obligation to obtain planning permission as a land developer.

H. Cross References & Additional Commentary 185

The Common Law approach on precontractual liability is analysed in Chapter 4 (Precontractual liability in the Common Law). Closely related to this Chapter are the following: Chapter 7 on formalities (among other things: how do formal requirements and non-compliance with them influence the liability for breaking off negotiations), Chapter 8 on formation of contracts (when and how does the precontractual stage end and turns into an existing contract), Chapter 11 on validity (the breach of precontractual information duties can qualify as an issue of invalidity due to mistake, misrepresentation, fraud, etc. and therefore there can be a concurrence or uncertain interrelation between the remedies of invalidity and precontractual liability), Chapter 14 on conformity of goods and Chapter 16 on examination and notice of non-conformity (making false statement in the precontractual stage or not warning the buyer on the lack of one or more specific features of the contractual goods can be channelled into the buyer’s contractual expectations and result in non-conformity), Chapter 19 on remedies and damages (if precontractual misrepresentation refers to quality or a feature of the contractual goods that becomes part of the contract, the non-conformity with these qualities and features qualifies as a breach of contract and triggers the respective remedies, such as specific performance that generally prevails over precontractual liability).

I. Practitioner Tips & Contract Clauses 186

In order to keep precontractual negotiations transparent and to avoid precontractual liability, it is advised to identify those essential elements without which one or both parties are not willing to see the contract as concluded. The same way, it is useful to take minutes or draft follow-up memos in and after negotiations in order to document the statements made and to make the parties aware of the stand of the negotiations. If one party drafts the minutes, it is advised to have them confirmed by the other party in order to avoid misunderstandings and issues already closed being reopened. The parties should avoid making supportive statements on the future conclusion of the contract if they know that essential issues are still open or the results of financial and legal audits, due diligence, feasibility studies, etc. have not yet arrived or have not yet been evaluated. They also need to refrain from unnecessary supportive statements if they negotiate parallelly with several partners. Both parties should make inquiries as to whether some particular approvals from authorities are needed to conclude or to perform the contract. That particular party on site shall provide the other party with all information on local laws and customary standards. The other party must urge that this information be handed over. The provision of information is advised to be documented.

J. Additional Sources (Bibliography) 187 Bergjan, ‘Die Haftung aus culpa in contrahendo beim Letter of Intent nach neuem Schuldrecht’, 25 Zeitschrift für Wirtschaftsrecht (2004) 395; Cartwright & Hesselink, Precontractual Liability in European Private Law (2008); Cartwright & Whittaker, The Code Napoleon Rewritten – French Contract Law after the 2016 reforms (2017); Dietrich, ‘Classifying precontractual liability: a comparative analysis’, 21 Legal Studies (2001) 153; Ding, ‘The Doctrine of Precontractual Liability Under Chinese Contract Law: A Comparative

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A. Topics Covered Outlook’, 27 European Review of Private Law (2019) 485; Ersoy, Die culpa in contrahendo im europäischen Internationalen Privat- und Verfahrensrecht (2020); Febbrajo, ‘Good Faith and Pre-Contractual Liability in Italy: Recent Developments in the Interpretation of Article 1337 of the Italian Civil Code’, 2 Italian Law Journal (2016) 291; Giliker, ‘A Role for Tort in Pre-Contractual Negotiations – An Examination of English, French and Canadian Law’, 52 International & Comparative Law Quarterly (2003) 969; Giliker, ‘Pre-contractual Good Faith and the Common European Sales Law: A Compromise Too Far?’, 21 European Review of Private Law (2013) 79; Han, ‘Culpa in Contrahendo in Chinese Contract Law’, 6 Tsinghua China Law Review (2014) 157; Harke, ‘Irrtum und culpa in contrahendo in den Grundregeln des Europäischen Vertragsrechts: Eine Kritik’, 14 Zeitschrift für Europäisches Privatrecht (2006) 326; Lehmann, ‘Die Zukunft der culpa in contrahendo im Europäischen Privatrecht’, 17 Zeitschrift für Europäisches Privatrecht (2009) 693; Li, ‘The Legal Status of Pre-Contractual Liability: Contrasting Responses from German and English Law’, 12 National Taiwan University Law Review (2017), 127; Magri, ‘Pre-Contractual Liability in Italy between Tort and Contract Law. Some Comparative Remarks’, 23 Revista Brasileria Direito Civil (2020) 101; Monsalve-Caballero, ‘The Legal and Historical Panorama of Culpa in Contrahendo at Contractual Negotiations – An Approach from European and Latin American Law’, 39 Revista Derecho Universidad del Norte (2013), 127; Nedzel, ‘A Comparative Study of Good Faith, Fair Dealing and Precontractual Liability’, 12 Tulane European & Civil Law Forum (1997) 97; Pannebakker, Letter of Intent in International Contracting (2016); Rubio & Crespo, La responsibilidad precontractual en el Derecho contractual europeo, 11/2 (2010) Indret: Revista para. el Análisis del Derecho 1; Schulze & Viscassilas, The Formation of Contract (2016); Spagnolo, ‘Opening Pandora’s Box: Good Faith and Precontractual Liability in the CISG’, 21 Temple International and Comparative Law Journal (2007) 261; Wei & Yu, ‘Rethinking Pre-Contractual Liability in China – One Step beyond China’s Latest Judicial Interpretation’, 43 Hong Kong Law Journal (2013) 279; Zuloaga, Reliance in the Breaking-off of Contractual Negotiations (2019).

Part II: Precontractual Instruments A. Topics Covered This second part of Chapter 3 covers the contractual arrangement of precontractual 188 duties and liability by drafting and agreeing upon precontractual instruments (PCIs) in order to supersede the vague general clauses of culpa in contrahendo and to control (limit or exclude) the risks that may arise due to the breach of precontractual duties and to create a tailor-made bundle of duties and remedies (or their absence) that best fits the parties’ intentions. In Section B (Introductory Note on the preliminary and general findings) the useful- 189 ness and advantages of PCIs are presented first (B.I., → mn. 191 ff.), followed by an attempt to define the notion of PCIs, despite the chaotic diversity of terms and taxonomy (B.II., → mn. 194 ff.). Legal effects of PCIs are analysed next (B.III., → mn. 197 ff.), distinguishing between primary effects (if the respective PCI is binding) and secondary effects (being taken into consideration in the course of the application of the statutory provisions on precontractual liability even if the respective PCI is not binding). Last but not least, the various types of PCIs are enumerated (B.IV., → mn. 200 ff.). More substantive information is provided in Section F (Commentary), wherein the 190 typical clauses frequently provided for in PCIs are presented with their legal background and application in practice, such as agreement to negotiate in good faith (F.I., → mn. 206 ff.); provision on the non-binding character of negotiations (F.II., → mn. 209 f.); final contract within the discretion of one party (F.III., → mn. 211 ff.); exclusivity (F.IV., → mn. 214 ff.); confidentiality (F.V., → mn. 217); distribution of costs and limitation of liability (F.VI., → mn. 218 ff.); and dispute resolution (F.VII., → mn. 223). Three illustrations (G., → mn. 224 ff.) and a couple of sample clauses (I.,→ mn. 233 ff.) are added as inspiration and support for practitioners.

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B. Introductory Note I. Why Are Precontractual Instruments Needed? As the previous part demonstrated, precontractual liability involves a high level of uncertainty and courts have a broad margin of discretion and evaluation.368 Legal uncertainty discourages businesspeople to invest, to enter into transactions and increases transactional costs. Precontractual instruments (such as letter of intent also called ‘safe harbour’) are drafted by the parties to concretise precontractual obligations and to set up tailor-made standards of conduct during negotiations, including remedies, and to ‘precipitate unsecured financial interests, unwanted obligations and liability’.369 Degree of certainty can be increased and time and money can be saved by setting up the conducts and rules to be complied with during negotiations and the legal consequences of nonobservance,370 by limiting or even restricting risks and liability in most of the cases as far as the applicable law makes it possible.371 If precontractual instruments are drafted and accepted, the reliance of the parties on the transparent and loyal manner of negotiations is encouraged, which has a relaxing and inspiring effect on precontractual investments to the benefit of both parties if the deal is made.372 Precontractual instruments may also deter unreasonable expectations and reliance by preventing misunderstanding and contributing to the conclusion of clearer contracts.373 The required pattern of conducts set up in advance supports building up mutual trust between the parties and encourages also the more open sharing of views and information.374 192 Setting up tailor-made standards of conduct in the negotiation period means precluding the use of various strategies and tactics or setting concrete limits upon their use or, to the contrary, allow them to be freely exercised.375 Any kind of limitation on the negotiating parties’ freedom results in restricting or precluding of one or more specific bargaining tactics. Parallel negotiations foster competition in general and among the potential partners in particular. Exclusivity precludes the possibility of baiting the parties negotiating in parallel to make better and better bids.376 Confidentiality prevents the parties from sharing the information received (as confidential) with other potential partners and in this way fostering competition and also from the weapon of exerting pressure on the other party by public announcement on the ongoing negotiations.377 Limiting or excluding liability generally enables the parties to follow more liberal or even aggressive negotiation tactics, which however come up against the wall of general and mandatory good faith and similar requirements provided for in the applicable law.378 193 Needless to say, negotiating and drafting precontractual instruments is also a timeand cost-consuming procedure, therefore opting for or against doing so is a question of economies of scale. The higher the value and the volume of the deal, the more complex 191

Pannebakker, 111. Pannebakker, 5, 7, 340. 370 DiMatteo, in this book, Chapter 4, para. 90. 371 Bergjan, 395. 372 McFarlane, 99. 373 DiMatteo, para. 93. 374 DiMatteo, para. 94. 375 Pannebakker, 329, 340. 376 Pannebakker, 329, 339. 377 Pannebakker, 339. 378 Pannebakker, 340. 368

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the goods and the transaction are,379 so the more sense it makes to invest time and money in setting up the legal frames of the negotiations in the form of a PCI.

II. What is a Precontractual Instrument? As it is rightly stated in the doctrine, a kind of ‘terminological anarchy’380 (commit- 194 ment letter, binder, agreements in principle, heads of agreement, letter of intent, memorandum of understanding, accords de pourparlers, avant-contracts, accord provisoire etc.) is present: it is difficult to identify a common denominator for all kinds of preliminary instruments. A general and overall definition seems easily to be meaningless (such as: ‘pre-contractual written instrument that reflects preliminary agreements or understandings of one or more parties to a future contract’;381 while a more accurate and substantiated notion immediately requires a classification of and distinction between the various types or focused reference to the content. For example, if reference is made to the content, such as PCIs either deal with certain precise aspects of the negotiations or with the progressive formation of the future contract;382 or similarly: whether PCIs only include a plan for the remaining negotiations (management of negotiations or the dynamic constituent) or also present an opportunity to memorialise the terms already agreed upon (substantive constituent),383 then the view is divided since preliminary agreements do not necessarily contain both of them. (Consequently, are those agreements still PCIs that include substantive constituents?) Elsewhere, it is highlighted that the focus is on ‘how the future possible agreement would be negotiated’ and not so much on what is negotiated (i.e. it is not the substance that matters).384 If precontractual instruments are required to be binding and stand-alone (i.e. severable or separable from the other content)385, another distinction is overlooked, namely that between soft (non-binding) and hard (binding) letters of intent.386 In contrast, letter of intent and memorandum of understanding (Grundsatzvereinbarung, accord de principe) are referred to elsewhere as genuinely non-binding,387 without any consideration of being soft or hard. As a starting point, the tentative description provided by Pannebakker can be quoted: 195 ‘letter of intent represents a pattern that emerges at the level of business self-regulation and stems from the attempts by private parties to frame the dynamics of complex negotiations and mitigate the financial risks involved by the use of private regulation.’388 In some legal systems, it is recognised that a contract to make a contract may be 196 concluded (Vorvertrag in German law, or precontrato in Spanish law), which grants an actionable right to demand the conclusion of the main contract, provided the parties

Similarly, Spagnolo, 280. Pannebakker, 2. 381 Pannebakker, 2. 382 Pannebakker, 3. 383 DiMatteo, para. 93. Pannebakker, 31. 384 Pannebakker, 334. 385 Pannebakker, 34. 386 Bergjan, 396. See the interrelation of this classification with Section 311 BGB: if there was a soft PCI only then Section 311(2) No. 3 applies (similar business contacts), which means that only duties of protection are imposed on the parties. However, if the parties entered into a hard PCI then this qualifies already as the commencement of contract negotiations according to No. 1, imposing also information duties on the parties. Cf. Bergjan, 401. 387 Ferrari, Article 14 CISG, in: Kröll, Mistelis & Perales Viscasillas, UN Convention on Contracts for the International Sales of Goods (2nd edn. 2018), para. 14. ’Rather less effect’, cf. Kötz, 34. 388 Pannebakker, 4. 379

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agreed upon all essential elements in the first contract.389 These agreements are not dealt with in this Chapter.

III. Legal Effects of Precontractual Instruments The function, content and legal effects of precontractual instruments are described as a ‘bottom up’, ‘natural’ or ‘evolutionary convergence’, resulting in a ‘non-codified trade usage’, ‘a pattern of repetitive behaviour among merchants’ to evolve.390 198 The legal relevance of precontractual instruments is twofold. First, contractual freedom enables the parties to conclude such legally binding preliminary agreements (with stand-alone, i.e. severable and separable duties) up to the general mandatory barriers of Civil Law, such as the requirement of good faith and fair dealing, good morals, reasonableness and fairness, etc. If the precontractual relationship of the parties is shaped by their mutual agreement, the remedies turn to be contractual, even if the culpa in contrahendo regime of the applicable law underlies the law of delict.391 Care should be taken in legal systems wherein the law of delict qualifies as a mandatory regime (such as France), because it cannot be set aside by any contractual means. 199 Second, if the respective culpa in contrahendo regime is not superseded entirely by the preliminary agreement, the existence of such an agreement can directly influence the interpretation and application of the precontractual liability rules. For example, if a hard (i.e. binding – related to some duties at least) precontractual instrument has been concluded by and between the parties, this contributes significantly to the reliance of the parties on the conclusion of the final contract, and the subsequent breaking off of the negotiations is more likely to trigger liability (in the absence of a justifiable reason on the breaking party’s side), provided liability itself was not excluded by the same instrument.392 197

IV. Types of Precontractual Instruments 200

One of the mostly cited distinctive issues is the binding force of precontractual instruments, also being referred to as soft and hard instruments. Binding elements must be sufficiently precise to be enforced (certainty of terms)393 and the parties’ intention to be bound needs to be clearly present.394 It can happen that the binding or non-binding nature of the PCI is a matter of debate between the parties and is subject to interpretation by the court. The more sophisticated the parties and the PCI are, the more the interpretation can be restricted to the literal meaning of the text; otherwise, all relevant circumstances have to be taken into account, such as the issues still needing to be agreed upon, customs and habits of the relevant sector, etc.395 Sticking to the literal meaning is preferred because it appears to provide more certainty, which is the primary goal of drafting PCIs in any form.396

Cartwright & Hesselink, 35, 185. Pannebakker, 272. 391 Pannebakker, 96. 392 Bergjan, 398-99 with reference to German law. 393 Kötz, 34; Wei & Yu, 300 with reference to Chinese law. 394 Wei & Yu, 300. 395 Pannebakker, 50, and 244 with reference to Dutch law. 396 Pannebakker, 344-45. 389

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C. Statement of Issues

Another classification focuses on the temporal and logical distance to the final agree- 201 ment (in terms of form and content) and presents certain combinations of content and binding force. 397 First, there are PCIs equivalent to the final sales contract on the merits, but without observance of the formal requirements. If this is so, either of the parties can require the court to order the other to formalise the agreement. 398 Second, the PCI is not that much equivalent (close) to the final contract if some important elements are still pending, although the parties have already agreed upon many contractual terms.399 Third, options – quite common in financial sales and in organised commodity markets – must contain all necessary elements of the final sales contract and reflect the clear intention of the offeror to sell the goods; therefore, the faith of the final contract depends solely on the free and unilateral decision of the other party, whether it makes use of the option or not. Options are generally transferable.400 Finally, fourth, some PCIs just clarify the status of the negotiations, but there is no firm intention to be bound yet, even if key features of the future contract are specified therein. 401 Again other analyses put the emphasis on the content402 and distinguish between 202 PCIs where the parties try to keep their negotiations non-binding and free from any regulation, be it contractual or extracontractual, until the final contract is concluded (subject to contract); more specifically, until the contract is entered into in a special form (subject to form); where they specify the manner in which the negotiations shall be continued, frequently with a short reference only to some general requirements such as bona fides; and where the parties create particular stand-alone duties confined to the negotiation process and limited in time, such as confidentiality, exclusivity, distribution of costs, limitations of liability (if the negotiations fail), and dispute resolution (jurisdiction and arbitration clauses). Remedies in the event of breach of the specified duties can be also adjusted to the parties’ mutual understanding.

C. Statement of Issues –

–

– –

Negotiating and drafting PCIs takes time and money and therefore increases trans- 203 actional costs. When and under what circumstances is it yet worth to do so? Why and how can PCIs reduce uncertainties and risks in the event that the negotiations fail? How do PCIs serve the parties’ intent to allow or exclude particular negotiating tactics? Which are the so-called stand-alone (severable) clauses forming part of PCIs? Under what conditions do they have binding force? If the PCI or some specific clauses therein are not enforceable, how can they be taken into account in the interpretation and application of statutory provisions on precontractual duties and liability? Is the literal meaning of PCIs sufficient to interpret their content and the parties’ intentions? How far can and should the circumstances before and during drafting the PCI be taken into consideration regarding their interpretation? Since drafting and concluding PCIs is based on party autonomy and contractual freedom, which are the general restrictions on the parties’ creativity in drafting PCIs

Illescas Ortiz, 53-56. Illescas Ortiz, 54 with reference to Spanish (Article 1279 Código Civil) and Italian law (Article 1351, 2645bis, 2932 Codice Civile). 399 Similarly, Pannebakker, 47-48 with reference to Dutch law: (trunk contract) the missing terms can be implied by the court or agreed upon by the parties later on. 400 Illescas Ortiz, 55. 401 Cf. Illescas Ortiz, 55-56 with reference to Chinese law. 402 Pannebakker, 8. 397 398

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(such as good faith and fair dealing, reasonableness and fairness, mandatory liability for intentional harm, etc.)? In what respect is the contractually undertaken duty to negotiate (in good faith) different and more than the same duty based on the law? Can the parties keep the precontractual negotiations non-binding and outside of judicial supervision? What are the generally accepted methods and routines of reallocations of costs (if the negotiations fail and no contract is concluded in the end) and of excluding or limiting liability (such as caps, restrictions on the amount of damages to be paid or on the heads of losses to be compensated for, etc.)? Besides paying damages, are any other remedies (injunctions, specific performance, etc.) available if duties provided for in the PCI are broken? If yes, in relation to which type of clauses?

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D. International Sales Transactions 204

Since the CISG does not cover precontractual liability according to the prevailing view, there is a significant level of uncertainty in this field of law and the outcome of legal disputes is therefore rather unpredictable. Therefore, if lengthy negotiations are anticipated regarding transactions of high value or of complex goods, ‘prudent parties negotiating a prospective cross-border sale’ should seriously consider privatising and contractualising their precontractual duties and liability.403 It is not a coincidence that precontractual instruments gained enormous significance in the second half of the 20 th Century, the period of ‘transnationalisation and regionalisation of law’ triggered by global trade and interdependent relations.404

E. Sampling of Laws I. UNIDROIT Principles of International Commercial Contract (PICC) Article 2.1.13 Where in the course of negotiations one of the parties insists that the contract is not concluded until there is agreement on specific matters or in a particular form, no contract is concluded before agreement is reached on those matters or in that form. Article 5.3.1 A contract or a contractual obligation may be made conditional upon the occurrence of a future uncertain event, so that the contract or the contractual obligation only takes effect if the event occurs (suspensive condition) or comes to an end if the event occurs (resolutive condition).

II. Principles on European Contract Law (PECL) Article 2:103: Sufficient Agreement (2) However, if one of the parties refuses to conclude a contract unless the parties have agreed on some specific matter, there is no contract unless agreement on that matter has been reached.

403 404

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F. Commentary

III. French Code Civil Art. 1123. A pre-emption agreement is a contract by which a party undertakes that, in the event that he decides to enter into a contract, he will make the first proposal for that contract to the beneficiary of the pre-emption agreement. Where a contract has been concluded with a third party in breach of a pre-emption agreement, the beneficiary of that agreement may obtain reparation of the loss that he has suffered. Where the third party knew of the existence of the pre-emption agreement and of the beneficiary’s intention to take advantage of it, the beneficiary may also sue for nullity or may ask the court to substitute him for the third party in the contract that has been concluded. The third party may give written notice to the beneficiary requiring him to confirm, within a period which the former fixes and which must be reasonable, the existence of a pre-emption agreement and whether he intends to take advantage of it. Such a written notice must state that if he does not reply within that period, the beneficiary of the pre-emption agreement will no longer have the right to claim either to be substituted in any contract concluded with the third party, or nullity of the contract. Art. 1124. A unilateral promise is a contract by which one party, the promisor, grants another, the beneficiary, a right to have the option to conclude a contract whose essential elements are determined, and for the formation of which only the consent of the beneficiary is missing. Revocation of the promise during the period allowed to the beneficiary to exercise the option does not prevent the formation of the contract, which was promised. A contract concluded in breach of a unilateral promise with a third party who knew of its existence, is a nullity.

IV. Spanish Código civil Article 1,279. If the law should require execution of a public deed or another special form for the obligations inherent to a contract to be effective, the contracting parties may compel each other reciprocally to fulfil such form from the moment when consent has been given and the remaining requirements necessary for its validity are present.

V. The Interpretation of the Supreme People's Court on Issues Concerning the Application of Law for the Trial of Cases of Disputes over Sales Contracts in Chinese Contract Law Article 2 Liability under Precontract If a party signs a pre-contract such as subscription agreement, purchase order agreement, advance purchase order agreement, letter of intent or memorandum, which agrees that a sales and purchase contract will be entered into within a certain period in the future, and a party fails to perform the obligation of entering into a sales and purchase contract while the other party requests this party to assume the liability for the violation of the pre-contract or requests the rescission of the pre-contract and claims damages, the people's court shall uphold such request and claim.

F. Commentary Those clauses frequently used in PCIs that can qualify as stand-alone and severable 205 and are therefore generally binding between the parties will be analysed next.405

405

This subsection follows the classification and analyses of Pannebakker.

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I. Agreement to Negotiate and to Negotiate in Good Faith If the parties do not provide for the specific content then such agreements or clauses have a rather symbolic character in repeating the standards of conduct that apply anyway. However, first the existence of such an explicitly assumed duty supports the imposition of liability in borderline cases and, second, non-compliance qualifies as breach of the agreement and triggers contractual liability.406 The duty to negotiate is considered to be an obligation of means (obligation de moyens), meaning that the parties must not sabotage the process of negotiations; they have to ensure that negotiations take place and use all available means (make serious efforts) to reach an agreement, such as always reading and analysing the other party’s proposals and to reply, but they are not bound to achieve a specific result, i.e. to conclude the final contract.407 207 In some legal systems, the agreement to negotiate in good faith includes the duty to inform the other party if parallel negotiations with a third party have been started. Dutch scholars even derive a duty to provide the other party with a last chance, i.e. to let it know the offer provided by the third party and to let the other original negotiating party choose whether it is willing to take over the (better) conditions that were offered by the third party. Again in the Dutch law, an injunction (court order to negotiate) can be awarded under the same preconditions analysed in the first part of this Chapter (F.III.2.),408 but this is unthinkable in other legal systems such as in France.409 208 Chinese law follows a different approach according to the relevant interpretation of the Peoples’ Supreme Court: if the parties signed a pre-contract (subscription agreement, purchase order agreement, advance purchase order agreement, letter of intent, memorandum) and they agreed to enter into a sales contract within a certain period of time, but one party fails to conclude the sales contract then the other party – besides terminating the pre-contract – can claim damages. This interpretation is remarkable, because first, the independent contractual validity of precontracts is acknowledged 410 and second, there is no sign of having an obligation de moyens here.411 206

II. Provision on the Non-binding Character of Negotiations 209

The parties may strive to keep the negotiations and their records as non-binding until the final contract is concluded or is concluded in a specific form and in this way to prevent the enforceability of the contract in the making. These are also called ‘subject to contract’, ‘subject to formal agreement’ or ‘not binding until formal agreement is executed’ clauses.412 The courts of the respective legal systems react differently: such agreements are more accepted in the Netherlands than in France. However, the general principle of reasonableness and fairness also applies in the former: the non-binding character can be disregarded if the outcome is not acceptable because it is not in line

406 Pannebakker, 236, 239 and with reference to Dutch law, 54; and to DCFR, 304. And therefore remedies can include expectation interests, cf. Zuloaga, 177 with reference to PICC, however, difficulties in proof shall not be disregarded. 407 Pannebakker, 92, 100 with reference to French law and 318-19 with reference to PICC. 408 Pannebakker, 53, 237. 409 Pannebakker, 108. The same applies to PICC, PECL and DCFR id. 319. 410 Wei & Yu, 286. 411 Ding, 489. 412 UNIDROIT Principles, 54-55.

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F. Commentary

with those requirements. French law seems to be more reluctant due to the mandatory (ordre public) character of extracontractual liability.413 Article 2.1.13 PICC is remarkable in that it explicitly provides for this possibility 210 to keep negotiations non-binding. The parties can insist on the non-existence of the contract until there is agreement on specific matters or in a particular form. If so, the parties have to express their insistence unequivocally.414 Article 2:103(2) PECL includes a similar possibility; however only the agreement on some specific matter is provided for and not that on a particular form.

III. Final Contract within the Discretion of One Party Another possibility is to leave the decision on the contract (including the withdrawal 211 from negotiations) completely to the other party, i.e. at its discretion. This is useful in particular if some internal approval procedure is mandatory within one party’s organisation (‘subject to board approval’ clauses).415 Article 5.3.1 PICC, on contracts made conditional on future uncertain events, also 212 covers this possibility, as this is confirmed in the official commentary (‘condition entirely dependent on the will of the obligor’). As one of the illustrations highlights, if one of the terms states that a contract of sale will come into being if the one party decides to sell certain goods, then this party ‘is under no obligation, not even a conditional one, in view of the fact that it is within its unfettered discretion to decide whether or not it wants to sell the goods.’416 Article 1124 Code Civil provides for a similar option under the title unilateral 213 promise (promesse unilatérale): one party grants another a right to have the option to conclude a contract, the essential elements of which are determined, and for the formation of which only the consent of the party is missing.417 According to the case law – whereupon the explicit codification of unilateral promise was based within the frame of the 2016 reform of the law of obligations – options like this shall be provided only for a limited period of time.418 Article 1331 of the Italian Codice Civile (option) also explicitly provides for such an authorisation of the one party to decide on the faith of the contract.

IV. Exclusivity Exclusivity is a widespread stand-alone (severable) clause in PCIs, which is accepted 214 by the courts and qualifies as enforceable. It is frequently coupled with the duty to negotiate. Exclusivity shall be limited in time; however, the expiration can be also implied by the courts and they can identify a point in time when the duty of exclusivity certainly must have expired because the negotiations have not progressed for a couple of 413 Pannebakker, 54-56 with reference to Dutch law; 99-100 with reference to France and see also her general conclusions and comparative findings: 240-245. 414 UNIDROIT Principles, 54. See also illustration No. 2, wherein one party insisted on the agreement in the matter that which party shall bear the costs of the publicity campaign. 415 Pannebakker 56-57 with reference to Dutch law. See also illustration No. 8: UNIDROIT Principles, 177. 416 Illustration No. 7, UNIDROIT Principles, 176. 417 Unilateral promises are criticized in French scholarship because they support – besides promoting investments – the speculations on the property market since such promises can be made fast (too fast), see Sefton-Green, 77. 418 Pannebakker, 95.

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month or the parties have exhausted all options and means (i.e. made sufficient efforts) to negotiate any further but they did not manage to come closer to the conclusion of the final contract. The limited period in time can be adjusted to the duration of the due diligence process or – if the effect of the letter of intent is limited in time – to this time limitation.419 215 Exclusivity clauses have two little siblings.420 The one is called a sincerity clause, which does not exclude the possibility of conducting parallel negotiations but requires the party doing so to inform the other party. 216 The other one is a pre-emption agreement, which limits the party’s contractual freedom on the choice of the contractual partner. Article 1123 of the French Code Civil (as certainly many other civil codes) also contains such an instrument (pacte de préférence). According to French case law, a preemption right can be granted both for a definite or indefinite period of time. Besides damages, the party whose preemption right was infringed can claim nullity or that the court substitute this party for the third party in the contract that has been concluded, provided the third party knew of the existence of the pre-emption agreement and of the beneficiary’s intention to take advantage of it. 421 In order to prevent nullity, the third party ‘may give written notice to the beneficiary requiring him to confirm, within a period which the former fixes and which must be reasonable, the existence of a pre-emption agreement and whether he intends to take advantage of it’ (Article 1123(3) Code Civil). If there is no answer, the beneficiary of the preemption right does not have the right to claim to be substituted or nullity (Article 1123(4) Code Civil).

V. Confidentiality 217

Since there is no general duty of confidentiality in the respective legal systems – apart from trade secrets and intellectual property rights – confidentiality clauses are frequently used and are severable and enforceable provisions within PCIs.422 The severability and binding force of such clauses (and also of other types of severable clauses such as dispute resolution) is acknowledged, even if the conclusion of the final contract is conditional on specific formality requirements.423 Besides ex post remedies, such as damages, ex ante reliefs, such as injunctions, can also be granted if confidential information has not yet been disclosed but there is an imminent threat.424 Confidentiality clauses – besides determining the scope, i.e. identifying the information that qualifies as confidential or, to the contrary, that are not – can include provisions that prohibit the disclosure even of the mere fact of negotiations (because the disclosure may have an impact on the shares to be sold), or make issuing any press release conditional on the other party’s consent, etc.

Pannebakker, 57-58 with reference to Dutch law, 249-250 and 344 in general. Pannebakker, 100. 421 See the explanations given by Pannebakker, 93-94. 422 Cf. the summaries on Dutch and French laws provided by Pannebakker, 51, 58-59, 101, and in general 246-48. 423 Cf. Wei & Yu, 296, 302 with reference to Chinese law. 424 Similarly, Pannebakker, 101 with reference to French law. 419

420

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F. Commentary

VI. Distribution of Costs and Limitation of Liability The (re)allocation of costs of preparing contracts and exclusionary or limitation clauses on liability are crucial for keeping the risks of non-conclusion (with special regard to investments of time and money that can turn out to have been wasted) predictable, and to limit the parties’ financial exposure.425 They are generally severable and enforceable up to some general barriers based on good faith, good morals or reasonableness and fairness requirements and to the restrictions on contractual freedom related to the exclusion or limitation of liability. The liability for intentional harm cannot be excluded or limited in the respective legal systems,426 and clauses that waive or limit liability can be prohibited if they are overall grossly unfair or infringe the requirement of consistent behaviour.427 The ordre public character and mandatory nature of tort law should also be borne in mind regarding French law. Difficulties can therefore arise on the distinction of duties, conducts and remedies covered by the PCI as a contract and other aspects that belong to the realm of tort law that cannot be set aside by mutual agreement of the parties.428 In some legal systems the courts have the power to adjust the amount of excessive contractual penalties (‘break-up fees’) or similar measures provided for in the PCI, 429 because such fees are expected to be proportional to the goal of the negotiated transaction.430 As far as the reallocation of costs is concerned, the parties may fix that both parties bear their own costs irrespective of why those particular costs arose. In this event, the courts tend not to establish any liability.431 The parties can empower each other to claim all reasonable and proper costs if the other party breaks off negotiations or make the subsequent reimbursement conditional on the previous request, instruction or approval of the other party. The heads and amounts of the respective costs can be limited in the PCI.432 Exclusion and limitation of liability is also quite common. The amount of damages to be paid can be capped and also liability for particular heads of losses can be excluded (loss of profit, loss of contract, loss of reputation).433

218

219

220

221

222

VII. Dispute Resolution Clauses related to dispute resolution (jurisdiction i.e. choice of forum, choice of law 223 and arbitration clauses) are severable (and therefore to be assessed independently) and binding in the respective legal systems (also if included in PCIs).434 They are explicitly allowed by European legal instruments such as Article 25(5) Brussels I-bis Regulation (regarding choice of court clauses). Pannebakker, 253. Pannebakker, 59-60 with reference to Dutch law and 255, 347 in general. 427 See Pannebakker, 302 with reference to PICC, however the latter can be disclaimed according to the prevailing view, id. 345. PECL seems to be more restrictive in this respect, id. 346. 428 Pannebakker, 255. However, the principle of non-cumul de responsabilité shall be also taken into account, id. 111. 429 Cf. Pannebakker, 252 with reference to Dutch case law and 110-11, 255 with reference to French law. 430 Pannebakker, 61 with reference to Dutch case law. 431 Pannebakker, 252 with reference to French case law. 432 Pannebakker, 250-53. 433 Pannebakker, 253-55. 434 Pannebakker, 256-260. 425

426

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G. Illustrations 224

225 226

227 228

229 230

231

The official commentary on Article 2.1.13 PICC (Conclusion of contract dependent on agreement on specific matters or in a particular form) provides two illustrations that are worth citing here.435 Integrated summary of illustrations No. 1 and 2: ‘A agrees with B on all the terms which are essential to their intended contract for the distribution of A’s goods. When the question subsequently arises of who should bear the costs of the publicity campaign, neither party may claim that no contract has come into existence by reason of the silence of the contract on this point, as the missing term is not essential to the type of transaction in question and will be implied in fact or by law.’ However, if during the negotiations B repeatedly declares that the question of who should bear the cost of the publicity campaign must be settled expressly, then ‘notwithstanding their agreement on all the essential terms of the contract, no contract has come into existence between A and B since B had insisted that the conclusion of the contract was dependent on agreement regarding that specific term.’ Integrated summary of illustrations No. 3 and 4: ‘After prolonged negotiations A and B sign a “Memorandum of Understanding” containing the terms of an agreement for a joint venture for the exploration and exploitation of the continental shelf of country X. The parties agree that they will at a later stage draw up the agreement in formal documents to be signed and exchanged at a public ceremony. If the “Memorandum” already contains all the relevant terms of the agreement and the subsequent documents are intended merely to permit the agreement to be properly presented to the public, it may be taken that the contract was already concluded when the first written document was signed.’ However, if ‘the “Memorandum of Understanding” contains a clause such as “Not binding until final agreement is executed” or the like’, then ‘until the signing and the exchange of the formal documents there is no binding contract.’ The hypothetical drafted by Cartwright and Hesselink on Exclusivity is remarkable:436 ‘A and B are negotiating for the sale by A to B of A’s business. At the start of the negotiations, A agrees that ‘for a period of three months he will not negotiate with any third party nor consider any proposal from a third party with a view to concluding a contract for the sale of the business’. During the negotiations between A and B the price is agreed (as €2 m) although there is no contract concluded because of other outstanding matters, including the question of whether B will continue to employ the whole of A’s workforce. After two months, A receives a proposal for the sale of the business from C, who agrees to take on the whole workforce and to pay a higher price (€3 m). A then breaks off the negotiations with B and, after conducting negotiations with C, concludes a contract with C for the sale of the business. During the negotiations, B had incurred accountants’ and lawyers’ fees in investigating the state of the business. The real value of the business, as established by independent experts, is €3 m. What liability (in contract, tort, restitution, or any other form of liability), if any, does A have to B? Would it make a difference if A had instead agreed that ‘he will negotiate with B in good faith and only break off the negotiations for a proper reason’? The legal systems analysed in Cartwright’s and Hesselink’s treatise would provide a remedy in the first version but most of them would not do so in the second. The breach 435 436

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I. Practitioner Tips & Contract Clauses

of an exclusivity agreement qualifies as a contract law case in most of the legal systems concerned but damages vary from one to another on whether they are restricted to the expenses incurred during negotiations or damages should be calculated on the basis of the lost chance to make a profit. The reporters also intensively address the causation; one of them (the German report) denies that there was a causal connection between the breach of the exclusivity clause and the losses.

H. Cross References & Additional Commentary The Common Law approach on PCIs is covered in Chapter 4 (Precontractual liability 232 in Common Law). Since precontractual agreements – having binding effect – are mostly treated as (normal) contracts with special duties and content, Chapter 7 on formalities and Chapter 8 on formation of contracts are therefore also related and relevant. Confidentiality is elaborated on in Chapter 29 too (Post contract and continuing obligations and rights).

I. Practitioner Tips & Contract Clauses As referred to above, the more valuable and the more complex the transaction, the 233 more negotiations are expected to be lengthy, the more uncertain the precontractual liability regime of the applicable law is, the more sense it makes to draft and sign a precontractual instrument. Vague statements and uncertain duties should be avoided in order to spare the parties and the court difficult interpretational stunts based on the circumstances. The parties’ intent should be clearly comprehensible on the basis of the text alone (literal meaning). It is useful to fix the period of validity or, if the PCI is agreed upon for an indefinite period of time, provisions of termination should be added. If the PCI is divided into binding and non-binding parts, the character of each provision must be clearly allocated into one or the other group. Some sample clauses follow next, based on the compilation by Pannebakker.437

I. Binding and Non-binding Parts ‘The terms of this Letter do not and are not intended to create binding legal obliga- 234 tions upon the parties hereto with the exception of this Clause and Clauses 5, 11 and 13 ...’438 (Choice of law and jurisdiction can be added: ‘which clauses shall be governed by French substantive law and are subject to the exclusive jurisdiction of French courts.’) ‘Seller and Purchaser acknowledge that this Letter of Intent proposal is not a binding 235 agreement and that it is intended solely to establish the principal terms of the purchase and as a basis for the preparation of a binding Purchase and Sale Agreement [...] provided, however, that in consideration of Purchaser’s good faith efforts to review the due diligence material provided by Seller, Seller agrees to be bound to provide the required due diligence documents to Purchaser within the time required and to comply with the Non–Solicitation provision set forth above.’439 437 Pannebakker, 240-259. Many other sample clauses can be found for example at this website: https:// www.lawinsider.com/clauses. 438 JSD Corporation PTE Ltd v. Al Waha Capital PJSC, Second Waha Lease Ltd [2009] EWHC 583 (Ch), 2009 WL 648840 [83]. Reported and analysed by Pannebakker, 242-43. 439 Logan v. D.W. Sivers Co., 169 P.3 d 1255 (Or. 2007). Reported and analysed by Pannebakker, 243.

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II. Confidentiality ‘The terms and conditions set out in this Letter shall remain confidential between the parties and each party acknowledges that this Letter contains commercially sensitive information and agrees not to disclose same except to their respective Boards of Directors, advisers and employees or potential financiers of the Aircraft or as otherwise agreed between the parties or required by applicable law. No press release may be made by either party without the other party’s consent to the release and its content.’ 440 237 ‘No announcements may be made about the Mirror’s possible involvement in the de Krant project without the Mirror’s prior approval.’441 236

III. Exclusivity ‘Seller and/or its representatives agree that it will not seek nor enter into a letter of intent or purchase agreement for sale of the Property with any third party for a period of sixty (60) days from the date this Letter of Intent is signed by both parties and becomes effective.’442 239 ‘Seller agrees to negotiate with Purchaser exclusively during the next ninety (90) day period to complete a mutually agreeable Purchase & Sale Agreement. If the parties are unable to reach final agreement on the formal Purchase & Sale Agreement during such period, neither party shall have any further obligation to the other.’443 238

IV. Reallocation of Costs, Limitations of Liability ‘If for whatever reason we at any time give notice to cease work (in which event you shall as soon as practicable cease all work) we shall reimburse all reasonable and proper costs incurred by you in accordance with the terms of this letter.’444 241 ‘... this letter would authorise expenditure on preliminaries and specialist design works up to a value of £50,000, but that this letter of intent does not cover construction works which will be the subject of a separate instruction.’445 242 ‘Subject to the terms of this letter, ACC is authorised to proceed with the works up to a total value of £250,000 or any other sum which may subsequently be notified to you in writing by the BBC.’446 243 ‘If DB breaches any of its obligations in this paragraph or if during the Lock-Out Period DB withdraws from negotiations with NBM for the sale of the Property, NBM shall be entitled to recover all of its costs and expenses relating to the investigation and nego240

440 JSD Corporation PTE Ltd v. Al Waha Capital PJSC, Second Waha Lease Ltd [2009] EWHC 583 (Ch), 2009 WL 648840 [83], presented and reported by Pannebakker, 245-46. 441 HR 24 November 1995, ECLI:NL:HR:1995:ZC1890, NJ 1996, 162 Van Engen/Mirror Group, presented and reported by Pannebakker, 246. 442 Logan v. D.W. Sivers Co., 169 P.3 d 1255, 1257 (Or. 2007), presented and reported by Pannebakker, 248. 443 Vestar Development II, LLC v. General Dynamics Corp., 249 F.3 d 958, 959 (C.A.9 2001), presented and reported by Pannebakker, 248. 444 Hackwood Ltd v. Areen Design Services Ltd [2005] EWHC 2322 (TCC), (2006) 22 Const LJ 68 [14], presented and reported by Pannebakker, 251. 445 Eugena Ltd v. Gelande Corp Ltd [2004] EWHC 3273 (QB), 2004 WL 2387190 [29], presented and reported by Pannebakker, 251. 446 AC Controls Limited v. British Broadcasting Corporation [2002] EWHC 3132 (TCC), 89 Con LR 52 [21], presented and reported by Pannebakker, 251.

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J. Additional Sources

tiation of the proposed acquisition by it of the Property, however in no case more than EUR 300,000.00 in total, without the possibility of any further claims of any kind of NBM.’447 ‘In the event that a Secondary Subcontract is not concluded we shall reimburse only 244 your reasonable and substantiated direct costs of complying with this instruction until it is revoked. We will not reimburse any other expenditure cost or loss whatsoever. This limitation includes without derogating from the generality of the foregoing any claim for breach of contract, loss of profit, loss of contract, loss of expectation or otherwise.’ 448 ‘If, for any unforeseen reason, the contract should fail to proceed and be formalised, 245 then any reasonable expenditure incurred by you in connection with the above will be reimbursed on a quantum meruit basis. Any such payment would strictly form the limit of our client’s commitment and our client would not be subject any further payment of compensation for damages for breach of contract.’449 ‘Clapham Park Homes Ltd do not undertake to reimburse any anticipated profits 246 for the works as a whole, nor actual costs or actual or theoretically incurred general or specific overheads arising after the date of notification that no further work is to be carried out.’450

J. Additional Sources Bergjan, ‘Die Haftung aus culpa in contrahendo beim Letter of Intent nach neuem Schuldrecht’, 25 Zeitschrift für Wirtschaftsrecht (2004) 395; Pannebakker, Letter of Intent in International Contracting (2016).

447 Hof Amsterdam 26 April 2011, ECLI:NL:GHAMS:2011:BQ5836, LJN BQ5836. Presented and reported by Pannebakker, 253. 448 Bennett (Electrical) Services Limited v. Inviron Limited [2007] EWHC 49 (TCC), 2007 WL 1518029. Presented and reported by Pannebakker, 254. 449 Harvey Shopfitters Limited v. A.D.I. Limited [2003] EWCA Civ 1757, [2004] 2 All ER 982 [3]. Presented and reported by Pannebakker, 254. 450 Diamond Build Ltd v. Clapham Park Homes Ltd [2008] EWHC 1439 (TCC), [2008] CILL 2601 [5]. Presented and reported by Pannebakker, 254.

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CHAPTER 4 PRE-CONTRACTUAL LIABILITY IN THE COMMON LAW Larry A. DiMatteo A. Topics Covered . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B. Introductory Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C. Statement of Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . D. International Sales Transaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . E. Sampling of Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Principles of European Contract Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Common Law of Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. American Restatement (Second) of Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. American Uniform Commercial Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. Trade Secrets Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI. American Uniform Trade Secrets Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VII. French Civil Code (Negotiations) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VIII. UNIDROIT Principles of International Commercial Contracts . . . . . . . . . . . . . . IX. CCC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . X. Interpretation II of the Supreme People’s Court of Several Issues concerning the Application of the Chinese Contract Law (prior to New Civil Code) XI. International Trade Usage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F. Commentary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Good Faith in Negotiations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Pre-contractual Instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Informality of Contracting and Waning of Formalities . . . . . . . . . . . . . . . . . . . . 2. Agreement to Agree . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Agreement to Negotiate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. Letters of Intent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5. Preliminary Agreements: Agreement in Principle, Memorandum of Understanding, and Heads of Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6. Email Based Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7. Lock-out Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8. Disclaimers of Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9. Recent Trends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Australia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) United Kingdom . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Misrepresentation and the Duty to Disclose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Breach of Confidentiality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . G. Illustrations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . H. Cross References & Additional Commentary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Practitioner Tips & Contract Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Good Commercial Practice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Benefits and Functions of a Well-Structured Preliminary Agreement . . . . . . . . III. Sample Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Privacy of Information Clause . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Restrictive Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Indemnity Language . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. Disclaimer Language . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5. Non-Reliance Provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . J. Additional Sources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 5 12 15 17 18 19 20 21 22 23 24 25 26 27 28 29 30 46 48 56 70 76 84 86 87 89 94 95 99 101 105 114 120 121 121 123 126 126 127 128 129 130 134

A. Topics Covered 1

This Chapter will review the Common Law approach to pre-contractual liability so that the reader may compare it to the Civil Law approach discussed in Chapter 3. The coverage (commentary) is broken into four areas: (1) liability for bad faith negotiations, (2) potential liability based upon pre-contractual instruments, (3) misrepresentation and 114

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the duty to disclose, and (4) liability based upon a breach of the duty of confidentiality for information obtained during the negotiation phase, whether or not leading to the conclusion of a contract. As to the first area, the doctrine of promissory estoppel will be discussed. Promissory estoppel is recognized under § 90 of the American Restatement (Second) of Contracts and has proven to be malleable doctrine allowing a court to hold a party liable for pre-contractual promises or assurances, as well as being used to find a formation or conclusion of a contract despite the fact that one of the requirements for a valid contract is missing. In the area of misrepresentations, false statements (of material fact) made during the negotiations can be subsequently used to void the contract and to sue for damages. The second area of coverage focuses on the enforceability of pre-contractual instru- 2 ments, such as letters of assurance, letters of intent, comfort letters, preliminary agreements, agreements to agree, agreement to negotiate, and so forth. The general rule is that liability cannot be premised upon such instruments if any sort of disclaimer of liability language is found within its contents. Such language is a common component in most of these instruments. However, some American courts have in more recent times have found agreements to agree to be stand-alone contracts in which the parties are bound to negotiate in good faith in the hope of consummating a final contract. This later trend in the law can be seen as determining when the parties have crossed the line from pre-contract to contract formation. The demarcation of the line between non-contract and contract is discussed in detail in Chapters 7 on ‘Contractual Formalities’ by Sieg Eiselen and Chapter 8 ‘Formation of Contract’ by Reiner Schulze. The third area discusses the Common Law’s recognition of three types of misrepre- 3 sentation – innocent, negligent, and intentional misrepresentation. The requirements to prove intentional misrepresentation in contract law are the same as for proving fraud in tort law. So, lawyers will generally make claims based upon intentional misrepresentation and fraud but argue for a finding in fraud in the hope of obtaining additional (punitive) damages. The final area discusses liability of a duty of confidentiality, express or implied, for using or disclosing confidential information shared by the other party during the negotiations. The key issue here is how does the law define ‘confidential information’? It is interesting the note the interrelationship between the duty to disclose (lack of doing so being an act of misrepresentation) and the duty of confidentiality (disclosing information by receiving party). The area of breach of confidentiality has a counterpart in Chapter 28’s discussion 4 of breach of confidentiality during the post-contract phase. Duties of confidentiality are ubiquitous throughout the scope of the contractual relationship. For example, in performing on a contract the parties may produce confidential information (know-how, customer databases) that should be protected in some way. Good contracts will provide express terms dealing with the definition of confidential information and the relative duties of the parties as to its use and the rights or lack of rights to further disseminate the information. Even if there are no express provisions creating duties of confidentiality, many laws and courts will imply such duties, especially in cases were one of the parties to the contract shares such information with the other party. Confidential duties also survive the completion or the termination of the contract. Such post-contractual duties may be perpetual in nature or continue until the confidential information becomes available in the public domain or when the information no longer gives the owner (sharing party) a competitive advantage in the marketplace. This Chapter will review the creation of duties of confidentiality during the negotiation phase of contracting. In order to fully specify the terms or adequately define the subject matter, parties may have to share confidential information with the other party. This Chapter will review the law

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regarding such disclosure and legal protections that are accorded to such information. It suggests that the parties should enter into a ‘negotiations agreement’ in order to specify the confidential nature of shared information and the attendant obligations not to use or disclose that information, whether a contract is subsequently formed or not.

B. Introductory Note Before discussing pre-contractual liability, it is first important to dispel a general adage that a major difference between civil and Common Law is that the former recognizes a general principle of good faith and the later does not. The idea that the Common Law’s rejection of a duty of good faith negotiations conformed to its overall rejection of the principle of good faith is no longer true. Numerous Common Law countries have recognized a duty of good faith in the performance and the enforcement of contracts. For example, both the American Restatement (Second) of Contracts 1 and the Uniform Commercial Code2 recognize such a duty. This recognition of the duty of good faith goes as far back as the 1960’s with the enactment of the American Uniform Commercial Code’s provision implying a duty of good faith and fair dealing in all sales of goods contracts, which was subsequently applied by analogy to non-sale contracts. In sum, the duty of good faith in the performance and enforcement is implied by American Common Law into all contracts. 6 Australia and Canada have more recently recognized a general implied duty of good faith. In Bhasin v Hrynew Ltd,3 the Canadian Supreme Court accepted the existence of a Common Law duty to act honestly in the performance of contractual obligations, applicable to all contracts. This duty requires ‘parties not to lie or otherwise knowingly mislead each other about matters directly linked to the performance of the contract’ and should be thought as a general doctrine of contract law that imposes as a contractual duty a minimum standard of honest contractual performance. There has also been a slight bending of rule against good faith in the United Kingdom. Although UK law continues to reject a general implied in law duty of good faith in the performance of contract, Justice Leggat in Yam Seng Pte Ltd v International Trade Corp Ltd4 recognized that such a duty may be implied-in-fact. Such a duty can be implied based upon party intent. 7 However, the Common Law countries are uniform in the belief that the duty of good faith does not extend to pre-contractual negotiations. However, both the common and the Civil Laws recognize liability rooted in the negotiations phase, such as liability for misrepresentation (fraud or deceit) and for breach of an express or implied duty of confidentiality. 8 The area of pre-contractual liability in the Civil Law is covered in Chapter 3. It is important to point out some of the starker differences between the common and Civil Law approaches to pre-contractual liability by way of introduction before proceeding to review the Common Law approach in detail. The Civil Law has adopted the Roman concept of culpa in contrahendo in which a party may be held liable for reliance damages and, in some cases, for full compensatory (expectation damages, lost profits) for the bad faith (without a just cause) breaking off of negotiations. 5

Restatement (Second) of Contracts § 205 (1981). UCC § 1-203. 3 Bhasin 2014 SCC 71; [2014]3 S.C.R 495. 4 Yam Seng [2013] EWHC 111 (QB); [2013] 1 All E.R. (Comm)1321. 1

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C. Statement of Issues

Because of the long recognition of the duty of good faith negotiations, continental 9 legal literature extensively addresses the question of what kinds of conduct are regarded as contrary to such a good faith standard, such as negotiating without intending to conclude a contract, conducting parallel negotiations, breaking off negotiations unilaterally, knowingly concluding an invalid contract, not giving adequate information, disclosing confidential information or causing physical harm to the other party in the course of negotiations. Nordic law recognizes s a duty of loyalty in the performance of contracts, which is 10 extended in Norwegian law to a precontractual duty of loyalty. The duty of loyalty is considered a basic norm, which has given rise to a number of rules. Some examples of specific obligations are the duty of cooperation, which for instance may oblige a party to apply for necessary permits, and the duty to abstain from competing with the other party or with the common project.5 Many commercial cases from the Nordic supreme courts concern the precontractual duty of loyalty in commercial settings. In the area of liability based upon pre-contractual instruments, the differences be- 11 tween the common and Civil Laws are not as stark as found in the area of good faith negotiations. The differences relating to the enforceability of pre-contractual instruments and liability for breach of these instruments are more a matter of semantics than of substance. Thus, the idea of the enforcement of a pre- or non-contractual instrument is a misnomer. The liability stemming from such instruments is based upon a finding of a binding obligation. The distance between binding obligations (especially if both parties undertake some obligation under the preliminary instrument) and contract is infinitesimal at best. What is likely the case is that there is one contract (preliminary) to be followed by a second contract (transactional).

C. Statement of Issues In the course of negotiations of a sales contract, a ‘change of circumstances’ may 12 lead to one party breaking off negotiations. In the worst case scenario, the parties have entered into the final stage of negotiations with most of the terms agreed to; due to the seriousness of the negotiations a party has invested substantial amounts of time and costs with the expectation that a contract would be concluded; and that such expenditures would be lost if such a contract is not concluded (due to a breaking off of negotiations by the other party). Should a party be able to break off negotiations so near a successful conclusion without liability to the other party? Is there a duty to negotiate in good faith in cases were negotiations have been fruitful and long-term? What types of damages, if any, should the non-breaking off party be able to collect? Do parties owe each other a duty to negotiate in good faith? During the negotiations, can parties incur legally enforceable obligations? What types 13 of conduct during the negotiations should bear legal consequences? Is a party who is provided confidential information by the other party to the negotiation obliged not to use the information on its own behalf or to disclose that information to a third party? Does a party to a negotiation have a duty to disclose material information to the other party? In protracted negotiations, especially involving the manufacture of custom and com- 14 plex goods, parties will exchange various materials, such as letters, specifications, and create preliminary instruments (letters of intent, agreements to agree, agreement in 5 Munukka, ‘The Contractual Duty of Loyalty: Good Faith in the Performance and Enforcement of Contract’ in The Nordic Contracts Act (DJØF Publishing, 2015).

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principle, comfort letter, heads of agreement, preliminary agreements, and so forth) to acknowledge contract terms agreed to; those that remain open; and to provide a blueprint for concluding the negotiations. Are these types of ‘preliminary agreements’ unenforceable or do they have the potential to create legally binding obligations? Can these instruments create a contractual obligation to negotiate in good faith independent of whether the parties successfully enter into a final sales contract?

D. International Sales Transaction Issues of pre-contractual liability are heightened in international sales transactions due to the wide variety of rules across the different national legal systems. Since the CISG fails to directly deal with the issue of liability stemming from negotiations or pre-contractual instruments, then private international law or choice of law determines whether a party is held liable for bad faith negotiations or other potential obligations incurred during the negotiation of a contract. An overly simplistic view notes that the Common Law countries do not recognize a duty to negotiate in good faith or the ability of parties to create an enforceable obligation to negotiate in good faith. In contrast, Civil Law countries recognize an implied in law duty to negotiate in good faith and are more likely to recognize liability relating to pre-contractual instruments. That said, there are significant variations across Common Law and Civil Law systems on the liability for bad faith negotiations, the ability to create a duty to negotiate through an ‘agreement to agree,’ the types of damages recoverable, the enforceability of ‘lock-out’ agreements (promise not to undertake negotiations with third parties), the duty to disclose material information, the use of promissory estoppel to obtain reliance damages for breach of a promise made during negotiations, and so forth. 16 It is important that international businesspersons and their lawyers understand these differences in order to manage liability related to contract negotiations or pre-contractual instruments. This information is important for purposes of choice of law, negotiation practice, and in the crafting of preliminary or pre-contractual instruments. The parties may want to bind themselves to some contractual obligations prior to the conclusion of the primary contract, such as to create an obligation of confidentiality, to require the disclosure of material information, agree not to negotiate with third parties, and to obligate each other to negotiate in good faith or to make clear that no such obligations or liabilities are intended (disclaimer). 15

E. Sampling of Laws 17

First a few introductory notes: (1) the analysis of the Common Law on good faith negotiations and the enforceability of preliminary agreements focuses on the laws of the United Kingdom (primarily English Common Law) and the United States (given their different views on the subjects this seemed to be an appropriate choice), (2) sections of the PECL is included given the UK’s position as a European country, (3) sections of the UNIDROIT Principles are included given its position as an international soft law instrument, and (4) sources taken from Chinese law are provided because they are interesting and because a plausible argument can be made that Chinese commercial law is a Civil Law system with Common Law influences.

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I. Principles of European Contract Law 18

Article 2:301 Negotiations Contrary to Good Faith (1) A party is free to negotiate and is not liable for failure to reach an agreement. (2) However, a party who has negotiated or broken off negotiations contrary to good faith is liable for the losses caused to the other party. (3) It is contrary to good faith, in particular, for a party to enter into or continue negotiations with no real intention of reaching an agreement with the other party.

II. Common Law of Contracts The Common Law of contracts formally rejects any liability for bad faith negotia- 19 tions. The status of the Common Law relating to pre-contractual liability in general will be discussed in depth in the commentary section of this Chapter.

III. American Restatement (Second) of Contracts 20

§ 205 Good Faith Every contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement. § 90 Promise reasonably Inducing Action or Forbearance [Detrimental Reliance/Promissory Estoppel] A promise which the promisor should reasonably expect to induce action … is binding if injustice can be avoided only by enforcement of the promise.

IV. American Uniform Commercial Code 21

§ 1-103 Supplementary general principles of law applicable Unless displaced by the particular provisions of this Title, the principles of law and equity, including the law merchant and the law relative to capacity to contract, principal and agent, estoppel, fraud, misrepresentation, duress, coercion, mistake, bankruptcy, or other validating or invalidating cause shall supplement its provisions. § 1-201 General definitions (16) Fault. ‘Fault’ means wrongful act, omission or breach. (19) Good faith. ‘Good faith’ means honesty in fact in the conduct or transaction concerned. § 1-203 Obligations of good faith Every contract or duty within this Title imposes an obligation of good faith in its performance or enforcement. § 2-103 Definitions and index of definitions (1)(b) Good faith. ‘Good faith’ in the case of a merchant means honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade. § 2-721 Remedies for fraud Remedies for material misrepresentation or fraud include all remedies available under this Article for nonfraudulent breach. Neither rescission nor a claim for rescission of the contract for sale nor rejection or return of the goods shall bar or be deemed inconsistent with a claim for damages or other remedy.

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V. Trade Secrets Law 22

The Common Law recognizes a cause of action (claim) for the stealing of trade secrets. A plausible argument can be made that the voluntary sharing of a party’s trade secrets during the negotiations obligates the receiving party to maintain the confidentiality of the information

VI. American Uniform Trade Secrets Act The Uniform Trade Secrets Act (UTSA) defines a trade secret as:

23

–

Information, including a formula, pattern, compilation, program, device, method, technique, or process; that derives independent economic value, actual or potential, from not being generally known to or readily ascertainable through appropriate means by other persons who might obtain economic value from its disclosure or use; and is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.

For a discussion of how to determine whether information is ‘confidential’ see the section on ‘Breach of Confidentiality.’

VII. French Civil Code (Negotiations) 24

The new French Civil Code of 2016 starts with the premise that parties are free to break-off negotiations unless the breaking-off was done in bad faith. Importantly, it limits damages to remedial damages and not ‘loss of benefits.’ Article 1104 Contracts must be negotiated, formed and performed in good faith.

It also notes that the duty to disclose information of decisive importance is immutable. Finally, Article 1112-2 recognizes an implied duty of confidentiality. Article 1112 The commencement, continuation and breaking-off of precontractual negotiations are free from control. They must mandatorily satisfy the requirements of good faith. In case of fault committed during the negotiations, the reparation of the resulting loss is not calculated so as to compensate the loss of benefits which were expected from the contract that was not concluded. Art. 1112-1. –The party who knows information which is of decisive importance for the consent of the other, must inform him of it where the latter legitimately does not know the information or relies on the contracting party. However, this duty to inform does not apply to an assessment of the value of the act of performance. Information is of decisive importance if it has a direct and necessary relationship with the content of the contract or the status of the parties. A person who claims that information was due to him has the burden of proving that the other party had the duty to provide it, and that other party has the burden of proving that he has provided it. The parties may neither limit nor exclude this duty. In addition to imposing liability on the party who had the duty to inform, his failure to fulfil the duty may lead to annulment of the contract under the conditions provided by articles 1130 and following. Art. 1112-2. – A person who without permission makes use of or discloses confidential information obtained in the course of negotiations incurs liability under the conditions set out by the general law.

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VIII. UNIDROIT Principles of International Commercial Contracts 25

Article 1.7 Good Faith and Fair Dealing (1) Each party must act in accordance with good faith and fair dealing in international trade. (2) The parties may not exclude or limit this duty. Article 1.8 Inconsistent Behaviour A party cannot act inconsistently with an understanding it has caused the other party to have and upon which that other party reasonably has acted in reliance to its detriment

IX. CCC The core provision dealing with liability in the negotiations of contracts in the new 26 CCC of 2021 is Article 500, which lists three grounds of liability: (1) negotiating as a pretext to a contract (no intent to reach a contract); (2) concealing information or providing false information; and (3) violating the principle of good faith. Subsequent case law or interpretations of the Supreme Court will determine the scope of such liabilities. Article 469 ‘email shall be regarded as written forms’ Article 7 All civil subjects engaging in civil activities shall observe the principle of good faith, adhere to honesty and keep their commitments. Article 500 A party shall be liable for compensation if it falls under any of the following circumstances when concluding a contract, thereby causing any losses to the other party: 1. Negotiating the contract in bad faith under the pretext of concluding a contract; 2. Deliberately concealing important facts relating to the conclusion of the contract or providing false information; 3. Having any other act in violation of the principle of good faith. Article 501 Trade secrets known by the contracting parties in the course of concluding the contract; or other confidential information shall not be disclosed or improperly used, no matter the contract has been concluded or not. Whoever discloses or improperly uses such trade secrets or information and thus causes losses to the other party shall be liable for compensation.

X. Interpretation II of the Supreme People’s Court of Several Issues concerning the Application of the Chinese Contract Law (prior to New Civil Code) After the formation of a contract which does not become effective until it is approved 27 or registered under a relevant law or administrative regulation, if the party which has the obligation to apply to go through the approval or registration formalities fails to do so under the relevant law or contractual provisions, such failure shall fall within the scope of ‘taking any other act contrary to the principle of good faith’, and the people’s court may, as the case may be, and upon the request of the opposite party, rule that the opposite party shall go through the relevant formalities by itself. However, the other party shall be liable for compensating the opposite party for the expenses incurred thereof and the losses actually caused to the opposite party.

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XI. International Trade Usage 28

‘Good Faith is a legal principle that forms an integral part of the rule of pacta sunt servanda.’6

F. Commentary 29

This commentary will focus on four areas: (1) duty of good faith negotiations, (2) enforceability of preliminary instruments or agreements, (3) misrepresentation and the duty to disclose, and (4) duty of confidentiality.

I. Good Faith in Negotiations Despite trends in some of the Common Law contracts toward the recognition of some types of pre-contractual liability, it is important to set out the general rule of the Common Law: ‘As a general rule, a party to pre-contractual 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.’7 However, E. Allan Farnsworth notes the recent trend in American Common Law is to impose pre-contractual liability in certain situations, including unjust enrichment related to the negotiations, misrepresentation or fraud, specific promises during negotiations that the other party reasonably relies upon (promissory estoppel), and the parties implied agreement to negotiate in good faith (see section below on Preliminary Instruments).8 31 The leading English case on a contractual agreement to negotiate in good faith is the decision of the House of Lords in Walford v Miles.9 There, the owners of a company were in negotiations to sell their shares to the plaintiff. An agreement was reached that the defendants would cease any negotiations for the sale of the company to third parties and would negotiate in good faith with the plaintiff with a view to concluding an agreement if the plaintiff produced confirmation from its banks that it had sufficient funds in place to complete the purchase of the shares. The necessary confirmation was duly provided but the defendants subsequently proceeded to sell their shares to a third party. 32 In the House of Lords, Lord Ackner held that an agreement to negotiate in good faith cannot be the basis of a legally enforceable contract. He rested this decision on three grounds: (1) Part of the rationale of the court was that such an agreement is indefinite since there was no measure for the court to determine whether a party was in breach of a negotiation agreement. (2) To recognize any such obligation to negotiate in good faith would bring uncertainty to freedom of negotiations and when it would be appropriate for a party to terminate the negotiations. (3) The parties should be free to negotiate freely based upon their own (narrow) self-interests: ‘A duty to negotiate in good faith is as unworkable in practice as it is inherently inconsistent with the position of a negotiating party.’10 33 However, other courts have established a distinction between an agreement to negotiate in good faith and a duty to use best efforts. A further distinction has been made between best efforts or endeavors and reasonable efforts or endeavors. In Rhodia Inter30

O’Connor, Good Faith in International Law (Dartmouth Publishing 1991) p. 124. Farnsworth, Farnsworth on Contracts Vol 1 (3rd edn., Aspen Publishers 2004) p. 369. 8 Id. p. 372. 9 Walford v Miles [1992] 2 AC 128. 10 Id. p. 138. 6

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national Holdings v Hunstman International LLC, the court held that a party could be held to a duty to use ‘reasonable’ endeavors, reasoning that the ‘reasonable’ standard was a lower standard and was a determination that courts were better equipped to make. 11 Furthermore, the best efforts provision could be interpreted to require that a party use all possible means to reach agreement – even though something may be possible to perform it may be commercially unreasonable for one to expect a party to take that step, which may be cost prohibitive.12 These distinctions have also been rationalized in that reasonable efforts can be determined objectively, while the duty of good faith and the duty to make best efforts are based upon a subjective (actual intentions and state of mind) standard. However, in American law there have been plausible arguments put forward that the duty of good faith can be objectively determined: What would a reasonable businessperson consider to be a good faith (or best efforts) discharge of its duties to negotiate? A businessperson may view the duty of good faith in negotiations and preliminary instruments differently than their lawyers. Good faith is seen as a part of commercial practice – a defining norm for defining the reliability, trustworthiness, and overall reputation of a commercial party. In American Common Law, the seminal case, Woods v Lady Lucy Duff-Gordon,13 also 34 recognized the duty of best efforts (in the context of an exclusive agency contract). But, most modern American courts use the reasonable efforts standard. The application of this duty has not been commonly applied in the negotiations setting. When a duty to negotiate is recognized in American law it has been recognized as a duty of good faith. The duty to negotiate in good faith only applies when American courts have concluded that a ‘contract’ to negotiate has been established. This will be discussed in detail in the section on pre-contractual instruments, especially in regard to ‘Agreements to Agree’. Irish Common Law has also aligned itself with the seminal English case of Walford v 35 Miles, recognizing that an agreement to negotiate in good faith is an illusory contract, which fails due to indefiniteness (uncertain terms).14 In that case, the parties agreed to negotiate on an exclusive basis for six months. The court held that an agreement to negotiate exclusively for a fixed period of time was enforceable, however, any obligation, express or implied, to negotiate in good faith was not enforceable.15 In the end, the Common Law’s rejection of a duty of good faith negotiations is 36 aligned with the freedom of contracting parties to enter or not enter a contract on any terms. Thus, a duty to negotiate in good faith is considered to be antithetical to parties’ freedom from contract. The self-interested premise underlying capitalism requires parties to be able to rigorously negotiate on their own behalf without restriction (no requirement to take the interests of the other party into account). 16 There are exceptions to the freedom from liability in the negotiations phase, such in cases of misrepresentation and the breach of confidentiality. Contracts based upon a material misrepresentation of one of the parties made during the negotiations would be grounds for a subsequent voiding of the contract and a claim for damages. The parties may also have a duty of confidentiality, express or implied, when confidential information

11 See Peel, ‘Agreements to Negotiate in Good Faith’ in Burrows & Peel (eds), Contract Formation and Parties (OUP 2010) p. 37. 12 [2007] 1 CLC 59, 75. 13 222 N.Y. 88, 118 N.E. 214 (1917). 14 See Triatic Ltd v Cork County Council [2007] 3 IR 57. 15 See also, Esso Ireland Ltd v Nine One Retail Ltd [2013] IEHC 514 (court rejected the duty of good faith, but open the possibility of recognizing a duty of ‘best endeavors’). 16 See Cohen, ‘Pre-Contractual Duties: Two Freedoms and the Contract to Negotiate’ in Beatson & Friedmann (eds), Good Faith and Fault in Contract Law (OUP 1995).

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is disclosed during the negotiations. The breach of confidentiality will be discussed in detail in the final part of this commentary. 37 The lack of a duty of good faith negotiations can be best understood in the context of the role of good faith within the common versus Civil Law systems. For example, the concept of good faith has been fully articulated in German law. The good faith provision found in BGB § 242 (‘Treu und Glauben’) is identical to the good faith obligation found in the American Restatement and UCC. The difference is that good faith in American law is used as an ancillary principle or a principle of last resort. In contrast, the German courts have used the good faith principle as a prism, which most contract issues and their application to contract disputes must pass. As a result, numerous contract law doctrines have evolved out of the good faith standard, such as the German doctrines of culpa in contrahendo,17 change in circumstances, contracts with protective effects vis-à-vis third parties, positive breach of contract, abuse of contractual rights, and termination of long-term contracts.18 38 This leads to an interesting tangent: Is Scots law, a product of a mixed jurisdiction, aligned with the English rejection of good faith or the German embrace of the principle? Hector MacQueen has asked that question as it relates to negotiations: ‘[C]an Scots law, like German law before it, use the doctrine of good faith to develop rules on culpa in contrahendo?’19 He notes, from the Civil Law perspective, that a party who improperly leads another party to believe that a contract is likely to be formed, when that party has no such intent, should be held accountable for at least the expenses incurred by the other party during the negotiations (Common Law’s reliance damages). 39 Scottish courts have generally followed the ‘anti-good faith negotiations’ rule of Walford v Miles, that each party has the duty to protect its own interests and should not expect the other party to act in good faith. Implicit in this statement is that parties are free to break off negotiations at any time. MacQueen characterizes this view as embodied in ‘the freedom not to contract.’20 The freedom to act solely in one’s self-interest is further bolstered by Scots law’s rejection of a duty to disclose material information to the other party.21 However, MacQueen notes that: ‘In many commercial situations time does not allow for such dalliance: negotiations and performance go together, perhaps with an expectation that the formal contract to be concluded in due course will have retrospective effect. It may be that the parties never make use of formal written contracts, and pursue an entirely informal relationship, in which negotiations, performance and contract are almost indistinguishable.’22 The courts have recognized such ‘dalliance’ in a number of cases: (1) where ‘a contract has come into existence despite the continuation of negotiations,’23 (2) where ‘there has been a transfer of value between the parties but

17 Rudolf von Jhering first developed the German concept of culpa in contrahendo in the nineteenth century. See von Jhering, ‘Culpa in contrahendo oder Schadenersatz bei nichtigen oder nicht zur Perfection gelangten Verträgen’ in Jahrbücher für die Dogmatik des Heutigen Römischen und Deutschen Privatrechts (1861). 18 See MacQueen, ‘Good Faith in the Scots Law of Contract: An Undisclosed Principle?’ in Forte (ed), Good Faith in Contract and Property Law (Hart 1999) p. 5, 10. 19 Id. p. 11. 20 Id. p. 14. 21 Id. p. 15. 22 Id. p. 15. 23 A recent example is Avintair Ltd v Ryder Airline Services Ltd 1994 SC 270; MacQueen, ‘Contract, unjustified enrichment and concurrent liability’ (1997) Acta Juridica 176, 188–189; MacQueen (n 15) p. 16.

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there is no contract,’24 and (3) possible claims for ‘wasted pre-contractual expenditure’ not within the scenarios of (1) and (2).25 The first scenario proves to be the easiest path to recovery since the courts recognize 40 an agreement despite the fact that it has not materialized into a formal written contract: ‘The key point being that it is contrary to good faith to break off a pre-contractual relationship, [when the] negotiations were essentially complete, making it reasonable to assume that the formalities would be carried through.’26 The second scenario is generally associated with the claim of unjust enrichment. Although it has been argued that a direct transfer of value between the parties is not always necessary if the parties are seen as engaging ‘in promoting an object of common interest, and the expenses entailed in furthering that object are thrown on one of the parties, then when that expenditure fails of obtaining the end aimed at the party-disburser must be recompensed, as being the disburser for a common object.’27 But, if the claim is for unjust enrichment there is still the difficulty of proving the amount that a party has been enriched; simply shifting some of the other party’s loss would not satisfy this requirement. In the end the successful claims cannot be said to be the result of bad faith negotiations, but are based upon the belief that the parties had actually entered into some form of an enforceable agreement – ‘theory of pre-contractual liability depends upon there being an ‘implied assurance’ that an agreement already reached is a binding contract’ – in which a party is reimbursed for expenditures ‘incurred on the faith of the non-contractual agreement.’ MacQueen asserts, however, that this is an example of the concretization of the good faith principle (application to specific types of fact scenarios).28 41 In the end, Professor MacQueen concludes: that good faith does play a substantial role in the Scottish law of contract, but that on the whole this has been expressed by way of particular rules rather than through broad general statements of the principle. The overall result is rather typical of the mixed system that is Scots law. These authorities do recognise a form of such liability which appears to go beyond anything established in the Anglo-American Common law but which is not nearly as extensive as those recognised in Germany, France or the Netherlands.

There are other cases where there is no agreement and no implied assurance that 42 there was a contract, but the parties often proceed as if there was one. These cases commonly involve a letter of intent.29 ‘The purpose of the letter of intent is to allow the chosen party to commence preparation for the contract, and it is not unusual for preparation to pass on to performance before the contract is concluded. But suppose the contract is never concluded because the negotiations are unsuccessful.’ 30 A case for detrimental reliance (promissory estoppel) to recover reliance damages (wasted expenditures) is difficult to make under Scottish law ‘given that letters of intent are often expressly not intended to have obligatory effect, the promise analysis [promissory estoppel] may be rather forced. An approach based on good faith, allowing recovery of justified reliance is perhaps more attractive and avoids the need for strained construc24 Contra, see Microwave Systems (Scotland) Ltd v Electro-Physiological Instruments Ltd 1971 SC 140 (OH); Site Preparations Ltd v Secretary of State for Scotland 1975 SLT (Notes) 41 (OH). 25 MacQueen (n 15) pp. 15–16. 26 Id. p. 17. 27 Id. p. 19. 28 Id. p. 21. 29 On letters of intent and the legal difficulties to which they give rise see Ball, ‘Work carried out in pursuance of letters of intent – contract or restitution?’ (1983) 99 LQR 572; Furmston et al., Contract Formation and Letters of Intent (Chancery Law Publishing 1998). 30 MacQueen (n 15) p. 24.

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tion and the implication of terms based, however artificially, upon the intention of the party issuing the letter of intent.’31 43 In sum, the simple ‘breaking off ’ negotiations, without more, is not actionable in the Common Law due to its rejection of the duty of good faith negotiations. Something ‘more’ would be cases were the parties negotiate the framework of a contract and one of the parties incurs expenses under the assumption that a contract would be reached. And even more powerful factor is when one of the parties asks the other party to expend money, such as beginning work, before a contract is formed. In such situations, the Common Law (especially, American Common Law) is not too far afield from German law where being able to obtain a better deal elsewhere is not a good reason for breaking off negotiations given the above factors (long-term negotiations and wasted expenditures). An interesting exception found in German law is that recovery of damages is precluded ‘where the expected conclusion of the contract requires notarial authentication.’32 44 English case law has seen the above scenario (one party encourages the other party to begin work during the negotiations) as the basis for finding a contract for work independent of the failed negotiations on the primary contract. The court in Brewer Street Investments Ltd v Barclays Woollen Co. 33 upheld a claim for unjust enrichment, but based damages on the cost expended on the work. Such reliance damages would be recoverable under promissory estoppel in American, Australian, and Irish law, but such a cause of action is not recognized in English law. Thus, the court used unjust enrichment to award reliance damages (monies expended) as a surrogate for restitution damages (value of benefit bestowed on wrongdoer), which is the normal remedy for unjust enrichment. In this case, the wrongdoer was not enriched so the English court found a contract in order to award out of pocket expenses. The court also determined that since the preliminary contract did not involve profit making, there was no expectancy interest other than to be paid for the work performed. 45 Given the rejection of the duty of good faith negotiations (implied in law) in the Common Law, the remaining question is whether private parties may agree to be bound by such an obligation and whether that express agreement would be enforceable in court? The English courts have rejected such an idea asserting that it would bring uncertainty to the freedom to negotiate and the freedom from contract, and the courts would be unable to measure when a party may break off negotiations in good faith.34 American courts have been more open to the ability of parties to agree to negotiate in good faith; however, the enforceability of such agreements has not been universally accepted. Courts have enforced such an obligation to negotiate in good faith, grounding liability on the parties having reached agreement to a substantial degree on the terms of the prospective contract.35

II. Pre-contractual Instruments 46

There are a wide varied of instruments that can be grouped under the heading of pre-contractual. All areas of commerce use such instruments despite the ambiguity of 31

Id. Zimmermann & Whittaker (eds), Good Faith in European Contract Law (CUP 2000) p. 237 n 6. 33 (1954) 1 QB 428, as discussed in Zimmermann & Whittaker (n 29) pp. 249–250. 34 See Courtney & Fairbairn Ltd. v Tolani Bros. [1975] 1 WLR 297. 35 See Itek Corp. v Chicago Aerial Industries, 248 A.2 d 625 (De. 1968); Channel Home Centers v Grossman, 795 F.2 d 291 (3rd Cir. 1986); Teachers Ins. & Annuity Assn. v Tribune Corp., 670 F. Supp. 491 (S.D.N.Y. 1987); Farnsworth (n 4) pp. 385–386. 32

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their enforceability. Lawyers write opinion letters in many different types of transactions, lending institutions considering a loan often request ‘comfort letters’ from parent companies of the prospective borrower, a party negotiating a complex contract may request a right of first refusal or letter of preference to allow it to match any future third party offers, and so forth. This section will focus on types of preliminary agreements that are more broadly used and have been used in the context of the sale of goods. The Chapter begins with the purposes served by preliminary instruments and the 47 ambiguity of their enforceability. The first section notes that their use is often due to the informality of contracting found in the business world. It also suggests that the ambiguity of enforcement is partially due to the waning of legal formalities in the law that had provided a stronger demarcation between pre-contract and contract. The next sections focus on specific types of pre-contractual instruments. Two that are given special attention are the ‘Agreement to Agree’ and ‘Letters of Intent.’ The agreement to agree allows for a discussion of whether the parties by express agreement can impose a duty of good faith negotiations in Common Law countries. Letters of intent are given special attention because of their widespread use and their use of the word ‘intent.’ A section on other types of preliminary agreements is used to discuss other popularly named instruments that in the end may be similar by way of analysis to the agreement to agree and the letter of intent. The special case of lock-out agreements that attempt to bind a party to exclusive negotiations will be briefly explored. The section finishes with a general discussion of disclaimer language, which is often found in many of the previously explored instruments.

1. Informality of Contracting and Waning of Formalities Modern day contracting have at times become more complex, given the increasing 48 complexity and specialization of products, including the creation and commodification of information products, but at the same time sale of goods transactions remain an informal affair. Professor Hugh Collins notes the divergence between the business deal and the legal contract. The parties’ deal is often not fully reflected or distorted by the formal contract. This fact questions the reality of intent that the formal documents are supposed to represent: ‘Yet to place such an emphasis upon the written documents often does not correspond to the intentions and expectations of the business parties.’ 36 Collins discusses the tension between the informality of the parties’ understandings and the law’s fixation on the final contract document. This may include the simple movement from oral agreement to written contract or it often includes a number of ‘sequential agreements.’ This in itself causes difficulty: Do the informal agreements bind the parties and the subsequent formal written contracts only represent a memorialization of the previous agreements? Alternatively, do the parties consider the informal agreement as non-binding with 49 their expectation that legal bindingness would occur in the formalization of the agreement into a written contract? What happens if the informal agreement conflicts with the formal one? Collins notes that there are two unattractive alternatives: (1) if the former controls, than the work of the lawyers in drafting the contract is wasted? (2) If the later controls, then the use of preliminary and informal agreements to manage the negotiations and the parties’ expectations is lost. The answer to this conundrum is found in the context of the negotiations. Had the parties previously dealt with one another? How did the parties previously regarded and acted upon the informal agreement as opposed to the formal agreement? Do the parties belong to an industry in which specific 36

Collins, Regulating Contracts (OUP 1999) p. 153.

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standard terms are widely accepted so that their disregard during the negotiation and subsequent inclusion in the formal contract makes perfect sense? In performing on the contract are the parties guided by the informal agreement or prior dealings as opposed to the lawyer drawn contract? 50 To answer the above questions requires the courts to consider extrinsic evidence that on the surface may contradict the written contract. In fact, the modern trend in the Common Law has been the loosening of the parol evidence rule37 that barred the admissibility of such evidence and an embrace of a contextual interpretation of contracts. This embrace of contextualism is more overtly demonstrated in American Common Law, but it is also is used, sometimes more covertly, in English Common Law. Contextual interpretation has been codified in the American law of sales through the UCC. The UCC provides that: Revised Article 1 (General Provisions): § 1-303 (a-c) (formerly, 1-205): A ‘course of performance’ is a sequence of conduct between the parties to a particular transaction that exists if: (1) the agreement of the parties with respect to the transaction involves repeated occasions for performance by a party; and (2) the other party, with knowledge of the nature of the performance and opportunity for objection to it, accepts the performance or acquiesces in it without objection. A ‘course of dealing’ [prior dealings] is a sequence of conduct concerning previous transactions between the parties to a particular transaction that is fairly to be regarded as establishing a common basis of understanding for interpreting their expressions and other conduct. A ‘usage of trade’ is any practice or method of dealing having such regularity of observance in a place, vocation, or trade as to justify an expectation that it will be observed with respect to the transaction in question. 1-303 (d): [Relationship between course of performance, course of dealing, and trade usage to the contract]: A course of performance or course of dealing between the parties or usage of trade in the vocation or trade in which they are engaged or of which they are or should be aware is relevant in ascertaining the meaning the parties’ agreement, may give particular meaning to specific terms of the agreement, and may supplement or qualify the terms of the agreement. A usage of trade applicable in the place in which part of the performance under the agreement is to occur may be so utilized as to that part of the performance. 1-303 (e): Ordering of Evidence [T]he express terms of an agreement and any applicable course of performance, course of dealing, or usage of trade must be construed whenever reasonable as consistent with each other; if such construction is unreasonable: (1) express terms prevail over course of performance, course of dealing, and usage of trade; (2) course of performance prevails over course of dealing and usage of trade; and (3) course of dealing prevails over usage of trade.

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The admission of extrinsic evidence is part of an overall reduction of the importance of formalities38 including, the inability to form a contract simply by the affixation of a ‘seal,’39 the liberal use of exceptions to the Statute of Frauds (written form requirement) found in the American UCC, and the ability of courts to declare a contract term to be See Chapter 23 (Contract Interpretation). See Chapter 7 (Contractual Formalities). 39 The formality of a sealed instrument evolved out of the late Middle Ages; it was formal contract that did not require a finding of consideration. ‘The ceremony of melting sealing wax onto parchment followed by impressing the melted wax with a signet wring was imposing.’ Perillo, Calamari and Perillo on Contracts (5th edn., Thomson-West Publishing 2003) p. 275. It was a ritual that signified the seriousness of the party 37

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ambiguous in order to avoid the parol evidence rule and the scope of a merger clause.40 The modern trend has been away from the need for formalities. The lack of formality requirements in the CISG is further evidence of this trend. Regarding the importance of the requirement of a written instrument, English Common Law revoked its Statute of Frauds years ago, but recognizes, as does the US the status of the integrated contract. That is, if the contract, even if not covered by the Statute of Frauds, is intended to be the final integration of the parties’ agreement, usually indicated by the incorporation of a merger clause, then the written contract controls the parties’ disputes unless, again, a term is ruled to be ambiguous. The relaxation of legal formalities has two implications for preliminary agreements. First, the lack of formalities makes it easier for parties to cross the threshold between mere negotiations to binding contract. Thus, there are no formalized obstacles to courts recognizing so-called preliminary agreements as binding contracts. Second preliminary agreements can be used as probative evidence in interpreting the formal written contract. In the end, nothing prevents a court from holding that a preliminary oral agreement created a binding contract. This is in itself a misnomer since if the parties orally agree to a contract then there is nothing preliminary about it. However, Common Law courts, even when the Statute of Frauds does not apply (American law) will be hesitant to recognize a contract in certain situations. The key factors are the amount of specificity provided and evidenced by the oral agreement and the complexity of the transaction. The higher the specificity of the agreed upon terms the greater likelihood of enforcement. If the transaction is considered to be complex in nature, such as the customized production of high cost, highly complex, and unique goods versus the sale of fungible goods, the courts will expect (even though not required) to see a written agreement. The two factors (specificity and complexity) are not mutually exclusive. If the evidence bears out the fact that the parties orally agreed with great specificity on the terms of the contract, then the agreement is enforceable, despite the complexity of the transaction. The difficult case is where there is doubt as to whether the parties actually entered into an oral contract. In such cases other factors could come into play. Comment c of § 27 of the American Restatement provides a list of factors that can be used to make this determination: (1) ‘the extent an express agreement has been reached on all (material) terms to be included in the contract’, (2) ‘whether the contract is of a type usually put in writing,’ (3) ‘whether it has few or many details,’ (4) ‘whether the amount involved is large or small,’ (5) ‘whether a standard form of contract is widely used in similar transactions’ (6) ‘whether it is a common or unusual contract,’ and (7) ‘whether either party takes any action in preparation for performance during the negotiations.’ Factor (5) is a bit confusing. It could be interpreted to mean that the existence of a standard form made it easy for the parties to enter a written agreement; thereby, their failure to do use the standard form or to refer to standard terms indicates that a contract had not been reached. The more plausible interpretation is that since that type of transaction had been ‘standardized’ the parties felt no need to go through the formality of signing a form. This later interpretation is supported by the informality of many commercial transactions, especially those involving repeat players.

to be bound in contract. The formation of contract under seal has been mostly abolished and has no place in the American UCC. 40 See Chapter 23 (Contract Interpretation).

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2. Agreement to Agree 56

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Sometimes the ‘agreement to agree’ is conflated with an ‘agreement to negotiate.’ The distinction to be used here is that the agreement to agree does not possess an express provision that requires the parties to negotiate in good faith. Any such duty would need to be implied by a court based on the intent of the parties and the context of the agreement. An agreement to negotiate generally has a provision that obligates the parties to negotiate in good faith. The issue for the courts is whether such a duty is enforceable. In the end, labels of legal or quasi-legal instruments are not what’s important so, much of the analysis of preliminary agreements will overlap. What matters is the content of the instrument and the intent of the parties. American courts have been willing to treat, in some contexts, the agreement to agree as an independent contract obligating the parties to negotiate in good faith. This rationale for recognizing a contract to negotiate in good faith has been rejected by the English courts. In Courtney & Fairbairn Ltd v Tolani Brothers Ltd,41 Lord Denning stated that: ‘the law does not recognise a contract to enter into a contract; it seems to me it cannot recognise a contract to negotiate. The reason is because it is too uncertain to have any binding force.’ American courts have been more open to recognizing the Agreement to Agree, in some instances, as a contract to negotiate in good faith. Professor E.A. Farnsworth makes a distinction between ‘agreements with open terms’ and ‘agreements to negotiate.’42 In the former case the parties’ preliminary agreement sets out the agreed upon terms and the issues for future negotiations (although, it may be silent on the second part). In this case, if the terms agreed upon are substantial, then the preliminary agreement could be viewed as a binding contract with the remaining terms to be implied by the court. This is an easy response under the American UCC given its long list of ‘gap-filler’ provisions. Furthermore, since the agreement with open terms is considered to be a binding contract the UCC good faith provision (performance of contract) obligates the parties to negotiate in good faith over the open terms. In agreements to negotiate, the parties are generally held to be free of liability if the negotiations fail to reach an agreement. However, some American courts have held, especially in cases of protracted negotiations and where the parties have agreed to many of the terms, that an agreement to negotiate is a binding contract with reciprocal duties to negotiate in good faith. Farnsworth also notes that some preliminary agreements anticipate a failure of negotiations and provide binding obligations in case of the failure to reach a final agreement. Such ‘stop-gap agreements may instruct a party to begin preparations for performance and require the other party to pay for work performed during the negotiations. Although pre-contractual instruments, especially those that anticipate a fuller integration in a formal contract, do not form binding obligations in the Common Law, a recent trend in American Common Law is a recognition that agreements to agree may create binding obligations to negotiate in good faith. As such, the agreement to agree is a standalone contract in which bad faith negotiation can support a claim for damages. Another plausible argument is that if the agreement to agree possesses sufficiently definite terms and is supported by adequate consideration, then the agreement to agree substitutes for a ‘final contract’ if the parties intended that any missing term would be supplied as a matter of law. Alternatively stated, the agreement to agree is a final contract with ‘open terms.’ Contracts often have intended gaps were parties intentional 41 42

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use of vague or open terms in their agreements. This practice is referred to as strategic ambiguity where parties that cannot come to an agreement on a term but still want the deal to go forward, leaving the term to future negotiations, and in case of a dispute for a court or arbitral panel to decide. However, the line between an unenforceable agreement to agree and agreement to agree qua contract is a blurry one, mostly solved by the Common Law presumption against enforceability or liability for bad faith negotiations. On the whole, Common Law courts see the contract to negotiate the terms of an agreement is not, in form or substance, an agreement to agree. If, despite their good faith efforts, the parties fail to reach ultimate agreement on the terms in issue the contract to negotiate is deemed to be performed by the parties and they are discharged from their obligations. Failure to agree is not, itself, a breach of the contract. Courts have found purported contracts to be unenforceable agreements to agree have focused on the enforceability of the underlying substantive contract, not on whether the agreement to negotiate the terms of that contract is enforceable. Courts look at a number of factors in determining whether a preliminary agreement can be grounds for liability including the comprehensiveness of the terms agreed upon, clarity of terms, and whether the parties used words of promise, such as X ‘shall’ do Y. In Cyberlock Consulting, Inc. v. Information Experts, Inc.,43 an American Federal Court of Appeals upheld a dismissal of a breached ‘teaming agreement,’ since agreements to agree are not enforceable under Virginia law. In Butler v. Balolia, the court distinguished between agreements to negotiate and agreements to agree, holding that the latter is not enforceable. Most jurisdictions which have considered the question have concluded a cause of action will lie for breach of a contract to negotiate the terms of an agreement. The Channel Home Centers case is illustrative. There the parties executed a letter of intent to enter into the lease of a store in a shopping center. The letter stated that Grossman the lessor ‘will withdraw the store from the rental market, and only negotiate the above described leasing transaction to completion.’ After Channel Home Centers expended approximately $25,000 in activities associated with the negotiations, Grossman unilaterally terminated negotiations. The following day Grossman leased the store to one of Channel Home Centers' competitors. The Court of Appeals distinguished this case from one alleging the breach of an agreement to agree: ‘[I]t is Channel's position that [the letter of intent] is enforceable as a mutually binding obligation to negotiate in good faith. The court concluded that under Pennsylvania law an agreement to negotiate in good faith is an enforceable contract. It is important to note that allowing a party to sue for breach of a contract to negotiate an agreement does not inject a covenant of good faith and fair dealing into the negotiation process in violation of the parties' intent. Only when the parties are under a contractual compulsion to negotiate does the covenant of good faith and fair dealing attach, as it does in every contract. In the latter situation the implied covenant of good faith and fair dealing has the salutary effect of creating a disincentive for acting in bad faith in contract negotiations. Professor Farnsworth supports such a cause of action and rejects the theory propounded by some European courts and legal scholars that, even absent a contractual agreement to negotiate, a general obligation of fair dealing arises out of the negotiations themselves. The Court reasoned that reliance damages are the only form of recovery available in an action on a contract to negotiate an agreement. Satisfactory proof of loss of profit damages is impossible because there is no way to know what the eventual terms of the

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co-packing agreement would have been, or even if the parties would have reached an agreement. The 2018 case of Teekay Tankers v STX Offshore & Shipbuilding44 illustrates that, where an essential matter in a contract is left by the parties to be agreed in the future, there is a risk that if a dispute arises, the contract will be held to be unenforceable. On one side, the courts are slow to imply terms into a contract, even when necessary to give effect to the parties’ intention that the contract be enforceable. On the other side, open or vague terms are commonly found in formal contracts. In Morris v Swanton Care & Community Ltd,45 the court held that the law should be reluctant to hold a term void that was ‘intended to have legal effect’, particularly if either party benefited from part-performance or invested in reliance on the existence of a binding obligation. But the Court walked the line that a duty to negotiate in good faith is ‘repugnant to the adversarial position of the parties’ in negotiations. A duty of good faith conflicts with the principle of freedom of contract allowing the parties to withdraw from negotiations at any time from. Morris confirmed the longstanding principle that language such as good faith or best efforts do not render an agreement to agree enforceable. Enforceability of such agreements is not impossible, however, when ‘potentially enforceable obligations arising from the parties having reached agreement on contractual terms with certain elements remaining to be resolved in the future based on objective criteria or a particular mechanism, assessable by the courts pursuant to the parties' agreement.’ The ability to determine the future term objectivity is the key to enforceability, while unenforceable obligations arise when the parties defer their agreement on contractual terms ‘with either party remaining free to agree or disagree about the matter.’ Generally speaking, agreements to agree lack sufficient certainty to constitute a legally enforceable contract and any agreement to negotiate in good faith is unenforceable by itself under UK law. On one hand, case law has focused on the clarity of the terms. Where the subject matter of the agreement is not easily ascertainable, the agreement is an unenforceable agreement to agree. On the other hand, if the agreement includes an arbitration clause then the courts may see this as evidence of the parties’ intentions to be legally bound. An arbitration clause is seen has an objective standard for filling in missing terms. In January 2016, a Court of Appeal went further than previous case law and decided that the agreement was a legally enforceable contract, despite the absence of price, specification, and an ascertainable delivery date.46 The case involved an agreement to purchase a limited edition automobile if the dealer was allocated any such vehicles. The customer was given verbal assurances that he was first in the line for the vehicle. The Court held that the subsequent verbal assurance constituted a collateral contract that superseded the original agreement and the dealership had breached when it sold the vehicle to another customer. The judgment confirmed that agreements to agree can be binding where the lack of detail is not substantial, and the parties intended to create legal relations despite the lack of certainty. To prevent the forming of collateral contracts parties are advised to include an 'entire agreement clause' in their original agreements. In the 2020 Chalker Energy Partners v Le Norman Operating,47 an American court noted that the Common Law has long recognized that an agreement can be expressed in multiple writings exchanged between the parties. In the area of email exchanges, the Court asserted that we must begin to give certainty to this developing area of contract [2017] EWHC 253 (Comm). [2018] EWCA Civ 2763. 46 Hughes v Pendragon Sabre Limited (t/a Porsche Centre Bolton) 2016 EWCA Civ 18. 47 No. 18-0352 (Texas Supreme Court) (28 Feb 2020). 44

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law. It noted that the most sophisticated transactions are conducted, in part, through email. The term ‘definitive agreement’ does not include an executed letter of intent or any other preliminary written agreement or offer, unless specifically so designated in writing and executed by both parties. In response to this reality, parties often protect themselves through agreements stipulating the conditions upon which they will be bound. For example, by including ‘No Obligation Clause’ in a preliminary or confidentiality agreement, the parties agree that a definitive agreement was a condition precedent to contract formation. In e-mail transactions, the fact issue is whether the email chain satisfies the definitive-agreement requirement (agreement on material terms). The only argument for liability despite the existence of a no obligation term is ‘waiver.’ Waiver is an intentional relinquishment of a right through intentional conduct inconsistent with claiming that right.

3. Agreement to Negotiate In Common Law, Courts often give voice to the black-letter principle that a so-called 70 ‘agreement to agree,’ where material terms are left to future negotiations, is unenforceable. In 77 Constr. Co. v. UXB Int'l, Inc,48 the court concluded that an agreement to negotiate at a later date is an unenforceable agreement to agree.49 But other courts have distinguished unenforceable agreements to agree from valid agreements to negotiate in good faith.50 In Copeland v. Baskin Robbins, U.S.A.,51 a California Court posed this question: may a party sue for breach of a contract to negotiate an agreement or is such a ‘contract’ merely an unenforceable ‘agreement to agree’? The court recognized the distinction between a ‘contract to negotiate’ from an ‘agreement to agree.’ and can be formed and breached just like any other contract. It noted that agreements to negotiate may be enforceable under the right set of facts and that liability for breach is limited to reliance damages. Strategically Copeland faced a dilemma – it could sue for lost profits for breach of 71 the co-packing agreement on the that the court could supply any missing terms in order to find an enforceable contract or sue for reliance damages for breach of an agreement to negotiate. It chose the former and lost, while the court indicated the second cause of action may have been successful. It is still the general rule that where any of the essential elements of a promise are reserved for the future agreement of both parties, no legal obligation arises ‘until such future agreement is made.’ Here, ‘a variety of complex terms’ remained for agreement before the co-packing contract could be completed. Copeland chose a third course. Rather than insist the parties had formed a co-packing contract and Baskin Robbins had breached it, he claimed the May 1999 letter constituted a contract to negotiate the remaining terms of the co-packing agreement and Baskin Robbins breached this contract by refusing without excuse to continue negotiations or, alternatively, by failing to negotiate in good faith. This path too has its difficulties. No reported California case has held breach of a contract to negotiate an agreement gives rise to a cause of action for damages. Initially, we see no reason why in principle the parties could not enter into a valid, enforceable contract to negotiate the terms of a co-packing agreement. A contract, after all, is ‘an agreement to do or not to do a certain thing.’ Purported contracts which the courts have dismissed as mere ‘agreements to agree’ are distinguishable from contracts to negotiate in at least two respects. In re Estate of Wyman, 8 N.Y.S. 3 d 493, 494 (App. Div. 2015). 77 Constr. Co. v. UXB Int'l, Inc., No. 7:13-CV-340, 2015 WL 926036, at *4 (W.D. Va. Mar. 4, 2015). 50 See, e.g., Copeland v. Baskin Robbins, U.S.A., 117 Cal. Rptr. 2 d 875 (Ct. App. 2002). 51 96 Cal. App. 4th 1253. 48

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The court, in dicta, reasoned that the agreement required the parties to negotiate in good faith, and breaking off the negotiations for an unrelated reason was a breach of this duty. Copeland negotiated to purchase a Baskin Robbins’ ice cream manufacturing plant. The purchase transaction was contingent on the parties agreeing to a ‘copacking’ agreement in which Baskin Robbins would agree to buy the ice cream that Copeland manufactured. Baskin Robbins sent Copeland a letter indicating that it would sell the plant for $1.3 million and buy ice cream for a period of three years, ‘subject to a separate co-packing agreement and negotiated pricing.’ Copeland indicated its agreement, after which the parties continued negotiating the copacking agreement. Two months later, Baskin Robbins broke off the negotiations noting that the copacking arrangement was no longer in alignment with its strategic plan. Copeland sued for breach of contract. 73 The lower court dismissed the case because the essential terms of the copacking deal were never agreed to. The court of appeal disagreed and concluded that a cause of action can be based on the breach of a ‘contract to negotiate’ an agreement: ‘Initially, we see no reason why in principle the parties could not enter into a valid, enforceable contract to negotiate the terms of a co-packing agreement.’ The court distinguished a valid agreement to negotiate from an unenforceable agreement to agree. If, despite their good faith efforts, the parties fail to reach ultimate agreement the contract to negotiate is deemed performed and the parties are discharged from liability. A party may be liable if the failure to reach an agreement resulted from a breach of that party's obligation to negotiate in good faith. Copeland still loss because the court determined that its claim for damages based on loss profits was not appropriate. The damages recoverable for the breach of an agreement to negotiate are measured by the injury, if any, the plaintiff suffered in relying on the defendant's promise, such as his out-of-pocket costs in conducting the negotiations and, possibly, the cost of opportunities missed while negotiating with the defendant. The case shows that a claim is possible for failure to negotiate in good faith when there is an ‘agreement to negotiate.’ Further, it shows that traditional measure of damages in such cases is damages suffered in reliance on the broken promise and not expectation damages (lost profits). Although in some cases a claim in restitution or unjust enrichment may be supported. Recovery for unjust enrichment in the context of contract negotiations is usually based on ideas disclosed or services rendered during the negotiations. 74 Professor Bridge reviews the evolution of British law in the area of agreements to negotiate.52 He notes the seminal case of Walford v Miles,53 where Lord Ackner reasoned: 72

that an agreement to negotiate in good faith was ‘repugnant to the adversarial position of the parties; to agreements to negotiate means that a clause seeking to lock the seller of a business into negotiations for the sale of that business over a stated period cannot be enforced; same objection does not apply where a sufficiently precise clause (a ‘lock-out clause’) precludes the vendor from opening competing discussions with the third parties over a stipulated period; declaring a contract unenforceable for lack of certainty is a measure of last resort. An agreement to use best endeavours to agree would not be open to the same objection as an agreement to agree.54 Despite this, there is a general refusal to treat best endeavours agreements to negotiate as binding. 55

Michael Bridge, Law of Sales §1.48. [1992] 2 AC 128. 54 [1992] 2 AC 128, 138. 55 See Little v Courage Ltd [1995] CLC 164, 169; Philips Petroleum v Enron Europe [1997] CLC 329 at [343]; London & Regional Investments Limited v TBI plc [2002] EWCA Civ 355; Multiplex Constructions (UK) Ltd v Cleveland Bridge UK Ltd [2006] EWHC 1341 (TCC) at [633]–[638]; Shaker v Vistajet Group Holdings SA [2012] EWHC 1329 (Comm) at [7]; [2012] 2 Lloyd’s Rep 93; Teekay Tankers Ltd v STX Offshore & Shipbuilding Co Ltd [2017] EWHC 253 (Comm); [2017] 1 Lloyd’s Rep 387. Cf. Emirates Trading Agency LLC v Prime Mineral Exports Private Ltd [2014] EWHC 2104 (Comm); [2015] 1 WLR 1145 52

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Bridge predicts ‘that the fundamental commitment in English law to the enforcement 75 of parties’ agreements is in time likely to, and should, lead to the general enforcement of express best endeavours and good faith negotiation clauses.’

4. Letters of Intent Just as advertisements are generally considered as invitations to offer (removing the receiving party’s ability to accept and bind the advertising party to a contract), a party that sends a ‘letter of intent’ who does not intend to be bound until some future time should take care that the letter cannot be construed as an offer and is merely an ‘invitation to negotiate’ further. The party should insert language to that effect: ‘This letter or proposal is only part of preliminary negotiations. We intend to be bound only upon the execution by both parties of a formal contract in writing.’56 However, parties are not always clear about their intentions leaving open the question of whether the letter was a mere memorialization of the status of the negotiations or a statement of an oral agreement that was previously entered into. Furthermore, if the letter of intent frames the steps still to be taken in the negotiation process the steps could be construed as conditions that create a conditional contract. That is, the letter creates a binding contract, but does not go into effect until the conditions are met. If one of the parties fails to make a reasonable effort to satisfy a ‘condition’ a Common Law court may hold it accountable for damages. Under the objective theory of contract, a party may be found to have entered into a contract even though he did not subjectively intend to do so. Again, a party should make clear in any written instrument that it does not intend to be bound by any of the terms or potential obligations outlined in the instrument. Letters of intent are found in various areas of commerce. The key word being ‘intent’; that is, a party indicates intent to enter a contract in the future on the terms outlined in the letter. The letter of intent is not enforceable because there is no present intent to enter a contract. Furthermore, there are often conditions that the other party must meet before the actual contract is executed. However, liability, at least in promissory estoppel, should be considered in cases where the letter induces the other party to expend money on the assurance that a contract was close at hand and would be consummated once the receiving party performed the ‘preliminary’ steps. In British Steel Corp. v Cleveland Bridge Co.,57 the buyer sent a letter of intent (with price and delivery terms still to be negotiated) and asked the other party to begin production of the goods. The court held that the letter writer was liable for the reasonable price of the goods since they benefited (unjust enrichment) by the early deliver of the goods, which was made possible by the party’s insistence that the seller begin manufacturing the goods immediately. In this case, there is no evidence that either party acted in bad faith; they simply failed to agree to material terms needed to conclude the contract. In the event that the letter writer breaks off negotiations after the seller begins production of the goods (especially if they are custom goods) a case for reliance damages would likely succeed in a claim for promissory estoppel.58 Marcel Fontaine and Filip De Ly in an extensive study of letters of intent categorize them into four types – (1) vaguely worded letters and those incorporating either a (treating as binding a dispute resolution clause in a sale contract calling first for ‘friendly discussions’) (citations by Bridge). 56 Burnham, The Contract Drafting Guidebook (LexisNexis 1992) p. 16. 57 [1984] 1 All ER 504, cited in Whincup, Contract Law and Practice (Kluwer Law International 2006) p. 30. 58 Whincup (n 41) p. 30.

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condition precedent or an entry into force clause, (2) letters of intent that relate different stages of a long negotiation, (3) letters that bind the party to negotiate in good faith, and (4) letters in which ‘parties incontestably assume precise contracting obligations with regard to certain aspects of the negotiations.’59 They note that in complex contract negotiations, such as a long-term supply contracts for ‘primary materials’ often involve numerous preliminary instruments, inter-dependent contracts, and that include clauses that interrelate technical with legal elements of the agreements. During the negotiation stage of such complex or long-term contracts, the parties spend considerable time, incur much expense; and create many things such as specifications, provide assistance and make commitments to third parties; perform studies, surveys, and engineering work; and apply for government licenses and permits, as well as financing. In order to organize the negotiations by describing their purpose, the parties’ responsibilities during the negotiations, and to provide a blueprint for going forward, the parties generate numerous preliminary instruments, such as a letters of intent, agreement in principle and memorandum of understanding. They also obtain such instruments from third parties to secure certain assurances. 80 Although generally considered by such parties as non-binding in nature, some letters and provisions within those letters can create legal obligations during the negotiations stage that may lead to liability for damages. Fontaine and De Ly note that this remains an evolving area of law in which complete non-enforceability has become a tenuous proposition. The first danger of liability is that if the instrument comes from one party a court may interpret the instrument as an offer or an acceptance leading to the formation of a contract, even though it was not intended for that purpose. Of course, in some instances it may indeed be intended to serve such a purpose. For example: This letter is to notify you of our intent to award your firm the project for the production of X amount of goods. This is a letter of intent to start your preparation for commencing the work; we request that you delegate an authorized representative to sign the contract documents, which are now being prepared. Please forward the guarantee as provided in the preliminary documents.60

Referencing the above provisions, courts could easily conclude that a contract had been formed and that the subsequent execution was a mere formality. An alternative interpretation would be that the letter mentioning the issuance of a guarantee is contract with a condition precedent. Thereby, it is binding on the parties, but does not come into effect until the satisfaction of the condition precedent (providing the guarantee). If the condition precedent is not met, then the contract never becomes operational. Although, if the guaranteeing party fails to make ‘reasonable efforts’ to provide the guaranty, then a case for liability is possible. 82 International sales transactions often entail the need to obtain a permit or license from a government authority. These types of ‘preliminary’ steps can be construed as conditions precedent or they may be construed, as a risk allocated to one of the parties, thereby, failing to obtain the necessary approvals would be considered as a breach of contract. In order to clarify the parties’ obligations and potential liability, the agreement or letter may include an ‘Entry into Force Clause’: 81

This agreement [contract] will only come into force when the following conditions have been fulfilled: obtaining (a) an import license; (b) government approval of contract, (c) certification of

59 Fontaine & De Ly, Drafting International Contracts: An Analysis of Contract Clauses (Transnational Publishers 2006) p. 24. 60 Id. p. 9.

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F. Commentary quality, [and so forth] not later than 60 days from the date of this agreement or November 1, XXXX, whichever is later.61

However, such a provision may be interpreted in two ways. First, the deadline of 60 83 days creates an option on the procuring party to obtain the necessary licenses, approvals and certifications. In not doing so, the party is essentially opting out of the contract. Second, the fixed term does nothing to disclaim the party’s obligation to use reasonable efforts to satisfy the conditions needed for the contract to enter into force. A court could reason that if the parties wanted to disclaim such liability they could have expressly stated so, such as, by stating that it is in the party’s sole discretion on whether to meet the conditions or by stating that the party shall not be liable if it fails to satisfy the conditions for any reason. Of course, such language is likely to be unpalatable to the other party since it signals that the procuring party is not reliable or trustworthy.

5. Preliminary Agreements: Agreement in Principle, Memorandum of Understanding, and Heads of Agreement Given the ubiquity of preliminary agreements, known by many different names, the 84 question posed is whether such agreements stand on their own or are clearly non-binding preliminary instruments? Are they mere proposals or guides to negotiations or binding in their own right? The answer, of course, is that it depends on the intent of the parties. Did the parties envision that the preliminary agreement was to be followed by a more formal one? If so, does that mean the preliminary agreement cannot be construed as binding in any way? The answer is in the negative. The Court of Appeals, in Harvey v ADI, stated that: ‘the mere fact that the letter envisaged the execution of further documentation does not preclude the conclusion that a binding contract has been entered into, provided that all the necessary elements of a contract were present.’ 62 The necessary elements include the general intent to be bound, consideration, and substantial agreement on the terms. It is the later element that proves to be the most problematic. However, the fact that the agreement does not contain all of the terms to be agreed upon is inconclusive. The requirement of definiteness of terms shouldn’t be any more rigorous than what is required for formal contracts, which are often filled with gaps. That said, the more detailed and formal the preliminary agreement the more likely a court will be able to find an intent to be bound: ‘The question in each case is whether the outline agreement is sufficiently clear to be enforced.’63 The lack of content is less of an obstacle to creating a binding contract under the UCC. The UCC recognizes the informality of sale of goods transactions and generally only require a finding of a general intent to enter to into a contract. The UCC is filled with ‘gap-fillers’ that can be used to salvage a sparsely worded agreement. However, the Common Law requires more – not only a general intent to be bound, but also agreement on all material terms. In contrast, the American courts have extinguished the notion of material terms in the sale of goods. The court in Mutual Export Corp. v Westpac Banking Corp noted that an instrument 85 that includes operative phases implying obligation, such as ‘agree’, ‘promise’ or ‘undertake’, may lead to a finding of contractual intent: ‘[The writer’s] use of the word undertakes … while not mystically transforming [the instrument] into a contract, nevertheless reinforces [that conclusion.]’ 64 Thus to avoid liability the instrument writer should avoid the operative phrases of obligation and use clear disclaimer language. In Chromallloy Id. p. 12. Harvey v ADI [2003] EWCA Civ 1757. 63 Whincup (n 41) p. 27. 64 789 F. Supp. 1279, 1286 (S.D.N.Y. 1992). 61 62

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Am. Corp. v Universal Hous. Sys. Of Am., The court stated that: ‘In light of all the written disclaimers of contractual liability which were made, any reliance on the existence of an agreement [is] unreasonable.’65 86 To determine the binding nature of the agreement to agree (obligation to negotiate), as well as any secondary obligations (confidentiality, work to be done, expense sharing, exclusivity), it is prudent to put the negotiations into a timeframe, that is the contract must be concluded within a certain number of days of the execution of the preliminary agreement. The agreement to agree may include provisions discussed elsewhere in this Chapter, including standstill and exclusivity or lock-out provisions. The standstill provision prohibits a party from actively soliciting or entering into negotiations with third parties for a contract of the kind being negotiated. The exclusivity or lock-out provision requires a party to cease negotiations with third parties or require a party to disclose offers made by third parties. It may also give a right of refusal or order of preference to the other party to match (conclude a contract) under the terms offered by a third party that are acceptable to the other party.66

6. Email Based Agreements New York courts have increasingly been asked to consider whether emails indicate a current intent to be bound, and whether such communications can result in legally binding contracts inadvertently being created. New York's highest court weighed in on a significant contract formation dispute in Kolchins v. Evolution Markets, Inc.67 Kolchins makes clear that, under New York law, a binding contract can be formed by an email exchange notwithstanding the fact that the parties tried and failed to memorialize their understanding in a more formal instrument. Factors to be analyzed is: (1) whether the parties expressly reserved the right not to be bound in the absence of a formal agreement; (2) whether one of the parties engaged in any partial performance; (3) the parties had agreed to material terms; and (4) the regularity with which this type of agreement leads to a formal written contract or whether such formalities are uncommon in this type of transaction (business customs).

7. Lock-out Agreements 87

Exclusive negotiation agreements have fared better in Common Law courts. In a lock-out agreement, a party (usually the seller) agrees not to negotiate with a third party while negotiating with the party at hand. Professor Nili Cohen explains the difference between the agreements to agree (duty of good faith negotiations) and the lock-out agreements (the duty not to negotiate with a third party).68 The first is unenforceable in English law because the duty of good faith negotiations is not recognized. However, the lock-out agreement has nothing to do with the duty of good faith since it is more specific in the nature of the obligations being undertaken. However, American and English courts have been split as to the potential enforceability of lock-out agreements. The likelihood of enforceability increases with the degree of specificity of the obligation not to negotiate with third parties, especially when a determinate amount of time is fixed in the agreement (expiration date). Nonetheless, an American court ruled in favor of a plaintiff that sued based upon a lock-out agreement in which the defendant agreed 495 F. Supp. 544, 551 (S.D.N.Y. 1980). See Torsello, ‘Pre-contractual Liability and Preliminary Agreements’ in DiMatteo (ed), International Sales Law: A Global Challenge (CUP 2014) pp. 643–644. 67 128 A.D.3 d 47,49-50, 8 N.Y.S. 3 d 1 (2015). 68 Cohen (n 13) pp. 43–48. 65 66

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to take a rental property off the market and then proceeded to rent the space to the plaintiff ’s competitor.69 In that case, the course held that the lack of a fixed time period in the agreement was not fatal since the court could imply a reasonable time. The modern trend is in the way of a greater acceptance of such agreements as en- 88 forceable instruments. An English court enforced a lock-out agreement in which a party agreed to not negotiate with third parties for two weeks in which the existing parties agreed to exchange contracts.70 Ultimately, the court enforced the lock-out obligation under the premise that the contract was bound by consideration Professor Cohen notes that the ground for a finding consideration was shaky at best and that ultimately the court enforced the obligation as a matter of justice.71

8. Disclaimers of Liability Disclaimer language (subject to contract, without prejudice, subject to satisfactory 89 engineering reports, and so forth) help make clear that the agreement is conditional on subsequent events occurring or not occurring. The key issue is the relationship between the disclaimer language and the duty of good faith. In the Civil Law, disclaimers do not abrogate the duty of good faith negotiations. However, such disclaimer language will reinforce the unenforceability of the preliminary agreement. In the Common Law, such disclaimers are effective in preventing a finding of obligation and attendant liability. In the end, it is the language of the instrument that will determine if it is a binding 90 contract, a non-binding planning document, or whether it creates a duty of good faith negotiations (in Common Law countries). It is important to note that conditional contracts are enforceable under civil and Common Law. Whether a Common Law court views the preliminary agreement as a conditional contract depends on the language of the condition. If the conditional language is something like ‘subject to contract’ or ‘without prejudice’ Common Law courts are likely to see the document as a non-binding instrument since it relates to a future meeting of the minds. However, if the conditional language can be externally or objectively determined (that is, not in control of the parties) then the preliminary agreement is likely to be construed as a binding contract. Thus, conditional language such as ‘subject to engineering studies’ or subject to ‘market prices staying within a certain price range’ make the case that the agreement is intended to be a conditional, binding contract. That said, the conditional language would need to be interpreted within the context of the instrument as a whole. It is possible that a vague or subjectively determined condition in the context of a highly detailed and formal preliminary agreement would not prevent a court from finding the preliminary agreement as a binding contract or, more minimally, to recognize an implied duty to negotiate in good faith. An analogy supportive of finding a duty of good faith in negotiations is the option 91 contract. In a common real state option contract, the prospective buyer generally pays for an amount of time (property is taken off the market) to do a due diligence examination of the property (environmental, re-zoning, and so forth). Now, the analogy breaks down since it is a contract (payment for time). However, if the property is of marketable quality and the would-be buyer only pays a token amount, then a duty of good faith performance may be implied (failing to perform due diligence is an act of bad faith). The analogy would be that in an ongoing negotiations where a party needs to take conditional steps (such as, survey, engineering, due diligence) in order for the Channel Home Centers v Grossman, 795 F.2 d 291 (3rd Cir 1986). Pitt v PHH Asset Management Ltd [1994] 1 WLR 327. 71 Cohen (n 13) pp. 47–48. 69

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negotiations to proceed to conclusion then a strong argument can be made that failure to take reasonable steps to do so violates an implied duty of good faith. An especially strong case would be where both parties are expected to expend time and money to determine the feasibility of entering in a contract and one party does as promised and the other fails to do so. 92 Often disclaimers are implicit, that in exchanging oral or written (preliminary) instruments, the intention is to be ‘not bound until a later writing.’ However, if this intent is not expressly stated then it is left to the courts to determine whether: ‘the written draft is viewed by the parties merely as a convenient memorial, or record of their previous contract [intention to form a contract prior to the formal signing], [the] absence [of a party’s signature] does not affect the binding force; if however, [the need to sign a final draft] is viewed as the consummation of the negotiation, there is no contract until [a] written draft is finally signed.’72 Again, a US Federal Circuit Court held that: [C]ourts focus on the parties’ intentions whether an enforceable contract comes into being during the course of the negotiations, or whether some formalization of the agreement is required before it becomes binding. The fact that some matters may have been left for future agreement does not necessarily preclude a finding of intent to contract during preliminary negotiations. Courts look to all circumstances surrounding the negotiations.73

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If the party or parties intended not to be bound, then the inclusion in the preliminary instrument or oral agreement of a clear statement of this intent is prudent and would be good business practice. American courts have generally enforced disclaimer language, such as, it is the party’s intention that this instrument (preliminary agreement) shall not be binding in any way and that parties are not obligated in any way ‘until final agreement is executed.’74 However, the disclaimer may not always be given legal effect under an all of the circumstances or ‘totality of the circumstances’ analysis.75 The continuing negotiations may ‘overtake’ the disclaimer language and provide courts with evidence that the parties subsequently entered into a contract prior to the execution of a final agreement. The courts may look at the overall specificity of the preliminary agreement and determine that despite the disclaimer language, the parties’ subsequent agreement to most of the terms is evidence of intent to be bound. But, generally, the Common Law has strictly enforced disclaimer language. However, this, as noted above, may be ephemeral in nature. What happens subsequent to the writing of the preliminary agreement provides evidence as to whether the parties have reached an agreement before the execution of the final or formal contract. In order to preserve the intent not to be bound, a party should take additional care. First, the disclaimer language should define the phrase ‘until final agreement is executed’ to make absolutely clear that a lawyer drawn final contract signed by both parties is required. Second, the disclaimer language should be forward-looking. It should state that subsequent negotiations and agreement to terms do not form a contract until memorialized into a final and formal written contract. Third, in long-term negotiations, the intent not to be bound should be reaffirmed. Thus, the preliminary agreement should be periodically updated with appropriate disclaimer language.

72 Mississippi & Dominion S.S. Co. v Swift, 29 A. 1063, 1066–67 (Maine 1894). See Farnsworth (n 4) pp. 220–221. 73 A/S Apothekernes Laboratorium v I.M.C. Chem. Group, 873 F.2 d 155, 157 (7 th Cir 1989), as cited and discussed in Farnsworth (n 4) p. 221. 74 Farnsworth (n 4) p. 222. 75 DiMatteo, Contract Theory: The Evolution of Contractual Intent (Michigan State University Press 1998) pp. 56–60.

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9. Recent Trends Preliminary agreements are increasingly being recognized as creating legal obligations, such as a duty to negotiate in good faith. This duty has been the subject of a substantial number of judicial opinions over the past few decades and yet continues to be regarded as a confusing and unpredictable issue in the Common Law of contracts. Legal scholarship is hamstrung in its analysis of the case law because it has focused on only one purpose for this good faith duty: protecting the parties' reliance investments in the bargaining process. It remains the case that there is no general duty to bargain in good faith that courts would enforce if negotiations break down. Nevertheless, parties have the ability to create such a duty in a preliminary agreement. Thus, a duty of good faith can be created by the terms of a preliminary agreement or implied-in-fact based on the court’s determination of the parties' intent. The courts also recognize that parties at times bundle binding terms with non-bind- 94 ing terms. The binding terms might include exclusivity, confidentiality, and other negotiation-related terms. The binding terms relate to the process of deal making where the parties often agree to binding exclusivity and confidentiality terms and to terms in which they agree not to solicit each other's employees for employment. a) Australia It can now be said that the obligation to ‘negotiate in good faith’ is found in commer- 95 cial agreements. Judge Kirby in Cliff Collieries v Sijehama Pty Ltd76 considered whether an agreement to negotiate in good faith was enforceable. In this case the parties agreed in a memorandum of understanding to ‘proceed in good faith to consult together upon the formulation of a more comprehensive and detailed joint venture agreement ... which when agreed [would] take the place of these heads of agreement.’ It was found that this promise was unenforceable given that it was essentially ‘an agreement to agree’ and therefore too vague and uncertain. However, it was suggested that an explicit promise to negotiate in good faith could be certain enough to be legally binding in some circumstances, including where the promise is clear and part of an undoubted agreement between the parties and there is a reference to an external standard. The Judge reasoned that, based upon freedom of contract, the parties intended the 96 agreement to be binding. Kirby then discussed general principles relating to agreements to negotiate. He rejected Lord Denning’s argument that such contracts were too uncertain to have binding force and that estimating damages would be near impossible. Instead, Kirby asserted that courts could assess an appropriate measure of damages for ‘loss of chance’ based on future probabilities and that the burden would be on the party claiming loss to demonstrate that loss sufficiently. Thus, Australian law diverges from English law’s position that ‘no promise to nego- 97 tiate in good faith would ever be enforced by a court’ in favor of a more nuanced analysis of each particular agreement. The case for enforceability is enhanced where the parties’ agreement provides for third-party arbiters. Thus, the duty of good faith will be enforceable in certain circumstances. The broad outlines of such a duty include: (1) the parties must act honestly; (2) each party must have regard to the legitimate interests of the other party; and (3) neither party must act in a manner which is arbitrary, capricious or intended to cause harm to the other party. The duty does not limit the parties from negotiating with someone else at the same time unless they have agreed that the negotiations would be exclusive. 76

(1991) 24 NSWLR 1.

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In 2019, the Court in United Group Rail Services Limited v Rail Corporation,77 held that an agreement to negotiate in good faith was enforceable. In that case the parties agreed to ‘meet and undertake genuine and good faith negotiations with a view to resolving the dispute or difference.’ If the dispute was not resolved within fourteen days, the clause obligated the parties to resort to mediation and arbitration. The Court found that the obligation to negotiate in good faith was enforceable in these circumstances because the clause provided an objective measure against which the negotiations can be judged – where senior representatives failed to resolve the dispute within fourteen days, the final step was to send the parties to arbitration. Breach could be based on whether ‘the parties had brought an honest and genuine approach to settling the dispute, and whether they had given fidelity to the existing bargain.’ In the case of Macquarie International Health Clinic Pty Ltd v Sydney South West Area Health Service,78 the Court balanced commerciality with the duty of good faith in holding the obligation to negotiate in good faith to be enforceable. It reasoned that the obligation of good faith does not require parties to compromise their own commercial interests, but parties must negotiate in such a way to achieve their mutual contract objectives. b) United Kingdom

Professor Michael Bridge notes that under British law, as a general matter, an agreement to agree is not a contract known to law.79 Although there are exceptions to this rule. There are cases, where the courts found ‘a binding agreement even though something is left to be agreed between the parties in the future.’ Three factors may persuade a court on the issue of enforceability including, whether the preliminary agreement used the word “shall” indicating the parties intent to be bound, other evidence of the parties intentions to be bound, and the inclusion of an arbitration clause signalling that the parties where going forward as if a binding agreement was in place.80 Bridge acknowledges that British law may be at an inflection point: ‘The prohibition on enforcing an agreement to agree is therefore a shibboleth that should not command unswerving support in a modern and flexible law of contract. This is particularly so where the parties intend to be contractually bound on terms that are fair and reasonable.’ 100 The trend in the Common Law of recognizing pre-contractual liability is likely due to the increasing recognition that contracts are more complex today and parties invest substantial amounts of money in their negotiations. Further, that such investments should not be lost due to bad faith practices by the other negotiating party. Deals are often the product of a long-term process in which agreements are reached piecemeal (‘scaffolding’) with informal agreements on issues made along the way. Professor Farnsworth observes, contracts today are not formed by discrete offers, counteroffers and acceptances. They are a result of long-term flows of information between the parties followed by compromises and tentative agreements. This process is time-consuming but costly. For these reasons, the parties should have some assurance that ‘their investments 99

[2009] NSWSCA 177. [2010] NSWCA 268. 79 Michael Bridge, Law of Sales, § 1.47. See May & Butcher Ltd v The King (1929) [1934] 2 KB 17 note. See also Courtney and Fairbairn Ltd v Tolaini Bros (Hotels) Ltd [1975] 1 WLR 297; Barbudev v Eurocom Cable Management Bulgaria EOOD [2012] EWCA Civ 548 at [43]–[46]; [2012] 2 All ER (Comm) 963. May & Butcher was distinguished in a case involving a lease with an option to purchase the reversion at a price to be agreed, not by the parties themselves, but by valuers appointed by each of the parties: Sudbrook Trading Estate Ltd v Eggleton [1983] 1 AC 444; see also Queensland Electricity Generating Board v New Hope Collieries Pty Ltd [1989] 1 Lloyd’s Rep. 205 (citations by Bridge). 80 [2001] EWCA Civ 406. 77

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in time and money and effort will not be wiped out by the other party’s delaying tactics or change of heart or taking advantage of a vulnerable position created by the negotiation.’

III. Misrepresentation and the Duty to Disclose Parties to a negotiation may misrepresent the truthfulness of a fact – either innocently, negligently, or intentionally (fraud) – or fail to disclose information that would be of value to the other party to the negotiations. Common Law countries, in the past, have been quite uniform in that parties should not misrepresent a fact, but, at the same time, they had no duty to disclose information to the other party. In the law of misrepresentation, contracts can be voided if they are based on a misrepresentation of a material fact. It generally does not matter whether the misrepresenting party believed it was true, negligently avoided finding out its truthfulness, or knew it was false. The other party is generally allowed to terminate the contract. However, a party may also receive damages in cases of negligent or intentional misrepresentation. In American law, intentional misrepresentation can be framed as the tort of fraud in which punitive damages can also be awarded. The duty to disclose information is more robust in American Common Law than is found in English Common Law. But, there is commonality on the following points:81 (1) if a party elects to disclose information it must do it truthfully and completely (not just state the positive factors), (2) in particular situations a duty to disclose exists, such as in fiduciary relationships, (3) a party knows that the other party has misunderstood a term (not disclosing allows the other party to make a claim for termination based upon the doctrine of mistake) (4) a party fails to correct a statement that was true at the time of its making, but has subsequently become untrue or incorrect or when a party makes a statement believing it to be true, but subsequently finds out it is false, and (5) if a party states something that is technically true, but is also misleading (for example, stating he is ‘unaware of something’ leading the other party to believe that the something does not exist).82 In the area of breaking of negotiations, a plausible case for misrepresentation or fraud can be made if a party enters into negotiations without any intent to conclude a contract or enters negotiations with such intent, but during the negotiations decides against concluding a contract yet continues to negotiate.83 Farnsworth notes that this would also be the case where a party misrepresents its authority to enter into a contract on behalf of another (assuming there is also a lack of apparent authority). The major change in some Common Law jurisdictions is an increasing recognition of a party’s duty to disclose material information to the other party. English courts have rejected a general duty to disclose material information. American courts have recognized such a duty in certain areas, such as in the sale of real estate. Warranty law in the sale of goods, whether common, civil, or CISG law, does note that if the seller knew of a (latent) defect then the limitation period does not begin to run until the buyer becomes aware of the defect, which could be many years into the future.

See McKendrick, Contract Law (9th edn., Palgrave Macmillan 2011) pp. 215–219. Id. pp. 219–220. 83 Farnsworth (n 4) pp. 377–378. 81

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IV. Breach of Confidentiality At times, in order to consummate a contract, the parties will have to share sensitive and confidential information. Confidential information may be described broadly to include trade secrets, business know-how, methods of doing business, databases, customer’s lists, specifications for products, marketing plans, particular manufacturing details that are not publicly available often qualify as protectable trade secrets, and so forth. Generally, information protected by separate legal regimes, such as patents, trademarks, and copyrights, do not come within the scope of a duty of confidentiality, since separate independent intellectual property laws protect these rights. However, it is conceivable that information relating to a patent that is not part of the public domain (not provided in patent application) would come within the scope of confidential information.84 106 Whether information is considered as ‘confidential’ is based upon two factors. First, does the information give its owner a competitive advantage against competitors, that is, does it create value? Second, does the owner treat it as confidential information? The latter question involves security and accessibility related to the information. The owner needs to take common sense precautions to secure the information, such as placing the information in a secured location (under ‘lock and key’), limit access to the information to ‘key personnel’ (need to know basis), and requiring anyone that has access to that information to sign a confidentiality agreement. 107 In answer to the above questions, the American Uniform Trade Secrets Act provides six factors to be considered in determining whether information constitutes a trade secret: 105

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The extent to which the information is known outside the claimant's business, The extent to which it is known by employees and others involved in the business, The extent of the measures taken by the claimant to guard the secrecy of the information, The value of the information to the business and its competitors, The amount of effort or money expended by the business in developing the information, and The ease or difficulty with which the information could be properly acquired or duplicated by others.

Common Law recognizes legal protection for trade secrets. In the United States, trade secrets law can be found in both state Common Law and statutory law. Forty-seven American states have adopted a version of the Uniform Trade Secrets Act. Only the states of Massachusetts, New York, and Texas have not passed the Act into law, but provide similar protections either by a specialized statute or through the Common Law. The Act provides another definition of protectable (proprietary) trade secrets: Information, including a formula, pattern, compilation, program device, method, technique, or process, that: (i) derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use, and (ii) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.

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The broadness of this definition brings in all forms of materials within its scope as long as the owner keeps the information confidential including, customers lists. The Act holds a party liable who obtains the confidential information by ‘improper means.’ 84 For a discussion of practical intellectual property issues, particularly trade secrets, see The Gates Rubber Co. v Bando Chemical Industries Ltd., 9 F.3 d 823 (10th Cir. 1993).

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Improper means is defined as ‘theft, bribery, misrepresentation, breach or inducement of a duty to maintain secrecy, or espionage through electronic or other means.’ Thus, it makes clear that the breach of a confidentiality agreement brings the breaching party within the scope of the Act. The Act provides an expansive damages regime that allows for collection of: (1) actual loss caused by misappropriation, (2) unjust enrichment that is not taken into account in computing actual loss, and (3) in lieu of actual damages, the damages may be measured by imposition of liability for a reasonable royalty. The Act also allows for the collection of exemplary (punitive) damages not to exceed twice the award amount and for the awarding of attorney fees in cases where the misappropriation was ‘willful and malicious’ or where a claim for an injunction or a defense against an injunction is made in ‘bad faith.’ Trade secrets law differs from intellectual property law in that a competitor is free 110 to reverse engineer to uncover the ‘secret.’ However, trade secrets law provides legal protection from the information being stolen. If stolen, the party stealing the information (often ex-employees) and others who benefit from the stolen information can be prevented from using it or further disclosing the information, as well as, being required to pay damages, such as the disgorgement of profits. Being classified as a ‘theft’ my also subject the stealing party to criminal liability. At the federal level, the US government passed the Economic Foreign Espionage Act of 1996.85 This Act criminalizes the stealing of trade secrets by foreign entities. American courts have recognized that customer lists or databases, even though 111 compiled from information available in the public domain, can be protected under trade secrets law. But, it is important to note that although the US allows databases to be treated as trade secrets, it does not recognize them as a separate, legally protected type of intellectual property. In contrast, the European Union has created a separate intellectual property regime to protect databases. EU Directive 96/9/EC, in the words of the European Commission, ‘created a new exclusive ‘sui generis’ right for database producers, valid for 15 years, to protect their investment of time, money and effort, irrespective of whether the database is in itself innovative (‘non-original’ databases). The Directive is a double-edged sword for foreign parties. On one hand, it subjects them to liability for using databases protected under the Directive. On the other hand, it provides an avenue for obtaining protection of their databases. Despite trade secrets protection and duties of confidentiality that are implied in law, 112 good commercial practice calls for the parties to enter enforceable confidentiality and non-disclosure agreements before any confidential information is shared. An example of such a clause in a confidentiality or non-disclosure agreement follows: Any proprietary information, including but not limited to, technical and financial information disclosed by either party to the other shall be kept secret and confidential and not be used by the receiving party other than for purposes of the negotiations, performing due diligence or feasibility analyses or other evaluations nor disclose to any third parties except for key employees requiring the information for the performance of their duties relating to the negotiations or in preparation of the final contract. These duties of confidentiality and non-disclosure shall survive the termination of this preliminary agreement and any subsequent negotiations or subsequent contract.86

It is important to note, that these obligations survive even if a subsequent contract 113 is entered into force. The formal or final contract should, of course, have its own confidentiality and non-disclosure provisions, but if for some reason the parties fail to insert 85 18 U.S.C. § 90 (2000). See United States v Hsu, 155 F.3 d 189 (3 rd Cir. 1998); United States v Yang, 281 F.3 d 534 (6th Cir. 2002). 86 Part of this model clause was taken from Fontaine & De Ly (n 48) pp. 25–26.

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such provisions, a party may be able to bring a claim for a breach of confidentiality based upon the preliminary agreement. Alternatively, the provisions in the preliminary agreement could be implied into the final contract, but this is unlikely under the Common Law due to the parol evidence rule. At the very least, the sharing party must make expressly clear that the information being shared is confidential in nature. If the party fails to do so the other party could plausibly argue that it did not know that the information was confidential (because the sharing party failed to treat it as such).

G. Illustrations Case of Promissory Estoppel A general contractor notifies its independent purchasing agent that it is pursuing (negotiating or bidding) on a construction contract with a foreign government that likely will have severe penalty clauses for untimely or delayed performance. Based upon this information, the purchasing agent began to expend money to secure materials, equipment, and carriage. The general contractor was eventually successful in obtaining the construction contract, but elected to use another purchasing agent.87 Is the contractor liable to the first purchasing agent; under what theory; and how should damages be calculated? 115 This is a classic case for the use of promissory estoppel. There was clearly no contract entered into between the contractor and the first purchasing agent because it was contingent or speculative because of the uncertainty of the contractor being able to obtain the prime contract. The court held that the contractor’s comfort letter or letter of assurance made it liable on a non-contractual promise. The three elements of detrimental reliance (promissory estoppel) are listed in § 90 of the Second Restatement: (1) promise or assurance (express or implied), (2) reasonable reliance on that assurance, and (3) an injustice would be done if no remedy is provided. The standard remedy would be reliance damages – the out of pocket expenses incurred by the relying party. In some cases, a claim for unjust enrichment could also be supported. For example, the relying party provides important information (specifications, designs, drawings, and so forth) that is of value to the other party. 116 The seminal promissory estoppel case in the United States is Hoffman v Red Owl Stores.88 In that case, a party, after prolonged negotiations and substantial expenditures of money, was promised a grocery store franchise if he took expensive steps to prepare to manage such an operation. After the relying party expended substantial sunk costs, the franchisor continued to add expensive conditions before it was willing to award the franchise. The negotiations failed and the party sued for his wasted expenditures. The court awarded him damages based upon the doctrine of promissory estoppel – an assurance (promise) was given by the franchisor, the plaintiff reasonably relied on the assurance to its detriment, and an injustice would be done if the court did not provide a remedy. 117 The English courts have rejected promissory estoppel as a ground for a claim of damages. Instead, English law only recognizes promissory estoppel as grounds for a defense. In contrast, Australian Common Law has proactively used promissory estoppel to support an independent non-contractual cause of action and, more startling, to 114

87 88

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recognize the formation of a contract.89 The High Court in Waltons Stores Ltd v Maher90 held that promissory estoppel could be used to prevent a party ‘from retreating from its implied promise to complete the agreement.’ As such, a party can sue for breach of contract and collect full expectancy damages (lost profits) and not just reliance damages (out of pocket expenses) that are allowed under American law. Lord Denning in Central London Property Trust v. High Trees House,91a case where a 118 landlord promises to reduce the rent in the future. Denning noted that: ‘If a person by words or conduct makes a promise or representation which he intends another person to act upon, and that other person does act upon it as intended, then the promisor or representor cannot deny his promise or representation if it would be unfair to do so. In Combe v. Combe, Lord Denning narrowed the possibilities of his ruling in High Trees by rejecting the claim for estoppel by pronouncing that estoppel ‘shield but not a sword.’ Hence estoppel by itself cannot give rise to cause an action (a right to sue). Estoppel in English law cannot apply to statements made under duress or deception by the other side. However, the rule that estoppel is only ‘a shield and not a sword’ has been criticized. In Crabb v. Arun, the Court held that if, for example A leads B to believe that he has rights in or over A’s land, and B incurs expenses in reliance on that assurance, B can sue to protect his interest even though he gave no consideration for it. In American law, and at times in British law, the doctrine of promissory estoppel 119 is generally used to enforce the defendant's clear and unambiguous promise when the plaintiff has reasonably and foreseeably relied on it. We agree a cause of action for promissory estoppel might lie if the defendant made a clear, unambiguous promise to negotiate in good faith and the plaintiff reasonably and foreseeably relied on that promise in incurring expenditures connected with the negotiation If these propositions are correct, then promissory estoppel is just a different rubric for determining the enforceability of a contract to negotiate an agreement.

H. Cross References & Additional Commentary This Chapter interrelates with other Chapters of this Treatise. Most obviously, it 120 should be read in conjunction with Chapter 3’s coverage of pre-contractual liability in Civil Law systems. The enforceability of pre-contractual instruments often revolves around the determination of the demarcation between pre-contract and the conclusion of a contract. This line of demarcation is discussed in-depth in Chapters 7 on ‘Contractual Formalities’ and Chapter 8 on the ‘Formation of Contracts.’ As discussed earlier, one method courts have used to deal with the issue of the enforceability of preliminary agreements (made during negotiations) is to find that the agreement is not preliminary at all, but is a contract of its own, binding parties to certain obligations, such as incurring expenses, maintaining the confidentiality of information, disavowing parallel negotiations, negotiating in good faith, and taking reasonable efforts to satisfy conditions to the contract. Finally, the duty of confidentiality discussed in this Chapter parallels the discussion of the duty of confidentiality discussed in Chapter 29’s discussion of ‘Post-Contract: Continuing Obligations & Rights’.

Hogg, Promises and Contracts: Comparative Perspectives (CUP 2011) pp. 187, 189. (1988) 164 CLR 387, 408, as discussed in id. pp. 187. 91 1 KB 130 [1947]. 89

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I. Practitioner Tips & Contract Clauses I. Good Commercial Practice The area of pre-contractual liability for bad faith negotiations and the enforceability of preliminary agreements is an important gray area in international sales transactions. This is because the common and Civil Laws diverge dramatically in these areas, and the CISG fails to provide coverage. Depending on the parties’ preference for being able to break-off or not to break-off negotiations for any reason (good or bad), as well as their preferences for creating or not creating binding obligations during the course of their negotiations, the applicable law will be crucial. Unfortunately, those parties that want a specific law to apply will need to enter a binding agreement if they want to enforce a choice of law or arbitration provision. Good business and legal practice should not ignore such uncertainty, especially, in cases or prolonged negotiations, as well as, transactions in high value or complex goods: ‘prudent parties negotiating a prospective cross-border sale should consider ‘contractualizing’ the duties owed to each other throughout the negotiations, reducing the uncertainties as to rules of conduct that must be observed and the legal consequences for nonobservance.’92 122 In the end, if contract negotiations are expected to be prolonged and expensive or have entered into the final stage of the negotiation process, it may be prudent for the parties to enter into a preliminary agreement that would cover the issues discussed in this Chapter. The parties could expressly state that they will negotiate in good faith and define it as the duty to make reasonable efforts to agree on the remaining open terms. The agreement could also require the parties to disclose all necessary information needed to come to a fully informed contract. It also should, when appropriate, insert a confidentiality, exclusive negotiation, and duration of the negotiations provisions. The agreement may also lists actions that would violate the duty to negotiate in good faith. Professor Farnsworth lists seven categories of bad faith including refusal to negotiate, use of improper tactics (demanding unnecessary conditions), making unreasonable proposals (ignoring trade custom), non-disclosure or misrepresentation, engaging in parallel negotiations, not honoring or demanding renegotiation of previously agreed upon terms, and breaking off negotiations for no apparent (commercially viable) reason.93 121

II. Benefits and Functions of a Well-Structured Preliminary Agreement 123

As noted in the previous section, the use of preliminary instruments may be especially important in international transactions: ‘Recent changes in modern commercial transactions have led to an increased reliance on pre-contractual instruments. Commercial transactions are increasingly consummated between parties of diverse cultural and legal traditions. Parties are often unfamiliar with the ethical and legal ramifications of the negotiating process in other countries, which may lead the parties to write out their goals at a relatively early stage of the negotiation.’ 94 With this theme in mind, this section reviews the important functions that a well-written preliminary agreement often serves. Torsello (n 50) p. 646. Farnsworth (n 4) pp. 403–415. 94 Klein & Bachechi, ‘Pre-contractual Liability and the Duty of Good Faith Negotiation in International Transactions’ (1994) 17 Houston J Int’l L 1, 8. 92 93

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The primary purpose of a preliminary agreement is to lays out a plan or blueprint 124 for the remaining negotiations. If the preliminary agreement is executed at a later stage of the negotiations, then it presents an opportunity to memorialize the terms that the parties have so far agreed upon (or think they have agreed upon). This is especially important in cross-border negotiations where language and cultural differences, styles of negotiation, and meanings of words can lead to undetected misunderstandings. Preliminary agreements often lead to clearer contracts and increase the likelihood of performance by decreasing the chances of subsequent misunderstandings. They may also deter unreasonable expectations and reliance. The agreement may also be used to align the parties’ interests in building trust by 125 allocating sunk costs between the parties and encouraging information sharing. Lockout or exclusive negotiation, confidentiality, and amicable dispute resolution (mediation) provisions can help build such trust. The parties should also be clear if their intentions are to be subject to any liability stemming from the negotiations.

III. Sample Clauses 1. Privacy of Information Clause Except as required by law, no public release of any information, or confirmation or 126 denial of same, with respect to the negotiations or the subject matter hereof, will be made by either party without the prior written consent of the other party.

2. Restrictive Agreement Party A pledges and agrees not to negotiate with third parties for a period of six 127 months (lock-out agreement).

3. Indemnity Language If a binding contract for the sale of the ‘specialized goods’ is not concluded Buyer 128 shall reimburse Seller for all reasonable costs, fees, and expenses in relationship to the research, design, engineering incurred during the negotiation of the possible manufacture and sale of such goods, but payment (liability) shall not exceed … (USD).

4. Disclaimer Language This letter is not intended as a contract, but merely as a statement of present inten- 129 tions and understandings.

5. Non-Reliance Provision Before parties execute an agreement of sale or merger, the potential acquirer engages 130 in due diligence and there are usually extensive precontractual negotiations between the parties. The purpose of a confidentiality agreement is to promote and to facilitate such precontractual negotiations. Non-reliance clauses in a confidentiality agreement are intended to limit or eliminate liability for misrepresentations during the due diligence process.95 The Parties agree that unless and until a definitive agreement between the Parties 131 with respect to the Potential Transaction has been executed and delivered, and then only 95

RAA Mgmt., LLC v. Savage Sports Holdings, Inc., 2012 Del. LEXIS 271, *23 (Del. May 18, 2012).

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to the extent of the specific terms of such definitive agreement, no Party hereto will be under any legal obligation of any kind whatsoever with respect to any transaction by virtue of this Agreement or any written or oral expression with respect to such a transaction by any Party or their respective 132 Representatives, except, in the case of this Agreement, for the matters specifically agreed to herein. A Party shall be entitled to cease disclosure of Confidential Information hereunder and any Party may depart from negotiations at any time for any reason or no reason without liability to any Party hereto.96 133 It is important for parties to be aware that the enforceability of an obligation to negotiate in good faith is entirely dependent on the context of the obligation. Parties should proceed cautiously when they enter into an agreement which requires them to negotiate in good faith, and a party proposing to enter into an agreement containing such a term should seek legal advice on its implications.

J. Additional Sources 134 Banakas, ‘Liability for Contractual Negotiations in English Law: Looking for the Litmus Test’ (2009) In

Dret – Revista para. el Analisis del Derecho 1; Bunting, ‘Estoppel by Convention and Pre-Contractual Understandings’ (2011) 42 Victoria U. Wellington Law Review 511; Cardenas, Deal Jumping in Cross-Border Merger & Acquisition Negotiations: A Comparative Analysis of Pre-Contractual Liability Under French, German, United Kingdom and United States Law (2013); Cartwright & Hesselink, Pre-contractual Liability in European Private Law (CUP 2008); Caterina & Feitel, ‘Inadvertent Contract Formation via Email under New York Law: An Update’ (2019) 69:4 Syracuse L Rev 733; Cohen, ‘Pre-Contractual Duties: Two Freedoms and the Contract to Negotiate’ in Beatson and Friedmann (eds), Good Faith and Fault in Contract Law (OUP 1995); Choi & Triantis, ‘Designing and Enforcing Preliminary Agreements’ (2020) 98:3 Texas L. Rev. 439; D. Chuanyan, ‘The Doctrine of Precontractual Liability under Chinese Law: A Comparative Outlook’ (2019) European Review Private Law 485; Collins, ‘Good faith in European contract law’ (1994) 14 Oxford Journal of Legal Studies 229; DiMatteo, ‘The CISG and the Presumption of Enforceability: Unintended Contractual Liability in International Business Dealings’ (1997) 22 Yale J Int’l Law 111; DiMatteo & Sacasas, ‘Credit and Value Comfort Instruments: Crossing the Line from Assurance to Legally Significant Reliance and Toward a Theory of Enforceability’ (1995) 47 Baylor Law Review 357; Egan, ‘Drafting Preliminary Agreements, including Confidentiality Agreements and Letters of Intent’ (2019) 48 Texas J Business Law 1; Fandl, ‘Let’s Shake on It: Perceived Pre-contractual Risk in Cross-Border Investment’ (2019) 27 U. Miami Business Law Review 215; Farnsworth, ‘Pre-contractual Liability and Preliminary Agreements: Fair Dealing and Failed Negotiations’ (1987) 87 Columbia L Rev 217; Farnsworth, Farnsworth on Contracts 3 Vol (3 rd edn., Aspen Publishers 2004); Giliker, ‘Regulating Contractual Behavior: The Duty to Disclose in English and French Law’ (2005) 13 ERPL 621; Hwang,’ Faux Contracts’ (2019) 105 Virginia Law Review 1025; Jeffries, ‘Preliminary Negotiations or Binding Obligations? A Framework for Determining the Intent of the Parties’ (2012) 48 Gonzaga Law Review 1; Jones, ‘Claims arising out of anticipated contracts which do not materialize’ (1980) 18 University of Western Ontario Law Review 447; Kessler & Fine, ‘Culpa in contrahendo, bargaining in good faith, and freedom of contract: a comparative study’ (1964) 77 Harvard L Rev 401; Klein & Bachechi, ‘Pre-contractual Liability and the Duty of Good Faith Negotiations in International Transactions’ (1994) 17 Houston J Int’l Law 17; Kötz, ‘Pre-contractual Duties of Disclosure: A Comparative and Economic Perspective’ (2000) 9 European J Law & Econ 5.; Kovac, ‘Culpa in Contrahendo, Promissory Estoppel, and Pre-Contractual Good Faith and Irredeemable Acts’ (2019) Asian J. Law and Economics; Lake & Draetta, Letters of Intent and other Pre-contractual Documents: Comparative Analysis and Forms (2 nd edn., Butterworths 1994); McKendrick, ‘Work done in anticipation of a contract which does not materialise’ in Cornish et al. (eds), Restitution Past, Present and Future (OUP 1998); Musey, ‘The Good Faith Principle in Contract Law and the Pre-contractual Duty to Disclose: Comparative Analysis of New Differences in Legal Cultures’ (2001) 1 Global Jur Adv 1; Schmidt, ‘Preliminary Agreements in International Contract Negotiation’ (1993) 6 Houston J Int’l L 37; Schwartz& Scott, ‘Pre-Contractual Liability and Preliminary Agreements’ (2007) 120 Harvard Law Review 662; Lord Steyn, ‘Contract law: fulfilling the reasonable expectations of honest men’ (1997) 113 LQR 433; Trakman & Sharma, ‘The Binding Force of Agreements to Negotiate in Good Faith’ (2018) 73 Cambridge L.J. 598; Zuloaga, Reliance in the Breaking-Off of Contractual Negotiations (Intersentia 2019). 96

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Enterprise Products Partners, L.P. v. Energy Transfer Partners, L.P., 529 S.W.3 d at 545 (2017).

Larry A. DiMatteo

CHAPTER 5 SCOPE OF CISG Sieg Eiselen A. Topics Covered . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B. Introductory Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C. Statement of Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . D. International Sales Transaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . E. Sampling of Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. CISG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. CISG Advisory Council Opinions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Opinion No. 4 Contracts for the Sale of Goods to Be Manufactured or Produced and Mixed Contracts (Article 3 CISG) . . . . . . . . . . . . . . . . . . . . . . . . . 2. Opinion No. 16 Exclusion of the CISG under Article 6 . . . . . . . . . . . . . . . . . . . III. INCOTERMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Incorporate the INCOTERMS® 2020 rules into your contract of sale . . . . . 2. Choose the Appropriate INCOTERMS Rule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Principles of European Contract Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. Common European Sales Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI. UNIDROIT Principles of International Commercial Contracts . . . . . . . . . . . . . . VII. German Bürgerliches Gesetzbuch and Handelsgesetzbuch . . . . . . . . . . . . . . . . . . . 1. Bürgerliches Gesetzbuch . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Handelsgesetzbuch . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VIII. French Code Civil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IX. Spanish Código Civil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . X. American Uniform Commercial Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XI. English Sales Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Sale of Goods Act 1979 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Supply of Goods and Services Act 1982 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XII. Chinese Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F. Commentary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. CISG’s Choice of Law Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Defining Sale of Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Mixed Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Issues of Validity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. Personal Injury . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI. Derogation from the CISG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VII. CISG and Other International Law Instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VIII. CISG and INCOTERMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IX. CISG and National Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . G. Practitioner Tips & Contract Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Practitioner Tips . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Model Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Opting Out of the CISG Where the CISG Would Otherwise Apply . . . . . . . 2. Accepting the Application of the CISG Where It Would Apply . . . . . . . . . . . 3. Opting-In to the CISG Where It Would Not Apply . . . . . . . . . . . . . . . . . . . . . . . 4. Opting into the CISG and the PICC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5. Opting into the CISG in Distributorship Agreements . . . . . . . . . . . . . . . . . . . . . H. Additional Sources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 2 6 10 11 11 12 12 13 14 15 16 17 18 19 20 20 20 21 22 23 24 24 24 25 26 26 27 30 31 32 33 34 38 39 48 48 52 52 53 54 55 57 59

A. Topics Covered The following topics will be covered in this chapter: – –

1

General nature of international sales The different types of sales object

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– –

Commercial and consumer sales Distinguishing sales from other types of contract • Sales and services • Sales and distribution • Sales and framework agreements

B. Introductory Note Sales law forms one of the most basic but also key aspects of private law and spans a wide variety of activities and role players. Sales law has developed in all legal systems to protect different interests in order to provide efficiency, legal certainty and protecting the interests of the different role players.1 While all legal systems strive to balance the interests of the parties, some legal systems seem to slightly favour the buyer whilst others slightly favour the seller.2 These differences can largely be ascribed to historical reasons. The most important distinction to be drawn today is the differentiation between commercial sales and consumer sales.3 In systems where there is a developed consumer law, there are additional safeguards to protect the interests of consumers due to the lesser bargaining power, inexperience and lack of legal knowledge of consumers.4 This restatement is concerned with commercial sales, that is, sales between commercial parties and where no consumer is involved.5 This is also a clear distinction that is drawn in the CISG where consumer contracts are specifically excluded in Article 2 CISG. 3 In most legal systems a distinction is also drawn between various types of agreement such as sales contracts, service contracts, construction contracts, credit agreements, intellectual property contracts to mention but a few.6 The purpose of these distinctions is to establish which particular legal rules will apply to the contract in question. These rules may be mandatory rules which will apply irrespective of the agreement of the parties, but may also be merely supplementary in order to provide for contingencies that the parties have not dealt with in their agreement.7 In the case of international sales law there are very few mandatory rules. The domestic sales law of a few countries such as Russia8 and the United States9 for instance require international sales to be in writing. 2

Schwenzer, Hachem & Kee, Global Sales and Contract Law (2012) pp. 85–86. Eiselen, ‘Adoption of the Vienna Convention for the International Sale of Goods (the CISG) in South Africa’ (1999) 116 South African Law Journal 350–351; Honnold, Uniform law for international sales under the 1980 United Nations Convention (4th edn, 2009), para 73; Eiselen & Kritzer, International Contract Manual Volume IV (2008 – looseleaf), para 81:6. 3 Schwenzer, Hachem & Kee (n 1) p. 85. 4 For the development of consumer law see Ramsay, Consumer Law and Policy: Text and Materials on Regulating Consumer Markets (3rd edn, 2012) pp. 2, 7; Goldring et al, Consumer Protection Law (5th edn, 1998) pp. 4–5; Hondius & Bollen, Handboek Consumentenrecht (2006) pp. 21–22; Lowe & Woodroffe, Consumer Law and Practice (6th edn, 2004), 2–3; Micklitz, Stuyck & Terryn, Cases, Materials and Text on Consumer Law (2010) pp. 1–3; Naudé & Eiselen, Commentary on the Consumer Protection Act (2015) pp. 1–6. 5 Schwenzer, Hachem & Kee (n 1) pp. 85–86; Peel & Treitel, An Outline of the Law of Contract (15 th edn, 2020) p. 72; Beatson, Burrows & Cartwright, Anson's Law of Contract (29th edn, 2010) p. 51. 6 See for instance the German BGB Division 8 and Spanish Civil Code Book IV. 7 Peel & Treitel (n 5) p. 72. 8 Secretariat Commentary on Article 11 of the 1978 Draft of the CISG; Eiselen & Kritzer (n 2) para 85:74 n 1; CISG-AC Opinion No. 15, Reservations under Articles 95 and 96 CISG, Rapporteur: Prof. Dr. Ulrich G. Schroeter, University of Mannheim, Germany Comments paras 2.4 & 4.3. 9 Zweigert & Kötz, An Introduction to Comparative Law (3rd edn,1998) pp. 366–367; 377–378; McKendrick, Contract Law – Text, Cases and Materials (9th edn, 2020) pp. 247-249. 1

2

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C. Statement of Issues

The parties may not derogate from this requirement, but the only consequence is usually that the agreement will be void or unenforceable.10 It is also important to draw a distinction between domestic sales where purely domes- 4 tic sales law will apply and international sales transactions where the rules of private international law will determine which legal system will apply.11 This is usually done with reference to the place of business of the respective parties. In addition, if both the seller and the buyer have their places of business in different countries where the CISG is applicable, or where the rules of private international law points to the application of the law of a country where the CISG applies, the CISG will apply in terms of Article 1 CISG, thereby displacing the otherwise applicable domestic sales law.12 However, it is open to the parties to exclude the application of the CISG in terms of Article 6 CISG provided it is clearly done in the agreement.13 A simple reference to domestic law will not be sufficient as the CISG is regarded as part of domestic law.14 In most jurisdictions courts will honour the choice of law of the parties, but there may be circumstances where courts will abrogate from this choice where there is no connection between the choice and the parties or contract itself. DiMatteo however quite correctly points out that a neutral choice may well be reasonable in international sales contracts.15 It may sometimes also be difficult to determine whether a contract is in fact a sales 5 contract or not either because the performance of one of the parties consists of a mixture of services and goods or due to the nature of the goods.16 For instance, when a company markets a plant consisting of a number of individual machines but which will form a production line and which will be installed by the manufacturer, is the contract to be considered a sale or a contract for services? Similarly, where a company markets software, is the contract one of sale, services, intellectual property or a mixture of them all? In the case of the CISG the contract must clearly be a sale before the Convention will apply. Whether this issue is of importance for domestic law will depend on the particular domestic law and how it deals with such overlaps.

C. Statement of Issues This chapter will deal with the scope of sales law, i.e. when is a contract considered 6 to be a sale as distinguished from other types of contract. The distinction between sales and services is of particular importance here because the CISG will apply to sales but not services. The distinction will also determine which legal rules will apply by implication in the absence of any agreement between the parties.

See Chapter 7 ‘Contractual Formalities’ below. It is beyond the scope of this work to deal with the different rules of private international law of the legal systems involved. 12 Schwenzer & Hachem, in Schlechtriem & Schwenzer (eds), Commentary on the UN Convention on the International Sale of Goods (CISG) (3rd edn, 2010) Article 1 CISG paras 28–30. 13 Schwenzer & Hachem (n 12) Article 6 CISG para 2; Magnus, in Martinek (ed), J. von Staudingers Kommentar zum Bürgerlichen Gesetzbuch mit Einführungsgesetz und Nebengesetze Wiener UN-Kaufrecht (CISG) (2014) Article 6 CISG para 10. See also CISG-AC Opinion No. 16, Exclusion of the CISG under Article 6, Rapporteur: Doctor Lisa Spagnolo, Monash University, Australia. 14 Schwenzer & Hachem (n 12) Article 6 CISG para 13; Mistelis, in Kröll, Mistelis & Perales Viscasillas (eds) UN Convention on Contracts for the International Sale of Goods (CISG) (2018) Article 6 CISG para 23. See also CISG-AC Opinion No. 16, Exclusion of the CISG under Article 6, Rapporteur: Doctor Lisa Spagnolo, Monash University, Australia. 15 DiMatteo (ed), International Contracting: Law and Practice (3rd edn, 2013) paras 310–311. 16 See the discussion of mixed contracts under Article 3 CISG below. 10

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A distinction will also be drawn between international sales and domestic sales as the CISG will only apply in the case of international sales. 8 The chapter will outline the various laws that apply to international sales laws in the various legal systems under discussion. 9 Special consideration will be given to the sale of software which is problematic to characterize in most legal systems and is dealt with differently in different legal systems. 7

D. International Sales Transaction 10

International sales transactions contain a number of characteristics which set them apart from domestic sales. These transactions tend to be much more complex than domestic sales due to the fact that the parties reside in different countries with different sales laws. Due to the territorial nature of law, there is therefore immediately a conflict of laws issue, namely to determine which legal system will apply to the contract. This issue has become less burning in cases where both parties reside in countries where the CISG applies. Secondly, the logistics of international sales involve many more parties such as shipping companies, freight forwarders, agents, banks and insurance companies. The fact that goods are transported across borders brings about issues of customs and excise duties, export and import permissions, environmental law requirements and prohibitions and standards issues. There are also additional risks associated with the transport of goods, especially by sea which need to be accounted for. It is therefore important for international traders to be aware of the legal rules that will apply to their contracts and the impact of incorporating standard trade terms such as the INCOTERMS into their contract. For instance, the CISG has much more onerous provisions for the buyer regarding the liability for defective goods than is found in most common law countries. In terms of Articles 38 and 39 of the CISG the buyer is under an obligation to inspect the goods and notify the seller of any deficiencies within a reasonable period of time. Failure to do so results in the loss of certain remedies for breach.17

E. Sampling of Laws I. CISG 11 Article 1 (1) This Convention applies to contracts of sale of goods between parties whose places of business are in different States: (a) when the States are Contracting States; or (b) when the rules of private international law lead to the application of the law of a Contracting State. (2) The fact that the parties have their places of business in different States is to be disregarded whenever this fact does not appear either from the contract or from any dealings between or from information disclosed by, the parties at any time before or at the conclusion of the contract. (3) Neither the nationality of the parties nor the civil or commercial character of the parties or of the contract is to be taken into consideration in determining the application of this Convention.

17 See the discussion of Articles 38 and 39 CISG in Schlechtriem & Schwenzer (n 12) and Magnus/ Staudinger (n 13).

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E. Sampling of Laws Article 2 This Convention does not apply to sales: (a) of goods bought for personal, family or household use, unless the seller, at any time before or at the conclusion of the contract, neither knew nor ought to have known that the goods were bought for any such use; (b) by auction; (c) on execution or otherwise by authority of law; (d) of stocks, shares, investment securities, negotiable instruments or money; (e) of ships, vessels, hovercraft or aircraft; (f) of electricity. Article 3 (1) Contracts for the supply of goods to be manufactured or produced are to be considered sales unless the party who orders the goods undertakes to supply a substantial part of the materials necessary for such manufacture or production. (2) This 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. Article 4 This Convention governs only the formation of the contract of sale and the rights and obligations of the seller and the buyer arising from such a contract. In particular, except as otherwise expressly provided in this Convention, it is not concerned with: (a) the validity of the contract or of any of its provisions or of any usage; (b) the effect which the contract may have on the property in the goods sold. Article 5 This Convention does not apply to the liability of the seller for death or personal injury caused by the goods to any person. Article 6 The parties may exclude the application of this Convention or, subject to article 12, derogate from or vary the effect of any of its provisions.

II. CISG Advisory Council Opinions 1. Opinion No. 4 Contracts for the Sale of Goods to Be Manufactured or Produced and Mixed Contracts (Article 3 CISG) 1. 2. 3. 4. 5. 6. 7. 8.

Paragraphs (1) and (2) of Article 3 CISG govern different matters, though in complex transactions there may be some reciprocal influence in their interpretation and application. In interpreting the words “substantial part” under Article 3(1) CISG, primarily an “economic value” criterion should be used. An “essential” criterion should only be considered where the “economic value” is impossible or inappropriate to apply taking into account the circumstances of the case. “Substantial” should not be quantified by predetermined percentages of value; it should be determined on the basis of an overall assessment. The supply of labour or other services necessary for the manufacture or production of the goods is covered by the words “manufactured or produced” of Article 3(1) CISG and is not governed by Article 3(2) CISG. The words “materials necessary for such manufacture” in Article 3(1) CISG do not cover drawings, technical specifications, technology or formulas, unless they enhance the value of the materials supplied by the parties. In the interpretation of Article 3(1) CISG, it is irrelevant whether the goods are fungible or non-fungible, standard or custom-made. Article 3(2) CISG governs mixed contracts. Whether the different obligations as to goods and services are agreed upon in one mixed contract or in several contracts is a matter of contract interpretation. In the interpretation of the parties' agreements relevant factors include, inter alia, the denomination and entire content of the contract, the structure of the price, and the weight given by the parties to the different obligations under the contract.

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12

Chapter 5 Scope of CISG 9.

In interpreting the words “preponderant part” under Article 3(2) CISG, primarily an “economic value” criterion should be used. An “essential” criterion should only be considered where the “economic value” is impossible or inappropriate to apply taking into account the circumstances of the case. 10. “Preponderant” should not be quantified by predetermined percentages of value; it should be determined on the basis of an overall assessment. 11. The plural form of the word “obligations” in Article 3(2) CISG should prevail, despite the use of the singular in the Arabic and French text of the Convention.

2. Opinion No. 16 Exclusion of the CISG under Article 6 13 1. Where the CISG is applicable according to Articles 1–3 CISG, the principle of party autonomy 2. 3. 4.

5. 6.

expressed in Article 6 CISG permits parties to agree to exclude its application, at the time of or after the conclusion of the contract. The CISG governs the manner of exclusion. An agreement to exclude the CISG is governed by the rules on contract formation and modification in Articles 11, 14–24, 29 CISG. The intent of the parties to exclude must be determined in accordance with Article 8 CISG. Such intent should be clearly manifested, whether at the time of conclusion of the contract or at any time thereafter. This standard also applies to exclusions during legal proceedings. Generally, such a clear intent to exclude: (a) should be inferred, for example, from: (i) express exclusion of the CISG; (ii) choice of the law of a non-Contracting State; (iii) choice of an expressly specified domestic statute or code where that would otherwise be displaced by the CISG’s application. (b) should not be inferred merely from, for example: (i) the choice of the law of a Contracting State; (ii) choice of the law of a territorial unit of a Contracting State. During legal proceedings an intent to exclude may not be inferred merely from failure of one or both parties to plead or present arguments based on the CISG. This applies irrespective of whether or not one or both parties are unaware of the CISG’s applicability. Domestic principles of waiver should not be used to determine the parties’ intent to exclude the CISG.

III. INCOTERMS 14

The INCOTERMS rules explain a set of three-letter terms reflecting business-to-business practice in contracts for the sale of goods. The INCOTERMS describe mainly the tasks, costs and risks involved in the delivery of the goods from sellers to buyers.

How to use INCOTERMS® 2020 Rules 1. Incorporate the INCOTERMS® 2020 rules into your contract of sale 15

If you want the INCOTERMS® 2020 rules to apply to your contract, you should make this clear in the contract, through such words as ‘the chosen INCOTERMS rule including the named place followed by’ INCOTERMS®.

2. Choose the Appropriate INCOTERMS Rule 16

The chosen INCOTERMS rule needs to be appropriate to the goods, to the means of transport, and above all to whether the parties intend to put additional obligations, for example such as the obligation to organize carriage or insurance, on the seller or on the buyer. The Guidance Note to each INCOTERMS rule contains information that is particularly helpful when making the choice. Whichever INCOTERMS rule is chosen, the parties should be aware that the interpretation of the contract may well be influenced by customs particular to the port or place being used. 156

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IV. Principles of European Contract Law PECL does not deal specifically with sales agreements but contains a set of general 17 contractual rules dealing with the formation of contracts, their interpretation, the rights and duties of parties generally, breach and the consequences of breach.

V. Common European Sales Law 18

Preamble … (9) This Regulation establishes a Common European Sales Law. It harmonises the contract laws of the Member States not by requiring amendments to the pre-existing national contract law, but by creating within each Member State's national law a second contract law regime for contracts within its scope. This second regime should be identical throughout the Union and exist alongside the pre-existing rules of national contract law. The Common European Sales Law should apply on a voluntary basis, upon an express agreement of the parties, to a cross-border contract. (10) The agreement to use the Common European Sales Law should be a choice exercised within the scope of the respective national law which is applicable pursuant to Regulation (EC) No 593/2008 or, in relation to pre-contractual information duties, pursuant to Regulation (EC) No 864/2007 of the European Parliament and of the Council of 11 July 2007 on the law applicable to non-contractual obligations (Regulation (EC) No 864/2007), or any other relevant conflict of law rule. The agreement to use the Common European Sales Law should therefore not amount to, and not be confused with, a choice of the applicable law within the meaning of the conflict-of-law rules and should be without prejudice to them. This Regulation will therefore not affect any of the existing conflict of law rules. Article 1 1. The purpose of this Regulation is to improve the conditions for the establishment and the functioning of the internal market by making available a uniform set of contract law rules as set out in Annex I ('the Common European Sales Law'). These rules can be used for cross-border transactions for the sale of goods, for the supply of digital content and for related services where the parties to a contract agree to do so. 2. This Regulation enables traders to rely on a common set of rules and use the same contract terms for all their cross-border transactions thereby reducing unnecessary costs while providing a high degree of legal certainty. Article 2 … (e) (f)

‘trader’ means any natural or legal person who is acting for purposes relating to that person’s trade, business, craft, or profession; ‘consumer’ means any natural person who is acting for purposes which are outside that person's trade, business, craft, or profession;

… (h) ‘goods’ means any tangible movable items; it excludes: electricity and natural gas; and water and other types of gas unless they are put up for sale in a limited volume or set quantity; … (k) ‘sales contract’ means any contract under which the trader ('the seller') transfers or undertakes to transfer the ownership of the goods to another person ('the buyer'), and the buyer pays or undertakes to pay the price thereof; it includes a contract for the supply of goods to be manufactured or produced and excludes contracts for sale on execution or otherwise involving the exercise of public authority; Article 3 The parties may agree that the Common European Sales Law governs their cross-border contracts for the sale of goods, for the supply of digital content and for the provision of related services within the territorial, material and personal scope as set out in Articles 4 to 7.

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Chapter 5 Scope of CISG Article 5 Contracts for which the Common European Sales Law can be used The Common European Sales Law may be used for: (a) sales contracts; (b) contracts for the supply of digital content whether or not supplied on a tangible medium which can be stored, processed or accessed, and re-used by the user, irrespective of whether the digital content is supplied in exchange for the payment of a price. (c) related service contracts, irrespective of whether a separate price was agreed for the related service.

VI. UNIDROIT Principles of International Commercial Contracts 19 Preamble These Principles set forth general rules for international commercial contracts. They shall be applied when the parties have agreed that their contract be governed by them. They may be applied when the parties have agreed that their contract be governed by general principles of law, the lex mercatoria or the like. They may be applied when the parties have not chosen any law to govern their contract. They may be used to interpret or supplement international uniform law instruments. They may be used to interpret or supplement domestic law. They may serve as a model for national and international legislators.

VII. German Bürgerliches Gesetzbuch and Handelsgesetzbuch 1. Bürgerliches Gesetzbuch 20 § 90 Concept of the thing Only corporeal objects are things as defined by law. § 433 Typical contractual duties in a purchase agreement (1) By a purchase agreement, the seller of a thing is obliged to deliver the thing to the buyer and to procure ownership of the thing for the buyer. The seller must procure the thing for the buyer free from material and legal defects. (2) The buyer is obliged to pay the seller the agreed purchase price and to accept delivery of the thing purchased. § 453 Purchase of rights (1) The provisions on the purchase of things apply with the necessary modifications to the purchase of rights and other objects. (2) The seller bears the costs of creation and transfer of the right. (3) If a right comprising the right to possession of a thing is sold, the seller is obliged to deliver the thing to the buyer free of material and legal defects. § 650 Application of sale of goods law The provisions of sale of goods law are applicable to a contract dealing with the supply of movable things to be produced or manufactured. § 442 (1) sentence 1 also applies to these contracts if the defect is caused by the material supplied by the customer. To the extent that the movable things to be produced or manufactured are not fungible things, §§ 642, 643, 645, 648 and 649 apply, subject to the proviso that the applicable point of time under §§ 446 and 447 takes the place of acceptance.

2. Handelsgesetzbuch § 343 (1) Commercial transactions include all transaction by a businessman that forms part of his commercial enterprise.

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E. Sampling of Laws § 344 (1) Transactions concluded by a businessman are regarded as part of his commercial enterprise in cases of doubt.

VIII. French Code Civil 21

Chapter VII Article 1128 The following are necessary for the validity of a contract: 1. the consent of the parties; 2. their capacity to contract; 3. content which is lawful and certain. Article 1163 An obligation has as its subject-matter a present or future act of performance. The latter must be possible and determined or capable of being determined. An act of performance is capable of being determined where it can be deduced from the contract or by reference to usage or the previous dealings of the parties, without the need for further agreement. Article 1174 Where writing is required for the validity of a contract, it may be created or stored in electronic form subject to the conditions provided by articles 1366 and 1367 and, where an authenticated instrument is required, by paragraph 2 of article 1369. Where a person undertaking an obligation is required to add something in his own hand, he may do so in electronic form if the circumstances of this are such as to guarantee that it could have been done only by him. Article 1365 Writing consists of a series of letters, characters, numbers or any other signs or symbols with an intelligible meaning, whatever their medium. Article 1366 Electronic writing has the same probative force as writing on paper, provided that it is possible properly to identify the person from whom it originates and that it is created and stored in such conditions as will guarantee its integrity. Article 1367 A signature which is required in order to perfect a juridical act identifies its own author. It demonstrates his consent to the obligations which stem from that act. Where it is placed on the act by a public official, it confers authenticity on it. Where it is in electronic form, it must use a reliable process of identification which guarantees its relationship with the act to which it is attached. The reliability of the process is presumed in the absence of proof to the contrary where an electronic signature is created, the identity of the signatory is ensured and the integrity of the act is guaranteed on the conditions fixed by decree of the Conseil d’État.

IX. Spanish Código Civil 22

Article 1271 All things which are not beyond the bounds of commerce between men may be the subject matter of a contract, even future things. Notwithstanding the foregoing, no contracts may be entered into regarding the future inheritance other than those whose purpose is to perform the division of an estate inter vivos and other partitional dispositions, in accordance with the provisions of Article 1056. Likewise all services which are not contrary to the laws or to good customs may constitute the subject matter of a contract.

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Chapter 5 Scope of CISG Article 1272 Impossible things or services may not be the subject matter of a contract. Article 1273 The subject matter of any contract must be a thing determined as to its species. Indetermination as to amount shall not prevent the existence of a contract, provided that it is possible to determine it without the need for a new agreement with the contracting parties. Article 1445 Pursuant to the contract of sale and purchase, one of the contracting parties undertakes to deliver a specific thing and the other to pay a certain price for it, in money or something which represents it.

X. American Uniform Commercial Code 23 § 2-101 Short title This Article shall be known and may be cited as Uniform Commercial Code—Sales. § 2-102 Scope: certain security and other transactions excluded from this Article Unless the context otherwise requires, this Article applies to transactions in goods; it does not apply to any transaction which although in the form of an unconditional contract to sell or present sale is intended to operate only as a security transaction nor does this Article impair or repeal any statute regulating sales to consumers, farmers or other specified classes of buyers. § 2-103 Definitions and index of definitions (1) In this Article unless the context otherwise requires (a) “Buyer” means a person who buys or contracts to buy goods. … (c) “Receipt” of goods means taking physical possession of them. (d) “Seller” means a person who sells or contracts to sell goods. § 2-104 Definitions: “merchant”; “between merchants”; “financing agency” (1) “Merchant” means a person who deals in goods of the kind or otherwise by his occupation holds himself out as having knowledge or skill peculiar to the practices or goods involved in the transaction or to whom such knowledge or skill may be attributed by his employment of an agent or broker or other intermediary who by his occupation holds himself out as having such knowledge or skill. … (3) “Between merchants” means in any transaction with respect to which both parties are chargeable with the knowledge or skill of merchants. § 2-105 Definitions: “transferability”; “goods”; “future” goods; “lot”; “commercial unit” (1) “Goods” means all things (including specially manufactured goods) which are movable at the time of identification to the contract for sale other than the money in which the price is to be paid, investment securities (Article 8) and things in action. “Goods” also includes the unborn young of animals and growing crops and other identified things attached to realty as described in the section on goods to be severed from realty (Section 2-107). (2) Goods must be both existing and identified before any interest in them can pass. Goods which are not both existing and identified are “future” goods. A purported present sale of future goods or of any interest therein operates as a contract to sell. (3) There may be a sale of a part interest in existing identified goods. (4) An undivided share in an identified bulk of fungible goods is sufficiently identified to be sold although the quantity of the bulk is not determined. Any agreed proportion of such a bulk or any quantity thereof agreed upon by number, weight or other measure may to the extent of the seller's interest in the bulk be sold to the buyer who then becomes an owner in common. § 2-106 Definitions: “contract”; “agreement”; “contract for sale”; “sale”; “present sale”; “conforming” to contract; “termination”; “cancellation” (1) In this Article unless the context otherwise requires “contract” and “agreement” are limited to those relating to the present or future sale of goods. “Contract for sale” includes both a present sale of goods and a contract to sell goods at a future time. A “sale” consists in the passing of title from the

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E. Sampling of Laws seller to the buyer for a price (Section 2-401). A “present sale” means a sale which is accomplished by the making of the contract.

XI. English Sales Law 1. Sale of Goods Act 1979 24

Section 1 Contracts to which Act applies (1) This Act applies to contracts of sale of goods made on or after (but not to those made before) 1 January 1894. (2) In relation to contracts made on certain dates, this Act applies subject to the modification of certain of its sections as mentioned in Schedule 1 below. (3) Any such modification is indicated in the section concerned by a reference to Schedule 1 below. (4) Accordingly, where a section does not contain such a reference, this Act applies in relation to the contract concerned without such modification of the section. Section 2 Contract of sale (1) A contract of sale of goods is a contract by which the seller transfers or agrees to transfer the property in goods to the buyer for a money consideration, called the price. (2) There may be a contract of sale between one part owner and another. (3) A contract of sale may be absolute or conditional. (4) Where under a contract of sale the property in the goods is transferred from the seller to the buyer the contract is called a sale. (5) Where under a contract of sale the transfer of the property in the goods is to take place at a future time or subject to some condition later to be fulfilled the contract is called an agreement to sell. (6) An agreement to sell becomes a sale when the time elapses or the conditions are fulfilled subject to which the property in the goods is to be transferred. Section 5 Existing or future goods (1) The goods which form the subject of a contract of sale may be either existing goods, owned or possessed by the seller, or goods to be manufactured or acquired by him after the making of the contract of sale, in this Act called future goods. (2) There may be a contract for the sale of goods the acquisition of which by the seller depends on a contingency which may or may not happen. (3) Where by a contract of sale the seller purports to effect a present sale of future goods, the contract operates as an agreement to sell the goods. Section 61 Interpretation (1) In this Act, unless the context or subject matter otherwise requires, — “buyer” means a person who buys or agrees to buy goods; “contract of sale” includes an agreement to sell as well as a sale; “goods” includes all personal chattels other than things in action and money, and in Scotland all corporeal moveables except money; and in particular “goods” includes emblements, industrial growing crops, and things attached to or forming part of the land which are agreed to be severed before sale or under the contract of sale; “sale” includes a bargain and sale as well as a sale and delivery; “seller” means a person who sells or agrees to sell goods;

2. Supply of Goods and Services Act 1982 Section 1 The contracts concerned (1) In this Act in its application to England and Wales and Northern Ireland a “contract for the transfer of goods” means a contract under which one person transfers or agrees to transfer to another the property in goods, other than an excepted contract. (2) For the purposes of this section an excepted contract means any of the following:— (a) a contract of sale of goods; … (3) For the purposes of this Act in its application to England and Wales and Northern Ireland contract is a contract for the transfer of goods whether or not services are also provided or to be provided under

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XII. Chinese Law 25 Chinese Civil Code Chapter XI Sales Contracts Article 595 A sales contract is a contract whereby the seller transfers the ownership of a subject matter to the buyer, and the buyer pays the price for it. Article 596 A sales contract shall generally include the name, quantity, quality, and price of the subject matter; the time limit, place, and method for performance; and packaging method, inspection standards and methods, settlement method, the language employed in the contract, and its validity.

F. Commentary I. CISG’s Choice of Law Rules 26

A clear line must be drawn between countries where the CISG applies18 such as China, Germany, France and Spain and those countries where it does not apply such as England, Portugal and India. If both parties have their places of business in a CISG country, the CISG applies autonomously without reference to the provisions of private international law.19 If only on party has its place of business in a CISG country the CISG will apply if the rules of private international law refers the dispute to the law of the CISG country,20 but it will not apply where the rules of private international law leads to the law of a non-CISG country.21

II. Defining Sale of Goods 27

The CISG does not contain a definition of a sale, but its scope must be gleaned from the general obligations of the parties under Articles 30 and 53 CISG with the delivery of movable goods and documents, and the transfer of property on the side of

18 See for the UNCITRAL website at available at http://www.uncitral.org/uncitral/en/uncitral_texts/ sale_goods/1980CISG_status.html a current list of the countries where the CISG applies as well as the reservations, if any, declared by such countries. 19 Article 1(1)(a) CISG. See Schwenzer & Hachem (n 12), Article 1 CISG paras 28–29; Magnus/Staudinger (n 13) Article 1 CISG para 85; Mistelis (n 14) Article 1 CISG para 47. 20 Article 1(1)(b) CISG. This is subject to the exception in Article 96 CISG in terms of which a country may declare that the CISG will not apply in respect of Article 1(1)(b) CISG cases. The following states have made such declarations: Armenia, China, the Czech Republic, Saint Vincent and the Grenadines, Singapore and the US. Commentators generally agree that the original reasons for this reservation are no longer relevant and the reservation should be withdrawn by these countries. See CISG-AC Opinion No. 15, Reservations under Articles 95 and 96 CISG, Rapporteur: Prof. Dr. Ulrich G. Schroeter, University of Mannheim, Germany paras 2.1–2.3 and CISG AC Declaration No. 2 Use of Reservations under the CISG. Rapporteur: Prof. Dr. Ulrich G. Schroeter, University of Mannheim, Germany para 2. 21 Schwenzer & Hachem (n 12) Article 1 CISG para 30; Magnus/Staudinger (n 13) Article 1 CISG paras 12, 13 et seq.; Mistelis (n 14) Article 1 CISG paras 26–31.

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the seller and payment of the price on the part of the buyer.22 The CISG is therefore first and foremost applicable to the sale of movable goods.23 Where software is permanently transferred to the other party in all respects except for the reservation of copyright, the contract will be subject to the CISG irrespective of whether the software is standard software or customized software, and irrespective of the mode of delivery. 24 This must be distinguished from true licensing agreements where the user is only entitled to use the software as long as the licensing fee is paid.25 Article 2 CISG excludes certain types of transactions from the scope of application 28 of the convention. Firstly, the CISG will not apply to consumer sales. In the CISG consumer sales are defined as sales where the goods are for personal, family or household use. Business use does not only encompass industrial or retail use but also professional use, such as office furniture bought by a firm of lawyers.26 The problem of consumer sales only arises where the buyer is a natural person. Sales to juristic persons are all within the scope of the CISG. The deciding factor in sales to natural persons is the intended use of the goods as evidenced from the objective factors known to the seller. 27 Also excluded by Article 2 CISG are sales by auction, on execution, of stocks, shares, investment securities, negotiable instruments or money, electricity and sales of ships, vessels, hovercraft and aircraft. This last exception in terms of Article 2(e) CISG has proven problematic. It was included as some legal systems deal with these objects in manner similar to immovables.28 In practice it has been difficult to distinguish between different kinds of ships, vessels or boats and whether the CISG should be applicable or not.29 A new question that arises is whether the sale of drones will fall inside or outside the scope of the convention as size is not always a factor—is it an aircraft or not? The exception only applies to assembled goods, not to parts or components.30 The sale of an aircraft engine will therefore be subject to the CISG.31 Dealership, distributorship, franchise and agency contracts have consistently been excluded from the scope of the CISG.32 Framework contracts will only be subject to the CISG if it already contains

22 Schwenzer & Hachem (n 12) Article 1 CISG para 8; Magnus/Staudinger (n 13) Article 1 CISG para 12; Mistelis (n 14) Article 1 CISG para 47. 23 Schwenzer & Hachem (n 12) Article 1 CISG para 18; Magnus/Staudinger (n 13) Article 1 CISG para 44; Mistelis (n 14) Article 1 CISG para 40; Eiselen & Kritzer (n 2) para 84:6; Diedrich, ‘The CISG and Computer Software Revisited’ (2002) 6 Vindobona J Int’l Com L & Arb, Supplement 72; OGH 21 June 2005 (Software case) available at http://cisgw3.law.pace.edu/cases/050621a3.html. 24 Schwenzer & Hachem (n 12) Article 1 CISG para 18; Mistelis (n 14) Article 6 CISG paras 1–3. 25 Eiselen & Kritzer (n 2) para 84:6; 23; Fakes, ‘Application of the CISG to Computer, Software and Database Transactions’ (1990) 3 Software LJ 584–585; cf Primak who takes the position that the CISG should apply to software whether it is sold or licensed: Primak, ‘Computer Software: Should the CISG Apply? A Contextual Approach to the Question’ (1991) 11 Computer LJ 231 See also Lockhart & McKenna, ‘Software License Agreements in Light of the U.C.C. and the CISG on the International Sale of Goods’ (1991) Michigan Bar J 650 who suggest that, as in the case with domestic applications of the UCC, the CISG may well be applied to license agreements by analogy. 26 Schwenzer & Hachem (n 12) Article 2 CISG para 4; Magnus/Staudinger (n 13) Article 2 CISG paras 11–13; Spohnheimer, in Kröll, Mistelis & Perales Viscasillas (n 14) Article 2 CISG para 11. 27 Schwenzer & Hachem (n 12) Article 2 CISG paras 8–12; Magnus/Staudinger (n 13) Article 2 CISG paras 11–13; Spohnheimer (n 26) Article 2 CISG paras 15–17. 28 Magnus/Staudinger (n 13) Article 2 CISG paras 44–45. 29 Schwenzer & Hachem (n 12) Article 2 CISG paras 27–30; Magnus/Staudinger (n 13) Article 2 CISG paras 45–48; Spohnheimer (n 26) Article 2 CISG paras 37–41. 30 Spohnheimer (n 26) Article 2 CISG para 42. 31 Spohnheimer (n 26) Article 2 CISG para 42. 32 Schwenzer & Hachem (n 12) Article 1 CISG para 14; Federal District Court [Pennsylvania] 29 August 2000 (Viva Vino Import v Farnese Vini) http://cisgw3.law.pace.edu/cases/000829u1.html.

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specific orders. Contracts for the sale of goods under a dealership, distributorship, agency or franchise agreement will be subject to the CISG.33 29 Where the goods are not yet in existence, but a contract is concluded for the manufacture of goods according to the specifications of one of the parties, the contract is regarded as a sale under the CISG unless the party who has ordered the goods supply a substantial part of the of the materials necessary for the manufacturing or production of the goods according to Article 3 CISG.34 CISG AC Opinion No. 435 deals with the interpretation of Article 3 CISG which has proved problematic in practice as it is often difficult to determine what the term 'substantial parts of the materials' means. The Opinion indicates that primarily an economic value approach should be taken but a court must make an overall assessment taking all relevant information into account. 36 This is in accordance with the majority view on this issue.37

III. Mixed Sales 30

Article 3(2) CISG deals with mixed contracts where part of the contract consists of the delivery of goods, but the preponderant part consists of services. In this case the Advisory Council Opinion also indicates that an economic test should be applied to determine what the 'preponderant part' means but a court must make an overall assessment taking all relevant information into account.38 This is in conformity with the majority opinion on this issue.39

IV. Issues of Validity 31

Article 4 CISG indicates that the Convention governs only the formation of the sales contract and the rights of the parties arising from the agreement. It specifically stipulates that the Convention does not govern issues of validity. This statement is slightly misleading as the CISG also deals with the interpretation of statements and conduct of the parties (Article 8 CISG), the relevance of practices established between the parties and usages (Article 9 CISG), the formation of the contract (Articles 14 to 24 CISG ), the modification and termination of the agreement (Article 29 CISG) and the consequences of a breach of contract (Chapter V).40 Article 4(a) CISG stipulates that the CISG is not concerned with the validity of the agreement or any of its provisions, leaving this aspect to the applicable domestic law. 41 Accordingly the substantive validity of standard terms will therefore have to be judged according to the provisions of domestic law such as §§ 305– 33 Schwenzer & Hachem Article 1 CISG para 14; Cour de cassation 20 February 2007 (Perfume case) http://cisgw3.law.pace.edu/cases/070220f1.html. 34 Schwenzer & Hachem (n 12) Article 3 CISG para 2; Magnus/Staudinger (n 13) Article 3 CISG paras 1–5. 35 CISG-AC Opinion No. 4, Contracts for the Sale of Goods to Be Manufactured or Produced and Mixed Contracts (Article 3 CISG), 24 October 2004. Rapporteur: Prof. Dr. Pilar Perales Viscasillas, Universidad Carlos III de Madrid. 36 Opinion Rules No. 2 and 3. 37 Schwenzer & Hachem (n 12) Article 3 CISG para 6; Magnus/Staudinger (n 13) Article 3 CISG paras 13–14. 38 Opinion 4 Rule 9 and Comment 3.3. 39 Schwenzer & Hachem (n 12) Article 3 CISG para 18; Magnus/Staudinger (n 13) Article 3 CISG para 21. CISG-AC Opinion Comment 3.3. 40 See Schwenzer & Hachem (n 12) Article 4 CISG para 2. 41 Schwenzer & Hachem (n 12) Article 4 CISG para 12; Magnus/Staudinger, (n 13) Article 4 CISG paras 20–21; Djordjevic in Kröll, Mistelis & Perales Viscasillas (n 14) Article 4 CISG paras 13–16.

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310 of the German BGB or § 2-201 of the American UCC42, but their inclusion is governed by the CISG. The same holds true for penalty or liquidated damages clauses in a contract.43 The issue of agreed sums is specifically addressed in CISG AC Opinion No. 10.44 The Opinion acknowledges that the issues of the substantive validity of an agreed sum clause are governed by the applicable domestic law, but points out that notions such as reasonableness, excessiveness and proportionality must be applied in accordance with an international standard.45

V. Personal Injury Article 5 CISG excludes issues on the liability of the seller for death or personal 32 injury from the application of the Convention.46 The liability for damage to goods remains firmly within the scope of the CISG. The purpose of the provision was to excise the controversial issue of product liability from the scope of the Convention.47 The application of Article 5 CISG is controversial in circumstances where a third party is injured and has claimed damages from the buyer (reseller).48 One view holds that the term 'any person' excludes any such claims,49 whilst the opposing view argues that this is a claim for economic damages under Article 74 CISG and is therefore not excluded from the scope of the CISG.50 There is as yet no reported case law dealing with this issue.

VI. Derogation from the CISG Article 6 CISG preserves the principles of freedom of contract and party autonomy, 33 allowing the parties to vary or exclude some or all of the provisions of the Convention.51 Although this seems quite straightforward, the application of Article 6 CISG has given rise to many difficulties in practice, especially in regard to the exclusion of the Convention as a whole.52 Often parties will include a choice of law clause pointing to the 42 Schwenzer & Hachem (n 12); Magnus/Staudinger (n 13) Article 4 CISG para 24; Djordjevic (n 41) Article 4 CISG para 25. 43 Schwenzer & Hachem (n 12) Article 4 CISG para 44; Magnus/Staudinger (n 13) Article 74 CISG para 60; Djordjevic (n 41) Article 4 CISG para 26. 44 CISG-AC Opinion No. 10, Agreed Sums Payable upon Breach of an Obligation in CISG Contracts, Rapporteur: Dr. Pascal Hachem, Bär & Karrer AG, Zurich, Switzerland. 45 Rule 4 and Comments 4.1–4.3. 46 Schwenzer & Hachem (n 12) Article 5 CISG paras 4–5; Magnus/Staudinger (n 13) Article 5 CISG paras 1–2; Mistelis & Ribeiro, in Kröll Mistelis & Perales Viscasillas (n 14). 47 Schwenzer & Hachem (n 12) Article 5 CISG paras 4–5; Magnus/Staudinger (n 13) Article 5 CISG paras 1–2; Mistelis & Ribeiro (n 45) Article 5 CISG paras 1–2. 48 Schwenzer & Hachem (n 12) Article 5 CISG paras 4–5; Magnus/Staudinger (n 13) Article 5 CISG paras 1–2; Mistelis & Ribeiro (n 45) Article 5 CISG paras 1–2. 49 Magnus/Staudinger (n 13) Article 5 CISG para 7. 50 Schwenzer & Hachem (n 12) Article 5 CISG paras 8–10; Mistelis & Ribeiro (n 45) Article 5 CISG paras 11–13. 51 Schwenzer & Hachem (n 12) Article 6 CISG paras 1–3; Magnus/Staudinger (n 13) Article 6 CISG paras 1–4; Mistelis (n 14) Article 6 CISG paras 1–3. 52 See the Addendum of cases to CISG-AC Opinion No. 16 for examples of the difficulties encountered. See also OGH 22 October 2001 [1 Ob 77/01g] (Gasoline and gas oil case) available at http://cisgw3.law. pace.edu/cases/011022a3.html; OLG Linz 23 January 2006 (Auto case) available at http://cisgw3.law.pa ce.edu/cases/060123a3.html; Supreme People's Court [Economic Chamber] Cuba 16 June 2008 (Nordic boots case) available at http://cisgw3.law.pace.edu/cases/080616cu.htm; Cour de cassation 3 November 2009 (Société Anthon GmbH & Co. v SA Tonnellerie Ludonnais) available at http://cisgw3.law.pace.edu/c ases/091103f1.html; District Court Vigevano 12 July 2000 (Rheinland Versicherungen v Atlarex) available at http://cisgw3.law.pace.edu/cases/000712i3.html; State Appellate Court [Oregon] 12 April 1995 (GPL

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application of a specific legal system, oblivious of the fact that the choice of that legal system will also include the application of the CISG as the CISG is regarded as part of the domestic legal system of that country.53 Parties who wish to exclude the CISG must therefore do so expressly and in no uncertain terms. Examples of effective exclusion clauses are contained below. The exclusion of the CISG may also be implicit,54 but this situation should be avoided as far as possible. It is sometimes said that a choice of jurisdiction clause also is an implicit choice of the law of the same state, but this is controversial.55 According to this view the choice of exclusive jurisdiction of a non-CISG state, also implies an intention to exclude the CISG.56 Choice of jurisdiction or venue and choice of law are two distinct issues which should not be confused. The mere choice of jurisdiction without other indications that the parties also had the choice of the substantive law in mind, should not be regarded as choice of law. The exclusion issue has also been addressed by the CISG AC in its Opinion No. 16.57 Parties may also expressly choose the application of the CISG as governing their contract, but the validity of such a choice will depend on whether the applicable law recognizes such a choice or incorporation of the Convention.

VII. CISG and Other International Law Instruments 34

The Principles of European Contract Law are the product of work carried out by the Commission on European Contract Law, a group of lawyers drawn from all the member states of the European Union. It was a response to the need for a Union-wide harmonization of general contract law principles to counter the burgeoning volume of Community law regulating specific contracts.58 It was inter alia aimed at establishing the basis for European legislation but also at providing a modern lex mercatoria to parties who did not want to subject their agreements to domestic law, but to an international instrument.59

Treatment v Louisiana-Pacific) available at http://cisgw3.law.pace.edu/cases/950412u1.html; Federal District Court [New York] 2 December 2010 (Ho Myung Moolsan, Co. Ltd. v Manitou Mineral Water, Inc.) available at http://cisgw3.law.pace.edu/cases/101202u1.htm. 53 Schwenzer & Hachem (n 12) Article 6 CISG paras 12; Magnus/Staudinger (n 13) Article 6 CISG paras 16, 24 & 30; Mistelis (n 14) Article 6 CISG para 1; OGH 22 October 2001 [1 Ob 77/01g] (Gasoline and gas oil case) available at http://cisgw3.law.pace.edu/cases/011022a3.html. 54 Schwenzer & Hachem (n 12) Article 6 CISG para 20; Magnus/Staudinger (n 13) Article 6 CISG para 20; Mistelis (n 14) Article 6 CISG paras 1–3; OLG Linz 23 January 2006 (Auto case) available at http://cisg w3.law.pace.edu/cases/060123a3.html; Supreme People's Court [Economic Chamber] Cuba, 16 June 2008 (Nordic boots case) available at http://cisgw3.law.pace.edu/cases/080616cu.html; Cour de cassation 26 June 2001 (Muller Ecole v Federal Trait) available at http://cisgw3.law.pace.edu/cases/010626f2.html; OLG Munich 2 October 2013 (Concentrated juice case) available at http://cisgw3.law.pace.edu/cases/131002g1. html. 55 Schwenzer & Hachem (n 12) Article 6 CISG para 20 argues, correctly in our view, that the existence of a choice of jurisdiction clause in itself is insufficient to indicate an intention to also choose the law of that state. See however Magnus/Staudinger (n 13) Article 6 CISG para 36; Mistelis (n 14) Article 6 CISG para 40. 56 Magnus/Staudinger (n 13) Article 6 CISG para 36; Mistelis (n 14) Article 6 CISG para 12; OLG Stuttgart 31 March 2008 (Automobile case) available at http://cisgw3.law.pace.edu/cases/080331g1.html. 57 CISG-AC Opinion No. 16, Exclusion of the CISG under Article 6, Rapporteur: Dr. Lisa Spagnolo, Monash University, Australia. 58 Lando & Beale (eds), Principles of European Contract Law Parts I and II (Kluwer 2000) p. xxi. See also Riedl, ‘The Work of the Lando-Commission from an Alternative Viewpoint’ (2000) 8 ERPL 71. 59 Lando & Beale (n 58) pp. xxiii–xxiv.

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The Principles only apply if the parties incorporate them into their contract by 35 reference.60 The Principles do not specifically address sales law, but rather deals with the general provisions of contract law. It overlaps with the CISG in such areas as the formation of the agreement and the remedies for breach. The Principles have not achieved the success hoped for and have been overtaken by other developments such as the development of the European Draft Common Framework of Reference 61 and the Principles of European Sales Law. The UNIDROIT Principles of International Commercial Contracts (PICC) are mod- 36 elled on the American Restatement of Contract Law.62 They are aimed at restating common principles to be found in global contract law, but also as a model for national and supra national legislators.63 The PICC does not deal with sales law specifically, but rather restates general principles of contract law. As such it overlaps with the CISG in regard to the formation of the contract and the remedies that are applicable after breach. The PICC will apply if the parties expressly make their contract subject to the provisions of the Principles.64 Such a choice often goes hand in hand with a choice in favour of arbitration.65 Arbitration tribunals often apply the PICC because they are not bound to apply 37 any specific legal system,66 especially in the absence of a choice of law clause in the agreement or where the clause refers to general principles of international sales or to the lex mercatoria.67 There is some uncertainty whether the PICC can be chosen as choice of law option, because the PICC will not readily be recognized as a legal system in most jurisdictions.68 This is the approach in Europe under Article 3 of the Convention on the Law Applicable to Contractual Obligations (Rome Convention).69 However, in most legal systems the incorporation of PICC in to the contract will be recognized and enforced under the principle of freedom of contract and the autonomy of the parties. 70 As the PICC compliments the CISG, parties may well decide to choose the PICC as a subsidiary set of rules to the CISG as suggested in the Model Clauses below.71

VIII. CISG and INCOTERMS The INCOTERMS 2020 is an important instrument of international sales law har- 38 monization. First published in 1936, but updated roughly every ten years, the 2020 version provides rules for dealing with the delivery of the goods that are appropriate to

Lando & Beale (n 58) pp. xxiii–xxiv. See European Commission Justice website at available at http://ec.europa.eu/justice/contract/cesl/bac kground/index_en.htm. 62 Michaels, in Vogenauer (ed), Commentary on the UNIDROIT Principles of International Commercial Contracts (PICC) (2nd edn., OUP 2015) Preamble I para 6; Rosett, ‘The UNIDROIT Principles of International Commercial Contracts: A New Approach to International Commercial Contracts’ (1998) 46 Am J Comp L 347, 355–356. 63 Preamble; Official Comment para 4. Michaels (n 68) Preamble paras 3–6; Veillard, ‘The General and Commercial Character of the UNIDROIT Principles of International Commercial Contracts’ (2007) Int’l Bus LJ 482. 64 Preamble; Official Comment para 4; Michaels (n 69) paras 33–34. 65 Preamble; Official Comment para 4. 66 Preamble: Official Comment para 4; Scherer in Vogenauer (n 69) Preamble II para 5. 67 Preamble; Official Comment para 4. 68 Michaels (n 69) paras 49–50. 69 Michaels (n 68) para 51. 70 Michaels (n 68) paras 32–34. 71 See Michaels (n 68) Preamble I para 47. 60

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international trade and to the type of transport used by the parties.72 Each three letter Incoterm such as EXW, CIP, DDP, FOB and CIF provides a shorthand way of dealing with the risk of loss or damage, the cost of transport and insurance, the payment of duties and obligation for obtaining permissions and certificates in an international sale.73 Very often parties use the INCOTERMS without being aware of their full implications or without regard to the particular type of transport being used. This complicates the interpretation of the contract. Parties are free to use an Incoterm but to derogate from its provisions by including conflicting provisions in their contract. This should however be done consciously and with care. Many legal systems also recognize similar trade terms such as the American UCC74 or the German HGB,75 but these trade terms are not identical to the INCOTERMS even though the three letter term may be identical.

IX. CISG and National Laws In German law the CISG applies to international sales transactions unless the parties have expressly excluded the application of the CISG.76 The law of sale is generally regarded as the core element of the civil law.77 It is specifically dealt with in Division 8 of the BGB,78 but the general principles of the BGB in regard to formation and validity of agreements apply to sales unless the more specific provisions of the law of sale takes precedence.79 If the sale is regarded as commercial sale as defined in the Handelsgesetzbuch of 1897 the provisions of §§ 373 to 381 HGB will also apply to the sale.80 40 In German law the law of sale is largely dispositive in nature, i.e. it is open to the parties to change or exclude the rules under the general principle of freedom of contract. 81 It is only when the contract does not make provision for a specific contingency that these rules will apply. In commercial sales the only real restriction to the freedom of the parties in commercial sales, relate to the validity of unfair standard terms in terms of §§ 305 to 310 of the BGB.82 All other compulsory provisions deal with consumer sales and not commercial sales.83 The seller may sell a particular thing or a thing from a genus 39

72 INCOTERMS 2010 ICC Publication 715E; Gabriel, ‘International Chamber of Commerce INCOTERMS 2000: A Guide to Their Terms and Usage’ (2001) 5 Vindobona J of Int’l Com L & Arb, 41; Ramberg, ICC Guide to INCOTERMS 2000—Understanding and Practical Use (ICC Publication No. 620, 1999). 73 Eiselen & Kritzer (n 2) para 88:7; China 30 April 1996 CIETAC Arbitration proceeding (Jacks and bearing brackets case) available at http://cisgw3.law.pace.edu/cases/960430c1.html. See also United States St. Paul Guardian Ins. Co. v Neuromed Medical Systems & Support, GmbH, 2002 WL 465312 (S.D. N.Y. 2002). 74 §§ 2-319 to 2-224 UCC. 75 Hopt et al, Handelsgesetzbuch (36th edn, 2014) § 346 paras 39–40. 76 Schlechtriem & Schwenzer, (n 12) Article 6 CISG paras 6–8; BGH 23 July 1997, CISG-Online No. 285; OLG Munich 2 October 2013, CISG-Online No. 2473. 77 Beckmann, in J. Von Staudingers Kommentar zum Bürgerlichen Gesetzbuch mit Einführungsgesetz und Nebengesetze §§ 433 – 487; Leasing (2014) Buch 2 Abschnitt 8 para 1. 78 Reinicke & Tiedtke Kaufrecht (8th edn, 2009) para 1; Staudinger/Beckmann (n 83) Buch 2 Abschnitt 8 para 1. 79 Reinicke & Tiedtke (n 85) para 7. 80 Staudinger/Beckmann (n 84) Buch 2 Abschnitt 8 para 3. 81 Staudinger/Beckmann (n 84) Buch 2 Abschnitt 8 para 11. 82 Staudinger/Beckmann (n 84) Buch 2 Abschnitt 8 para 2. 83 See discussion in Staudinger/Beckmann (n 84) Buch 2 Abschnitt 8 paras 11 et seq. The only exceptions are § 444 BGB which deals with the exclusion for the liability for fraud and § 449(3) BGB dealing with an agreement on retention of title is void to the extent that the passing of ownership is made subject to the satisfaction by the buyer of third-party claims.

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of goods.84 It may also sell future goods or goods still to be manufactured. The seller is obliged to deliver the thing as well as transfer the ownership in the goods.85 Until the goods have been delivered the seller remains owner of the goods.86 In German law sales contracts are in principle only concerned with the sale of corpo- 41 real things in terms of § 433 BGB read with § 90 BGB. 87 However, in terms of § 453 BGB the provisions on sales are extended to the purchase of rights and other objects thereby considerably extending the reach of sales law provisions.88 The sale of software is subject to all of these sales provisions in terms of § 453 BGB. 89 Excluded from sales law are utilities such as electricity, remote heating and know-how.90 The CISG applies to the international sale of goods in Spanish law unless it has 42 been specifically excluded by the parties.91 The general provisions of Section 2 of the Spanish Civil Code deal with the general aspects of contract law.92 Sales contracts are dealt with more specifically in Title IV.93 The general provisions in regard to the law of contract of the Spanish Civil Code found in Book IV Title II (Articles 1.254 et seq.) also applies to sales contracts.94 In terms of Article 1,271 everything which forms part of free commerce may be the object of a sales contract.95 Book IV Title IV deals specifically with sales contracts. The object of an international sale may be any movable thing, but also rights and obligations.96 Accordingly the sale of software is governed by the general rules applicable to sales under Title IV.97 The CISG applies to the international sale of goods in France unless it has been 43 excluded by the parties.98 In French law no specific formalities are prescribed for international sale of goods contracts. Article 1128 French Civil Code states three requirements for a valid sales contract, but requires no formalities.99 The sale is complete as soon as the goods and the price have been agreed upon in terms of Article 1583 French Civil Code. At that time ownership is also transferred automatically.100 Like German law, French law also makes provision for using electronic communications for the formation of a contract in compliance with the European Community Directive on Electronic Commerce in Articles 1365 to 1367 French Civil Code. The requirements for an electronic signature in a contract are simple authentication and integrity requirements similar to the provisions of the UNCITRAL Model on Electronic Commerce and the Electronics Convention of 2005. Staudinger/Beckmann (n 84) Buch 2 Abschnitt 8 para 1. Reinicke & Tiedtke (n 85) para 2. 86 § 929 BGB. See Reinicke & Tiedtke (n 85) para 4. 87 Staudinger/Beckmann (n 84) Buch 2 Abschnitt 8 para 43. 88 Staudinger/Beckmann (n 84) Buch 2 Abschnitt 8 para 44; Bassenge et al, Palandt Bürgerliches Gesetzbuch (79th edn, 2020) § 90 BGB para 2. 89 Palandt (n 95) § 90 BGB para 2; Staudinger/Magnus (n 13) Article 1 CISG para 44. 90 Palandt (n 95) § 453 BGB para 1. 91 Schlechtriem/Schwenzer (n 1) Article 6 CISG paras 6–8; Tribunal Supremo 24 February 2006 (Mercantil NERTOR v Autolux F. Strub) available at http://cisgw3.law.pace.edu/cases/060224s4.html. 92 Vaquer, Contract Law in Spain (2012) pp. 35–37; 56–59. 93 Vaquer (n 99). p. 185. 94 Vaquer (n 99) pp. 56–57; Piske, Kaufvertrag in Spanien (1998) paras 109 et seq. 95 Vaquer (n 99) p. 185; Piske (n 101) para 109. 96 Piske (n 101) para 109. 97 Piske (n 101) para 119. 98 Schlechtriem & Schwenzer (n 1) Article 6 CISG paras 6–8; Cour d'appel Paris 6 November 2001 available at http://cisgw3.law.pace.edu/cases/011106f1.html; Cour de cassation 25 October 2005 CISG-Online No. 1098. 99 Campbell (n 20) p. FRA 8; Dalhuisen (n 19) para 1.2.8; Endrös, Kaufvertrag in Frankreich (1999) pp. 10–11. 100 Endrös (n 108) p. 10. 84

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The CISG applies to the international sale of goods in American law unless it has been specifically excluded by the parties.101 Commercial contracts in the United States are subject to the UCC adopted by the various states, and more specifically article which deals with sales.102 The UCC applies in all states except Louisiana. Sales are concerned with the transfer of goods according to § 2-102 UCC but do not include services.103 Distribution agreements have accordingly consistently been ruled as sales.104 'Goods' are defined in § 2-105 UCC as all movable goods in existence except money. Where future goods are sold, the contract is a contract to sell and not a sale.105 The main difference is that under a sale ownership is passed from the seller to the buyer, whereas in a contract to sell ownership is only passed at a later stage.106 Whether a contract for the provision of software is a sale or not has been problematic in the United States.107 The primary test used by courts to determine whether software is a good under the UCC is the predominant factor test, where courts look to the ‘essence of the agreement’ on a case-by-case basis to decide how to characterize the transaction.108 Generally, courts have found that mass-produced, standardized, or generally available software, even with modifications and ancillary services included in the agreement, is a good that is covered by the UCC.109 45 The CISG does not apply in England and consequently international sales are governed by English domestic law. Still on the English statute book is the Uniform Laws on International Sales Act of 1967 which implemented the two Hague Conventions of 1964 applying to international sales, namely the Uniform Law on the Sale of Goods Convention and the Uniform Law on the Formation of Contracts for the International Sale of Goods. Due to reservations made by the United Kingdom the conventions only apply when chosen by the parties (opt-in) and has had virtually no impact in the United 44

101 Schlechtriem & Schwenzer (n 12) Article 6 CISG paras 6–8; Circuit Court of Appeals (2 d. Cir.) 6 December 1995 (Delchi Carrier, S.p.A. v Rotorex Corp) available at http://cisgw3.law.pace.edu/cases/94090 9u1.html; District Court, Southern District of New York 26 March 2002 (St Paul Guardian Insurance Company and Travelers Insurance Company v Neuromed Medical Systems GmbH) available at http://www.cisg.la w.pace.edu/cases/020326u1.html; District Court [Pennsylvania] 6 January 2006 (LLC v GOSoftware, Inc.) available at http://cisgw3.law.pace.edu/cases/050816u1.html; District Court, Southern District of New York 18 January 2011 (Hanwha Corporation v Cedar Petrochemicals, Inc.) available at http://cisgw3.law.pac e.edu/cases/110118u1.html. 102 Specialty Beverages, L.L.C. v Pabst Brewing Co. 537 F.3 d 1165 C.A.10 (Okla.), 2008 p. 1173 et seq.; Pepsi-Cola Bottling Co. of Pittsburg, Inc. v PepsiCo, Inc. 431 F.3 d 1241 C.A.10 (Kan.), 2005 p. 1255. 103 Pepsi-Cola Bottling Co. of Pittsburg, Inc. v PepsiCo, Inc. 431 F.3 d 1241 C.A.10 (Kan.), 2005 p. 1255. 104 Specialty Beverages, L.L.C. v Pabst Brewing Co. 537 F.3 d 1165 C.A.10 (Okla.), 2008 p. 1173 et seq.; Pepsi-Cola Bottling Co. of Pittsburg, Inc. v PepsiCo, Inc. 431 F.3 d 1241 C.A.10 (Kan.), 2005 p. 1255. 105 § 2-105(2) UCC. Busch v Dyno Nobel, Inc. 40 Fed.Appx. 947 C.A.6 (Mich.), 2002; Computer Servicenters, Inc. v Beacon Mfg. Co. 328 F.Supp. 653 D.C.S.C. 1970 pp. 654–655. 106 § 2-106 UCC. 107 Simulados Software, Ltd. v Photon Infotech Private, Ltd. 40 F.Supp.3 d 1191 N.D.Cal., 2014. See also Boss & Woodward, ‘Scope of the Uniform Commercial Code; Survey of Computer Contracting Cases’ (1998) 43 Bus Law 1513; Owen, ‘The Application of Article 2 of the Uniform Commercial Code To Computer Contracts’ (1987) 14 N Kentucky LR 277; Rodau, ‘Computer Software: Does Article 2 of the Uniform Commercial Code Apply’ (1986) 35 Emory LJ 853; Holmes, ‘Application of Article Two of the Uniform Commercial Code to Computer System Acquisitions’ (1982) 9 Rutgers Computer & Technology LJ 1; Note, ‘Computer Software As A Good Under the Uniform Commercial Code: Taking a Byte Out of the Intangibility Myth’ (1985) 65 BUL Rev 129 (1985); Note, ‘Computer Programs as Goods Under the U.C.C.’ (1979) 77 Mich LR 1149. 108 Simulados Software, Ltd. v Photon Infotech Private, Ltd. 40 F.Supp.3 d 1191 N.D.Cal., 2014; Gross v Symantec Corp., No. C–12–00154–CRB, 2012 WL 3116158, at *8 (N.D.Cal. July 31, 2012); RRX Indus., Inc. v Lab–Con, Inc., 772 F.2 d 543, 546 (9th Cir.1985). 109 Simulados Software, Ltd. v Photon Infotech Private, Ltd. 40 F.Supp.3 d 1191 N.D.Cal., 2014; RRX Indus., Inc. v Lab–Con, Inc., 772 F.2 d 543, 546 (9th Cir.1985); Advent Systems Ltd. v Unisys Corp. 925 F.2 d 670 C.A.3 (Pa.), 1991.

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Kingdom and may safely be ignored.110 The Sale of Goods Act of 1979 governs all sales and agreements to sell, including international commercial sales. In terms of s 61 the term 'goods' include all personal chattels. In Scotland this refers to all corporeal moveables. It would seem that software is not regarded as goods under the Sale of Goods Act, only the physical disk is regarded as goods.111 However, the software is subject to the Supply of Goods and Services Act 1982 which contain many similar provisions to the Sale of Goods Act in regard to transfer of title and defects in the goods or services. 112 The Acts are not exhaustive in dealing with commercial sales as there may be other rules such as rules in bankruptcy,113 rules of the common law and the law merchant which are not inconsistent with the Act. This relates in particular to the rules on agency, the effect of fraud, misrepresentation, duress, mistake or other invalidating causes. 114 Traders in international sales have developed specialized contracts that are well known in the law and incorporate standardized trade terms such as cif., fob, c&f and cfr which are similar to the INCOTERMS of the International Chamber of Commerce 115 but also differ in important respects.116 Commercial parties should therefore be vigilant when using English contracts to establish which trade terms are governing. The CISG applies to the international sale of goods in Chinese law unless it has been 46 specifically excluded by the parties.117 Where domestic Chinese sales law apply to an international sale, the specific provisions of Chapter IX of the new Chinese Civil Code. The general provisions of Title I of Book III apply to all contracts, including sales 47 and deals with issues such as formation of the contract,118 breach and remedies.119 The specific provisions contained in Title II of Book III distinguish between various types of contract, including sales, the supply of electricity, water gas or heating, contracts for work, construction projects and contracts for technology. Sales contracts are concerned with agreements where the seller transfers ownership of an object to the buyer and the buyer pays a price for it.120 The seller must be the owner of the goods or entitled to dispose of the goods.121 A sales contract must be distinguished from a contract for work which is dealt with in Chapter XVII.122 Article 770 Chinese Civil Code defines a contract for work as an agreement whereby the contractor shall complete the work and deliver the results therefrom in exchange for payment. Unlike the position under Article 3 CISG, contracts where the buyer supplies the raw materials, remain a contract for work under Articles 774 and 775 Chinese Civil Code. In terms of Article 512 110 Beale (ed), Chitty on Contracts (31st edn, 2012) para 43-003. The two Hague Conventions may have lapsed since the United Kingdom is the only Contracting State as all other previous Contracting States have now adopted the CISG and have denounced the Hague Convention either expressly or by implication. 111 St Albans City and District Council v International Computers Ltd [1996] 4 All ER 481 at 493; Your Response Ltd v Datateam Business Media Ltd [2014] 4 All ER 928; [2014] EWCA Civ 281 para [20]; Thunder Air Ltd v Hilmarsson [2008] EWHC 355 (Ch), [2008] All ER (D) 245 (Mar). 112 See ss 2–4 for example. 113 s 62(1) SGA 1979. Beale (n 121) para 43-001. 114 s 62(2) SGA 1979. Beale (n 121) para 43-002. 115 INCOTERMS 2010 ICC Publication 715. 116 Beale (n 121) para 43-007. 117 Schlechtriem & Schwenzer (n 12) Article 6 CISG paras 6–8; CISG-AC Opinion No. 15, Reservations under Articles 95 and 96 CISG, Rapporteur: Prof. Dr. Ulrich G. Schroeter, University of Mannheim, Germany, Comments paras 2.4 & 4.3; CIETAC Arbitration Award May 2006 available at http://cisgw3.law. pace.edu/cases/060500c3.html. 118 Book III Chapter III. 119 Book III Chapter VII and VIII. 120 Article 595 Chinese Civil Code. 121 Article 597 Chinese Civil Code. 122 See Zimmermann (n 129) pp. 270 et seq.

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Chinese Civil Code if the subject matter of an electronic contract is delivered by means of online transmission, the time of delivery shall be the time when the subject matter of the contract enters the specific system designated by the other party and becomes susceptible to search and identification. This is consistent with the earlier Article 5 of the Supreme Court's Interpretation of Issues Concerning the Application of Law for the Trial of Cases of Disputes over Sales Contracts stipulates that electronic products can be the subject matter of a sales contract even though there will be no physical delivery.

G. Practitioner Tips & Contract Clauses I. Practitioner Tips Parties to an international sales contract must consider the applicable law. It is open to parties under all of the legal regimes discussed above to agree to the applicable law. See the model clauses for a choice of law clause below. 49 Do not exclude the application of the CISG without considering the implications of such a choice. In many circumstances your client, whether buyer or seller may be better off under the CISG than under domestic law. Where both parties reside in CISG countries many of the issues of which legal system will apply is avoided. If you do want to exclude the application of the CISG you need to do so explicitly and carefully as indicated in the notes above. See the model clauses below for an effective express exclusion. 50 Consider the use of the INCOTERMS to deal with the incidence of risk, and the allocation of the costs for transport, insurance and a number of ancillary issues such as the payment of duties.123 It is important to specify that INCOTERMS will apply as well as which version, because many domestic laws such as English law, the American UCC and German law recognize terms which are similar in appearance but not necessarily in effect. The INCOTERMS should be preferred as they have been developed specifically for international trade and are kept up to date to make provision for developments in transport and communications.124 For a roadmap to use the INCOTERMS in conjunction with the CISG see Eiselen & Kritzer.125 51 Consider whether any disputes should be subject to arbitration or to the regular courts which may have jurisdiction. See Chapter 30 on ‘Dispute Resolution’ below for model clauses. If arbitration is not chosen, consider including a choice of jurisdiction clause. Choice of jurisdiction and choice of law are often confused in practice, but these are two distinct issues which should be dealt with separately. A choice of jurisdiction or venue does not necessarily imply a choice of the substantive law of that venue. See Chapter 6 on ‘Jurisdictional Issues’ below for a more detailed discussion and further tips. 48

INCOTERMS 2010 ICC Publication 715E. INCOTERMS 2010 ICC Publication 715E Foreword p. 4. 125 Eiselen & Kritzer (n 2) § 88:14. 123

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II. Model Clauses 1. Opting Out of the CISG Where the CISG Would Otherwise Apply This agreement and all consequences flowing from it shall be subject to and governed by the domestic law of [State/Country], excluding the provisions of the UN Convention for the International Sale of Goods, Vienna 1980 (CISG).126

52

Alternatively This contract shall be governed by and constructed according to the law of the State of New York, without giving effect to any conflict of laws principles of the law of the forum, and with the exclusion of the UN Convention for the International Sale of Goods, Vienna 1980 (CISG).127

2. Accepting the Application of the CISG Where It Would Apply This agreement and all consequences flowing from it shall be subject to and governed by the domestic law of [State/Country], including the provisions of the UN Convention for the International Sale of Goods, Vienna 1980 (CISG).

53

3. Opting-In to the CISG Where It Would Not Apply In so far as any matters are not covered by the foregoing provisions, this Contract is governed by the following, in descending order of precedence: – –

54

The United Nations Convention on Contracts for the International Sale of Goods 1980 (CISG); For matters not dealt with in the above-mentioned texts, the law applicable at [country].

4. Opting into the CISG and the PICC Article 14 of the ITC Model Contract for the International Sale of Perishable Goods 55 is useful especially for use where provision is made for arbitration and where the parties wish to opt in to both the CISG and the PICC:128 In so far as any matters are not covered by the foregoing provisions, this Contract is governed by the following, in descending order of precedence: – – –

The United Nations Convention on Contracts for the International Sale of Goods (CISG); The UNIDROIT Principles of International Commercial Contracts For matters not dealt with in the above-mentioned texts, the law applicable at [country], or in the absence of a choice of law, the law applicable at the Seller's place of business through which this Contract is to be performed.

This clause may be adapted to the specific needs of the parties, for instance. Parties 56 may also consider giving precedence to the PICC over the CISG, but this may be a more uncertain choice as there is not yet as substantial a body of law interpreting the PICC as is the case with the CISG.

5. Opting into the CISG in Distributorship Agreements Recital: This is a [distributorship/agency/franchise] agreement which deals with both the 57 long term relationship created between the parties (who have their places of business in different countries), and eventual sales of goods as understood in the UN Convention for the International Sale of Goods, Vienna 1980 (CISG). ICM § 84:8. DiMatteo (n 15) para 3.12. 128 This clause is preferable to the model clauses provided by UNIDROIT in its footnote—see Michaels (n 69) p. 41. 126

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Choice of law: This agreement and any consequences flowing from it shall be subject to and governed by the law of [State/Country]. Section x [or Clauses xx–xx] which comprises the terms for any sales to be concluded between the parties shall be governed by the provisions of the UN Convention for the International Sale of Goods, Vienna 1980 (CISG). Any residual questions not governed by the contract or the CISG shall be governed by the law of [State/Country].

H. Additional Sources 59 Alpa et al, The Proposed Common European Sales Law – the Lawyer's View (Sellier 2013); Bassenge et al,

Palandt Bürgerliches Gesetzbuch (79th edn, C.H. Beck 2020); Beale (ed), Chitty on Contracts (31st edn, Sweet & Maxwell 2012); Beatson, Burrows & Cartwright, Anson's Law of Contract (29 th edn, OUP 2010); Beckmann in J. von Staudingers Kommentar zum Bürgerlichen Gesetzbuch mit Einführungsgesetz und Nebengesetze §§ 433 – 487 Leasing (Sellier – de Gruyter 2014); Bonell (ed), The UNIDROIT Principles in Practice – Caselaw and Bibliography on the UNIDROIT Principles of International Commercial Contracts (2nd edn, Transnational Publishers 2006); Bonell, An International Restatement of Contract Law – The UNIDROIT Principles of International Commercial Contracts (3rd edn, Brill 2005); Boss & Woodward, ‘Scope of the Uniform Commercial Code Survey of Computer Contracting Cases’ (1988) 43 Bus Law 1513; CISG AC Declaration No. 2 Use of Reservations under the CISG. Rapporteur: Professor Dr. Ulrich G. Schroeter, University of Mannheim; CISG AC Opinion No. 4, Contracts for the Sale of Goods to Be Manufactured or Produced and Mixed Contracts (Article 3 CISG), 24 October 2004. Rapporteur: Professor Dr. Pilar Perales Viscasillas, University Carlos III of Madrid; CISG AC Opinion No. 10, Agreed Sums Payable upon Breach of an Obligation in CISG Contracts, Rapporteur: Dr. Pascal Hachem, Bär & Karrer AG, Zurich; CISG AC Opinion No. 15, Reservations under Articles 95 and 96 CISG, Rapporteur: Professor Dr. Ulrich G. Schroeter, University of Mannheim, Comments; CISG AC Opinion No. 16, Exclusion of the CISG under Article 6, Rapporteur: Dr. Lisa Spagnolo, Monash University; Diedrich, ‘The CISG and Computer Software Revisited’ (2002) 6 Vindobona J of Int’l Com L & Arb, Supplement 72; Djordjevic in Kröll, Mistelis & Perales Viscasillas UN Convention on Contracts for the International Sale of Goods (CISG) (2nd ed C.H. Beck, Hart, Nomos 2018); Eiselen & Kritzer, International Contract Manual Vol IV (Thomson Reuters 2015); Eiselen, ‘Adoption of the Vienna Convention for the International Sale of Goods (the CISG) in South Africa’ (1999) 116 South African Law Journal 350–351; Fakes, ‘Application of the CISG to Computer, Software and Database Transactions’ (1990) 3 Software LJ 584–585; Fox, International commercial agreements – A Primer on Drafting, Negotiating and Resolving Disputes (4th edn, Wolters Kluwer 2009); Gabriel, ‘International Chamber of Commerce INCOTERMS 2000: A Guide to Their Terms and Usage’ (2001) 5 Vindobona J of Int’l Com L & Arb 41–73; Goldring et al, Consumer Protection Law (5th edn, Federation Press 1998); Holmes, ‘Application of Article Two of the Uniform Commercial Code to Computer System Acquisitions’ (1982) 9 Rutgers Computer & Technology LJ 1; Hondius & Bollen, Handboek Consumentenrecht (Uitgeverij Paris 2006); Honnold & Flechtner, Uniform Law for International Sales under the 1980 United Nations Convention (4th edn, Kluwer 2009); Hopt et al, Handelsgesetzbuch (36th edn, C.H. Beck 2014); Lando & Beale (eds), Principles of European Contract Law Parts I and II (Kluwer 2000); Lockhart & McKenna, ‘Software License Agreements in Light of the U.C.C. and the CISG on the International Sale of Goods’ (1991) Michigan Bar J 650; Lowe & Woodroffe, Consumer Law and Practice (6th edn, Sweet & Maxwell 2004); Magnus in Martinek (ed), J. von Staudingers Kommentar zum Bürgerlichen Gesetzbuch mit Einführungsgesetz und Nebengesetze Wiener UN-Kaufrecht (CISG) (Sellier – de Gruyter 2014); McKendrick, Contract Law – Text, Cases and Materials (9th edn, OUP 2020); Michaels in Vogenauer (ed) Commentary on the UNIDROIT Principles of International Commercial Contracts (PICC) (2nd edn, OUP 2015); Micklitz, Stuyck & Terryn, Cases, Materials and Text on Consumer Law (Hart 2010); Mistelis & Ribeiro, in Kröll, Mistelis & Perales Viscasillas (eds), UN Convention on Contracts for the International Sale of Goods (CISG) (2nd ed, C.H. Beck, Hart, Nomos 2018); Mistelis, in Kröll Mistelis & Perales Viscasillas (eds), UN Convention on Contracts for the International Sale of Goods (CISG) (2nd ed, C.H. Beck, Hart, Nomos 2018); Naudé & Eiselen, Commentary on the Consumer Protection Act (Juta 2015); Note, ‘Computer Software As A Good Under the Uniform Commercial Code: Taking a Byte Out of the Intangibility Myth’ (1985) 65 BUL Rev 129; Owen, ‘The Application of Article 2 of the Uniform Commercial Code To Computer Contracts’ (1987) 14 N Kentucky LR 277; Peel & Treitel, An Outline of The Law of Contract (15th edn, OUP 2020); Primak, ‘Computer Software: Should the CISG Apply? A Contextual Approach to the Question’ (1991) XI Computer LJ 231; Ramberg, ICC Guide to INCOTERMS 2000—Understanding and Practical Use (ICC Publication No. 620 1999); Ramsay, Consumer Law and Policy: Text and Materials on Regulating Consumer Markets (3rd edn, Hart 2012); Reinicke & Tiedtke, Kaufrecht (8th edn, Carl Heymanns Verlag 2009); Riedl, ‘The Work of the Lando-Commission from an Alternative Viewpoint’ (2000) 1

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H. Additional Sources European Review of Private Law 71; Rodau, ‘Computer Software: Does Article 2 of the Uniform Commercial Code Apply’ (1986) 35 Emory L.J. 853; Rosett, ‘The UNIDROIT Principles of International Commercial Contracts: A New Approach to International Commercial Contracts’ (1998) 46 Am J Comp L 347, 355–356; Scherer in Vogenauer S J (ed) Commentary on the UNIDROIT Principles of International Commercial Contracts (PICC) (2nd edn, OUP 2015); Schulze (ed), Common European Sales Law – Commentary (Nomos 2012); Schwenzer & Hachem in Schwenzer (ed), Schlechtriem & Schwenzer Commentary on the UN Convention on the International Sale of Goods (CISG) (4th edn, OUP 2016); Schwenzer, Hachem & Kee, Global Sales and Contract Law (OUP 2012); Spohnheimer in Kröll, Mistelis & Perales Viscasillas (eds), UN Convention on Contracts for the International Sale of Goods (CISG) (2nd ed, C.H. Beck, Hart, Nomos 2018); Vaquer, Contract Law in Spain (Kluwer 2012); Veillard, ‘The General and Commercial Character of the UNIDROIT Principles of International Commercial Contracts’ (2007) Int’l Bus LJ 482; Zimmerman, China Law Deskbook – A Legal Guide for Foreign-Investment Enterprises (4th edn, American Bar Association 2014); Zweigert & Kötz, An Introduction to Comparative Law (3rd edn, Clarendon Press 1998).

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CHAPTER 6 JURISDICTION Sieg Eiselen A. Topics Covered . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B. Introductory Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C. Statement of Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . D. International Sales Transaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . E. Regional Regimes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F. Domicile, Residence or Place of Business of the Defendant . . . . . . . . . . . . . . . . . . I. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Sampling of Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. CISG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. ALI/UNIDROIT Principles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. European Union . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. Germany . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5. Spain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6. France . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7. England . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8. United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9. China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . G. Agreement and Submission . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Sampling of Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. CISG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. ALI/UNIDROIT Principles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. European Union . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. The 2005 Hague Convention on Choice of Court Agreements . . . . . . . . . . . 5. Germany . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6. Spain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7. France . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8. England . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9. United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10. China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . H. Where the Cause of Action Arose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Sampling of laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. CISG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. ALI/UNIDROIT Principles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. European Union . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. Germany . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5. Spain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6. France . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7. England . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8. United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9. China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Exclusion of Jurisdiction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Sampling of Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. CISG and the New York Convention . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. European Union – Brussels I Recast 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Exclusive Jurisdiction Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Arbitration Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Lis Alibi Pendens – related Actions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d) Forum Non Conveniens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Germany . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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1 6 14 15 19 25 25 26 26 26 27 28 31 34 37 44 50 54 74 74 76 76 77 78 79 80 81 82 84 87 89 92 107 107 109 109 110 111 112 113 114 115 117 118 120 138 138 143 143 144 144 145 146 147 149

A. Topics Covered a) Exclusive Jurisdiction Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Arbitration Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Lis Alibi Pendens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d) Forum Non Conveniens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. Spain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Exclusive Jurisdiction Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Arbitration Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Lis Alibi Pendens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d) Forum Non Conveniens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5. France . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Exclusive Jurisdiction Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Arbitration Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Lis Alibi Pendens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d) Forum Non Conveniens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6. England . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Exclusive Jurisdiction Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Arbitration Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Lis Alibi Pendens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d) Forum Non Conveniens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7. United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Exclusive Jurisdiction Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Arbitration Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Lis Alibi Pendens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d) Forum Non Conveniens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8. China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Exclusive Jurisdiction Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Arbitration Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Lis Alibi Pendens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d) Forum Non Conveniens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Exclusive Jurisdiction Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Arbitration Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Lis Alibi Pendens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. Forum Non Conveniens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . J. Illustrations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Example 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Example 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . K. Cross References & Additional Commentary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . L. Practitioner Tips & Contract Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . M. Additional Sources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

149 150 152 153 154 154 155 156 157 158 158 159 160 162 163 163 164 165 166 169 169 170 172 174 177 177 178 180 181 182 182 186 190 197 202 202 203 204 206 211

A. Topics Covered In domestic law the topic of jurisdiction usually covers two broad aspects, namely the 1 substantive jurisdiction of the particular type or level of court and the venue where the litigation will take place. In international sales transactions it is the issue of venue which is of particular importance. The discussion in this section will deal with the various issues that may impact on the choice or determination of the venue, i.e. whether the courts of a particular country will exercise jurisdiction over a dispute about an international commercial sales contract. Rules relating to consumer contracts are beyond the scope of this work. The choice of court where the litigation is initiated may firstly be determined by 2 the agreement between the parties if the contract includes a choice of venue clause, and secondly, by the claimant who initiates litigation. In some cases, there may only be one specific court in one specific country that may have jurisdiction thereby restricting the choice that the claimant has. In other cases there may be several courts in several different countries that may potentially have, providing the claimant with a choice of the Sieg Eiselen

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court that will most suit it. Very often domestic courts may not have jurisdiction because the parties may have agreed to submit their disputes to arbitration rather than litigation. For many years arbitration has been favored over regular state courts by commercial parties for a variety of reasons such as control over the process, specialized arbitrators, cost, the speed of arbitration and the ease of enforcement of arbitral awards under the 1958 New York Convention on the Recognition and Enforcement of Arbitral Awards.1 However as Kramer and Sotabji indicate, there has been an important growth, not only in Europe, but internationally, of specialized business courts aimed at addressing some of the problems of arbitration, but primarily as a matter of public policy to enhance the rule of law and to promote the attractiveness of these fora as legal and economic hubs.2 In future commercial parties should not simply choose arbitration as has been traditionally been done, but should consider whether these courts do not provide an attractive and viable alternative that may be cheaper and as efficient as arbitration. Although such courts have existed for a long time in some jurisdictions such as France and the United Kingdom, new courts have recently been established in the Middle East, Southeast Asia and China.3 3 This section will firstly deal with those factors which generally determine the jurisdiction of courts in the international context, namely: (a) the domicile, place of business or habitual residence of the defendant; (b) agreement or submission to jurisdiction; and (c) the place where the cause of action arose. This may be the place of contracting, the place of performance or the place where the breach of contract took place. 4

The next part addresses the factors which may exclude the jurisdiction of a court even though a court may seem to have jurisdiction when the general rules discussed in the first part are applied. The impact of the following issues will be considered: (a) (b) (c) (d)

5

exclusive jurisdiction clauses; arbitration clauses; the lis alibi pendens doctrine; and the forum non conveniens doctrine.

In the final part attention will be given to some practical hints when dealing with jurisdiction at the contract formation stage. Examples of choice of jurisdiction clauses will be provided.

B. Introductory Note 6

The word jurisdiction is susceptible of several different meanings, but in the context of this Chapter it deals with the power of a court in a specific country to deal authoritatively with a dispute brought before it.4 In some legal systems this is referred to as ‘venue’ or ‘personal jurisdiction’ rather than jurisdiction with jurisdiction reserved for matters relating to subject matter.5 In this Chapter the term will be used mostly in the Strong p. 255–256; Isidro p. 4. Kramer & Sorabji Foreword. See also Strong 255-256. See generally the essays covered in the book, providing an overview of developments internationally. 3 Kramer & Sorabji 2; Isidro 4. 4 Torremans & Fawcett p. 187; Thomas/Putzo/Hüßtege Intro para. 1; Business Litigation in Florida § 1; Layton & Mercer §§ 1.002, 1.005. 5 Torremans & Fawcett p. 187; Thomas/Putzo/Hüßtege Intro para. 1; Business Litigation in Florida § 1; Layton & Mercer §§ 1.002, 1.005; Hay, Borchers & Symeonides § 5.1. 1

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sense of venue. In most legal systems the jurisdiction of their courts is determined by the domestic law of the system, although there may also be some regional arrangements such as the Brussels I Regulation Recast and the Lugano Convention. It is often a fairly complex part of the procedural rules of particular legal systems and the rules differ quite substantially from system to system. The issue of jurisdiction must be clearly distinguished from the issue of the law that will be applied to the substantive issues in a particular dispute. Although there is often a bias towards applying the lex fori, i.e. the domestic law of the forum, the issue is determined by the private international law of conflicts rules of the forum.6 A distinction is made in most legal systems between procedural rules and substantive rules, with courts applying their domestic procedural rules, but the substantive rules of the legal system appointed by the conflicts rules.7 The court will therefore not necessarily apply its own substantive laws to the dispute, but will apply the rules of that legal system towards which the conflicts rules directs it. The issue of jurisdiction is regarded as a procedural issue and therefore determined by the lex fori. Although there are big differences between the rules of jurisdiction between various legal systems there are some grounds of jurisdiction which are fairly generally recognized throughout the world. It is usually also these grounds of jurisdiction that courts turn to when they are faced with the enforcement of foreign judgments.8 Judgments given where the claimant relied on these grounds of jurisdiction will be more readily enforced than those judgments based on extended or more tenuous and often controversial grounds of jurisdiction.9 Agreement between the parties on jurisdiction and submission to jurisdiction by the defendant are the first of the generally recognized grounds. It is also almost universally accepted that a claimant is entitled to sue the defendant in its own backyard, that is to say where it is domiciled or where it has its usual place of business. A little less common, but still fairly widespread is the ground relying on the place where the cause of action arose, although this may refer alternatively to the place where the contract was concluded, the place where performance was due or the place where the breach took place. There are also some instances where courts will refuse to exercise jurisdiction even though it may formally have jurisdiction based on one of the grounds recognized in that legal system. Where parties have agreed to exclude the jurisdiction of a specific court or provided for exclusive jurisdiction for certain courts, such agreements will generally be honored. The jurisdiction of courts generally may be excluded by implication where parties have opted for arbitration rather than conventional litigation in their agreement as most legal systems give preference to arbitration above litigation. The doctrine of lis alibi pendens allows a court to stay a matter over which it has jurisdiction where another court with jurisdiction is already seized with the matter until such time as the matter is finalized or withdrawn. Once the foreign court has given a final judgment the matter becomes one of res judicata, and a court will then refuse to deal with the matter again. Some legal systems, most notably in the Common Law family also have some exclusionary rules in terms of which a court may refuse to exercise jurisdiction even though it may formally have jurisdiction because another forum may be more appropriate in the particular circumstances to deal with the conflict. This is the so-called forum non 6 Torremans & Fawcett pp. 3–4; Sonnenberger Münchener Kommentar Intro IPR para. 3; Hay, Borchers & Symeonides § 24.33 et seq. 7 Torremans & Fawcett p. 73; Sonnenberger Münchener Kommentar Intro para. 429. 8 Siehr pp. 518 et seq.; Torremans & Fawcett pp. 525 et seq. 9 Siehr pp. 518 et seq.

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conveniens doctrine. It is a complex and somewhat controversial doctrine, especially in the United Kingdom where the traditional rules of jurisdiction are also subject to the regional conventions and regulations. 12 The CISG consists for the most part of substantive rules of sales law and does not directly deal with procedural issues such as jurisdiction. However, indirectly some of the provisions of the Convention may have a bearing on the question of jurisdiction. This is the case where jurisdictional grounds are based on the place of the conclusion of the contract, or the place of performance, or the place of breach. These provisions will be considered below. 13 Jurisdiction is an important aspect of any international transaction and should be given due consideration.10 The first question that should be raised is whether any disputes should be resolved by arbitration rather than litigation in which event the jurisdiction of courts will generally be excluded based on the principle of freedom of contract.11 If parties do not opt for arbitration the next question should be which courts would be most appropriate. Of course, each party would normally prefer to sue in its own courts for practical reasons. Very often jurisdiction clauses are not negotiated but are hidden away in the standard terms of the parties and depend on which set of standard terms will apply. At the time of the conclusion of the contract it may seem distant to haggle about jurisdiction, but it is an important practical issue which requires due consideration. Parties should also consider subjecting any disputes to one of the newly developed international commercial courts which have been established in many jurisdictions.12

C. Statement of Issues 14 (i)

Generally recognized grounds of jurisdiction This section will firstly look at the generally recognized grounds of jurisdiction. Many systems have additional or extraordinary rules of jurisdiction. Although such instances may be mentioned they will not be analyzed in detail. (a) Domicile, habitual residence and in jurisdiction service There are important differences between the rules of Common Law countries and Civil Law countries on key aspects. In regard to jurisdiction based on location, the Civil Law is based on the domicile or habitual residence of the defendant, whereas the Common Law systems base jurisdiction on service on the defendant while the latter is within in the area of jurisdiction. (b) Location where cause of action arose There are various aspects of an international sales transaction that may give rise to jurisdiction based on this ground, namely the place of contracting, the place of performance and the place of breach. This section will analyze which of these grounds will be recognized in the various legal systems under discussion. The divide between civil and Common Law is much smaller in this area as will become apparent.

M/S Bremen v Zapata Off-Shore Co. 407 U.S. 1, 92 S.Ct. 1907. The general principle is further strengthened by the very wide application of the 1958 New York Convention on the Recognition and Enforcement of Arbitral Awards. 12 Isidro pp. 4-5. 10

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(c) Agreement and submission It would seem that all systems under review recognize the basic principle of freedom of contract and the concomitant recognition of choice of venue or jurisdiction clauses in international sales agreements, exclusive jurisdiction clauses and the unilateral submission of the defendant to the jurisdiction of the court. This solidarity in approach between common and civil now also applies to arbitration clauses although that had not always been the case. (ii) Exclusion of jurisdiction Most legal systems also contain rules which may lead to the exclusion of jurisdiction in specific instances with the result that a court that would normally have had jurisdiction in terms of the general rules mentioned above will refrain from exercising jurisdiction. The following issues will be discussed: (a) The recognition of exclusive jurisdiction clauses Most legal systems recognize the freedom of contract principle and will hence also recognize exclusive jurisdiction clauses in international sales contracts. (b) Arbitration clauses The inclusion of an arbitration clause or agreement in an international sales agreement will lead to the ousting of the general jurisdiction of ordinary courts. This is stipulated not only in domestic law, but also applies as a result of Art. 2 of the 1958 New York Convention on the Recognition of Arbitral Awards which requires courts to enforce arbitration agreements.13 (c) Lis pendens This part of the discussion will deal with the issue of parallel proceedings, i.e. where the parties have both initiated litigation but in the courts of different countries. Most legal systems recognize the so-called lis pendens doctrine, but it is not universally applied in the countries under review. (d) Forum non conveniens The forum non conveniens doctrine is an important Common Law remedy to curb the excesses caused by exorbitant jurisdictional rules such as service on someone merely present in the jurisdiction of the court without any other connecting factors or the long-arm statutes of many American states. This is another set of rules where there is a clear divide between common and Civil Law as the doctrine is not recognized in Civil Law.

D. International Sales Transaction When parties are negotiating a contract in the domestic setting, they should usually 15 give consideration to dispute resolution. This may include a choice between ordinary litigation and arbitration although arbitration is less common in domestic sales contracts than in international sales contracts. Where there are different levels of courts that may potentially have jurisdiction over the subject matter or size of the dispute, consideration must be given also to that aspect. Finally, parties must decide on the venue for their litigation, i.e. which specific court will have jurisdiction in the case of a dispute. The choice of venue may be important from a practical point of view especially in jurisdictions which are large such as the United States or Australia. However, generally the applicable procedural laws will be identical or at least quite similar and easy to establish as it will be the procedural laws of the particular country. 13

Forsyth pp. 450–451.

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In international sales the issue of venue becomes important not only from the practical issue of distance and costs related to that, but also because a different set of procedural rules will apply with which the party will probably not be acquainted. Although the distances involved for a litigant from Oregon who needs to sue a party in Florida are substantial, at least the rules of jurisdiction and procedure will be easy to establish and will be quite familiar. The same cannot be said for a Texas litigant who wants to sue a party in Mexico even though the distances may not be that substantial. 17 There are important differences in procedural law, the law of evidence and the approach to litigation in different jurisdictions that needs to be considered when negotiating an agreement. There are considerable differences between civil and Common Law countries in their approaches to civil procedure and admissibility of evidence to warrant serious consideration of the jurisdiction issue at the time of negotiating the agreement and even more so of course when litigation is contemplated. 18 Of course, it will always be most convenient if one could sue in one's own jurisdiction but it may not always be that easy to negotiate. As will become apparent from the sampling of laws below, parties are allowed under the rules of jurisdiction of most countries to agree to jurisdiction in advance, but as will also become apparent, these agreements will not always be fully enforceable due to certain exclusionary rules. 16

E. Regional Regimes 19

In this section the various grounds for jurisdiction that are encountered in various legal systems will be discussed with reference to a number of chosen countries. The discussion is somewhat complicated by the fact that in certain of the systems such as England, Germany, Spain and France there are various regional conventions or regimes that may determine the grounds of jurisdictions, namely the Brussels I Recast of 2012, 14 and the Lugano Convention of 198815 and then, in instances where these instruments do not apply, the domestic rules of jurisdiction still apply.16 These instruments apply as follows: (a) The Lugano Convention is a parallel convention to the Brussels I Recast and applies to commercial and civil matters where the defendant is domiciled in a European Free Trade Areas State (Iceland, Norway and Switzerland). (b) The Brussels I Regulation, and now the Brussels I Recast of 2012 which effectively replaced the Brussels Convention of 196817 applies in all member states (apart from Denmark)18 in commercial and civil matters where the defendant is domiciled in

[2001] OJ L12/1. [1998] OJ L319/9. 16 For purposes of this discussion the Brussels Convention on Jurisdiction and the Enforcement of Judgments in Civil and Commercial Matters 1968 and the Agreement between the European Community and Denmark of 2006 are not considered. For more detail see Torremans & Fawcett pp. 191–194. 17 The Brussels Convention still applies to certain territorial areas of France and the Netherlands, but will not be discussed here as it does no longer generally apply to the legal systems under consideration here. 18 The Regulation applies indirectly in Denmark in terms of the Agreement between the European Community and Denmark of 2006. Moreover, all EU Member States including Denmark have ratified the 2005 Hague Convention on Choice of Court Agreements (see below n. 23) which contains a regulation rather similar to Art. 25 Brussels I Recast. The future situation in the former EU Member State Great Britain is regulated by sec. 3 European Union (Withdrawal) Act 2018 which preliminarily leaves in force all EU law directly applicable on exit day. 14

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a European Community Member State.19 Even where the defendant is not so domiciled, the Regulation will still apply if there is an agreement conferring jurisdiction on the courts of a Member State.20 Notice must also be taken of the United Kingdom’s withdrawal from the European 20 Union which will take place in the course of 2020. According to the British European Union (Withdrawal) Act of 2018,21 section 3 the directly applicable European Union law, including Regulations, will remain in force in the United Kingdom after exit day until it has been modified under section 7(2). The provisions read as follows: 3 Incorporation of direct EU legislation (1) Direct EU legislation, so far as operative immediately before exit day, forms part of domestic law on and after exit day. (2) In this Act “direct EU legislation” means— (a) any EU regulation, EU decision or EU tertiary legislation, as it has effect in EU law immediately before exit day and so far as— (i) it is not an exempt EU instrument (for which see section 20(1) and Schedule 6), (ii) it is not an EU decision addressed only to a member State other than the United Kingdom, and (iii) its effect is not reproduced in an enactment to which section 2(1) applies, (b) any Annex to the EEA agreement, as it has effect in EU law immediately before exit day and so far as— (i) it refers to, or contains adaptations of, anything falling within paragraph (a), and (ii) its effect is not reproduced in an enactment to which section 2(1) applies, or (c) Protocol 1 to the EEA agreement (which contains horizontal adaptations that apply in relation to EU instruments referred to in the Annexes to that agreement), as it has effect in EU law immediately before exit day. […] 7 Status of retained EU law (2) Retained direct principal EU legislation cannot be modified by any primary or subordinate legislation other than— (a) an Act of Parliament, (b) any other primary legislation (so far as it has the power to make such a modification), or (c) any subordinate legislation so far as it is made under a power which permits such a modification by virtue of— (i) paragraph 3, 5(3)(a) or (4)(a), 8(3), 10(3)(a) or (4)(a), 11(2)(a) or 12(3) of Schedule 8, (ii) any other provision made by or under this Act, (iii) any provision made by or under an Act of Parliament passed before, and in the same Session as, this Act, or (iv) any provision made on or after the passing of this Act by or under primary legislation.

The Lugano Convention of 1988 was replaced by the new Lugano Convention of 21 200722 to align its provisions to the Brussels I Regulation. The Brussels I Regulation was replaced in 2015 in a recast form in accordance with an agreement of 2012. 23 For purposes of the discussion below, reference will only be made to the provisions of the 2001 Brussels I Regulation and the 2012 recast version of the Brussels I Regulation as the 19 Art. 4 Brussels I Recast. See also Torremans & Fawcett p. 202-204; Magnus/Mankowski/Vlas Art. 4 Brussels I Recast para. 3. 20 Art. 25 Brussels I Recast. See also Torremans & Fawcett p. 202; Magnus/Mankowski/Magnus Art 25 Brussels I Recast para. 20. 21 See also the rather complex European Union (Withdrawal Agreement) Act 2020 which is to the same effect and amends some of the provisions of the 2018 Act. 22 Lugano Convention 2007 Convention on Jurisdiction and the Recognition and Enforcement of Judgments in Civil and Commercial Matters (http://www.europeancivillaw.com/legislation/luganocon200 7.htm). 23 See the second paragraph of Art. 81 Regulation (EU) No. 1215/2012 of the European Parliament and of the Council of 12 December 2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (recast) [2012] OJ L351/1.

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provisions of the Lugano Convention are very similar and not directly applicable to the sampling of laws chosen for this Restatement. 22 The CISG does not directly deal with the issue of jurisdiction as it comprises for the most part of substantive rules of sales law, but it does do so indirectly. In certain jurisdictions as will be seen below a court may exercise jurisdiction dependent on the place where the contract was concluded (if the dispute for instance deals with the validity of the agreement), where performance was to be rendered or where a breach of contract took place. The provisions of the CISG dealing with these issues will therefore be considered in the relevant parts. Unlike other parts of this Restatement, the rules of the CESL and the UNIDROIT Principles will not be discussed as it will make the discussion too cumbersome and these rules are unlikely to be employed by courts in the determination of jurisdiction in international sales. There are however other important international instruments affecting jurisdiction like the Brussels I Recast and the ALI/ UNIDROIT Principles which will be discussed 23 In 2004 UNIDROIT and the American Law Institute adopted the ALI/UNIDROIT Principles of Transnational Civil Procedure, including rules on jurisdiction.24 The provisions of this instrument will be considered below. 24 The Hague Conference on Private International Law has also been active in the field of jurisdiction with conventions on choice of court clauses. Three different conventions have been proposed, one in 1958,25 one in 196526 and one in 2005.27 The accession of the European Union on 11 June 2015 may further complicate the already complicated regulatory landscape in Europe as will be seen below.

F. Domicile, Residence or Place of Business of the Defendant I. Introduction 25

The concept of domicile is used in many legal systems to determine the jurisdiction over persons. This is also the case in the Brussels I Recast. The concept may have quite different meanings in the various legal systems and regimes discussed below, but in essence will be determined by the meaning of that concept in the particular legal system.

II. Sampling of Laws 1. CISG 26 Article 10 For the purposes of this Convention: (a) if a party has more than one place of business, the place of business is that which has the closest relationship to the contract and its performance, having regard to the circumstances known to or contemplated by the parties at any time before or at the conclusion of the contract; (b) if a party does not have a place of business, reference is to be made to his habitual residence. 24 The text of the Principles and the accompanying commentary were adopted by the American Law Institute (ALI) in May 2004 and by the International Institute for the Unification of Private Law (UNIDROIT) in April 2004. 25 Convention on the Jurisdiction of the Selected Forum in the Case of International Sales of Goods. Concluded 15 April 1958; it attracted one signature. 26 Convention on the Choice of Court. Concluded 25 November 1965; it attracted one signature. 27 Convention on Choice of Court Agreements. Concluded 30 June 2005; it has 32 Contracting States, including the European Union as such, and entered into force on 1 October 2015.

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2. ALI/UNIDROIT Principles Article 2 Jurisdiction over Parties 2.1 Jurisdiction over a party may be exercised: 2.1.2 When there is a substantial connection between the forum state and the party or the transaction or occurrence in dispute. A substantial connection exists when a significant part of the transaction or occurrence occurred in the forum state, when an individual defendant is a habitual resident of the forum state or a jural entity has received its charter of organization or has its principal place of business therein, or when property to which the dispute relates is located in the forum state. 2.2 Jurisdiction may also be exercised, when no other forum is reasonably available, on the basis of: 2.2.1 Presence or nationality of the defendant in the forum state; or …

3. European Union28 27

Brussels I Regulation Recast Article 1 This Regulation shall apply in civil and commercial matters whatever the nature of the court or tribunal. It shall not extend, in particular, to revenue, customs or administrative matters or to the liability of the State for acts and omissions in the exercise of State authority (acta iure imperii). Article 4 1. Subject to this Regulation, persons domiciled in a Member State shall, whatever their nationality, be sued in the courts of that Member State. 2. Persons who are not nationals of the Member State in which they are domiciled shall be governed by the rules of jurisdiction applicable to nationals of that State. Article 62 1. In order to determine whether a party is domiciled in the Member State whose courts are seised of a matter, the court shall apply its internal law. 2. If a party is not domiciled in the Member State whose courts are seised of the matter, then, in order to determine whether the party is domiciled in another Member State, the court shall apply the law of that Member State. Article 63 1. For the purposes of this Regulation, a company or other legal person or association of natural or legal persons is domiciled at the place where it has its: (a) statutory seat, or (b) central administration, or (c) principal place of business. 2. For the purposes of Ireland, Cyprus and the United Kingdom, ‘statutory seat’ means the registered office or, where there is no such office anywhere, the place of incorporation or, where there is no such place anywhere, the place under the law of which the formation took place.

4. Germany In Germany the provisions determining the domicile of a person for purposes of 28 jurisdiction are set out in the provisions of the Bürgerliches Gesetzbuch (BGB) and the Zivilprozessordnung (ZPO). These provisions will firstly determine where a person or company is domiciled for purposes of the Brussels I Recast. If the Brussels I Recast is not applicable, they will determine the jurisdiction of the German court in an international sales transaction directly.

28 As indicated above there are two instruments relevant the jurisdiction over persons in the European Union, namely the Brussels Regulation 2001 which was applied until 10 January 2015 and the recast Brussels Regulation which will apply from that date.

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The BGB provides: § 7 Residence; establishment and termination (1) A person who settles permanently in a place establishes his residence in that place. (2) There may be a residence in more than one place at the same time. (3) Residence is terminated if the person abandons the place of residence with the intention of giving it up.

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The ZPO provides: § 12 General venue; term The court within the jurisdiction of which a person has his general venue is competent for all actions that may be brought against that person, unless an exclusive venue has been established for court actions. § 13 General venue of the place of residence The general venue of a person is determined by his place of residence. § 17 General venue of legal persons (1) The general venue of the municipalities, corporate bodies, and of those companies, co-operatives or other associations as well as of those foundations, institutions, and available assets that may be sued as such is defined by their registered seat. Unless anything to the contrary is stipulated elsewhere, a legal person’s registered seat shall be deemed to be the place at which it has its administrative centre. (2) Mining companies have their general venue with the court having jurisdiction over the location of the mine; public authorities – provided they can be sued as such – have their general venue with the court of their official seat. (3) It is admissible to determine a venue, in derogation from what is determined by the stipulations of the present subsection, by statute or by other special provision. § 21 Specific jurisdiction of a place of business (1) Should someone have a place of business serving the operation of a factory, a trade enterprise, or any other commercial establishment, and from which transactions are directly concluded, all actions that relate to the operation of the place of business may be brought against that person at the court of the location at which the place of business is situate. (2) The jurisdiction of the place of business also applies to actions brought against persons acting as owners, beneficiaries, or lessees in managing a property, on which residential and service buildings have been constructed, to the extent such complaints concern the legal relationships relating to the property’s management.

5. Spain In Spain the provisions determining the domicile of a person for purposes of jurisdiction is set out in the provisions of the Spanish Civil Code and the Civil Procedure Act of 2010 (CPA). These provisions will firstly determine where a person or company is domiciled for purposes of the Brussels I Recast. If the Brussels I Recast is not applicable, they will determine the jurisdiction of the Spanish court in an international sales transaction directly. 32 The Spanish Civil Code determines: 31

Article 40 The domicile of natural persons for the purposes of the exercise of civil rights and the performance of civil obligations shall be their place of habitual residence and, as the case may be, their domicile as determined by the Civil Procedural Law. Article 41 Where neither the law which created or recognised them or the articles of association or foundational articles should establish the domicile of legal entities, it shall be deemed to be in the place where their legal representation is located, or where they exercise their main institutional functions.

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The CPA provides:

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Article 50 General jurisdiction of natural persons. 1. Unless the law establishes otherwise, the territorial jurisdiction shall correspond to the court of the place of residence of the defendant and, if the latter has no place of residence within the national territory, the competent Judge shall be the Judge of his place of residence in the territory concerned. 2. Those who do not have an address or place of residence in Spain may be sued in the place where they are within the national territory or that of their latest place of residence in the said territory and, if the jurisdiction cannot be determined in this manner either, in the place of residence of the plaintiff. 3. Businessmen and professionals involved in litigation deriving from their business of professional activity can also be sued in the place where the said activity is being carried out and, if they have establishments under their responsibility in various places, in any of such places at the discretion of the plaintiff. Article 51 General jurisdiction of corporate entities and entities without legal personality. 1. Unless the law establishes otherwise, corporate entities shall be sued in the place of their address. They can also be sued in the place where the situation or the legal relation to which the litigation refers has originated or must take effect, provided that they have an establishment open to the public or a representative authorised to act in the name of the entity in the said place. 2. Entities without legal personality can be sued at the address of their administrators or in any place where they are carrying out their activity.

6. France In France the provisions determining the domicile of a person for purposes of 34 jurisdiction is set out in the provisions of the French Code Civil and the Nouveau Code de Procédure Civile (NCPC). These provisions will firstly determine where a person or company is domiciled for purposes of the Brussels I Recast. If the Brussels I Recast is not applicable, they will determine the jurisdiction of the French court in an international sales transaction directly. 35 The Code Civil provides as follows: Article 14 An alien, even if not residing in France, may be cited before French courts for the performance of obligations contracted by him in France with a French person; he may be called before the courts of France for obligations contracted by him in a foreign country towards French persons. Article 15 French persons may be called before a court of France for obligations contracted by them in a foreign country, even with an alien. Article 102 The domicile of a French person, as to the exercise of his civil rights, is at the place where he has his main establishment. Article 103 A change of domicile takes place in consequence of an actual residence in another place, in addition to the intention to fix one's main establishment there. Article 104 Proof of that intention shall result from an express declaration made both to the municipality of the place which one leaves and to that of the place where the domicile is transferred. Article 105 Failing an express declaration, proof of intention shall depend on circumstances.

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The NCPC provides: Article 42 The territorially competent court is, unless otherwise provided, that of the place where the defendant lives. If there are several defendants, the plaintiff may, at his choosing, bring his case before the court of the place where one of them lives. If the defendant has neither a known domicile nor residence, the plaintiff may bring his case before the court of the place where he lives or before the court of his choice if he lives abroad. Article 43 The place where the defendant lives means: – in relation to a natural person, the place where he has his domicile or, in default thereof, his residence, – in relation to a corporate entity, the place where it is established.

7. England In England the provisions determining the domicile of a person for purposes of jurisdiction is not contained in any act but is found in the traditional Common Law rules. These provisions will firstly determine where a person or company is domiciled for purposes of the Brussels I Recast. If the Brussels I Recast is not applicable, they will determine the jurisdiction of the English court in an international sales transaction directly. The provisions are as follows: 38 There are five general rules under Common Law determining domicile in English law:29 37

(a) Nobody shall be without a domicile. Accordingly, everybody is assigned a domicile of origin at birth. This is the same as the domicile of the father for legitimate children and that of the mother for illegitimate children. This domicile prevails until a new domicile is established. (b) A person cannot have more than one domicile at any given time. (c) The domicile is usually connected to a law district, i.e. a territory subject to a single legal system. (d) There is a presumption of the continuance of an existing domicile. The onus of proof of a new domicile lies on the party alleging such a change. (e) Domicile is to be determined according to the English concept of domicile and not any foreign concept. The domicile of origin can be changed by choice by any person of full age. It must be established that the person in question established their residence in a certain country with the intention of remaining there permanently. The domicile of choice will then continue to exist until a new domicile is established.30 40 In terms of the traditional procedural rules any defendant may be subjected to the jurisdiction of an English court by service of a claim form.31 The mere presence of the defendant within the borders of England is sufficient if a service of claim is served on the person, even if the presence in England is of a purely transient nature.32 Subsequent departure from England does not affect the jurisdiction so established.33 39

Torremans & Fawcett pp. 155 et seq. Torremans & Fawcett p. 157; Mark v Mark [2005] UKHL 42 at para. 39. 31 Torremans & Fawcett p. 353. 32 Torremans & Fawcett p. 354; John Russel & Co Ltd v Cayzer, Irvine & Co Ltd [1916] 2 AC 298 at 302; Carrick v Hancock (1895) 12 TLR 59; Colt Industries Inc v Sarlie [1966] 1 WLR 440. 33 Torremans & Fawcett p. 354; Razelos v Razelos (No 2) [1970] 1 WLR 392. 29 30

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The Civil Jurisdiction and Judgments Act 1982 (CJJA) was introduced to make 41 provision for the implementation of the Brussels and Lugano Conventions. It has been amended to also provide for the implementation of the Brussels I Recast: 16 Allocation within U.K. of jurisdiction in certain civil proceedings (1) The provisions set out in Schedule 4 (which contains a modified version of Chapter II of the Regulation) shall have effect for determining, for each part of the United Kingdom, whether the courts of law of that part, or any particular court of law in that part, have or has jurisdiction in proceedings where— (a) the subject-matter of the proceedings is within the scope of the Regulation as determined by Article 1 of the Regulation (whether or not the Regulation has effect in relation to the proceedings); and (b) the defendant or defender is domiciled in the United Kingdom or the proceedings are of a kind mentioned in Article 22 of the Regulation] (exclusive jurisdiction regardless of domicile). Schedule 4 Chapter II of the Regulation as Modified: Rules for Allocation of Jurisdiction within UK General 1. Subject to the rules of this Schedule, persons domiciled in a part of the United Kingdom shall be sued in the courts of that part.

The Civil Jurisdiction and Judgments Order 2001 then determines:

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Domicile of individuals (Section 41) 9.(1) Subject to Article 59 (which contains provisions for determining whether a party is domiciled in a Regulation State), the following provisions of this paragraph determine, for the purposes of the Regulation, whether an individual is domiciled in the United Kingdom or in a particular part of, or place in, the United Kingdom or in a state other than a Regulation State. (2) An individual is domiciled in the United Kingdom if and only if— (a) he is resident in the United Kingdom; and (b) the nature and circumstances of his residence indicate that he has a substantial connection with the United Kingdom. (4) An individual is domiciled in a particular place in the United Kingdom if and only if he— (a) is domiciled in the part of the United Kingdom in which that place is situated; and (b) is resident in that place. (5) An individual who is domiciled in the United Kingdom but in whose case the requirements of sub-paragraph (3)(b) are not satisfied in relation to any particular part of the United Kingdom shall be treated as domiciled in the part of the United Kingdom in which he is resident.

The service on companies is determined by the Companies Act 2006:

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1139 Service of documents on company (1) A document may be served on a company registered under this Act by leaving it at, or sending it by post to, the company’s registered office. (2) A document may be served on an overseas company whose particulars are registered under section 1046— (a) by leaving it at, or sending it by post to, the registered address of any person resident in the United Kingdom who is authorised to accept service of documents on the company’s behalf, or (b) if there is no such person, or if any such person refuses service or service cannot for any other reason be effected, by leaving it at or sending by post to any place of business of the company in the United Kingdom. (3) For the purposes of this section a person’s ‘registered address’ means any address for the time being shown as a current address in relation to that person in the part of the register available for public inspection. 1140 Service of documents on directors, secretaries and others (1) A document may be served on a person to whom this section applies by leaving it at, or sending it by post to, the person’s registered address.

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Chapter 6 Jurisdiction (2) This section applies to— (a) a director or secretary of a company; (b) in the case of an overseas company whose particulars are registered under section 1 046, a person holding any such position as may be specified for the purposes of this section by regulations under that section;

8. United States Jurisdiction over commercial matters is an issue determined by state law. 34 For purposes of this discussion reference will be made to jurisdiction under the law of the State of Florida. The development of state law has been under the influence of a number of Supreme Court decisions developing the principles in regard to personal jurisdiction.35 45 Florida courts have jurisdiction over Florida residents even when they are temporarily absent from Florida provided there is no intent to relinquish their Florida residency.36 46 In Goodyear Dunlop Tires Operations SA v Brown37 the Supreme Court held that: 44

For an individual, the paradigm forum for the exercise of general jurisdiction is the individual's domicile; for a corporation, it is an equivalent place, one in which the corporation is fairly regarded as at home. See Brilmayer 728 (identifying domicile, place of incorporation, and principal place of business as ‘paradig[m]’ bases for the exercise of general jurisdiction).

There is a constitutionally mandated requirement of minimum contacts with a case for a court to have personal jurisdiction over a person in order to satisfy the traditional notions of fair play and substantial justice.38 48 As far as non-residents are concerned, no court is authorized to exercise jurisdiction over a non-resident unless such person voluntarily appears or is voluntarily within the area of jurisdiction of the court so that service of process can be served on him or her. 39 The constitutionality of establishing jurisdiction over somebody who is merely present within a state was confirmed in Michigan Trust Co v Ferry.40 49 In regard to non-residents engaging in business in the state, § 48.181 of the Florida State Laws provides as follows: 47

§ 48.181 In terms of Florida Statutes personal jurisdiction may also be acquired by substituted or constructive service under certain exceptions over a non-resident who is doing business in the state or who performs acts within the forum state under the Florida long-arm statute, Florida State Laws § 48.193:41 § 48.193 Acts subjecting person to jurisdiction of courts of state (1) Any person, whether or not a citizen or resident of this state, who personally or through an agent does any of the acts enumerated in this subsection thereby submits himself or herself and, if he or she is

See Hay, Borchers & Symeonides § 5.14 for an account of how this developed in the US. See Pennoyer v Neff 95 U.S. 714 (1977); International Shoe Co v Washington 326 U.S. 310 (1945); and World-Wide Volkswagen Corp. Woodson 444 U.S. 286 (1980); Burger King Corp v Rudzewicz 471 U.S. 462 (1985); Asahi Metal Industry Co. v Superior Court 480 U.S. 102 (1987) Teitz pp. 13 et seq.; Hay, Borchers & Symeonides § 5.3. 36 Fl Jurisprudence § 59. For a general discussion of the development of jurisdictional rules in the US see Teitz pp. 12 et seq.; Hay, Borchers & Symeonides § 51 et seq. 37 131 SC 2846 (2011) at 2853–2854. For a general discussion of domicile and presence see Teitz pp. 46 et seq. 38 International Shoe Co v Washington 326 U.S. 310 (145) 316; Florida Jurisprudence § 58; AMJUR Process § 172; pp. Teitz 15–17; Hay, Borchers & Symeonides § 5.4. 39 Florida Jurisprudence § 64. 40 228 U.S. 346 (1913). See also Burnham v Superior Court of California 495 U.S. 604 (1990). 41 Florida Jurisprudence § 64. For a survey of similar long-arm statutes in other states see Vedder, Price, Kaufmann & Kammholz, Long-Arm Statutes: A Fifty State Survey (2003) (euro.ecom.cmu.edu/ program/law/08-732/Jurisdiction/LongArmSurvey.pdf). See also Teitz pp. 29 et seq.; Hay, Borchers & Symeonides § 514; Travelocity.com LP v Pier 35 Events, Inc. 2014 WL 2999208; S.D.Fla., 2014. 34

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F. Domicile, Residence or Place of Business of the Defendant a natural person, his or her personal representative to the jurisdiction of the courts of this state for any cause of action arising from the doing of any of the following acts: (a) Operating, conducting, engaging in, or carrying on a business or business venture in this state or having an office or agency in this state. – … (g) Breaching a contract in this state by failing to perform acts required by the contract to be performed in this state. – … (2) A defendant who is engaged in substantial and not isolated activity within this state, whether such activity is wholly interstate, intrastate, or otherwise, is subject to the jurisdiction of the courts of this state, whether or not the claim arises from that activity. (3) Service of process upon any person who is subject to the jurisdiction of the courts of this state as provided in this section may be made by personally serving the process upon the defendant outside this state, as provided in s. 48.194. The service shall have the same effect as if it had been personally served within this state. (4) If a defendant in his or her pleadings demands affirmative relief on causes of action unrelated to the transaction forming the basis of the plaintiff 's claim, the defendant shall thereafter in that action be subject to the jurisdiction of the court for any cause of action, regardless of its basis, which the plaintiff may by amendment assert against the defendant. (5) Nothing contained in this section limits or affects the right to serve any process in any other manner now or hereinafter provided by law. § 48.181 Service on nonresident engaging in business in state (1) The acceptance by any person or persons, individually or associated together as a copartnership or any other form or type of association, who are residents of any other state or country, and all foreign corporations, and any person who is a resident of the state and who subsequently becomes a nonresident of the state or conceals his or her whereabouts, of the privilege extended by law to nonresidents and others to operate, conduct, engage in, or carry on a business or business venture in the state, or to have an office or agency in the state, constitutes an appointment by the persons and foreign corporations of the Secretary of State of the state as their agent on whom all process in any action or proceeding against them, or any of them, arising out of any transaction or operation connected with or incidental to the business or business venture may be served. The acceptance of the privilege is signification of the agreement of the persons and foreign corporations that the process against them which is so served is of the same validity as if served personally on the persons or foreign corporations. (2) If a foreign corporation has a resident agent or officer in the state, process shall be served on the resident agent or officer. (3) Any person, firm, or corporation which sells, consigns, or leases by any means whatsoever tangible or intangible personal property, through brokers, jobbers, wholesalers, or distributors to any person, firm, or corporation in this state is conclusively presumed to be both engaged in substantial and not isolated activities within this state and operating, conducting, engaging in, or carrying on a business or business venture in this state.

9. China China enacted a new Civil Procedure Law (CPL) in 2012 replacing the 1992 Law. 50 In addition to the Civil Procedure Law the Supreme People's Court from time to time issues Opinions on procedural matters, including jurisdiction, which supplements the law. The current Opinions were all issued prior to the new law of 2012. The domicile of a person is determined in terms of the Civil Code of the People’s Republic of China of 1929. 51 The Civil Code provides as follows: Article 20 – A person who resides in a place with the intention of remaining there permanently, upon presence of supporting fact, is to establish his domicile at that place. – Every person has at all times one domicile, and no person has more than one domicile at a time. Article 22 – A person’s residence is deemed to be his domicile in either of the following circumstances:

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Chapter 6 Jurisdiction 1. When his domicile cannot be certified. 2. When he has no domicile in [The Republic of] China except when lex domicilli governs. Article 23 – Where a person has chosen a residence for a specific purpose, the residence is deemed to be his domicile with regard to that purpose.

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The Civil Procedure Law of 2012 provides as follows: Article 21 A civil lawsuit brought against a citizen shall be under the jurisdiction of the people’s court located in the place where the defendant has his domicile; if the defendant’s domicile is different from his habitual residence, the lawsuit shall be under the jurisdiction of the people’s court located in the place of his habitual residence. A civil lawsuit brought against a legal person or an organization shall be under the jurisdiction of the people’s court located in the place where the defendant has its domicile. Where the domiciles or habitual residences of several defendants in the same lawsuit are in the areas under the jurisdiction of two or more people’s courts, all of those people’s courts shall have jurisdiction over the lawsuit. Article 23 A lawsuit brought about a contract dispute shall be under the jurisdiction of the people’s court located in the place where the defendant has his domicile or where the contract is performed. Article 265 A lawsuit brought against a defendant who has no domicile in the People’s Republic of China concerning a contract dispute or other disputes over property rights and interests, if the contract is signed or performed within the territory of the People’s Republic of China, or the object of the action is within the territory of the People’s Republic of China, or the defendant has detainable property within the territory of the People’s Republic of China, or the defendant has its representative agency, branch, or business agent within the territory of the People’s Republic of China, may be under the jurisdiction of the people’s court located in the place where the contract is signed or performed, the subject of the action is located, the defendant’s detainable property is located, the infringing act takes place, or the representative agency, branch or business agent is located.

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Domicile and habitual residence have been defined by the Supreme People's Court42 as follows: Article 4 Domicile The place of a citizen's domicile refers to the place where the citizen registers his residency. The place of a legal person's domicile refers to the place where the legal person mainly operates or runs its business. Article 5 Habitual Residence A citizen's habitual reference refers to the place where the citizen has lived for a year or more after he left his domicile and before the lawsuit is filed. The exception shall be given to the place where a citizen is admitted into a hospital for medical treatment. Article 18 Contract disputes For lawsuits brought about contract disputes, if the contract has not been performed in fact and both of the parties do not reside in the place for performance agreed to in the contract, the people's court located in the place where the defendant is resident shall have jurisdiction.

42 The Opinions of the Supreme People's Court on Several Issues Regarding the Application of the Civil Procedure Law of the People's Republic of China adopted in July 1992 at the 528th Session of the Adjudication Committee of the Supreme People's Court and promulgated on 4 July 1992.

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III. Comments Where a defendant has its domicile within Germany, France, Spain or the United Kingdom, the provisions of the Brussels I Recast will apply.43 The person must be sued in the courts of its country of domicile unless one of the exceptional rules under Art. 5 applies.44 Art. 4 does however not confer jurisdiction to the court where the defendant is domiciled, merely to the courts of that state. Which particular court will have jurisdiction is determined by the domestic rules of that state.45 In most cases that will be the court where the person or company is domiciled in any event.46 In line with developments elsewhere special commercial courts have been developed in France, Germany and the United Kingdom.47 These courts allow proceedings to be conducted in English. In 2010 special chambers were created in North-Rhine Westphalia at certain Regional Courts with an appeal to special senates at the Higher Regional Courts. However, these courts only have jurisdiction if selected by the claimant and with agreement of the defendant.48 In 2016 the ‘Justice Initiative Frankfurt’ was initiated based on the importance of Frankfurt as a commercial hub. Similar to the 2010 NorthRhine Westphalia initiative it is required that the parties agree to the jurisdiction of the court amongst others. The dispute must also be international and of a commercial nature.49 In France there is an international Chamber of the Commercial Court and an International Chamber of the Court of Appeal that constitutes the new International Commercial Courts of Paris.50 Both courts conduct their proceedings in English and adapt the French procedural rules to take into account the internationality of the cases. The judges are experienced in commercial matters and anglophone.51 As in Germany, the parties have to agree to have their case assigned to the Commercial Court. Proceedings are conducted in English.52 For purposes of the Brussels I Recast the domicile of a natural person is determined by the domestic legal system of the court in question.53 In German law domicile is determined with reference to his place of residence (§ 13 ZPO read with § 7 BGB). In terms of § 7(2) BGB a person may have more than one domicile and may accordingly be sued at any of them.54 This is also the case in Spain (Art 50 CPA).55 In France domicile is more restricted as it refers to 'his main establishment' (Art 102 CC). 56 A person may also only have one domicile at any time, similar to the position in English law.57

43 Art. 4 Brussels I Recast. In Great Britain Brussels I Recast will continue to be applicable after Brexit at least for some time (sec. 3 (1) European Union (Withdrawal) Act 2018). 44 Magnus/Mankowski/Vlas Art. 4 Brussels I Recast para. 5. 45 Magnus/Mankowski/Vlas Art. 4 Brussels I Recast para. 5. 46 Germany: § 12 ZPO; Spain: Art. 40 CC and Art. 50 CPA; France: Art. 102 CC and Arts. 42 and 43 NCPC; England: s 1 of Schedule 4 CJJA. See also Torremans & Fawcett pp. 198-200; Magnus/Mankowski/ Vlas Art. 2 Brussels I Recast para. 5. 47 Lehmann p. 85; Isidro p. 4. 48 Lehmann p. 85–86. For other German initiatives see Isidro pp. 15 ff. 49 Isidro pp. 14-15. 50 Jeuland p. 65; Isidro p. 16. 51 Jeuland p. 65; Isidro p. 16. 52 Jeuland p.69. 53 Art. 62. 54 Zöller/Vollkommer § 13 para. 13; Thomas/Putzo/Hüßtege § 13 para. 1. 55 Layton & Mercer § 62.051; Quintana, De Natal & Cortes 687. 56 Layton & Mercer § 51.051; Kunkler p. 78. 57 Layton & Mercer § 51.051.

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The position in England is complicated as its rules of procedure do not generally make provision for jurisdiction based on domicile, but rather on in-jurisdiction service. However, when the Brussels I Regulation applies s 16 of the CJJA provides that the provisions of Schedule 4 to the Act determines jurisdiction. s 1 determines that persons domiciled in a part of the UK shall be sued in the courts of that part, meaning England, Scotland, Wales or Northern Ireland. The Civil Jurisdiction and Judgments Order 2001 then determines in which place a person is deemed domiciled. The default place is the place where the defendant is resident.58 The term resident carries its ordinary meaning when determining Common Law domicile.59 59 The English law has a more restrictive approach to domicile. The most usual domicile is a person's domicile of choice at the place where the person has his habitual residence with the intention of staying at that place indefinitely.60 A person can however have only one domicile at any given time,61 unlike the case in German law. 60 For purposes of the Brussels I Recast the domicile of a juristic person or corporation is determined autonomously by Art. 63 Brussels I Recast.62 It makes provision for three different connecting factors, the statutory seat, the central administration and the principal place of business. A company may therefore have more than one domicile and may be sued at any one of these domiciles. As English law does not know a statutory seat, special provision is made in Art. 63(2) Brussels I Recast for the United Kingdom with reference to the registered place, the place of incorporation or the place where the formation of the company took place.63 The meaning of the terms used in Art. 63 Brussels I Recast may not be interpreted with reference to national law, but must rather be interpreted with reference to Art. 48 of the European Community Treaty which specifically uses these terms.64 In most cases the statutory seat of a company is the place of incorporation and cannot be changed easily.65 The central administration is less certain and dependent on the factual situation, but 'has something of the back-office about it', and will be influenced by factors such as where the company and chief executive officer are situated.66 The notion 'principal place of business’ means the place where the main business activities are located and may not always be easy to establish. There may also be considerable overlap with the central administration.67 61 In terms of s 1139 of the English Companies Act 200668 a claim form may be served on a company incorporated in England at its registered address. Under Art. 63(2) of the Brussels I Recast the registered office of the company constitutes its domicile and accordingly the English courts will have jurisdiction over such a company. s 1046 of the Companies Act 2006 requires foreign companies which establish a place of business in England to register the names and addresses of its officers on whom a claim form may be served. Service of the claim at any of the registered addresses also establishes jurisdiction over the foreign company.69 Alternatively, jurisdiction may be established over a 58

58 The Civil Jurisdiction and Judgments Order 2001 paragraph 9(5). For a detailed discussion see Torremans & Fawcett pp. 198-200 and 213 et seq. 59 See Torremans & Fawcett pp. 147-149. 60 Torremans & Fawcett pp. 147-149. 61 Torremans & Fawcett 148 pp. et seq. 62 Mankowski/Magnus/Vlas Art. 63 Brussels I Recast para. 2; Torremans & Fawcett p. 198-202. 63 Mankowski/Magnus/Vlas Art. 63 Brussels I Recast para. 9; Torremans & Fawcett pp. 198-202. 64 Mankowski/Magnus/Vlas Art. 63 Brussels I Recast para. 2; Torremans & Fawcett p. 202. 65 Mankowski/Magnus/Vlas Art. 63 Brussels I Recast para. 4; Torremans & Fawcett p. 202. 66 Mankowski/Magnus/Vlas Art. 63 Brussels I Recast para. 5; Torremans & Fawcett p. 202. 67 King v Crown Energy Trading AG [2003] EWHC 163; Mankowski/Magnus/Vlas Art. 63 Brussels I Recast para. 6; Torremans & Fawcett pp. 201-202. 68 Read with Overseas Companies Regulations 2009, SI 2009/1801, Reg 7. 69 Rogerson p. 144.

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foreign company by serving a claim form in terms of Rule 6(9) ‘any place within the jurisdiction where the corporation carries on its activities; or any place of business of the company within the jurisdiction.’70 This latter rule is of importance in regard to foreign companies which are not domiciled in England as provided for in the Brussels I Recast and therefore are not subject to the Regulation. Art. 1 of the Regulation determines that the Regulation will apply in all civil and commercial matters whatever the nature of the court or tribunal. Art. 4 of the Brussels I Recast provides that subject to certain exceptions contained in the Regulation, persons domiciled in a Member State may only be sued in the courts of that Member State irrespective of their nationality. 71 Nationality therefore plays no role in questions of jurisdiction.72 The term 'civil and commercial matters' is not defined in the Regulation and may present difficulties for Common Lawyers as the distinction between private and public law in Common Law jurisdiction is not that clearly drawn.73 Art. 4 of the Brussels I Recast only determines the country where the courts will have jurisdiction. It does not determine the specific courts of that country. The specific court that will have jurisdiction is still determined by the domestic jurisdiction rules of that country. Under traditional rules of English law when the Brussels I Recast is not applicable the courts are not concerned with any connection between the person or the cause of action as the mere service of a claim form on the defendant present in England is sufficient to establish jurisdiction.74 The mere presence of a defendant within England is sufficient, even if such presence is merely transient. 75 The apparent harshness of this rule is tempered by the forum non conveniens doctrine.76 In the United Kingdom the Business and Property Courts (“B&PC”) were established in 2018 to bring together the specialist commercial courts of the High Court of England and Wales.77 This development was not only aimed at providing the various specialist courts that existed under one umbrella without losing the existing differences between the various courts, but also to protect these courts from the increased competition of similar foreign business courts that were being established in Europe and elsewhere. 78 It is a distinguishing characteristic of these courts that the judges have expert legal and commercial skills in a wide range of commercial sectors and markets, including banking, shipping, insurance, commodities, construction and engineering.79 It is primarily up to the claimant to select the court in which it wishes the dispute to be heard,80 provided that the English court has jurisdiction on an established ground. The Florida law on personal jurisdiction is a hybrid between the residency approach where residence within the state of Florida provides the essential element, 81 and the injurisdiction service approach where mere voluntary presence within Florida is sufficient Rogerson pp. 144–145. Art. 2 Brussels I Recast: ‘1. Subject to this Regulation, persons domiciled in a Member State shall, whatever their nationality, be sued in the courts of that Member State’. 72 See also Art. 2 Brussels I Recast. 73 Torremans & Fawcett p. 204. See also the opinion of the Advocate General Reischl in Case C-29/76 LTU v Eurocontrol [1976] ECR 1541; and Betlem & Bernasconi ‘European Private International Law, the Environment and Obstacles for Public Authorities’ (2006) 122 LQR 124. 74 Torremans & Fawcett p. 334. 75 Torremans & Fawcett pp. 334-335; Colt Industries v Sarlie [1966] 1 WLR 440. 76 Torremans & Fawcett p. 334. For a discussion of the doctrine see IV.C below. 77 Ahmed p. 21. 78 Ahmed p. 21. 79 Ahmed p. 23. 80 Ahmed p. 28. 81 Goodyear Dunlop Tires Operations SA v Brown 131 SC 2846 (2011) at 2853–2854. 70

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to found jurisdiction if process is served on the person whilst in Florida.82 Florida also has a long-arm statute which extends jurisdiction to persons doing business in the state or breaching a contract by failing to perform their obligations in the state. The effects of these extended forms of jurisdiction are tempered though by the constitutionally mandated minimum contacts requirements83 and the forum non conveniens doctrine discussed below. The minimum-contacts test is not a mechanical or quantitative test; instead, a question of reasonableness is presented. It is a flexible test. The primary concern is whether it is fair and reasonable to expect a defendant to defend an action in a given forum, given the nature of his or her activities in that forum. The facts of each case must be weighed to determine whether the requisite contacts exist.84 It has been held that the bare existence of minimum contacts is not sufficient to allow a court to exercise personal jurisdiction over a nonresident defendant. Rather, the court must also determine that the assertion of jurisdiction would comport with traditional notions of ‘fair play and substantial justice’. In other words, the court must conclude that the assertion of jurisdiction is reasonable. The ‘constitutional touchstone’ of specific jurisdiction is whether the defendant purposefully established ‘minimum contacts’ in the forum state, and the plaintiff 's claim arose out of those contacts.85 In analyzing whether it is reasonable to exercise personal jurisdiction, under traditional notions of fair play and substantial justice, courts must evaluate the following factors: (1) the burden that the exercise of jurisdiction will impose on the defendant; (2) the interests of the forum state in adjudicating the case; (3) the plaintiff 's interest in obtaining convenient and effective relief; (4) the interstate judicial system's interest in obtaining the most efficient resolution of the controversy; and (5) the shared interest of the several states in furthering fundamental substantive social policies.86 When determining whether a non-resident defendant has purposefully availed itself of privilege of doing business in forum state, such that exercise of personal jurisdiction over the defendant comports with due process, courts consider a variety of factors, including: (1) whether defendant maintains offices or agents in forum state; (2) whether defendant owns property in forum state; (3) whether defendant reached into forum state to solicit or initiate business; (4) whether defendant deliberately engaged in significant or long-term business activities in forum state; (5) whether parties contractually agreed that forum state's law would govern disputes; (6) whether defendant made in-person contact with resident of forum in forum state regarding business relationship; (7) nature, quality, and extent of parties' communications about business being transacted; and (8) whether performance of contractual duties was to occur within forum.87

82 The constitutionality of this rule was confirmed in Michigan Trust Co v Ferry 228 U.S. 346 (1913) and Burnham v Superior Court 495 U.S. 604 (1990). See also Hay, Borchers & Symeonides § 6.2 for a general discussion under US law. 83 International Shoe Co v Washington 326 U.S. 310 (145) 316; Florida Jurisprudence § 58; AMJUR Process § 172; Teitz pp. 15–17; Hay, Borchers & Symeonides § 5.4. 84 AMJUR Process § 172; Travelocity.com LP v Pier 35 Events, Inc., 2014 WL 2999208 S.D.Fla., 2014. 85 U.S.C.A. Const.Amend. 14. NuCal Foods, Inc. v Quality Egg LLC, 887 F. Supp. 2 d 977, 89 Fed. R. Evid. Serv. 174 (E.D. Cal. 2012). Burger King Corp v Rudzewicz 471 U.S. 462 Teitz p. 16. 86 WorldCare Ltd. Corp. v World Ins. Co., 767 F. Supp. 2 d 341 (D. Conn. 2011). See also Hay, Borchers & Symeonides § 5.11. 87 U.S.C.A. Const.Amend. 14. CSS Antenna, Inc. v Amphenol-Tuchel Electronics, GmbH, 764 F. Supp. 2 d 745 (D. Md. 2011). See also Hay, Borchers & Symeonides § 5.11.

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Strong argues that the United States is not strongly positioned to compete in the international litigation market.88 No specialist international commercial courts have developed and federal courts seem to be averse to change due to a deeply ingrained aversion to forum shopping or forum selling.89 A significant number of states have developed specialized commercial courts, but these have been aimed at interstate rather than truly international litigation.90 In France the defendant is usually sued where he is domiciled both in terms of the Brussels I Recast and in terms of the domestic law.91 Persons are domiciled in France where they have their principal establishment. It is a question of fact, but it also includes the intention of the person.92 The following factors may be relevant: the habitual residence, the focus of the family and social life, and the economic and professional interest. 93 A person may only have one domicile at any given time, but may change the domicile by moving to another place with the intention to settle there. A person of any nationality may register their domicile in the local inhabitants’ register. This provides a rebuttable presumption of domicile.94 A special rule applies to single tradespersons. Their domicile is determined by their place of business (domicile commercial principal).95 In French law the domicile of a legal person is firstly determined by Art. 63 of the Brussels I Recast for purposes of the Regulation. In terms of domestic law a business is domiciled where it has its principal establishment.96 Usually this is the place as contained in its constitution it is said to be established and which is registered with the local tribunal de commerce.97 In cases where a company has its principal place of business in France, but is registered elsewhere, it may nevertheless be sued in France. 98 Arts. 14 and 15 of the Code Civil make provision for extended grounds of jurisdiction in contractual matters where one of the parties is a French national.99 These rules do not apply when the Brussels I Recast applies, i.e. when the defendant is domiciled within the European Union. A French national may sue a foreign defendant in France whether the contract was concluded in France or not (Art. 14 of the Code Civil). Equally a French national may be sued in France where a contract was concluded outside of France (Art. 15 of the Code Civil). These rules are tempered as they may normally only be invoked if the subject matter which is in dispute has an appropriate connection with the seat of the court.100 The application of Art. 14 of the Code Civil is also now limited in practice to situations where no other forum has jurisdiction.101 In the Peoples Republic of China Art. 18 of the Opinions of the Supreme People's Court of China issued in 1992 on Several Questions of Applying the Civil Procedure Law determines that if the contract has not yet been performed and the domicile of the parties are not at the place of performance, only the people's court at the place of domi-

Strong p. 265. Strong 265. 90 Strong p. 265. 91 Layton & Mercer § 51.051; Vahramian & Wallenbrock pp. 220–221; Kunkler p. 78. 92 Vahramian & Wallenbrock pp. 220–221, Kunkler p. 78. 93 Layton & Mercer § 51.051. 94 Layton & Mercer § 51.051. 95 Kunkler p. 78. 96 Kunkler pp. 79–80. 97 Kunkler p. 80. 98 Layton & Mercer § 51.052; Vahramian & Wallenbrock pp. 220–221. 99 Layton & Mercer § 51.056. 100 Layton & Mercer § 51.056; Kunkler p. 80. 101 Borchers p. xviii. 88 89

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cile of the defendant shall have jurisdiction.102 In terms of the Civil Procedure Law of 2012 if a civil suit is brought against a citizen it must be brought in the place of his habitual residence. In terms of Art. 23 if the dispute is a contractual matter the defendant may be sued at his place of domicile. The place of domicile of a natural person is determined by Art. 20 of the Civil Code as the place where a person physically resides with the intention of remaining there permanently. The place of residence is deemed to be the domicile if the domicile cannot be certified. In terms of the Supreme People's Court a legal person is deemed to be domiciled where it mainly operates or runs its business.

G. Agreement and Submission I. Introduction In most legal systems an agreement between the parties to submit to the jurisdiction of a particular country’s courts or even a specified court will be valid and enforceable with the specified courts exercising jurisdiction. This is in accordance with the principle of freedom of contract. However, in some instances a court may refuse to exercise jurisdiction where there is no link between the parties, the agreement or the cause of action and the specific court or where there is a more appropriate court to determine the dispute under the forum non conveniens doctrine.103 The agreement may form part of the original sales contract by the incorporation of a jurisdiction clause or it may be an agreement in respect of the specific dispute. Courts will usually also exercise jurisdiction over a defendant who enters an appearance other than to contest jurisdiction by raising substantive defences to the claim. 75 See also the discussion of exclusive jurisdiction clauses and arbitration clauses below. 74

II. Sampling of Laws 1. CISG 76

The CISG contains no direct provision dealing with jurisdiction agreements104 but supports the principle of freedom of contract generally: Article 6 The parties may exclude the application of this Convention or, subject to article 12, derogate from or vary the effect of any of its provisions.

2. ALI/UNIDROIT Principles 77 Article 2 Jurisdiction over Parties 2.1 Jurisdiction over a party may be exercised: 2.1.1 By consent of the parties to submit the dispute to the tribunal;

Chen p. 36. See discussion below. 104 Art. 81(1) sent. 2 CISG merely mentions ‚any provision of the contract for the settlement of disputes’ and retains their validity even after the termination of the contract. 102 103

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3. European Union 78

Brussels I Regulation Recast Article 25 1. If the parties, regardless of their domicile, have agreed that a court or the courts of a Member State are to have jurisdiction to settle any disputes which have arisen or which may arise in connection with a particular legal relationship, that court or those courts shall have jurisdiction, unless the agreement is null and void as to its substantive validity under the law of that Member State. Such jurisdiction shall be exclusive unless the parties have agreed otherwise. The agreement conferring jurisdiction shall be either: (a) in writing or evidenced in writing; (b) in a form which accords with practices which the parties have established between themselves; or (c) in international trade or commerce, in a form which accords with a usage of which the parties are or ought to have been aware and which in such trade or commerce is widely known to, and regularly observed by, parties to contracts of the type involved in the particular trade or commerce concerned. 2. Any communication by electronic means which provides a durable record of the agreement shall be equivalent to ‘writing’. 3. The court or courts of a Member State on which a trust instrument has conferred jurisdiction shall have exclusive jurisdiction in any proceedings brought against a settlor, trustee or beneficiary, if relations between those persons or their rights or obligations under the trust are involved. Article 26 1. Apart from jurisdiction derived from other provisions of this Regulation, a court of a Member State before which a defendant enters an appearance shall have jurisdiction. This rule shall not apply where appearance was entered to contest the jurisdiction, or where another court has exclusive jurisdiction by virtue of Article 24.

4. The 2005 Hague Convention on Choice of Court Agreements 79

Article 1 Scope (1) This Convention shall apply in international cases to exclusive choice of court agreements concluded in civil or commercial matters. (2) For the purposes of Chapter II, a case is international unless the parties are resident in the same Contracting State and the relationship of the parties and all other elements relevant to the dispute, regardless of the location of the chosen court, are connected only with that State. (3) For the purposes of Chapter III, a case is international where recognition or enforcement of a foreign judgment is sought. Article 3 Exclusive choice of court agreements For the purposes of this Convention – a) "exclusive choice of court agreement" means an agreement concluded by two or more parties that meets the requirements of paragraph c) and designates, for the purpose of deciding disputes which have arisen or may arise in connection with a particular legal relationship, the courts of one Contracting State or one or more specific courts of one Contracting State to the exclusion of the jurisdiction of any other courts; b) a choice of court agreement which designates the courts of one Contracting State or one or more specific courts of one Contracting State shall be deemed to be exclusive unless the parties have expressly provided otherwise; c) an exclusive choice of court agreement must be concluded or documented i) in writing; or ii) by any other means of communication which renders information accessible so as to be usable for subsequent reference;

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Chapter 6 Jurisdiction d) an exclusive choice of court agreement that forms part of a contract shall be treated as an agreement independent of the other terms of the contract. The validity of the exclusive choice of court agreement cannot be contested solely on the ground that the contract is not valid. Article 5 Jurisdiction of the chosen court (1) The court or courts of a Contracting State designated in an exclusive choice of court agreement shall have jurisdiction to decide a dispute to which the agreement applies, unless the agreement is null and void under the law of that State. (2) A court that has jurisdiction under paragraph 1 shall not decline to exercise jurisdiction on the ground that the dispute should be decided in a court of another State. (3) The preceding paragraphs shall not affect rules a) on jurisdiction related to subject matter or to the value of the claim; b) on the internal allocation of jurisdiction among the courts of a Contracting State. However, where the chosen court has discretion as to whether to transfer a case, due consideration should be given to the choice of the parties. Article 6 Obligations of a court not chosen A court of a Contracting State other than that of the chosen court shall suspend or dismiss proceedings to which an exclusive choice of court agreement applies unless a) the agreement is null and void under the law of the State of the chosen court; b) a party lacked the capacity to conclude the agreement under the law of the State of the court seised; c) giving effect to the agreement would lead to a manifest injustice or would be manifestly contrary to the public policy of the State of the court seised; d) for exceptional reasons beyond the control of the parties, the agreement cannot reasonably be performed; or e) the chosen court has decided not to hear the case.

5. Germany 80

The provisions of the Zivilprozessordnung provide: Title 3 Agreement as to the jurisdiction of the courts § 38 Admissible agreement as to the choice of venue (1) A court of first instance that as such is not competent will become the forum by express or tacit agreement of the parties should the parties to the agreement be merchants, legal persons under public law, or special assets (Sondervermögen) under public law. (2) The competence of a court of first instance may be agreed, furthermore, wherever at least one of the parties to the agreement has no general venue in Germany. Such agreement must be concluded in writing or, should it have been concluded orally, must be confirmed in writing. If one of the parties has its general venue in Germany, a court may be selected in Germany only if that party has its general venue in that court’s jurisdiction, or if a specific jurisdiction is given. (3) In all other regards, a choice-of-court agreement shall be admissible only where it was concluded, expressly and in writing: 1. After the dispute has arisen, or 2. For the event that, following the conclusion of the agreement, the party to whom claim is to be laid relocated his place of residence or habitual place of abode to a location outside the territorial scope of this Code, or for the event that the party’s place of residence or habitual place of abode is not known at the time the proceedings are brought in the courts. § 39 Competence of a court as a result of a party having participated in court proceedings without objecting to the court’s lack of jurisdiction (rügelose Verhandlung) Furthermore, the competence of a court of first instance is established by the fact that the defendant makes an appearance in oral argument on the merits of the case and fails to object to the court’s lack of jurisdiction. This shall not apply where the notification stipulated by section 504 was not given.

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6. Spain The Spanish Civil Procedure Act of 2010 stipulates:

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Article 54 Dispositive nature of the rules on territorial jurisdiction. 1. The legal rules attributing the territorial jurisdiction shall be applied only in the absence of an explicit or tacit submission by the parties to the courts of a specific judicial district. An exception applies to the rules established under points (i) and (iv) to (xv) of paragraph 1 and in paragraph 2 of Article 52 and other provisions in which this or another law expressly establishes their imperative nature. Nor shall the explicit or tacit submission apply to matters that must be resolved in oral trials. 2. The explicit acceptance contained in contracts of adherence or contracts containing general conditions imposed by one of the parties or that have been entered into with consumers or users shall not be valid. 3. The submission of the parties shall be valid and effective only when made to courts with objective jurisdiction to hear the relevant case. Article 55 Explicit submission. Explicit submission shall be understood as that agreed upon by the parties involved with specification of the judicial district to whose courts they submit themselves. Article 56 Tacit submission. The following shall be considered submitted tacitly: (i) The plaintiff, by the mere fact that he presented himself at the courts of a specific judicial district lodging the complaint or filing a petition or application required to be presented to the court competent to hear the complaint. (ii) The defendant who, having appeared at the hearing after the filing of the complaint, undertakes any action other than that of filing a declinatory action in due form. Likewise, the defendant to, having been summoned or served notice in due form, fails to appear at the hearing or does appear after the faculty to propose the declinatory action has precluded shall be deemed to have submitted himself tacitly. Article 57 Explicit submission and assignment. The explicit submission of the parties shall determine the judicial district whose courts must hear the case. When, in the said judicial district, there are several courts of the same class, the assignment of the cases shall determine to which of them it shall correspond to hear the case, and the parties shall not be entitled to submit themselves to a specific court to the exclusion of the others.

7. France The NCPC stipulates:

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Article 48 Any clause that departs, directly or indirectly, from the rules of territorial jurisdiction will be deemed non-existent unless it has been agreed between parties to a contract entered into as merchants and the same has been provided for in an explicit manner in the undertakings of the party against whom it will be enforced.

The code contains no specific provision on submission apart from such agreement, 83 but it is nevertheless recognized.105

8. England Where the Brussels I Recast applies the Civil Jurisdiction and Judgments Act 1982 84 contains specifically applicable rules:

105

Layton & Mercer § 51.055.

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Chapter 6 Jurisdiction 16 Allocation within UK of jurisdiction in certain civil proceedings (1)The provisions set out in Schedule 4 (which contains a modified version of Chapter II of the Regulation]) shall have effect for determining, for each part of the United Kingdom, whether the courts of law of that part, or any particular court of law in that part, have or has jurisdiction in proceedings where— (a) the subject matter of the proceedings is within the scope of the Regulation as determined by Article 1 of the Regulation (whether or not the Regulation has effect in relation to the proceedings); and] (b) the defendant or defender is domiciled in the United Kingdom or the proceedings are of a kind mentioned in Article 22 of the Regulation] (exclusive jurisdiction regardless of domicile). Schedule 4 Chapter II of the Regulation as Modified Rules for Allocation of Jurisdiction within UK Prorogation of jurisdiction 12(1) If the parties have agreed that a court or the courts of a part of the United Kingdom are to have jurisdiction to settle any disputes which have arisen or which may arise in connection with a particular legal relationship, and, apart from this Schedule, the agreement would be effective to confer jurisdiction under the law of that part, that court or those courts shall have jurisdiction. 13(1) Apart from jurisdiction derived from other provisions of this Schedule, a court of a part of the United Kingdom before which a defendant enters an appearance shall have jurisdiction. (2) This rule shall not apply where appearance was entered to contest the jurisdiction, or where another court has exclusive jurisdiction by virtue of rule 11.

A defendant who voluntarily takes a step in the proceedings before a court other than merely contesting the jurisdiction of the court, has recognized the court's jurisdiction. 106 A defendant submits to the jurisdiction by taking a step which is only necessary or useful if the objection to jurisdiction has been waived.107 A foreign claimant who submits a claim in England submits to the jurisdiction of English courts, also in respect of any counterclaim.108 86 Under Common Law a person may contract to submit to the jurisdiction of a court to which it would not otherwise be subject. The agreement may be express or impliedly. 109 A choice of English law in itself does not constitute an implied agreement to the jurisdiction of English courts.110 85

9. United States Personal jurisdiction under Florida law may be conferred by agreement. The agreement may be contained in a forum selection clause in their agreement or with the specific dispute in mind.111 88 Submission to the jurisdiction of the court may be express or implied. Where the defendant fails to seasonably object to the jurisdiction of the court, this may manifest a submission to the jurisdiction. This is regarded as a lawful waiver.112 87

Florida Rules of Civil Procedure Rule 1.140. Defenses (b) How Presented. Every defense in law or fact to a claim for relief in a pleading shall be asserted in the responsive pleading, if one is required, but the following defenses may be made by motion at the option of the pleader: (1) lack of jurisdiction over the subject matter, (2) lack of jurisdiction over the person, (3)

Rogerson p. 146; The Messiniaki Tolmi [1984] 1 Lloyd's LR 266 at 270. Williams & Glyns Bank Astro Dinamico [1984] 1 WLR 438; Rogerson pp.146–147; Torremans & Fawcett p. 332. 108 Torremans & Fawcett p. 332; Glencore International AG v Esser Shipping Ltd [2002] All ER (Comm) 1. 109 Torremans & Fawcett p. 333; Feyrick v Hubbard (1902) 71 LJKB 509. 110 Torremans & Fawcett 333; Dunbree Ltd v Gilman & Co (Australia) (Pty) Ltd [1968] 2 Lloyds LR 394. However, see Acrow (Automation) Ltd v Rex Chainbelt Inc [1971] 3 All ER 1175 at 1182. 111 Florida Jurisprudence § 62. For a general discussion of consent see Teitz pp. 53 et seq. M/S Bremen v Zapata Off-Shore Co. 407 U.S. 1, 92 S.Ct. 190. 112 Levy County v Diamond 7 So.3 d 564 (Fla. 1st DCA 2009). Florida Jurisprudence § 63. See also generally Hay, Borchers & Symeonides § 6.5. 106

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G. Agreement and Submission improper venue, (4) insufficiency of process, (5) insufficiency of service of process, (6) failure to state a cause of action, and (7) failure to join indispensable parties. A motion making any of these defenses shall be made before pleading if a further pleading is permitted. The grounds on which any of the enumerated defenses are based and the substantial matters of law intended to be argued shall be stated specifically and with particularity in the responsive pleading or motion. Any ground not stated shall be deemed to be waived except any ground showing that the court lacks jurisdiction of the subject matter may be made at any time. No defense or objection is waived by being joined with other defenses or objections in a responsive pleading or motion. A forum selection clause is insufficient in itself to provide jurisdiction to Florida court over a non-resident defendant. There must be an independent basis for conferring long-arm jurisdiction. 113 Agreement alone will however suffice where, the contract:114 (a) includes a choice of law clause choosing Florida law; (b) includes a provision whereby the nonresident agrees to submit to the jurisdiction of the courts of Florida; (c) involves consideration of not less than $250,000; (d) does not violate the US Constitution; (e) bear a substantial or reasonable relation to Florida or where at least one of the parties is a resident of Florida or incorporated under its laws.

10. China The 2012 Chinese Code of Civil Procedure provides:

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Article 34 A party to a contract or other property dispute may choose by written agreement to be under the jurisdiction of the people's court in the location of the defendant's domicile, where the contract is performed or signed, in the location of the plaintiff 's domicile, in the location of the subject matter or in other locations which have actual connections with the dispute, provided that the provisions on hierarchical jurisdiction and exclusive jurisdiction are not violated.

90

Article 127 If a party rejects the jurisdiction of his case after the case was accepted by a people’s court, the party shall raise the rejection during the period for submitting briefs. The people’s court shall examine such objection. If the objection is tenable, the people’s court shall rule that the case be transferred to the people’s court that does have jurisdiction over the case; if the rejection is untenable, the people’s court shall overrule the objection.

Where a party responds to an action without challenging the jurisdiction, the people's 91 court accepting the case shall be deemed to have the jurisdiction, provided that there is no violation of the provisions on hierarchical jurisdiction and exclusive jurisdiction.

III. Comments The freedom of contract and in consequence the validity of choice of court agree- 92 ments are recognized almost universally in regard to international sales transactions as the sampling of laws here shows. Courts will recognize the choice of court of the parties, unless there is some prescriptive rule which may not be derogated from as is often found in respect of consumer contracts. In the context of international commercial relations and sales contracts no such limitation exists in any of the legal systems sampled here. The exercise of jurisdiction may be restricted though in terms of the lis pendens and forum non conveniens doctrines discussed below. A differentiation is made between prorogation, i.e. where the parties by agreement endow the courts of a particular counRule 1.140(b). Florida Jurisprudence § 62, Business Litigation in Florida § 3.5. Florida Jurisprudence § 62. See also Travelocity.com LP v Pier 35 Events, Inc., 2014 WL 2999208 S.D.Fla., 2014. 113

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try with jurisdiction and derogation where the jurisdiction of a particular court which otherwise would have had jurisdiction under the applicable law, is excluded.115 In terms of the Brussels I Regulation a distinction was drawn between agreements where one of the parties had its domicile within the European Union and agreements where neither party had its domicile in the European Union.116 This hard to understand distinction has now been done away with in the Brussels I Recast.117 Where the parties have agreed to the jurisdiction of the courts of a specific country or to the jurisdiction of a specific court, the courts of that country or that specific court will have jurisdiction over the matter. The jurisdiction is exclusive unless the parties have agreed otherwise. 118 The effect is thus one of prorogation and derogation unless otherwise agreed.119 There is uncertainty on whether Art. 25 applies in the case where the court chosen is outside the European Union, i.e. where there is only a derogation from the European court.120 The European Court of Justice and some national courts have taken the view that Art. 25 is not applicable in such cases and that the issue must then be determined by the domestic law which may be applicable.121 Other courts and commentators have taken the view that such an approach detracts from the unifying purpose of the Regulation and that Art. 25 should also apply in these circumstances.122 This uncertainty has not been resolved in the Brussels I Recast. The European legal systems sampled here, though, all recognize such derogation agreements.123 The position in Europe has now also been complicated with the accession of the European Union to the 2005 Hague Convention Choice of Court Agreements. The Convention entered into force in Europe on 1 October 2015. Of the 32 convention parties, only 4 are not European and they do not include the United States, China or any South American country but include the United Kingdom.124 The Convention only applies in cases where an agreement has appointed the courts of a specific convention state. The Convention takes precedence over both European and domestic provisions in case of any inconsistencies. Torremans and Fawcett indicate that the impact of the Convention on the Brussels I Recast will be limited because it will only apply where one of the two parties is not a European resident, but is resident in a Convention state, and secondly the rules of the two regimes are very similar. It was one of the objectives of the Brussels I recast that it would not affect the position in European law.125 The Convention applies only to exclusive jurisdiction clauses and not to cases where the jurisdiction clause is non-exclusive. However, Art. 3 does determine that where there is a reference to the courts of a Convention state, it is deemed to be an exclusive jurisdiction clause unless the parties have expressly provided otherwise. In terms of Art. 5 (2) a designated court may not decline jurisdiction on the ground that the dispute should be decided in a court of another state. A court in a Contracting State other than the court chosen must suspend or dismiss the proceedings in terms of 115 116

seq.

Magnus/Mankowski/Magnus Art. 25 para. 28; Thomas/Putzo/Hüßtege Intro § 38 ZPO para. 1. The former Art. 23 Brussels I Regulation; Magnus/Mankowski/Magnus Art. 25 paras 48 and 53 et

See Art. 25. See also Freitag FS Magnus 427 et seq. Magnus/Mankowski/Magnus Art. 25 paras 1 and 2. 119 Magnus/Mankowski/Magnus Art. 25 paras 1 and 2. 120 Magnus/Mankowski/Magnus Art. 25 para. 36. 121 See also Basedow FS Magnus pp. 337 et seq. for a critical analysis. 122 Magnus/Mankowski/Magnus Art. 25 para. 37. 123 Germany – § 38 ZPO; Spain – CPA Arts. 54 & 55 ZPO; France Art. 48 NCPC; England – Adams and others v Cape Industries plc and another [1991] 1 All ER 929. 124 https://www.hcch.net/en/instruments/conventions/status-table/?cid=98. 125 Torremans & Fawcett pp. 315-316. 117

118

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Art. 6 unless the agreement is void, or giving effect to the clause would lead to a manifest injustice or would be manifestly contrary to the public policy of the country of the court seised, or the agreement cannot be performed for reasons beyond the control of the parties, or lastly, the chosen court has decided not to hear the case.126 In the United States127 and China128 choice of court agreements are also explicitly recognized. The new Chinese rule does however not contain any provision on the derogation effect of choice of court agreements and the position is uncertain at this stage. The Chinese rule is further limited in that the chosen court must also somehow meet the statutory jurisdictional requirements for purely domestic cases, i.e. it must be at the defendant's domicile or habitual residence, the place of the contract performance or contract conclusion, the place of the plaintiff 's domicile or the place of the object of the action.129 In Florida the choice of court provision is presumptively valid but may be challenged on grounds of fraud, overwhelming bargaining power of the party who insisted on the clause, or where the clause is the sole connecting factor.130 In Germany the right to agree to the place of jurisdiction is limited by § 38 ZPO. 131 In terms of this provision agreements by merchants are specifically permitted. These agreements need not be in writing and their validity is determined by the general rules on the formation of contract under the BGB.132 The term 'merchants' is determined by § 1 of the German Handelsgesetzbuch (Commercial Code). A merchant is anyone who carries on a mercantile trade, including the sale of movable goods. In international commercial sales it is unlikely that a party will have to rely on § 38(2) or (3) ZPO as the parties will invariably be merchants as defined.133 The Brussels I Recast requires the agreement to be in writing or in a form which accords with a practice established between the parties or in accord with a usage in a particular trade.134 A clause contained in the standard terms of a party will be valid, but the European Court of Justice has developed special restrictive rules to ensure that the standard terms have indeed been agreed on and that the other party had a reasonable opportunity to check the terms and the clause.135 The domestic laws of Germany,136 Spain,137 France,138 England,139 and Florida140 do not require any specific formalities for such agreements concluded between commercial parties and they may even be tacitly agreed on. The domestic laws of China require writing for the validity of such a clause.141 In practice such clauses will most often be contained in the standard terms of the parties which are applicable to the agreement and which the writing requirement. Most legal systems will also recognize terms contained Torremans & Fawcett pp. 316-317. US/Florida – M/S Bremen v Zapata Off-Shore Co. 407 U.S. 1, 92 S.Ct. 190; China – CPL Art. 34 CPL. 128 Art. 34 CPL. 129 Chen pp. 38–39. 130 Business Litigation in Florida § 3.10; Weisser v PNC Bank, N.A., 967 So.2 d 327, 331–32 (Fla. 3 d DCA 2007); Agile Assur. Group, Ltd. v Palmer, So.3 d, 2014 WL 2151971 Fla.App. 2 Dist., 2014. 131 Boccafoschi p. 5. 132 Boccafoschi pp. 3, 8. 133 Thomas/Putzo/Hüßtege § 38 ZPO para. 9. 134 Magnus/Mankowski/Magnus Art. 25 para. 88. 135 See Magnus/Mankowski/Magnus Art. 25 para. 96. 136 § 38(1) ZPO. 137 Arts. 54(1) and 55 CPA; Layton & Mercer § 62.055; Quintana, De Natal & Cortes 687. 138 Art. 48 NCPC. 139 Torremans & Fawcett p. 371; Feyrick v Hubbard (1902) 71 LJKB 509. 140 Florida Jurisprudence § 6. 141 Art. 34 CCP; Chen pp. 38–39. 126 127

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106

on a website as 'in writing'. Under Spanish law such an agreement contained in the standard terms will not be valid where such standard terms are imposed by one of the parties.142 A clear distinction must be drawn between choice of court and choice of law clauses and agreements. A choice of law clause in itself is insufficient in itself to confer jurisdiction on the on the courts in terms of the legal systems sampled here.143 The Brussels I Recast does not require any other jurisdictional factor for the validity of a choice of court clause.144 This is also true for the domestic laws of Germany, England, and France. However, the domestic laws of Spain,145 China146 and Florida147 require additional jurisdictional elements to be present. The Florida requirements are fairly widely stated and liberal. Most of the legal systems recognize the tacit submission to jurisdiction by a party who does not object to the jurisdiction of the court. A party who enters an appearance solely to dispute jurisdiction is not regarded as having submitted to jurisdiction. The Brussels I Recast specifically recognizes the submission to jurisdiction. 148 The domestic laws of Germany,149 Spain,150 France,151 England,152 Florida,153 and China154 all recognize tacit submission to the jurisdiction of the courts. The earlier Chinese CPL allowed contractual parties to choose courts in certain places to hear their disputes. The Amended CPL further expands this rule. Apart from courts in places specified in the earlier CPL (i.e. where the defendant or plaintiff is domiciled, where the contract is signed or performed and where the subject matter of the contract is located), the new CPL of 2012 also permits parties to choose to have their dispute heard in a court in a place which has an actual connection with the dispute. However, the specific criteria for determining whether a place has an actual connection with the dispute are unclear, therefore parties should be careful when choosing a venue outside of those specified by the previous CPL.155

Art. 54(2) CPL. Magnus/Mankowski/Magnus Art. 25 para. 43; Thomas/Putzo/Hüßtege Intro § 38 ZPO para. 6. 144 Magnus/Mankowski/Magnus Art. 25 para. 1. 145 Art. 54(3)CPL requires objective jurisdiction as well. 146 Chen pp. 38–39. 147 Florida Jurisprudence § 62. 148 Art. 25 and Art. 26 respectively. See also Magnus/Mankowski/Magnus Art. 25 para. 1; Thomas/ Putzo/Hüßtege Intro § 39 ZPO para. 8. 149 § 39 ZPO; Thomas/Putzo/Hüßtege § 39 ZPO para. 1. 150 Art. 56 CPL. See also Quintana, De Natal & Cortes p. 688. 151 Layton & Mercer § 51.055. 152 Torremans & Fawcett p. 333-334; Rogerson p. 146; Feyrick v Hubbard (1902) 71 LJKB 509; The Messiniaki Tolmi [1984] 1 Lloyd's LR 266 at 270. 153 Fla. R. of C.P. Rule 1.140(b); Levy County v Diamond 7 So.3 d 564 (Fla. 1 st DCA 2009). Florida Jurisprudence § 63. See also Hay, Borchers & Symeonides § 6.5. 154 Art. 127 CPL. 155 Chen pp. 38–39. 142

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H. Where the Cause of Action Arose I. Introduction Jurisdiction based on the place where the cause of action arose may refer to the place 107 where: (a) a contract was concluded, especially if the dispute is about the conclusion, existence or interpretation of the agreement; or (b) the place of performance; or (c) where the breach of contract took place. In international sales transactions it may sometimes be difficult to determine exactly where a breach took place. For instance, if defective goods are delivered, is the breach of contract at the place where the goods were manufactured, where the goods were handed over to the first carrier or where the goods were finally put at the disposal of the buyer? Conversely in the case of non-payment, is the breach located at the place where the debtor failed to make payment or failed to open a letter of credit, or is it at the place where payment was to be made to the seller? There may be a significant overlap between the place of performance and the place 108 where the breach took place as with failure to deliver, delivery of defective goods and non-payment the breach takes place at the place of performance. With other types of breach such as anticipatory breach the breach may well take place elsewhere, for instance where the declaration that substantial performance will not be made takes place.

II. Sampling of laws 1. CISG The CISG contains no specific provision dealing with the place of contracting, but 109 specifically deals with the place of performance in Arts. 31 and 57 CISG: Article 31 If the seller is not bound to deliver the goods at any other particular place, his obligation to deliver consists: (a) if the contract of sale involves carriage of the goods – in handing the goods over to the first carrier for transmission to the buyer; (b) if, in cases not within the preceding subparagraph, the contract relates to specific goods, or unidentified goods to be drawn from a specific stock or to be manufactured or produced, and at the time of the conclusion of the contract the parties knew that the goods were at, or were to be manufactured or produced at, a particular place – in placing the goods at the buyer's disposal at that place; (c) in other cases – in placing the goods at the buyer's disposal at the place where the seller had his place of business at the time of the conclusion of the contract. Article 57 (1) If the buyer is not bound to pay the price at any other particular place, he must pay it to the seller: (a) at the seller's place of business; or (b) if the payment is to be made against the handing over of the goods or of documents, at the place where the handing over takes place.

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2. ALI/UNIDROIT Principles 110 Article 2 Jurisdiction Over Parties 2.1 Jurisdiction over a party may be exercised: 2.1.2 When there is a substantial connection between the forum state and the party or the transaction or occurrence in dispute. A substantial connection exists when a significant part of the transaction or occurrence occurred in the forum state, when an individual defendant is a habitual resident of the forum state or a jural entity has received its charter of organization or has its principal place of business therein, or when property to which the dispute relates is located in the forum state.

3. European Union 111

The recast Regulation also contains no provision on the place of contracting. Recast Brussels I Regulation 2012 Article 7 A person domiciled in a Member State may be sued in another Member State: (1) (a) in matters relating to a contract, in the courts for the place of performance of the obligation in question; (b) for the purpose of this provision and unless otherwise agreed, the place of performance of the obligation in question shall be: • in the case of the sale of goods, the place in a Member State where, under the contract, the goods were delivered or should have been delivered, • in the case of the provision of services, the place in a Member State where, under the contract, the services were provided or should have been provided; (c) if point (b) does not apply then point (a) applies; …

4. Germany 112

The ZPO contains no provision on the place of contracting, only on the place of performance. § 29 ZPO Specific jurisdiction of the place of performance (1) For any disputes arising from a contractual relationship and disputes regarding its existence, the court of that location shall have jurisdiction at which the obligation is to be performed that is at issue. (2) An agreement as to the place of performance shall establish a court as the forum only insofar as the parties to the agreement are merchants, legal persons under public law, or special assets (Sondervermögen) under public law.

5. Spain The Spanish Civil Procedure Act (Ley 1/2000) makes provision for the place of contracting or the place of performance as places of jurisdiction in the case of corporate entities. 114 The CPA provides: 113

Article 51 General jurisdiction of corporate entities and entities without legal personality. 1. Unless the law establishes otherwise, corporate entities shall be sued in the place of their address. They can also be sued in the place where the situation or the legal relation to which the litigation refers has originated or must take effect, provided that they have an establishment open to the public or a representative authorised to act in the name of the entity in the said place. 2. Entities without legal personality can be sued at the address of their administrators or in any place where they are carrying out their activity.

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6. France Article 46 The plaintiff may bring his case, at his choosing, besides the court of the place where the defendant lives, before: – in contractual matters, the court of the place of the actual delivery of the chattel or the place of performance of the agreed service; …

7. England There is no provision in English Common Law providing for jurisdiction with refer- 115 ence to the place of contracting, performance or breach of the contract. Where the Brussels 1 Recast applies the Civil Jurisdiction and Judgments Act 1982 116 contains special provisions to determine the place of jurisdiction: 16 Allocation within U.K. of jurisdiction in certain civil proceedings (1) The provisions set out in Schedule 4 (which contains a modified version of Chapter II of the Regulation) shall have effect for determining, for each part of the United Kingdom, whether the courts of law of that part, or any particular court of law in that part, have or has jurisdiction in proceedings where— (a) the subject matter of the proceedings is within the scope of the Regulation as determined by Article 1 of the Regulation (whether or not the Regulation has effect in relation to the proceedings); and (b) the defendant or defender is domiciled in the United Kingdom or the proceedings are of a kind mentioned in Article 22 of the Regulation (exclusive jurisdiction regardless of domicile). Schedule 4 Chapter II of the Regulation as Modified: Rules for Allocation of Jurisdiction within UK Special jurisdiction 3 A person domiciled in a part of the United Kingdom may, in another part of the United Kingdom, be sued— (a) in matters relating to a contract, in the courts for the place of performance of the obligation in question;

8. United States Although jurisdiction over the person is usually conferred by the service of process 117 on the person while within the area of jurisdiction of the court, the Florida long-arm statute also contains a provision relating to the fact that the cause of action may have arisen in Florida. § 48.193 stipulates: § 48.193. Acts subjecting person to jurisdiction of courts of state (1) Any person, whether or not a citizen or resident of this state, who personally or through an agent does any of the acts enumerated in this subsection thereby submits himself or herself and, if he or she is a natural person, his or her personal representative to the jurisdiction of the courts of this state for any cause of action arising from the doing of any of the following acts: … (g) Breaching a contract in this state by failing to perform acts required by the contract to be performed in this state.

9. China The 2012 Chinese Code of Civil Procedure provides:

118

Article 23 A lawsuit brought about a contract dispute shall be under the jurisdiction of the people’s court located in the place where the defendant has his domicile or where the contract is performed.

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Opinion of the Supreme People's Court of China on the place of performance in sales:156 (1) If the parties specify the place of performance, the specified location shall be the contract location. If the parties fail to specify the place of performance, the place specified for the delivery of the goods, shall be the place of performance. The destination of the cargo, the arrival station, place of inspection, place of testing or installation and other locations specified in the contract shall not be the place of performance. (2) If the parties specify the place of performance or the place of delivery, but agree in writing or by any other method to change the place during the course of performing the contract, the changed place of performance shall be deemed the place of performance. If the parties fail to follow the preceding methods of change to change the place of performance, the original place of performance shall persist. (3) If the parties fail to specify or to clearly specify the place of performance or delivery, or if the goods have not been delivered to the specified place of performance, or where the sale has been concluded orally, the place of performance shall not be used to determine the place of jurisdiction. 157

III. Comments The place of performance is not only important for purposes of substantive law, but it may also be for purposes of jurisdiction. 158 It has been applied in a number of cases dealing with the CISG.159 In this regard a distinction must be made between the obligations of the seller which is determined by Art. 31 CISG and the obligations of the buyer which are determined by Art. 57 CISG. In terms of Art. 6 CISG the choice of the parties takes precedence.160 If the parties have determined a specific place for performance in their contract, delivery at that place will take precedence as the place of performance. However, care must be taken when interpreting any clauses referring to a particular place if it is not clear that the parties have delivery in the sense of Art. 31 CISG at that place in mind. 121 Where the goods do not involve transportation, the seller must place the goods at the disposal of the seller.161 The goods must be collected by the buyer at the place of business of the seller or at another named place where the goods are situated. That place will be the place of delivery for purposes of Art. 31 CISG and also for jurisdiction. The usual place of delivery will be the place of business of the seller where the goods are handed over to the first independent carrier for transmission to the buyer.162 The seller is also free to dispatch the goods from a place other than its usual place of business in which case the place of dispatch becomes the place of delivery.163 120

156 Regulation on the Issues of How to Determine the Performance Locations for Sale Contracts when Determining the Jurisdiction of Economic Disputes of the Supreme People's Court promulgated on 12 September 1996. 157 Wei pp. 43–44 (n 88). 158 Brand, ‘Art. 31 CISG: When Substantive Law Rules Affect Jurisdictional Results’ (2005–06) 25 Journal of Law and Commerce 181; Widmer/Schlechtriem/Schwenzer Art. 31 CISG para. 87; Mohs/ Schlechtriem/Schwenzer Art. 57 CISG para. 23; Eiselen/Kritzer § 88:21. 159 See for instance Tribunale Reggio Emilia 3 July 2000 (Industrial machinery case) [http://cisgw3.la w.pace.edu/cases/000703i3.html]; OLG Koblenz 4 October 2002 (Concrete slabs case) [http://cisgw3.la w.pace.edu/cases/021004g1.html]; KG Zug 11 December 2003 (Plastic granulate case) [detailed abstract available] [http://cisgw3.law.pace.edu/cases/031211s1.html]; Tribunale Rovereto 28 August 2004 (Aqua}li Textile Yarns S.p.A. v Updeal Ltd) [http://cisgw3.law.pace.edu/cases/040828i3.html]; OGH 14 December 2004 (Laser device case) [http://cisgw3.law.pace.edu/cases/041214a3.html]; Cour d'appel Paris 18 March 1998 (Francoafricaine v More) [http://cisgw3.law.pace.edu/cases/980318f1.html]. 160 Saenger/Ferrari et al. Art. 31 CISG para. 2; Staudinger/Magnus Art. 31 CISG para. 6. 161 Widmer/Schlechtriem/Schwenzer Art. 31 CISG paras 3 and 4; Saenger/Ferrari et al. Art. 31 CISG para. 2; Staudinger/Magnus Art. 31 CISG para. 25. 162 Widmer/Schlechtriem/Schwenzer; Saenger/Ferrari et al. Art. 31 CISG para. 2; Staudinger/Magnus Art. 31 CISG paras 12 & 15. 163 Widmer/Schlechtriem/Schwenzer Art. 31 CISG para. 5.

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The use of INCOTERMS are very common in international sales contracts and may 122 have a bearing on the place of delivery.164 In some cases the use of the INCOTERMS has only a supplementary function and does not determine the place of delivery.165 This is the case with the terms EXW, CPT and CIP where the term does not stipulate a place of delivery other than the seller's place of business.166 The reference to a place in CPT and CIP merely determines the liability for the cost to that place. In the case of the use of terms like FAS, FOB, CFR and CIF without a named place, the place of delivery is still determined by Art. 31(a) CISG, namely the place of dispatch.167 Where the INCOTERMS specify a place, for instance FAS Hamburg or DDP to Sydney, then the place of delivery is specified in the agreement and that place becomes the place of delivery, also for purposes of jurisdiction.168 In this regard delivery at a place outside the seller's country becomes even more onerous as it may also provide an alternative place of jurisdiction more beneficial to the buyer. Similar to the seller's delivery obligation in Art. 31, the buyer's payment obligation is 123 determined in Art. 57 which reads as follows: (1) If the buyer is not bound to pay the price at any other particular place, he must pay it to the seller: (a) at the seller’s place of business; or (b) if the payment is to be made against the handing over of the goods or the documents, at the place where the handing over takes place. (2) The seller must bear any increases in the expenses incidental to payment which is caused by a change in his place of business subsequent to the conclusion of the contract.

In accordance with the principle of party autonomy under Art. 6 CISG the parties are 124 free to determine the place of payment in their agreement. Art. 57 CISG establishes the place of payment in the absence of such agreement.169 Mohs indicates that there is a three-tiered approach in Art. 57 CISG, namely:170 (a) express or implied agreement on the place of payment. For instance, where the parties agree on payment into a named bank account at a specific place. In this case the place of business of the bank is decisive.171 Where the parties agree that payment will take place by direct debiting, the place of business of the buyer's bank will be the place of payment.172 Payment clauses such as 'cash against invoice' and cash before delivery' also indicate an agreement to pay at the seller's place of business. 173

Eiselen/Kritzer § 88:21; Widmer/Schlechtriem/Schwenzer Art. 31 CISG para. 71. Widmer/Schlechtriem/Schwenzer Art. 31 CISG para. 72. 166 Widmer/Schlechtriem/Schwenzer Art. 31 CISG para. 72; Staudinger/Magnus Art. 57 CISG para. 31. 167 Widmer/Schlechtriem/Schwenzer Art. 31 CISG para. 74; Staudinger/Magnus Art. 57 CISG para. 31. 168 Widmer/Schlechtriem/Schwenzer Art. 31 CISG para. 73; Saenger/Ferrari et al. Art. CISG 31 para. 2; Staudinger/Magnus Art. 31 CISG para. 4. For the practical application see for instance Tribunale Reggio Emilia 3 July 2000 (Industrial machinery case) [http://cisgw3.law.pace.edu/cases/000703i3.html]; OLG Koblenz 4 October 2002 (Concrete slabs case) [http://cisgw3.law.pace.edu/cases/021004g1.html]; KG Zug 11 December 2003 (Plastic granulate case) [detailed abstract available] [http://cisgw3.law.pace.edu/cases/0 31211s1.html]; Tribunale Rovereto 28 August 2004 (Aqua}li Textile Yarns S.p.A. v Updeal Ltd) [http://cisg w3.law.pace.edu/cases/040828i3.html]; OGH 14 December 2004 (Laser device case) [http://cisgw3.law.pa ce.edu/cases/041214a3.html]; Cour d'appel Paris 18 March 1998 (Francoafricaine v More) [http://cisgw3.la w.pace.edu/cases/980318f1.html]. 169 Mohs/Schlechtriem/Schwenzer Art. 57 CISG para. 5; Staudinger/Magnus Art. 57 CISG para. 1. 170 Mohs/Schlechtriem/Schwenzer Art. 57 CISG para. 1; Staudinger/Magnus Art. 57 CISG para. 4. 171 Mohs/Schlechtriem/Schwenzer Art. 57 CISG para. 5. 172 Mohs/Schlechtriem/Schwenzer Art. 57 CISG para. 7. 173 Mohs/Schlechtriem/Schwenzer Art. 57 CISG paras 5 and 7; Staudinger/Magnus Art. 57 CISG paras 6 and 7. 164

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(b) if no place is specified then, payment must be made at the place where the goods are handed over against payment or where the documents174 are handed over against payment.175 This is the case where the contract contains a payment clause such as 'documents against payment' or 'cash on delivery'.176 This is also the case where payment is effected by letter of credit which is often termed a documentary sale. (c) if there is no agreement and payment is not stipulated against handing over of the goods or documents, payment must take place at the seller's place of business. This is therefore the default rule.177 The use of letters of credit is a common method of payment against handing over of documents.178 The place of payment will depend on the payment terms contained in the letter. If the letter of credit is payable at the issuing bank, which is usually a bank at the buyer's place of business, then the place of payment is in the buyer's jurisdiction, alternatively the place of business of the issuing bank.179 If payment is made at the confirming bank, which is often situated at the place of business of the seller, the seller's country will be the place of payment.180 126 The Brussels I Recast only makes provision for jurisdiction over a defendant domiciled in the European Union based on the place where the cause of action arose in contractual matters based on the place of performance of the obligation in question in terms of Art. 7(1) of the Brussels I Recast.181 Art. 5 of the Brussels I Recast states that persons domiciled in a Member State may only be sued in the courts of another Member State in terms of the provisions of the sections 2 to 7 of Chapter II of the Regulation.182 Of course, where a court outside a Member State has jurisdiction, the restrictions of the Regulation will not apply. There is therefore no room for jurisdiction based on the place where the contract was concluded even if the dispute is about the validity or interpretation of the agreement.183 127 The place of performance in the Brussels I Recast is determined autonomously in terms of its own provisions, unlike the Brussels Convention where this issue was determined by the applicable law.184 In a certain sense this is unfortunate as far as the 125

174 The term 'documents' is not defined in Art. 57 CISG but Art. 58 CISG refers to 'documents controlling their [the goods] disposition'. Which documents should be handed over will be determined by the agreement, or any letter of credit, or in their absence encompasses all operational and commercial documents controlling the disposition of the goods. See Mohs/Schlechtriem/Schwenzer Art. 57 CISG para. 9; CISG-AC Opinion No. 11, Issues Raised by Documents under the CISG Focusing on the Buyer’s Payment Duty, Rapporteur: Prof. Martin Davies, Tulane University Law School, New Orleans, USA. Adopted by the CISG-AC following its 16th meeting, in Wellington, New Zealand, on 3 August 2012 Comments para. 5. 175 Mohs/Schlechtriem/Schwenzer Art. 57 CISG para. 9; Staudinger/Magnus Art. 57 CISG para. 8. 176 Mohs/Schlechtriem/Schwenzer Art. 57 CISG para. 7; Staudinger/Magnus Art. CISG 57 para. 7. 177 Eiselen/Kritzer § 91:42; Sevón, ‘Obligations of the Buyer under the Vienna Convention on the International Sale of Goods’ (1990) 106 Juridisk Tidskrift 333; Mohs/Schlechtriem/Schwenzer Art. 57 CISG para. 14. See also OGH 22 October 2001 [1 Ob 77/01g] (Gasoline and gas oil case) [http://cisgw3.law.pace. edu/cases/011022a3.html]; Foreign Trade Arbitration Court attached to the Yugoslav Chamber of Commerce in Belgrade 24 September 2001, (Plums and mushrooms case) [http://cisgw3.law.pace.edu/cases/01 0924sb.html]; HG Aargau 19 June 2007 (Railway rails case) [http://cisgw3.law.pace.edu/cases/070619s1.ht ml]. 178 Eiselen/Kritzer § 91:44. 179 Staudinger/Magnus Art. 57 CISG para. 8; Mohs/Schlechtriem/Schwenzer Art. 57 CISG paras 10 & 11. 180 Mohs/Schlechtriem/Schwenzer Art. 57 CISG para. 7; Eiselen/Kritzer § 91:44. 181 Magnus/Mankowski/Mankowski Art. 7 Brussels I Recast para. 1. 182 Magnus/Mankowski/Vlas Art. 5 Brussels I Recast paras 1–2; Magnus/Mankowski/Mankowski Art. 7 Brussels I Recast para. 9. 183 Kropholler/Von Hein, EuGVO Intro Art. 5 Brussels I Recast para. 8. 184 Kropholler/Von Hein, EuGVO Intro Art. 5 Brussels I Recast paras 5 and 27; Ignatova 25–26; Magnus/Mankowski/Mankowski Art. 7 Brussels I Recast para. 69.

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application of the CISG is concerned as the place of performance will not be determined by the CISG as set out above, but by the Brussels I Recast.185 However, the purpose of the autonomous determination is to ensure uniformity of application throughout the European Union without reference to domestic law.186 The CISG will only be applicable in cases where the Brussels I Recast does not apply. Jurisdiction under Art. 7 of the Brussels I Recast does not constitute an exclusive 128 ground of jurisdiction but is applied as an additional ground of jurisdiction, leaving the claimant with a choice whether to rely on this ground or on another ground.187 This ground also only applies in respect of defendants domiciled in the European Union. If the defendant is domiciled elsewhere the domestic rules will apply. The term 'sale of goods' must be interpreted widely and includes goods still to be manufactured, the printing of brochures, the painting of a picture and the installation of the goods sold.188 In the case of sales the place of payment becomes irrelevant for purposes of the Brus- 129 sels I Regulation due to the provisions of Art. 7(1)(b) which qualifies the general rule in Art. 7(1)(a).189 The place where the goods were delivered or should have been delivered determines the place of jurisdiction. Where the goods are delivered at a place other than that agreed on and the buyer refuses to accept the goods there, the agreed place will remain the relevant place for jurisdiction.190 It is therefore important that parties stipulate the place of delivery with clarity.191 In this regard the INCOTERMS are of particular importance as they are widely used.192 The relevant Incoterm may determine where the seller is obliged to effect delivery, but not all INCOTERMS have this effect. Clauses dealing with insurance exclusively such as CPT and CIP have no impact on the place of performance.193 For instance in the case of FOB the port where the goods are exported from, constitutes the place of delivery. The same applies to CIF.194 The D clauses DAP, DPU and DDP point to a particular point of delivery which will be deemed the place of delivery. There is however an exception in those cases where the contract makes provision for the installation of the goods, in which case the place of installation is the place of delivery.195 Where the contract does not contain a clear place of delivery, regard may be had to the underlying applicable law to determine the place of delivery, but that should be done sparingly.196 In most European systems this would mean a resort to the CISG unless the parties have excluded the CISG. The place of payment is also now determined to be at the same place as where the 130 goods are to be delivered,197 thus providing an advantage to sellers in the case of FOB and CIF contracts and to buyers in the case of DAP, DPU and DDP (or the former DAT).

185 For further critical comment see Ignatova pp. 106–109; Kropholler/Von Hein, EuGVO Intro Art. 5 Brussels I Recast paras 2–3 and the authorities mentioned there. 186 Magnus/Mankowski/Mankowski Art. 7 Brussels I Recast para. 96. 187 Magnus/Mankowski/Mankowski Art. 7 Brussels I Recast para. 9. 188 Magnus/Mankowski/Mankowski Art. 7 Brussels I Recast para. 72. 189 Kropholler/Von Hein, EuGVO Art. 5 Brussels I Recast para. 45; Magnus/Mankowski/Mankowski Art. 7 Brussels I Recast para. 96. 190 Kropholler/Von Hein, EuGVO Art. 5 Brussels I Regulation para. 47. 191 Kropholler/Von Hein, EuGVO Art. 5 Brussels I Regulation para. 47. 192 Kropholler/Von Hein, EuGVO Art. 5 Brussels I Regulation para. 48; Magnus/Mankowski/Mankowski Art. 7 Brussels I Regulation para. 102. 193 Magnus/Mankowski/Mankowski Art. 7 Brussels I Regulation para. 103; Magnus 2002 IHR 48. 194 Magnus/Mankowski/Mankowski Art. 7 Brussels I Regulation para. 100. 195 Magnus/Mankowski/Mankowski Art. 7 Brussels I Regulation para. 103. 196 Magnus/Mankowski/Mankowski Art. 7 Brussels I Regulation para. 104. 197 Magnus/Mankowski/Mankowski Art. 7 Brussels I Regulation para. 100.

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132 133

134

135

136

The provisions of the Brussels I Recast on the place of performance was based on Art. 46 of the French Code of Civil Procedure which has an independent procedural determination for the place of performance, not relying on the substantive provision of the law of sale.198 It is the only country where the place of performance is determined without reference to the substantive contract law, but to the independent procedural provisions of Art. 46 of the French Code of Civil Procedure.199 Although it seems that this provision only applies where delivery has already taken place and not where it is still to take place, the courts have interpreted it as also applying to cases where delivery is still to take place.200 With sales where goods are to be sent, the place of business of the buyer is the place of delivery.201 The place of delivery is the place where the buyer takes possession of the goods, irrespective of the transfer of risk.202 The place of payment is regarded as the place of delivery, which in the absence of a contrary agreement, is the place where the goods were at the time of conclusion of the contract.203 Under French law a claimant may also sue the defendant at the place where delivery of the goods took place.204 Under German domestic law § 29 ZPO provides generally for the place of performance as the place of jurisdiction. This provided the example for Art. 7(1)(a) of the Brussels I Recast. There is no specific provision for sales in the ZPO as in the French law.205 The place of performance is determined by the applicable law according to the rules of private international law. In the case of Germany, this will be determined by the Rome I Regulation.206 Art. 4 of the Rome I Regulation determines that in the case of sales the law of the country where the seller has its habitual residence shall be the applicable law in the absence of a clear choice under Art. 3 of that Regulation. In Spain Art. 51 Civil Procedure Act of 2000 makes provision for a court to exercise jurisdiction where the contract was concluded or where performance is to take place provided that the defendant is a corporate entity and that it has a place of business or a representative in that place.207 English domestic law makes no provision for courts exercising jurisdiction based on the place where the cause of action arose, where the contract was made or where performance was to take place. It is only when the Brussels I Recast applies that the Civil Jurisdiction and Judgments Act 1982 which contains such provisions will apply. There is no specific provision in Florida law providing for jurisdiction relating to the conclusion of the contract as a ground of jurisdiction. Instead the law rather refers in general to the conducting of business within the area of jurisdiction of Florida in § 48.193 discussed above in the section on domicile and residence. In terms of the Florida long-arm statute persons may also be sued in Florida based on certain acts performed in the state. In the context of sales contracts this will relate to breaches of contract. Since the CISG applies in Florida, where a breach took place will have to be determined with reference to the place of performance under the CISG as discussed above.

Ignatova p. 229; Kropholler/von Hein, EuGVO Art. 5 Brussels I Regulation para. 27. Ignatova p. 218; Lüderitz, FS Zweigert p. 233 (pp. 248 et seq.). 200 Ignatova pp. 219, 223; Layton & Mercer § 51.054. 201 Ignatova p. 220. 202 Ignatova p. 221. 203 Layton & Mercer § 51.053. 204 Vahramian & Wallenbrock p. 221. 205 Vahramian & Wallenbrock p. 221. 206 Regulation (EC) No. 593/2008 of the European Parliament and of the Council of 17 June 2008 on the law applicable to contractual obligations (Rome I). See Thomas/Putzo/Hüßtege Intro § 29 ZPO para. 2. 207 Quintana, De Natal & Cortes pp. 686–687. 198

199

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In China a person may be sued in the place where the contract has been performed in 137 terms of Art. 23 of the CPL. The Opinion of the Supreme People's Court208 of China had previously determined that the place of performance in sales shall be determined as follows at either the place specified by the parties or the place for the delivery of the goods. It also clearly specifies that destination of the cargo, the arrival station, place of inspection, place of testing or installation and other locations specified in the contract shall not be the place of performance. However, if the contract was concluded orally or the goods have not been delivered, the place of delivery may not be a ground for jurisdiction.

I. Exclusion of Jurisdiction I. Introduction Although a court may seem to have jurisdiction in terms of the rules set out above, there are a number of factors which may exclude the jurisdiction of the court nevertheless. In such cases the case may either be dismissed or stayed depending on the domestic provisions of the court. The jurisdiction of a specific court may be excluded by agreement between the parties (derogated) even though such a court would ordinarily have had jurisdiction in that case. Its jurisdiction may be excluded specifically by naming the specific country or courts that are excluded, or in general by an exclusive jurisdiction clause. Exclusive jurisdiction clauses are recognized and enforced fairly generally, but not in all cases. Exclusive jurisdiction may also be determined by a legal presumption as in the case of the Brussels I Recast. In most legal systems the inclusion of an arbitration clause in a contract will also exclude the jurisdiction of the ordinary courts. Art. II(3) of the 1958 New York Convention on the Recognition and Enforcement of Arbitral Awards stipulates that the courts of a contracting state must refer a dispute to arbitration where the parties have concluded a written and signed arbitration agreement. It does not matter whether the agreement is a separate agreement or forms part of the sales agreement. All of the countries sampled in this Chapter are contracting states of this Convention. The jurisdiction of a court may also be restricted or excluded by the lis alibi pendens doctrine in terms of which a court should stay proceedings or refuse to exercise jurisdiction where another court with appropriate jurisdiction is already seized with substantially the same matter. The lis alibi pendens doctrine is not universally acknowledged or applied in international settings. Finally, certain Common Law courts may decline to exercise jurisdiction under the forum non conveniens doctrine even if it has jurisdiction under its own procedural rules if there is another more appropriate forum to adjudicate the dispute.

208 Regulation on the Issues of How to Determine the Performance Locations for Sale Contracts when Determining the Jurisdiction of Economic Disputes of the Supreme People's Court promulgated on 12 September 1996.

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II. Sampling of Laws 1. CISG and the New York Convention 143

The CISG provides as follows: Article 6 The parties may exclude the application of this Convention or, subject to article 12, derogate from or vary the effect of any of its provisions.

The 1958 New York Convention on the Recognition and Enforcement of Arbitral Awards stipulates: Article II 1. Each Contracting State shall recognize an agreement in writing under which the parties undertake to submit to arbitration all or any differences which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not, concerning a subject matter capable of settlement by arbitration. 2. The term ‘agreement in writing’ shall include an arbitral clause in a contract or an arbitration agreement, signed by the parties or contained in an exchange of letters or telegrams. 3. The court of a Contracting State, when seized of an action in a matter in respect of which the parties have made an agreement within the meaning of this article, shall, at the request of one of the parties, refer the parties to arbitration, unless it finds that the said agreement is null and void, inoperative or incapable of being performed.

2. European Union – Brussels I Recast 2012 a) Exclusive Jurisdiction Clauses 144 Article 25 1. If the parties, regardless of their domicile, have agreed that a court or the courts of a Member State are to have jurisdiction to settle any disputes which have arisen or which may arise in connection with a particular legal relationship, that court or those courts shall have jurisdiction, unless the agreement is null and void as to its substantive validity under the law of that Member State. Such jurisdiction shall be exclusive unless the parties have agreed otherwise. …

b) Arbitration Clauses 145

The Regulation does not apply to arbitration and only refers to arbitration clauses in the Preamble, but all of the EU member countries are subject to the provisions of the 1958 New York Convention (see above). Preamble (12) This Regulation should not apply to arbitration. Nothing in this Regulation should prevent the courts of a Member State, when seised of an action in a matter in respect of which the parties have entered into an arbitration agreement, from referring the parties to arbitration, from staying or dismissing the proceedings, or from examining whether the arbitration agreement is null and void, inoperative or incapable of being performed, in accordance with their national law.

c) Lis Alibi Pendens – related Actions 146 Article 29 1. Without prejudice to Article 31(2), where proceedings involving the same cause of action and between the same parties are brought in the courts of different Member States, any court other than the court first seised shall of its own motion stay its proceedings until such time as the jurisdiction of the court first seised is established.

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I. Exclusion of Jurisdiction 2. In cases referred to in paragraph 1, upon request by a court seised of the dispute, any other court seised shall without delay inform the former court of the date when it was seised in accordance with Article 32. 3. Where the jurisdiction of the court first seised is established, any court other than the court first seised shall decline jurisdiction in favour of that court. Article 30 1. Where related actions are pending in the courts of different Member States, any court other than the court first seised may stay its proceedings. 2. Where the action in the court first seised is pending at first instance, any other court may also, on the application of one of the parties, decline jurisdiction if the court first seised has jurisdiction over the actions in question and its law permits the consolidation thereof. 3. For the purposes of this Article, actions are deemed to be related where they are so closely connected that it is expedient to hear and determine them together to avoid the risk of irreconcilable judgments resulting from separate proceedings. Article 32 1. For the purposes of this Section, a court shall be deemed to be seised: (a) at the time when the document instituting the proceedings or an equivalent document is lodged with the court, provided that the claimant has not subsequently failed to take the steps he was required to take to have service effected on the defendant; or (b) if the document has to be served before being lodged with the court, at the time when it is received by the authority responsible for service, provided that the claimant has not subsequently failed to take the steps he was required to take to have the document lodged with the court. The authority responsible for service referred to in point (b) shall be the first authority receiving the documents to be served. 2. The court, or the authority responsible for service, referred to in paragraph 1, shall note, respectively, the date of the lodging of the document instituting the proceedings or the equivalent document, or the date of receipt of the documents to be served. Article 33 1. Where jurisdiction is based on Article 4 or on Articles 7, 8 or 9 and proceedings are pending before a court of a third State at the time when a court in a Member State is seised of an action involving the same cause of action and between the same parties as the proceedings in the court of the third State, the court of the Member State may stay the proceedings if: (a) it is expected that the court of the third State will give a judgment capable of recognition and, where applicable, of enforcement in that Member State; and (b) the court of the Member State is satisfied that a stay is necessary for the proper administration of justice.

d) Forum Non Conveniens The Regulation contains no provision recognizing the doctrine of forum non conve- 147 niens. The European Court of Justice has ruled in Olowu v Jackson209 that the application of the doctrine is not allowed when the Regulation is applicable: ‘37. It is common ground that no exception on the basis of the forum non conveniens doctrine was provided for by the authors of the Convention, although the question was discussed when the Convention of 9 October 1978 on the Accession of Denmark, Ireland and the United Kingdom was drawn up, as is apparent from the report on that Convention by Professor Schlosser (OJ 1979 C 59, p. 71, paragraphs 77 and 78). 46. In the light of all the foregoing considerations, the answer to the first question must be that the Brussels Convention precludes a court of a Contracting State from declining the jurisdiction conferred on it by Article 2 of that convention on the ground that a court of a non-Contracting State would be a more appropriate forum for the trial of the action even if the jurisdiction of no other Contracting State is in issue or the proceedings have no connecting factors to any other Contracting State.’

The Recast Regulation contains no provisions recognizing this doctrine. 209

148

Case C-281/02 Owusu v Jackson [2005] ECR I-1383.

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3. Germany a) Exclusive Jurisdiction Clauses 149

There is no specific provision dealing with exclusive jurisdiction clauses in the ZPO but such clauses are generally recognized.210 b) Arbitration Clauses

150 § 1032 ZPO Arbitration agreement and proceedings brought before the courts (1) Should proceedings be brought before a court regarding a matter that is subject to an arbitration agreement, the court is to dismiss the complaint as inadmissible provided the defendant has raised the corresponding objection prior to the hearing on the merits of the case commencing, unless the court determines the arbitration agreement to be null and void, invalid, or impossible to implement.

151

This provision essentially confirms the obligation to refer the dispute to arbitration required by the 1958 New York Convention to which Germany is a contracting state. c) Lis Alibi Pendens

152

The ZPO provides: § 261 Pending suit (1) By the complaint being brought, the dispute shall become pending. (2) A claim lodged only in the course of the proceedings shall become pending at that point in time at which the claim was lodged in the hearing or at which a written pleading in conformance with the requirements of section 253 (2) number 2 has been served. (3) Once the dispute is pending, this will have the following effects: 1. For as long as the dispute is pending, none of the parties may bring the dispute before another court or tribunal; 2. The jurisdiction of the court hearing the case will not be affected by any change to the circumstances giving rise to its competence.

d) Forum Non Conveniens 153

German law does not recognize the doctrine.

4. Spain a) Exclusive Jurisdiction Clauses 154

A choice of court or jurisdiction clause in favour of the Spanish courts will be normally construed in an ‘exclusive’ form, unless the parties have agreed otherwise. 211 b) Arbitration Clauses

155

The Civil Procedure Act provides: Article 19 The litigants’ right of disposition. Settlement and stay. 1. The litigants are empowered to dispose of the matter at issue in the proceedings and may waive, acquiesce, submit to arbitration and reach agreements on the matter at issue, except where the law should prohibit it or set forth limitations for reasons of general interest or to the benefit of a third party. (…)

210 211

218

Thomas/Putzo/Hüßtege § 38 para. 32; Vollkommer/Zöllner § 38 ZPO para. 14. Virgós & Cambronero para. 10.

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c) Lis Alibi Pendens Article 63 Contents of the declinatory action, legal competency to propose it and competent court to examine it

156

1. By means of the declinatory action, the defendant and those who may be legally entitled to be party to the case filed can claim the lack of jurisdiction of the court with which the complaint has been lodged on the grounds that the hearing of the case corresponds to foreign courts, to bodies of a different jurisdictional order or to arbitrators. A declinatory action may also be lodged to claim the lack of jurisdiction of any nature whatsoever. If the declinatory action is based on the lack of territorial jurisdiction, it shall specify the court to which, being considered territorially competent, the procedure should be referred. 2. The declinatory action shall be filed with the same court that is hearing the case and is considered to lack jurisdiction of competence. However, the declinatory action may also be filed with the court of the address of the defendant, and the said court shall forward the said action using the most rapid means of communication to the court with which the complaint was filed, notwithstanding its obligation to refer it officially on the day following that of its presentation. Article 65 Processing and decision of the declinatory action. 1. The writ of declinatory action shall be accompanied by the documents or principles of evidence on which it is grounded, with a number of copies equal to that of the remaining litigants, who shall avail of a term of five days as of the notification of the declinatory action to allege and to present whatever they deem convenient to sustain the jurisdiction or the competency of the court, which shall resolve the matter within the next five days. If the declinatory action concerns the lack of territorial jurisdiction, the plaintiff who challenges the said the said declinatory action may also allege the lack of territorial jurisdiction of the court in whose favour the hearing of the cause is being contested. 2. If the court considers that it has no jurisdiction because the hearing of the case corresponds to courts of another State, it shall so declare by means of an order, abstaining from hearing the case and declaring the stay of the proceedings. The court shall proceed in like manner if it allowed the declinatory action to proceed, based on the fact that the matter has been submitted to arbitration. 3. If the court considers that it has no jurisdiction because the matter concerned corresponds to the courts of a different jurisdictional level, in its order abstaining from hearing the case it shall inform the parties of the bodies before which they shall exercise their rights. The same decision shall be passed if the court considers that it lacks objective jurisdiction. 4. If a declinatory action has been lodged relating to the territorial jurisdiction and the latter is not determined by imperative rules, in order to allow the said action to proceed the court shall be bound to consider the body indicated by the party who filed the declinatory action to be the competent body. 5. The tribunal, when allowing the declinatory action relating to the territorial jurisdiction to proceed, shall disqualify itself in favour of the body to which the jurisdiction corresponds and shall resolve to refer the procedure to the said court, summoning the parties to appear before the latter within a term of ten days.

d) Forum Non Conveniens The Civil Procedure Law contains no provision providing for this doctrine.212

157

5. France a) Exclusive Jurisdiction Clauses The French Code of Civil procedure contains no specific provision dealing with this 158 issue, but such clauses are generally recognized and enforced.213

212 213

Quintana, De Natal & Cortes p. 688. Woods § 7-011.

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b) Arbitration Clauses 159

Code of Civil Procedure: Article 1458 Where a dispute, referred to an arbitration tribunal pursuant to an arbitration agreement, is brought before a court of law of the State, the latter must decline jurisdiction. Where the case has not yet been brought before arbitration tribunal, the court must also decline jurisdiction save where the arbitration agreement is manifestly null. In both cases, the court may not raise sua sponte its lack of jurisdiction.

c) Lis Alibi Pendens 160

Civil Procedure Code: Article 100 If the same dispute is pending before two distinct courts of the same hierarchy that have jurisdiction, the court to which the matter is brought must decline jurisdiction in favour of the other court if one of the parties requires it. Want of that, it may do it sua sponte.

161

The French Code of Civil procedure contains no specific provision dealing with this issue in regard to international matters, but decisions of the Supreme Court have extended the defence to international matters.214 d) Forum Non Conveniens

162

The French Code of Civil Procedure does not recognize this doctrine.

6. England a) Exclusive Jurisdiction Clauses 163

English law recognizes exclusive jurisdiction clauses and gives them a generous interpretation.215 In the Donohue case the court states: But the general rule is clear: where parties have bound themselves by an exclusive jurisdiction clause effect should ordinarily be given to that obligation in the absence of strong reasons for departing from it. Whether a party can show strong reasons, sufficient to displace the other party’s prima facie entitlement to enforce the contractual bargain, will depend on all the facts and circumstances of the particular case.216

b) Arbitration Clauses 164

Arbitration Act 1996: Section 9 Stay of legal proceedings. (1) A party to an arbitration agreement against whom legal proceedings are brought (whether by way of claim or counterclaim) in respect of a matter which under the agreement is to be referred to arbitration may (upon notice to the other parties to the proceedings) apply to the court in which the proceedings have been brought to stay the proceedings so far as they concern that matter.

214 Miniera di Fragne, n°73-13.820, Bull Civ. I n°312 p. 267 (1974). See also Yaknoo SA v Peschaud & Cie International, Cour de cassation, Commercial Division 19 February 2013, appeal No. 11-28.846 confirming the admissibility of the exception of international lis pendens, citing the case law principles stemming from the ‘Miniera di Fragne’ case. 215 Torremans & Fawcett p. 369-371. 216 Donohue v Armco Inc [2002] 1 All ER 749. A list of the exceptional circumstances that may be taken into account was stated authoritatively in The Eleftheria Owners of Cargo Lately Laden on Board Ship or Vessel Eleftheria Owners of Ship or Vessel Eleftheria [1969] 2 All ER 641 at 645–646.

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I. Exclusion of Jurisdiction … (4) On an application under this section the court shall grant a stay unless satisfied that the arbitration agreement is null and void, inoperative, or incapable of being performed.

c) Lis Alibi Pendens English law has no independent doctrine of lis pendens. Instead it is treated as a part 165 of the forum non conveniens doctrine and the same factors are considered.217 See the discussion below. d) Forum Non Conveniens A court has the power to stay an action in which its own jurisdiction is in issue.218 166 There is a general power to stay an action on the basis of forum non conveniens where the appropriate forum to adjudicate a particular dispute is abroad.219 The leading case is the Spiliada case which stated the principle as follows: The basic principle is that a stay will only be granted on the ground of forum non conveniens where the court is satisfied that there is some other available forum, having jurisdiction, which is the appropriate forum for trial of the action, i.e. in which the case may be tried more suitably for the interests of all the parties and the ends of justice.220

The forum non conveniens doctrine is also recognized in section 49 of the Civil 167 Jurisdiction and Judgments Act 1982.221 This section also resolves any potential conflict between the application of the doctrine and British obligations under the Lugano Convention and the 2005 Hague Convention. It reads as follows: 49 Saving for powers to stay, sist, strike out or dismiss proceeding Nothing in this Act shall prevent any court in the United Kingdom from staying, sisting, striking out or dismissing any proceedings before it, on the ground of forum non conveniens or otherwise, where to do so is not inconsistent with the 1968 Convention or, as the case may be, the Lugano Convention or the 2005 Hague Convention.

This is a two-stage enquiry:222 The first stage establishes whether there is another 168 forum with jurisdiction which is clearly more appropriate.223 The applicant bears to onus to prove this element.224 The second stage is concerned with the interests of justice. In this stage the claimant bears the onus to prove that the interests of justice require the dispute to be adjudicated in England.225 However, where the Brussels I Recast applies, the forum non conveniens doctrine may not be applied.226

217 Torremans & Fawcett pp. 393-395. See also Cleveland Museum of Art v Capricorn Art International SA [1990] Lloyd's LR 166. 218 William's and Glynn's Bank plc v Astro Dinamico Compania Naviens SA [1984] 1 WLR 438. 219 Torremans & Fawcett p. 426; Rogerson p. 164; The Abidin Daver [1984] AC 398 at 411; Spiliada Maritime Corps v Cansulex Ltd [1987] AC 460; Lubbe v Cape plc [2000] 1 WLR 1545 (HL). 220 Spiliada Maritime Corps v Cansulex Ltd [1987] AC 476. 221 Gillies ‘Appropriate adjustments post Brexit: Residual jurisdiction and forum non conveniens in UK courts’ 2020 Journal of Business Law 169. 222 Torremans & Fawcett p. 393-395; Rogerson p. 165; Spiliada Maritime Corps v Cansulex Ltd [1987] AC 474. 223 Rogerson p. 165; Spiliada Maritime Corps v Cansulex Ltd [1987] AC 476. 224 Spiliada Maritime Corps v Cansulex Ltd [1987] AC 474. 225 Spiliada Maritime Corps v Cansulex Ltd [1987] AC 476. 226 Case C-281/02 Owusu v Jackson [2005] ECR I-1383; Burke, ‘Foreclosure of the Doctrine of Forum Non Conveniens under the Brussels I Regulation: Advantages and Disadvantages’ (2008) European Legal Forum available I-21-I126; Rodger, ‘Forum Non Conveniens Post-Owusu’ (2006) Journal of Private International Law 71.

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7. United States a) Exclusive Jurisdiction Clauses 169

Parties are entitled to stipulate in advance that their disputes will be referred to a specific court:227 [W]hen a plaintiff agrees by contract to bring suit only in a specified forum – presumably in exchange for other binding promises by the defendant – the plaintiff has effectively exercised its ‘venue privilege’ before a dispute arises. Only that initial choice deserves deference, and the plaintiff must bear the burden of showing why the court should not transfer the case to the forum to which the parties agreed.228 When parties agree to a forum-selection clause, they waive the right to challenge the preselected forum as inconvenient or less convenient for themselves or their witnesses, or for their pursuit of the litigation. A court accordingly must deem the private-interest factors to weigh entirely in favor of the preselected forum.229

b) Arbitration Clauses 170

The Federal Arbitration Act230 provides as follows: Section 3 Stay of proceedings where issue therein referable to arbitration If any suit or proceeding be brought in any of the courts of the United States upon any issue referable to arbitration under an agreement in writing for such arbitration, the court in which such suit is pending, upon being satisfied that the issue involved in such suit or proceeding is referable to arbitration under such an agreement, shall on application of one of the parties stay the trial of the action until such arbitration has been had in accordance with the terms of the agreement, providing the applicant for the stay is not in default in proceeding with such arbitration.

171

The US is also a contracting state under the 1958 New York Convention (see above). c) Lis Alibi Pendens

If actions are pending in simultaneous court proceedings in Florida and in another state or country, and the proceedings involve the same parties and the same or substantially the same causes of action, the Florida court should, as a matter of comity stay the proceedings before it 'in deference to the prior and concurrent jurisdiction’ of the foreign court.231 173 This may not be the approach in all US states – see comments below. 172

227 Florida Jurisprudence § 62; Global Satellite Communication Co. v Sudline, 849 So. 2 d 466 (Fl. Dist. Crt App. 4th Dist. 2003). 228 Atlantic Marine Const. Co., Inc. v US Dist. Court for Western Dist. of Texas 134 S.Ct. 568 U.S., 2013 para. 24. 229 Atlantic Marine Const. Co., Inc. v U.S. Dist. Court for Western Dist. of Texas 134 S.Ct. 568 U.S., 2013 para. 25. 230 The Federal Arbitration Act Title 9, US Code, Section 1-14, was first enacted February 12, 1925 (43 Stat. 883), codified July 30, 1947 (61 Stat. 669), and amended September 3, 1954 (68 Stat. 1233). Chapter 2 was added July 31, 1970 (84 Stat. 692), two new Sections were passed by the Congress in October of 1988 and renumbered on December 1, 1990 (PLS 669 and 702); Chapter 3 was added on August 15, 1990 (PL 101-369); and Section 10 was amended on November 15. 231 Business Litigation in Florida § 1.64; Robinson v Royal Bank of Canada 462 So. 2 d, 101, (Fla 4 th DCA 1985); Fried v Bergman 736 So. 2 d 1281 (Fla 4th DCA 1999); Posner v Essex Ins. Co., 178 F.3 d 1209 (11th Cir. 1999).

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d) Forum Non Conveniens The law of Florida has a clear recognition of the forum non conveniens doctrine. In 174 the Kinney Systems case232 the Florida Supreme Court adopted the standards applied in federal cases233 to the doctrine:234 The federal doctrine also provides a well-defined method of balancing the often competing interests described above. Under Gilbert and its refinements, the courts reviewing a forum non conveniens motion must engage in a four-step analysis, succinctly described by the United States Court of Appeals for the District of Columbia Circuit: [1] As a prerequisite, the court must establish whether an adequate alternative forum exists which possesses jurisdiction over the whole case. [2] Next, the trial judge must consider all relevant factors of private interest, weighing in the balance a strong presumption against disturbing plaintiffs' initial forum choice. [3] If the trial judge finds this balance of private interests in equipoise or near equipoise, he must then determine whether or not factors of public interest tip the balance in favor of a trial in [another] forum. [4] If he decides that the balance favors such a … forum, the trial judge must finally ensure that plaintiffs can reinstate their suit in the alternative forum without undue inconvenience or prejudice.

The Florida Rules of Civil Procedure added Rule 1.061 after Florida's adoption of the 175 federal doctrine of forum non conveniens in the Kinney case. Rule 1.061 Choice of Forum (a) Grounds for Dismissal. An action may be dismissed on the ground that a satisfactory remedy may be more conveniently sought in a jurisdiction other than Florida when: (1) the trial court finds that an adequate alternate forum exists which possesses jurisdiction over the whole case, including all of the parties; (2) the trial court finds that all relevant factors of private interest favor the alternate forum, weighing in the balance a strong presumption against disturbing plaintiffs' initial forum choice; (3) if the balance of private interests is at or near equipoise, the court further finds that factors of public interest tip the balance in favor of trial in the alternate forum; and (4) the trial judge ensures that plaintiffs can reinstate their suit in the alternate forum without undue inconvenience or prejudice. The decision to grant or deny the motion for dismissal rests in the sound discretion of the trial court, subject to review for abuse of discretion.

The Court Commentary to the Rule states that Rule 1.061 should be interpreted in 176 light of Kinney.

8. China a) Exclusive Jurisdiction Clauses There is no specific provision in the Civil Procedure Law, but in practice such clauses 177 are often ignored.235 b) Arbitration Clauses Arbitration Law of the People's Republic of China:

178

Article 5 If the parties have concluded an arbitration agreement and one party institutes an action in a people's court, the people's court shall not accept the case, unless the arbitration agreement is null and void.

232 Kinney Systems, Inc. v Continental Ins. Co., 674 So.2 d 86 (Fla.1996). For a general discussion of the doctrine see Koh pp. 157 et seq.; Hay, Borchers & Symeonides §§ 11.8–11.13. 233 See Gulf Oil Corp. v Gilbert, 330 U.S. 501, 67 S.Ct. 839, 91 L.Ed. 1055 (1946); Piper Aircraft Co v Reyno 454 U.S. 235 (1981); p. Teitz 113. 234 Business Litigation in Florida § 1.19. 235 Tang, (2012) 61 Int’l & Comp LQ 458.

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Chapter 6 Jurisdiction 179

China is also a contracting state under the 1958 New York Convention (see above). c) Lis Alibi Pendens

180

China does not have an independent doctrine of lis pendens. Article 306 of the Opinions of the Supreme People's Court (1992)236 however deals with the issue as follows: Article 306 If one of the parties files a lawsuit in a foreign court over a case over which both Chinese people's courts and the foreign courts have jurisdiction, and the other party files a lawsuit in a Chinese court over the same case, the people's court may accept the lawsuit for adjudication. After a judgment being rendered, the application filed either by the foreign court or the party to ask the people's court to accept and enforce the judgment or ruling made by the foreign court shall not be approved; the exception is given to the areas provided by the international treaties that both countries have joined or signed.

d) Forum Non Conveniens 181

In 2005 the Supreme People's Court issued the following notice:237 In dealing with a foreign-related commercial case, if a Chinese court finds it is not convenient to exercise jurisdiction, that court can dismiss the case by the doctrine of forum non conveniens. To apply the doctrine, the following conditions must be met: (1) the defendant requests the application of the doctrine or challenges the jurisdiction of Chinese court and the court filed with the case thinks the doctrine could possibly be applicable; (2) the Chinese court filed with the case has jurisdiction over the case; (3) the parties do not have an agreement conferring jurisdiction on the Chinese court; (4) the case does not fall into exclusive jurisdiction of Chinese courts; (5) the case is not concerned with the interests of Chinese nationals, corporates or other organizations; (6) the main legal facts of the dispute do not happen within the Chinese territory and Chinese law is not the governing law for the case, and if the case is tried in China, there will be great difficulties in ascertaining the facts of the case and applying the governing law; (7) there is a foreign court that has jurisdiction over the case and is more convenient to try the case.

III. Comments 1. Exclusive Jurisdiction Clauses 182

Most legal systems recognize exclusive jurisdiction clauses and will stay proceedings or dismiss the case. The Brussels I Recast even has a presumption in favour of exclusivity where an agreement contains a choice of court clause.238 The parties may provide for alternative courts in their agreement, in which case such courts will have exclusive jurisdiction if they are situated within the European Union.239

236 Art. 306 of the Opinions of the Supreme People’s Court on Several Issues Regarding the Application of the Civil Procedure Law of the People’s Republic of China adopted in July 1992 at the 528th Session of the Adjudication Committee of the Supreme People’s Court and promulgated on 4 July 1992. 237 Notice on the Dissemination of the Minutes of the Second Country-wide Trial-work Conference for Foreign-related Commercial and Maritime Cases (SPC’s 2005 Notice). 238 See Arts. 25 and 29 Brussels I Recast respectively; also Art. 3 (b) Hague 2005 Convention on Choice of Court Agreements presumes the exclusivity of a jurisdiction clause. 239 Magnus/Mankowski/Magnus Art. 25 paras 144–145.

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The domestic laws of Germany,240 France,241 Spain,242 England,243 and Florida 244 rec- 183 ognize and enforce such clauses generally. In France however, one-way exclusive clauses which provide one of the parties with an option to ignore the exclusive jurisdiction clause has recently been found to be invalid.245 In contrast, in England it has been held that such clauses are valid.246 Both decisions were taken in the context of the Brussels I Recast but would also apply in domestic law. The effectiveness of exclusive jurisdiction clauses is uncertain in China.247 The Chi- 184 nese legislation provides very rigid requirements for a jurisdiction clause to be valid and does not clarify the prorogation and derogation effect of a valid exclusive jurisdiction clause. Because of the uncertainty in the law, the Chinese cases do not follow a consistent pattern. The most important differences are found in regard to the effectiveness of jurisdiction clauses choosing a foreign court to determine their disputes. In practice, the derogation effect of a valid foreign jurisdiction clause is frequently ignored by the Chinese courts. 248 Although the approach by the Chinese courts, when dealing with foreign jurisdiction clauses, may be regarded as parochial and unfortunate, an analysis of the cases shows that the validity of an exclusive jurisdiction clause is closely connected to the issue of recognition and enforcement of foreign judgments. If the judgment of the particular court agreed upon is unlikely to be recognized and enforced by the Chinese court, the Chinese court will exercise jurisdiction despite the jurisdiction clause to serve the ends of justice. The Chinese cases are strongly influenced by the narrow grounds in the Chinese law for the recognition and enforcement of foreign judgments.249 The US Supreme Court in Atlantic Marine Const. Co., Inc. v US Dist. Court for 185 Western Dist. of Texas. 250 held (confirming their earlier decision in M/S Bremen v Zapata Off-Shore Co.251 in 1972): [24]–[27] First, the plaintiff 's choice of forum merits no weight. Rather, as the party defying the forum-selection clause, the plaintiff bears the burden of establishing that transfer to the forum for which the parties bargained is unwarranted. Because plaintiffs are ordinarily allowed to select whatever forum they consider most advantageous (consistent with jurisdictional and venue limitations), we have termed their selection the ‘plaintiff 's venue privilege.’ Van Dusen, 376 U.S., at 635, 84 S.Ct. 805. 252 But when a plaintiff agrees by contract to bring suit only in a specified forum – presumably in exchange for other binding promises by the defendant – the plaintiff has effectively exercised its ‘venue privilege’ before a dispute arises. Only that initial choice deserves deference, and the plaintiff must bear the burden of showing why the court should not transfer the case to the forum to which the parties agreed.

Thomas/Putzo/Hüßtege § 38 para. 32. Woods § 7-011; Vahramian & Wallenbrock p. 221. 242 Virgós & Cambronero para. 10. 243 Torremans & Fawcett p. 437-441; Donohue v Armco Inc [2002] 1 All ER 749. 244 Florida Jurisprudence 2D § 62; Business Litigation in Florida § 3.10; Weisser v PNC Bank, N.A., 967 So.2 d 327, 331–32 (Fla. 3 d DCA 2007)); Agile Assur. Group, Ltd. v Palmer, So.3 d, 2014 WL 2151971 Fla.App. 2 Dist., 2014. 245 Cour de cassation, Civil Division 1 26 September 2012, Mme X v Rothschild 11-26022. For a critical discussion concluding that this decision is wrong see Freitag, FS Magnus pp. 427 et seq. 246 Mauritius Commercial Bank Ltd v Hestia Holdings Ltd & Anor [2013] EWHC 1328 (Comm) (24 May 2013). 247 Tang, (2012) 61 Int’l & Comp LQ 458. 248 Tang, (2012) 61 Int’l & Comp LQ 471. 249 Tang, (2012) 61 Int’l & Comp LQ 458–484. 250 Atlantic Marine Const. Co., Inc. v US Dist. Court for Western Dist. of Texas 134 S.Ct. 568 U.S.,2013. See also Teitz pp.105–106. 251 M/S Bremen v Zapata Off-Shore Co. 407 U.S. 1, 92 S.Ct. 1907. 252 We note that this ‘privilege’ exists within the confines of statutory limitations, and ‘[i]n most instances, the purpose of statutorily specified venue is to protect the defendant against the risk that a plaintiff will select an unfair or inconvenient place of trial.’ Leroy v Great Western United Corp., 443 U.S. 173, 183–184, 99 S.Ct. 2710, 61 L.Ed.2 d 464 (1979). 240 241

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Chapter 6 Jurisdiction [28] Second, a court evaluating a defendant's § 1404(a) motion to transfer based on a forum-selection clause should not consider arguments about the parties' private interests. When parties agree to a forum-selection clause, they waive the right to challenge the preselected forum as inconvenient or less convenient for themselves or their witnesses, or for their pursuit of the litigation. A court accordingly must deem the private-interest factors to weigh entirely in favor of the preselected forum. As we have explained in a different but ‘ ‘instructive’ ‘ context, Stewart, supra, at 28, 108 S.Ct. 2239, ‘[w]hatever ‘inconvenience’ [the parties] would suffer by being forced to litigate in the contractual forum as [they] agreed to do was clearly foreseeable at the time of contracting.’ The Bremen v. Zapata Off–Shore Co., 407 U.S. 1, 17–18, 92 S.Ct. 1907, 32 L.Ed.2 d 513 (1972); see also Stewart, supra, at 33, 108 S.Ct. 2239 (KENNEDY, J., concurring) (stating that Bremen 's ‘reasoning applies with much force to federal courts sitting in diversity’). As a consequence, a district court may consider arguments about public-interest factors only. See n. 6, supra. Because those factors will rarely defeat a transfer motion, the practical result is that forum-selection clauses should control except in unusual cases. Although it is ‘conceivable in a particular case’ that the district court ‘would refuse to transfer a case notwithstanding the counterweight of a forum-selection clause,’ Stewart, supra, at 30–31, 108 S.Ct. 2239, such cases will not be common.

2. Arbitration Clauses Born remarks that international conventions and most national legal systems expressly recognize the negative effect of arbitration agreements, namely that these laws forbid the litigation of arbitral matters in state courts.253 Courts are required to recognize the arbitration agreement under the New York Convention of 1958.254 As a provision in a convention this requirement should take precedence over domestic law. In agreeing to arbitrate the parties waive their right to approach the normal courts and affirmatively commit themselves to participating in the arbitration process.255 187 The Brussels I Recast specifically excludes arbitral matters from its scope. The validity of arbitration clauses must therefore be considered in the context of domestic law. 256 188 The domestic laws of Germany,257 Spain,258 France,259 England,260 the USA,261 and China262 all recognize the derogatory effect of arbitration clauses or agreements. Proceedings in a court will either be stayed or dismissed. The validity of the arbitration clause is subject to the general validity provisions of the applicable law. 189 The reason for the widespread acknowledgement and enforcement of arbitration clauses was expressed as follows in the Scherk case263 in the US where there is a federal policy in favour of arbitration:264 186

An agreement to arbitrate before a specified tribunal is, in effect, a specialized kind of forum-selection clause that posits not only the situs of suit but also the procedure to be used in resolving the dispute. The invalidation of such an agreement in the case before us would not only allow the respondent to repudiate its solemn promise but would, as well, reflect a ‘parochial concept that all disputes must be resolved under our laws and in our courts. … We cannot have trade and commerce in world markets and international waters exclusively on our terms, governed by our laws, and resolved in our courts. Id., at 9, 92 S.Ct., at 1912.

Born § 8.02 [A], [1]; § 8.03 [1]–[2]. Art. II(3) New York Convention. 255 Born § 8.02 [A]. 256 Magnus/Mankowski/Rogerson Art. 1 Brussels I Recast paras 36–37. 257 § 1032 ZPO. 258 Arts. 19, 63(1) and 65(2) Civil Procedure Act. 259 Art. 1458 Code of Civil Procedure. 260 s 9 of the Arbitration Act of 1996. 261 s 3 Federal Arbitration Act. 262 Art. 5 Arbitration Law of the People's Republic of China. 263 Scherk v Alberto-Culver Co 417 U.S. 506 519 (1974). 264 Teitz p. 103. 253

254

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3. Lis Alibi Pendens Brussels I Recast recognizes the doctrine of lis pendens. They make provision for both cases where the cause of action is the same or substantially the same and related cases. 265 The object of these provisions is to prevent conflicting judgments and irreconcilable judgments being given in different courts within the EU.266 The provisions give preference to the court where the proceedings were first instituted and require that courts dismiss or stay proceedings in later cases.267 The Brussels I Regulation made no provision for cases where the parallel proceeding took place in a non-member state.268 The uncertainty that this caused has now been resolved to some extent by the inclusion of Art. 33 in the Brussels I Recast. 269 Art. 33 however only applies if jurisdiction is based on Art. 4 (domicile), Art. 7 (place of performance), Art. 8 (multiple defendants) and Art. 9 (operation of a ship). It therefore does not apply in respect of cases where jurisdiction is based on agreement. Where the case concerns such a matter in a non-member state, proceedings should be stayed or dismissed only if the judgment of the foreign court is capable of recognition in the Member State and the court is satisfied that a stay is necessary for the proper administration of justice. The domestic laws in Germany270 and France271 recognize the lis pendens doctrine. The position in Spain seems to be uncertain in regard to international matters that fall outside the Brussels I Recast as the provisions of Art. 63 are usually only applied to domestic situations. A recent decision of the Supreme Court has however cast some doubt on it opening up the defence also in international cases.272 There is no independent doctrine of lis alibi pendens in English law; instead it is seen as a strand of the forum non conveniens doctrine.273 Florida has a clear approach to lis pendens or parallel proceedings.274 If actions are pending in simultaneous court proceedings in Florida and in another state or country, and the proceedings and the proceedings involve the same parties and the same or substantially the same causes of action, the Florida court should, as a matter of comity stay the proceedings before it 'in deference to the prior and concurrent jurisdiction’ of the foreign court. In Posner v Essex275 the Florida court sums up its approach to parallel proceedings:

265 Arts. 29–32 Brussels I Recast. See also Magnus/Mankowski/Fentiman Intro to Arts. 29–30 Brussels I Recast para. 1. 266 Magnus/Mankowski/Fentiman Intro to Arts. 29–30 Brussels I Recast para. 1. 267 Magnus/Mankowski/Fentiman Intro to Arts. 29–30 Brussels I Recast para. 1. 268 Magnus/Mankowski/Fentiman Arts. 33/34 Brussels I Recast para. 1. 269 This accords to the first solution proposed by Magnus/Mankowski/Fentiman (2 nd ed. 2012) Intro to Arts. 27–30 Brussels I Recast paras 59–61. 270 § 261 ZPO; Thomas/Putzo/ Reichold § 261 ZPO para. 2. 271 Miniera di Fragne, No. 73-13820, Bull Civ I No. 312 p. 267 (1974). See also the Cour de cassation confirming the admissibility of the exception of international lis pendens, citing the case law principles stemming from the ‘Miniera di Fragne’ case (Cour de cassation, Commercial Division, 19 February 2013, appeal No. 11-28.846). 272 Virgós & Cambronero para. 20; Requejo http://conflictoflaws.net/2008/lis-pendens-in-spain-autono mous-pil/. 273 Torremans & Fawcett p. 442 ff; Rogerson p. 169; Cleveland Museum of Art v Capricorn Art International SA [1990] 2 Lloyds' LR 166. 274 Business Litigation in Florida § 1.64; Robinson v Royal Bank of Canada 462So. 2 d, 101, (Fla 4 th DCA 1985); Fried v Bergman 736 So. 2 d 1281 (Fla 4th DCA 1999); Posner v Essex Ins. Co, 178 F3, d 1209 (11th Cir. 1999). 275 Posner v Essex Ins. Co., Ltd. 178 F.3 d 1209 C.A.11 (Fla.),1999 p 1223–1224.

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192 193

194 195

Chapter 6 Jurisdiction Because Quackenbush276 does not affect our analysis, we apply this court's formulation of the international abstention doctrine, set out in Turner.277 In that case, we stayed the district court proceedings where a substantially similar case had come to judgment in a German forum. Although this case is different from Turner in that the German dispute had come to judgment – and by contrast little progress has been made here in the Bermuda action – the same principles expressed in Turner govern here: ‘(1) a proper level of respect for the acts of our fellow sovereign nations – a rather vague concept referred to in American jurisprudence as international comity; (2) fairness to litigants; and (3) efficient use of scarce judicial resources.’ Turner, 25 F.3 d at 1518. … Although the district court's basic reasoning was sound, therefore, we hold that the court should have stayed the claims over which it had jurisdiction, rather than dismissing them.

196

This is not the case in all US jurisdictions.278 In Maroc Fruit Board S.A. v M/V Almeda Star279 the court formulated the parallel proceedings rule in Massachusetts as follows: Plaintiffs face a very high bar in seeking an international antisuit injunction: they are ‘rarely issued.’ 280 This court, of course, has the authority to enjoin the parties from pursuing litigation in foreign tribunals, but it must temper this authority with a robust appreciation for considerations of international comity.281 Accordingly, the Court of Appeals for the First Circuit has established a rebuttable presumption against international antisuit injunctions in favor of the ‘accepted proposition that parallel proceedings on the same in personam claim generally should be allowed to proceed simultaneously. 282 The First Circuit has instructed the district courts to examine the totality of the circumstances.283 As a threshold question, the court must first consider whether the parallel suits involve the same parties and issues. Only if they do may the court move on to examine ‘all the facts and circumstances.’ These circumstances include ‘the nature of the two actions (i.e., whether they are merely parallel or whether the foreign action is more properly classified as interdictory); the posture of the proceedings in the two countries; the conduct of the parties (including their good faith or lack thereof); the importance of the policies at stake in the litigation; and, finally, the extent to which the foreign action has the potential to undermine the forum court's ability to reach a just and speedy result.’ At all times, the court must give ‘substantial weight’ to considerations of international comity.

4. Forum Non Conveniens The forum non conveniens doctrine is a purely Common Law doctrine that is not recognized in any Civil Law jurisdiction,284 even though it has its roots in the mixed legal system of Scotland and has until recently been better developed in the United States than England.285 The doctrine is not recognized in the Brussels I Regulation or in the Brussels I Recast.286 198 The doctrine of forum non conveniens may only be applied in English law if the Lugano Convention or the Brussels I Recast does not apply.287 It is uncertain what the position in England will be after Brexit, Gillies submits that the scope of the forum non conveniens doctrine as a tool to achieve the ‘ends of justice’ will have to be reconsidered 197

Quackenbush v Allstate Ins. Co., 517 U.S. 706, 116 S. Ct. 1712, 135 L.Ed.2 d 1 (1996). Turner Entertainment Co. v Degeto Film GmbH, 25 F.3 d 1512 (11th Cir.1994). 278 Weintraub pp. 127 et seq., Koeninger & Bales pp. 482–483. 279 961 F.Supp.2 d 362 D.Mass 133–134. 280 Athina Invs. Ltd. v Pinchuk, 443 F.Supp.2 d 177, 180 (D.Mass.2006). 281 Quaak v Klynveld Peat Marwick Goerdeler Bedrijfsrevisoren, 361 F.3 d 11, 16–17 (1 st Cir.2004). 282 Quaak v Klynveld Peat Marwick Goerdeler Bedrijfsrevisoren, 361 F.3 d 11, 16, 18 (1 st Cir.2004). 283 Quaak v Klynveld Peat Marwick Goerdeler Bedrijfsrevisoren, 361 F.3 d 11, 19 (1 st Cir.2004). 284 With the possible exception of China. 285 Torremans & Fawcett p. 393-394. 286 Magnus/Mankowski/Magnus Intro para. 4; Case C-281/02 Owusu v Jackson [2005] ECR I-1383. See also Magnus/Mankowski/Vlas Art. 4 para. 6 et seq. 287 This is the consequence of the decision in Case C-281/02 Owusu v Jackson [2005] ECR I-1383. See also Torremans & Fawcett pp. 296–297 et seq. 276 277

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by English and Scottish courts and that the importance of the courts to re-establish the application of the doctrine will become more prominent post Brexit.288 199 In the United States Kinney Systems case the doctrine is explained as follows:289 Forum non conveniens is a common law doctrine addressing the problem that arises when a local court technically has jurisdiction over a suit but the cause of action may be fairly and more conveniently litigated elsewhere. Forum non conveniens also serves as a brake on the tendency of some plaintiffs to shop for the ‘best’ jurisdiction in which to bring suit – a concern of special importance in the international context. Commentators generally have noted a growing trend in private international law of attempting to file suit in an American state even for injuries or *88 breaches that occurred on foreign soil. There already is evidence the practice is growing to abusive levels in Florida. Michael J. Higer & Harris C. Siskind, Florida Provides Safe Haven for Forum Shoppers, Fla.B.J., Oct. 1995, at 20, 24–26 (documenting instances of abuse in Florida courts); Linda L. Silberman, Developments in Jurisdiction and Forum Non Conveniens in International Litigation: Thoughts on Reform and a Proposal for a Uniform Standard, 28 Tex. Int'l L.J. 501 (1993) (Florida favored by international plaintiffs); Jacques E. Soiret, The Foreign Defendant: Overview of Principles Governing Jurisdiction, Venue, Extraterritorial Service of Process and Extraterritorial Discovery in U.S. Courts, 28 Tort & Ins. L.J. 533 (1993) (same).

There is a certain element of discrimination against foreign plaintiffs in the applica- 200 tion of the forum non conveniens doctrine in the United States.290 The discriminatory approach is openly stated in the Piper case291 where the Supreme Court held that less weight should be accorded to a foreign plaintiff 's choice of court than to that of a citizen's choice.292 The practical result has been a reluctance by courts to provide a foreign forum for foreign plaintiffs in the absence of strong factors favouring the plaintiff. Courts have also been reluctant to dismiss a suit where the plaintiff is a citizen. 293 China is a country of Civil Law tradition and this doctrine had not previously been 201 accepted in Chinese law. It has, however, increasingly attracted the attention of Chinese lawyers since the 1990 s and was de facto applied by the Supreme People's Court and some lower Chinese courts in practice although there was no statutory authorization.294 In 2005 the Supreme Court issued a Notice which deals with forum non conveniens295 quoted above. The 2005 Opinion of the Supreme People’s Court is binding on lower courts and must be implemented by them.296 Nevertheless, unlike the British doctrine, the application of which is to compare the different alternative fora and search for the natural forum for each individual case in the name of serving ‘the interests of all the parties and the ends of justice’, the employment of the Chinese doctrine is to send away the cases unconnected to China and spare Chinese judicial resources with the simultaneous intention of protecting private interests of the parties.297 Tu concludes that the Chinese version of forum non conveniens is a doctrine that gives quite limited discretion to Chi288 See Gillies ‘Appropriate adjustments post Brexit: Residual jurisdiction and forum non conveniens in UK courts’ 2020 Journal of Business Law 166. 289 Kinney Systems, Inc. v Continental Ins. Co., 674 So.2 d 86 (Fla.1996) 88. See also Koh pp. 157 et seq.; Hay, Borchers & Symeonides §§ 11.8–11.13. 290 Teitz pp. 127–128. 291 Piper Aircraft Co v Reyno 454 U.S. 235 (1981). 292 Piper Aircraft Co v Reyno 454 U.S. 235 (1981) at 255–256. 293 Teitz p. 128. 294 Tu ‘Forum Non Conveniens in the People's Republic of China’ [2011] Chinese Journal of International Law 341, 342. 295 Notice on the Dissemination of the Minutes of the Second Country-wide Trial-work Conference for Foreign-related Commercial and Maritime Cases (SPC’s 2005 Notice). 296 Tu, ‘Forum Non Conveniens in the People's Republic of China’ [2011] Chinese Journal of International Law 341, 353–354. 297 Tu, ‘Forum Non Conveniens in the People's Republic of China’ [2011] Chinese Journal of International Law 341, 359.

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nese judges, and that Chinese judges may decline a case in terms of the doctrine only when the local forum is clearly inappropriate.298

J. Illustrations I. Example 1 202

A director of Company A, an American company with its headquarters in Florida, concludes an agreement in writing with the director of Company G, a German company with its headquarters in Hamburg while they are at a trade fair in China for the sale of 100,000 widgets at $10 a widget. There is a dispute between the parties about the interpretation of the agreement. If A wants to lodge proceedings against G to resolve the dispute, it has a choice of venues in the absence of an exclusive choice of venue or jurisdiction clause. (a) Jurisdiction based on agreement where the contract contains a clause stipulating that the courts of Florida will have jurisdiction. In terms of Florida Jurisprudence § 62 the courts of Florida will honour a forum selection clause subject to the additional requirements set out in Rule 1.140(b). In this case there are two grounds which meet these requirements, namely the contract is for consideration of more than $250,000 and one of the parties is incorporated under the laws of Florida. The applicable law is the CISG (Art. 1(1)(a) CISG since both parties have their places of business in CISG countries) and the case will therefore have to be heard in a federal court since it involves federal law. The court in Florida, however, may still decline to adjudicate in the matter if the forum non conveniens doctrine should be applied. The agreement was concluded in China and is therefore prima facie subject to Chinese law in the absence of a choice of law clause. The applicable law is the CISG and since the dispute is about the interpretation of the contract it is unlikely that the doctrine will be applied. (b) Jurisdiction based on domicile or residence. A will also be entitled to sue G in the courts of Hamburg since the company has its place of business in Hamburg, Germany under § 12 of the ZPO read with § 21 ZPO. (c) Where the cause of action arose. As the dispute is about the interpretation of the agreement, the cause of action would be regarded as the place where the contract was concluded, namely China. However, Art. 23 of the 2012 Chinese Code of Civil Procedure does not recognize the place of the conclusion of the contract as a ground for jurisdiction, only domicile and the place of performance are recognized. Also, the doctrine of forum non conveniens may be applied in accordance with the 2005 Notice of the Supreme People's Court.

II. Example 2 203

E, an English company, must deliver 50,000 widgets to C, a Chinese company, in terms of sales agreement concluded between them. The agreement was concluded by an exchange of emails, with C company accepting E's final offer. The contract provided 298 Tu, ‘Forum Non Conveniens in the People's Republic of China’ [2011] Chinese Journal of International Law 341–365.

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that the sale shall be FOB Liverpool (INCOTERMS 2010) and subject to E's standard terms. When C inspected the goods after delivery in Shanghai, it is found that 80% of the goods are defective. C wants to sue E for cancellation of the contract and damages. If the Chinese company wants to lodge proceedings against E, it has a choice of venues in the absence of an exclusive choice of venue or jurisdiction clause. (a) Jurisdiction based on agreement where the contract contains a clause stipulating that the courts of England will have jurisdiction. In terms of Art. 25 of Brussels I Recast the courts of England will have jurisdiction due to the choice of court clause in the agreement. Such a clause is regarded as exclusive except if the parties have agreed otherwise, which they have not done. If the clause stipulates English courts to have jurisdiction, the English courts will have exclusive jurisdiction under the Regulation. Under the Regulation emails (communication by electronic means) is sufficient to meet the writing requirement of Art. 25 of the Brussels I Recast. After the Owusu case the forum non conveniens doctrine may not be applied if the Recast Brussels Regulation applies to the issue of jurisdiction. b) Jurisdiction based on domicile or residence where there is no choice of jurisdiction clause. Under Art. 4 of the Brussels I Recast a company must be sued in the courts of its country of domicile. In terms of Article 63(2) of the Regulation a company's domicile in the United Kingdom is deemed to be the place registered, incorporated or where it was formed. C will therefore be able to sue E where it is registered or where it was incorporated. (c) Where the cause of action arose. There is no provision under English Common Law for the exercise of jurisdiction based on the place where the cause of action arose. The Brussels I Recast only provides for limited application of this ground where both parties are domiciled in the European Union. Art. 23 of the Chinese Code of Civil Procedure makes provision for jurisdiction based on the place of performance in sales contracts. In the absence of agreement, the place of delivery of the goods is to be regarded as the place of performance. Under the INCOTERM FOB the place of delivery is Liverpool according to the agreement of the parties. Accordingly, the Chinese courts in Shanghai should not have jurisdiction.

K. Cross References & Additional Commentary Choice of jurisdiction or venue clauses are usually included in the standard terms of 204 parties. For a discussion of the inclusion of standard terms see Chapter 9. Parties often choose not to submit their disputes to the regular courts, instead provid- 205 ing for arbitration in their sales agreements. For a discussion of arbitration and other dispute resolution mechanisms see Chapter 29.

L. Practitioner Tips & Contract Clauses The United States Supreme Court in the M/S Bremen v Zapata Off-Shore Co. case 299 206 already suggested that drafters should give serious consideration to inclusion of a forum 299

407 U.S. 1, 92 S.Ct. 1907.

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selecting clause in international transactions.300 Such clauses should preferably be exclusive jurisdiction clauses. This is in line with the Brussels I Recast which contains a presumption in favour of exclusive jurisdiction clauses.301 Explicit consent to jurisdiction is suggested.302 It should be clearly drafted referring to the specific court in so far as that is allowed under the domestic applicable law.303 207 Weintraub suggests the following very wordy clause:304 Any action arising from or in any way related to this transaction shall be brought only in the state courts in the first judicial district of Florida and both parties agree that they shall not seek forum non conveniens dismissal of any action so brought and shall not seek removal to a federal court or, if removal is effected despite this agreement, they shall not move for transfer from the federal district in Florida to which the case has been removed. This forum selection agreement applies no matter what the form of action, whether in rem, in personam or any other, and no matter what the theory of the action, whether tort, contract or any other, or whether based on any statute, rule, or regulation, now existing or hereafter enacted. If either party is sued without that party's consent or collusion in another forum, the party may implead the other party to this agreement for contribution or indemnity.

208

The above clause is typical of the Common Law approach to contract drafting. The following is a simpler clause more in keeping with the Civil Law tradition. It is submitted that both will do the job: The parties submit all their disputes arising out of or in connection with this Agreement to the exclusive jurisdiction of the Courts of […]’

209

Similarly: The parties agree that any dispute that may arise out of or in connection with this Agreement shall be subject to the exclusive jurisdiction of the Courts of [...]

210

It is beyond the scope of this work to provide a comprehensive arbitration agreement.305

M. Additional Sources 211 Basedow, ‘Zuständigkeitsderogation, Eingriffsnormen und ordre public’ in Mankowski & Wurmnest (eds),

Festschrift für Ulrich Magnus (Sellier 2014) 337–352; Baumbach et al, Zivilprozessordnung – mit FamFG, GVG und anderen Nebengesetze (71st edn, C.H. Beck 2013); Boccafoschi, Zuständigkeits- und Gerichtstandsvereinbarungen im deutschen und italienischen Recht (Peter Lang 2003); Borchers (ed), Jurisdiction and Private International Law Volume 1 and II (Elgar 2014); Born, International Commercial Arbitration Vol 1 (2nd edn, Wolters Kluwer 2014); Chen, Chinese Civil Procedure and the Conflict of Laws (Tsinghua University Press 2011); Czernich et al, Europäisches Gerichtstands- und Vollstreckungsrecht (3 rd edn, LexisNexis 2009); Eiselen & Kritzer, International Contract Manual Volumes IV & V (Thomson West 2008); Ferrari et al (eds), Internationales Vertragsrecht – Rom I-VO – CISG – CMR – FactÜ Kommentar (2 nd edn, C.H. Beck 2012); Florida Bar, Business Litigation in Florida (7th edn, LexisNexis 2012); Forsyth, Private International Law (5th edn, Juta 2012); Freitag, ‘Halbseitig ausschlieβliche Gerichtstandsvereinbarungen unter der Brüssel I-VO’ in Mankowski & Wurmnest (eds), Festschrift für Ulrich Magnus (Sellier 2014) 419–431; Geimer in Zöller, Zivilprozessordnung (30th edn, Otto Schmidt 2014); Geimer, Internationales Zivilprossrecht (7th edn, Otto Schmidt 2014); Gillies, ‘Appropriate adjustments post Brexit: Residual jurisdiction and forum non conveniens in UK courts’ 2020 Journal of Business Law 161–183; Hay, Borchers & Symeonides, Conflict of Laws (5th edn, West 2010); Herzog, Civil Procedure in France (Martinus Nijhoff 1967); Hoffheimer, Conflict of Laws (2nd edn, Wolters Kluwer 2013); Hopt in Hopt et al (eds), Baumbach/ Hopt Handelsgesetzbuch (36th edn, C.H. Beck 2014); Hüßtege in Thomas/Putzo (eds), Zivilprozessordnung M/S Bremen v Zapata Off-Shore Co. 407 U.S. 1, 92 S.Ct. 1907, 12. Art. 25; rather similar Art. 3 (b) Hague 2005 Convention on Choice of Court Agreements. 302 Weintraub p. 78. 303 Weintraub p. 78. 304 Weintraub p. 79. 305 Weintraub pp. 98 et seq. 300

301

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M. Additional Sources (36th edn, C.H.Beck 2015); Ignatova, Art. 5 Nr. 1 EuGVO – Chancen und Perspktiven der Reform des Gerichtsstands am Erfüllungsort (Peter Lang 2005); Iisidro ‘International Commercial Courts in the Litigation Market’ (2019 MPI) available at https://ssrn.com/abstract=3327166; James, Litigation with a Foreign Aspect – A Practical Guide (OUP 2009); Jeuland ‘The International Chambers of Paris: A Gaul village’ in Kramer & Sorabji (eds) International Business Courts – A European and Global Perspective (eleven 2019) pp. 65-81 Koeninger & Bale, ‘When a U.S. domestic court can join a foreign court proceeding’ (2014) 22 Cardozo Journal of International and Comparative Law 473–496; Koh, Transnational Litigation in United States Courts (Thomson West 2008); Kramer & Sorabji (eds) International Business Courts – A European and Global Perspective (eleven 2019), Kröll, Mistelis and Perales Viscasillas (eds), UN Convention on Contracts for the International Sale of Goods (CISG) (C.H. Beck, Hart, Nomos 2011); Kropholler & von Hein (eds), Europäisches Zivilprozessrecht (9th edn, Recht und Wirtschaft 2011); Kunkler, Das internationale Zivilverfahren im französischen Rechtskreis (Peter Lang 2010); Layton & Mercer (eds), European Civil Practice Volume 1 and 2 (2nd edn, Sweet & Maxwell 2004); Levy (ed), International Litigation – Defending and Suing Foreign Parties in U.S. Federal Courts (American Bar Association 2004); Lehmann ‘Law Made in Germany’: The export engine stutters’ in Kramer & Sorabji (eds) International Business Courts – A European and Global Perspective (eleven 2019) pp.83-106; Magnus, ‘Art. 25’ in Magnus & Mankowski (eds), Brussels Ibis Regulation (Otto Schmidt 2016); Magnus, ‘Wiener UN-Kaufrecht’ in Martinek (ed), J von Staudingers Kommentar zum Bürgerlichen Gesetzbuch mit Einführungsgesetz und Nebengesetzen (Sellier 2018); Mankowski, ‘Art. 7’ in Magnus & Mankowski (eds), Brussels Ibis Regulation (Otto Schmidt 2016); Quintana, De Natal & Cortes, ‘Spain’ in Grubbs (ed), International Civil Procedure (Kluwer 2003); Rogerson, Collier’s Conflict of Laws (4th edn, CUP 2013); Schultz, ‘Zuständigkeit und gerichtliches Ermessen in Mehrrechtsystemen’ (2005) 69 RabelsZ 419–457; Schwenzer (ed), Schlechtriem & Schwenzer Commentary on the UN Convention on Contracts for the International Sale of Goods (CISG) (3rd edn, OUP 2010); Siehr ‘Global jurisdiction of local courts and recognition of their judgments abroad’ in Mankowski & Wurmnest, Festschrift für Ulrich Magnus (Sellier 2014); Sonnenberger, ‘Internationales Privatrecht’ in Sonnenberger (ed), Münchener Kommentar zum Bürgerlichen Gesetzbuch Band 10 (5th edn, C.H. Beck 2010); Strong, ‘International Commercial Courts and the United States: An outlier by choice and by constitutional design’ in Kramer & Sorabji (eds) International Business Courts – A European and Global Perspective (eleven 2019) p. 255-272; Tang, ‘Effectiveness of Exclusive Jurisdiction Clauses in the Chinese Courts — A Pragmatic Study’ (2012) 61 Int’l & Comp LQ 458–484; Teitz, Transnational Litigation (Michie 1996); Thomas et al, Zivilprozessordnung Kommentar (36th edn, C.H. Beck 2015); Torremans & Fawcett Cheshire, North & Fawcett Private International Law (15th edn, OUP 2017); Tu, ‘Forum Non Conveniens in the People's Republic of China’ (2011) Chinese Journal of International Law 341–365; Vahramian & Wallenbrock, ‘France’ in Grubbs (ed), International Civil Procedure (Kluwer 2003); Vlas, ‘Art. 63’ in Magnus & Mankowski (eds), Brussels Ibis Regulation (Otto Schmidt 2016); Wei, The Civil Procedure Law and Court Rules of the People's Republic of China (William S Hein 2006); Weintraub, International Litigation and Arbitration – Practice and Planning (5th edn, Carolina Academic Press 2006).

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CHAPTER 7 CONTRACTUAL FORMALITIES Sieg Eiselen A. Topics Covered . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B. Introductory Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C. Statement of Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . D. International Sales Transaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . E. Sampling of Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. CISG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. United Nations Convention on the Use of Electronic Communications in International Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Principles of European Contract Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Common European Sales Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. UNIDROIT Principles of International Commercial Contracts . . . . . . . . . . . . . . VI. German Bürgerliches Gesetzbuch . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VII. French Code Civil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VIII. Spanish Código Civil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IX. United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . X. English Sales Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XI. Chinese Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Chinese Civil Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Chinese Supreme Court Interpretations Relating to Sales Law . . . . . . . . . . . . 3. Electronic Signature Law of the People's Republic of China . . . . . . . . . . . . . . F. Commentary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. CISG Formalities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. CISG and United Nations Convention on the Use of Electronic Communications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Modification of Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Uniform Commercial Code Formalities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. Other Electronic Commerce Laws and Conventions . . . . . . . . . . . . . . . . . . . . . . . . . G. Illustrations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . H. Cross References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Practitioner Tips & Contract Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Practitioner Tips . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Model Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Writing as Constitutive Requirement for Contract Formation . . . . . . . . . . . . 2. No Oral Modification Clause . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Electronic Communications Clause . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . J. Additional Sources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

A. Topics Covered The following topics will be covered in this chapter:

1

– – – –

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B. Introductory Note

B. Introductory Note Requiring formalities for the valid conclusion of a contract is a controversial issue.1 It 2 is generally recognized that formalities provide an obstacle to the free flow of commerce as they tend to be time-consuming, cumbersome, bureaucratic and costly.2 Nevertheless most legal systems require writing and sometimes signature as formalities for certain types of contract.3 Kötz remarks that because of the time and trouble it takes to meet formal requirements, legal systems only require formalities if there is a good reason to do so.4 The following reasons have been put forward:5 (a) Formalities provide objective proof of the transaction as the contents of the agreement will not be reliant on evidence of the negotiations and oral agreement between the parties. (b) Formalities provide greater legal certainty and therefore prevent unnecessary litigation about the contents of the agreement. (c) Formal requirements put the parties on notice that by signing the agreement there will be binding legal consequences. It may also mark the transition from negotiation to a binding contract. This may be especially important in cases where the negotiations are protracted or consist of multiple communications between the parties. (d) Formalities are also required where one of the parties needs special protection in cases such as important consumer contracts. (e) Signature may be required to ensure that there is proper identification of the parties and authentication of the document in question.6 (f) Formalities may also be required to combat abuse. This was for instance the reason for the initial enactment of the Statute of Frauds in 1677 in England which was aimed at stamping out false or spurious claims by fraudulent parties since the defendant was not allowed to testify on his own behalf and such abuse had become rife at the time. Over time, however it has become apparent that the cost of formalities was high 3 and it often did not achieve the objectives as set out above.7 Many legal systems have therefore reduced the number of contracts for which formalities are required. 8

1 See Honnold & Flechtner, Uniform law for international sales under the 1980 United Nations Convention (4th edn, 1999) para 128; Schlechtriem, Uniform Sales Law (1986) p. 44; Eiselen & Kritzer, International Contract Manual Volume IV (2008) para 85:73; Schlechtriem/Schmidt-Kessel, in Schlechtriem & Schwenzer (eds), Commentary on the UN Convention on the International Sale of Goods (CISG) (4 th edn, 2016) Article 11 para 1; McKendrick, Contract Law (9th edn, 2020) pp. 245-246; Secretariat Commentary on article 11 of the 1978 Draft of the CISG; CISG-AC Opinion No. 15, Reservations under Articles 95 and 96 CISG, Rapporteur: Prof. Dr. Ulrich G. Schroeter, University of Mannheim, Germany Comments para 2.4. 2 McKendrick id. pp. 245-246. 3 Zweigert & Kötz, An Introduction to Comparative Law (3 rd edn, 1998) pp. 366 et seq. 4 Kötz, European Contract Law Volume 1: Formation, Validity, Agency, Third Parties and Assignment (1998) p. 78; Vogenauer, in Vogenauer (ed), Commentary on the UNIDROIT Principles of International Commercial Contracts (PICC) (2nd edn, 2015) Article 1.2 para 1. 5 Kötz id.; Zweigert & Kötz (n 3) pp. 366–367; McKendrick (n 1) 245-246; UNCITRAL Model Law on Electronic Commerce – Guide to Enactment para 48; Ellenberger, in Bassenge et al (eds), Palandt Bürgerliches Gesetzbuch (79th edn, 2020) § 125 para 1; Wais in Danneman & Schulze German Civil Code (C.H. Beck 2020) § 125 para 1. 6 UNCITRAL Promoting confidence in electronic commerce: legal issues on international use of electronic authentication and signature methods (2009 UNCITRAL) para 2. 7 McKendrick (n 1) p. 246. 8 Zweigert & Kötz (n 3) pp. 377–379.

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In most legal systems there are no formal requirements for commercial sales contracts in conformance with the principle of freedom of contract, even though the Statute of Frauds still applies in one form or another in the Common Law world in legal systems such as that of the United States.9 Other notable exceptions are the Russian legal system and other former socialist states such as Belarus and the Ukraine who have made use of the Article 96 CISG reservation.10 5 Formalities may also be required by the parties even though they are not required by law.11 In such cases it needs to be determined whether the parties intended the formalities to be constitutive or merely evidentiary.12 In the former case no contract will come into existence if the formalities are not complied with, whereas in the latter case, a contract will still come into existence even though the formal proof may be absent. Under the principle of freedom of contract the agreement between the parties requiring formalities will be enforceable under most legal systems. The requirement for formalities by agreement is most often included in written contracts in regard to the future modification of the agreement, i.e. that no modification may be made to the contract unless it has been reduced to writing and signed by the parties. 6 Since the adoption of the CISG in 1980 communications have undergone a dramatic change due to the development of the internet.13 Whereas business communications at the time consisted of ordinary post, telephone, telegram and telex, those forms of communications have been superseded by various electronic communications such as email and sms.14 These developments have given rise to new regulatory instruments such as the 1996 UNCITRAL Model Law on Electronic Commerce15 and the 2005 United Nations Convention on the Use of Electronic Communications in International Contracts ('Electronics Convention').16 The Electronics Convention is aimed at augmenting conventions such as the CISG in making specific provision for recognition of electronic communications.17 The 1996 UNCITRAL Model Law has formed the basis for domestic 4

Zweigert & Kötz (n 3) pp. 366–367; 377–378; McKendrick (n 1) pp. 246-247. Secretariat Commentary on Article 11 of the 1978 Draft of the CISG; Eiselen & Kritzer (n 1) para 85:74; CISG-AC Opinion No. 15, Reservations under Articles 95 and 96 CISG, Rapporteur: Prof. Dr. Ulrich G. Schroeter, University of Mannheim, Germany Comments paras 2.4 & 4.3. 11 Schlechtriem/Schmidt-Kessel, in Schlechtriem/Schwenzer (n 1) para 18; Eiselen & Kritzer (n 1) para 85:66; Magnus, in Martinek (ed), J. von Staudingers Kommentar zum Bürgerlichen Gesetzbuch mit Einführungsgesetz und Nebengesetze Wiener UN-Kaufrecht (CISG) (2014) Article 11 paras 4–6; Eiselen ‚The Integration of the UN Electronic Communications Convention and the CISG’ in Schwenzer, Atamer & Butler (eds), Current Issues in the CISG and Arbitration (2014) pp. 145–166; Danneman/Schulze/Wais (n 5) § 125 para 5; Palandt/Ellenberger (n 5), § 125 para. 9. 12 Danneman/Schulze/Wais (n 5) § 125 para 5; Ellenberger/Palandt (n 5) § 125 para 5; Van Huyssteen et al (eds), Contract General Principles (5th edn, 2016) pp. 147; Vaquer, Contract Law in Spain (2012) para 93. 13 Eiselen, ‘Electronic commerce and the UN Convention on Contracts for the International Sale of Goods (CISG)’ (1980) 6 EDI Law Review (1999) 21–46; Van der Merwe et al, Information and Communications Technology Law (2nd ed 2016) pp. 149; Reed, Computer Law (7th edn, 2012) pp. 220–225; Mann & Winn Electronic Commerce (2nd edn, 2005); Recital to the UN General Assembly Resolution on the Report of the Sixth Committee (A/51/628) No. 51/162 of 1996 on the UNCITRAL Model Law on Electronic Commerce at its 85th Plenary Meeting 16 December 1996. See also paras 2–4 of the UNCITRAL Guide to Enactment of the UNCITRAL Model Law on Electronic Commerce (1996). 14 Eiselen (n 11) pp. 145–146. 15 See http://www.uncitral.org/uncitral/en/uncitral_texts/electronic_commerce/1996Model.html accessed 25 March 2015. 16 See http://www.uncitral.org/uncitral/en/uncitral_texts/electronic_commerce/2005Convention.html. For a discussion of this convention see Kilian and Boss (eds), The United Nations Convention on Electronic Communications in International Contracts (UNECE) (2009); Eiselen, ‘The UNECIC: International Trade in the Digital Era’ (2007) 2 Potchefstroom Electronic Law Journal 1–49 available online at http://www.nw u.ac.za/content/volume-10-2007-no-2 accessed 25 March 2015. 17 See the Preamble to the Convention and Secretariat Comments paras 3, 4 & 290. 9

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legislation dealing with ecommerce, including formalities, in more than 60 countries including the United States and France.18

C. Statement of Issues This chapter will deal with the formalities that may be required for international sales 7 contracts under the various legal systems. The formalities considered will be writing and signature as no other formal requirements such as notarization is required in any of the legal systems considered. The consideration of formalities will specifically deal with the recognition of elec- 8 tronic communications in the various legal systems. This chapter will not deal with the issue of parol evidence as that is dealt with in the 9 chapter dealing with the formation and content of the sales contract.

D. International Sales Transaction Although most legal systems do not require any formalities for international sales 10 transactions, there are a surprising number of jurisdictions where writing in one form or another is required. As the formalities requirement in these jurisdictions concerns the validity and enforceability of the sales agreement, this is a fundamental issue that needs to be addressed. Even under the harmonized CISG system formalities are still required in a few countries. Traders should therefore acquaint themselves with the applicable legal regime for each different country where they have dealings. The writing requirement also applies to any modifications of the agreement. All the legal systems under review recognize electronic communications as writing 11 provided certain minimum requirements are met.

E. Sampling of Laws I. CISG 12

Article 11 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. Article 12 Any provision of article 11, article 29 or Part II of this Convention that allows a contract of sale or its modification 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 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. Article 13 For the purposes of this Convention "writing" includes telegram and telex. Article 29 (1) A contract may be modified or terminated by the mere agreement of the parties.

18 See the status of this instrument at http://www.uncitral.org/uncitral/en/uncitral_texts/electronic_co mmerce/1996Model_status.html accessed on 25 March 2015.

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Chapter 7 Contractual Formalities (2) A contract in writing which contains a provision requiring any modification or termination by agreement to be in writing may not be otherwise modified or terminated by agreement. However, a party may be precluded by his conduct from asserting such a provision to the extent that the other party has relied on that conduct.

II. United Nations Convention on the Use of Electronic Communications in International Contracts 13 Article 8 Legal recognition of electronic communications 1. A communication or a contract shall not be denied validity or enforceability on the sole ground that it is in the form of an electronic communication. 2. Nothing in this Convention requires a party to use or accept electronic communications, but a party’s agreement to do so may be inferred from the party’s conduct. Article 9 Form requirements 1. Nothing in this Convention requires a communication or a contract to be made or evidenced in any particular form. 2. Where the law requires that a communication or a contract should be in writing, or provides consequences for the absence of a writing, that requirement is met by an electronic communication if the information contained therein is accessible so as to be usable for subsequent reference. 3. Where the law requires that a communication or a contract should be signed by a party, or provides consequences for the absence of a signature, that requirement is met in relation to an electronic communication if: (a) A method is used to identify the party and to indicate that party’s intention in respect of the information contained in the electronic communication; and (b) The method used is either: (i) As reliable as appropriate for the purpose for which the electronic communication was generated or communicated, in the light of all the circumstances, including any relevant agreement; or (ii) Proven in fact to have fulfilled the functions described in subparagraph (a) above, by itself or together with further evidence.

III. Principles of European Contract Law 14 Article 2:101 (ex Article 5.101) Conditions for the Conclusion of a Contract (1) A contract is concluded if: (a) the parties intend to be legally bound, and (b) they reach a sufficient agreement without any further requirement. (2) A contract need not be concluded or evidenced in writing nor is it subject to any other requirement as to form. The contract may be proved by any means, including witnesses. Article 2:106 (ex Article 5.106 B) Written Modification only (1) A clause in a written contract requiring any modification or ending by agreement to be made in writing establishes only a presumption that an agreement to modify or end the contract is not intended to be legally binding unless it is in writing. (2) A party may by its statements or conduct be precluded from asserting such a clause to the extent that the other party has reasonably relied on them.

IV. Common European Sales Law 15 Article 6 No form required Unless otherwise stated in the Common European Sales Law, a contract, statement or any other act which is governed by it need not be made in or evidenced by a particular form.

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V. UNIDROIT Principles of International Commercial Contracts 16

Article 1.2 No form required Nothing in these Principles requires a contract, statement or any other act to be made in or evidenced by a particular form. It may be proved by any means, including witnesses. Article 2.1.13 form

Conclusion of contract dependent on agreement on specific matters or in a particular

Where in the course of negotiations one of the parties insists that the contract is not concluded until there is agreement on specific matters or in a particular form, no contract is concluded before agreement is reached on those matters or in that form. Article 2.1.18 Modification in a particular form A contract in writing which contains a clause requiring any modification or termination by agreement to be in a a particular form may not be otherwise modified or terminated. However, a party may be precluded by its conduct from asserting such a clause to the extent that the other party has acted in reliance on that conduct.

VI. German Bürgerliches Gesetzbuch Writing is not required for commercial sales under the BGB.

17

§ 125 Voidness resulting from a defect of form A legal transaction that lacks the form prescribed by statute is void. In case of doubt, lack of the form specified by legal transaction also results in voidness. § 126 Written form (1) If written form is prescribed by statute, the document must be signed by the issuer with his name in his own hand, or by his notarially certified initials. (2) In the case of a contract, the signature of the parties must be made on the same document. If more than one counterpart of the contract is drawn up, it suffices if each party signs the document intended for the other party. (3) Written form may be replaced by electronic form, unless the statute leads to a different conclusion. (4) Notarial recording replaces the written form.

VII. French Code Civil 18

Article 1101 A contract is a concordance of wills of two or more persons intended to create, modify, transfer or extinguish obligations. Article 1102 Everyone is free to contract or not to contract, to choose the person with whom to contract, and to determine the content and form of the contract, within the limits imposed by legislation. Contractual freedom does not allow derogation from rules which are an expression of public policy. Article 1103 Contracts which are lawfully formed have the binding force of legislation for those who have made them. Article 1109 A contract is consensual where it is formed by the mere exchange of consents, in whatever way they may be expressed. A contract is solemn3 where its validity is subject to form prescribed by legislation. A contract is real where its formation is subject to the delivery of a thing.

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Chapter 7 Contractual Formalities Article 1113 A contract is formed by the meeting of an offer and an acceptance by which the parties demonstrate their will to be bound. This may stem from a person’s declaration or unequivocal conduct. Article 1125. – Electronic means may be used to make available contractual stipulations or information about property or services. Article 1126 Information requested with the view to the conclusion of a contract or provided during its performance may be sent by electronic mail if the recipient has agreed that this means may be used. Article 1127 Information intended for a business or professional9 may be addressed to them by electronic mail as long as they have communicated their electronic address. If the information must be placed on a form, the form must be made available electronically to the person who is required to complete it. Article 1127-1 A person who, in a business or professional capacity, makes a proposal by electronic means for the supply of property or services, must make available the applicable contractual stipulations in a way which permits their storage and reproduction. A person issuing an offer remains bound by it as long as it is made accessible by him by electronic means. An offer must set out in addition: 1. The different steps that must be followed to conclude the contract by electronic means; 2. The technical means by which the person to whom the offer is addressed, before the conclusion of the contract, may identify any errors in the data entry, and correct them; 3. The languages offered for the conclusion of the contract, which must include the French language; 4. Where appropriate, the ways in which the party issuing the offer is to file it, and the conditions for access to the filed contract; 5. The means of consulting electronically any business, professional or commercial rules to which the party issuing the offer intends (as the case may be) to be bound. Article 1127-2 A contract is validly concluded only if the party to whom the offer is addressed had the possibility of verifying the detail of his order and its total price and of correcting any possible errors before confirming his order in order to express his definitive acceptance. The party issuing the offer must without undue delay acknowledge by electronic means the receipt of such an order which has been addressed to him The order, the confirmation of acceptance of the offer, and the acknowledgement of receipt are deemed to have been received when the parties to whom they are addressed are able to have access to them. Article 1127-3 There is an exception to the obligations referred to in paragraphs 1 to 5 of article 1127-1 and to the first two paragraphs of article 1127-2 for contracts for the supply of property or services which are concluded exclusively by exchange of electronic mails. In addition, the provisions of paragraphs 1 to 5 of article 1127-1 and article 1127-2 may be excluded or restricted in contracts concluded between businesses or professionals. Article 1127-4 A simple letter relating to the conclusion or performance of a contract may be sent by electronic mail. The date of sending may be attached as a result of an electronic process which, in the absence of proof to the contrary, is presumed to be reliable as long as it satisfies the requirements set by decree of the Conseil d’État. Article 1127-5 A registered letter relating to the conclusion or performance of a contract may be sent by electronic mail as long as this electronic mail is routed through a third party following a process which allows the third party to be identified, the sender to be denoted and the identity of the addressee to be guaranteed, and as long as it can be established whether or not the letter has been delivered to the addressee.

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E. Sampling of Laws The contents of such a letter may, at the option of the sender, be printed by the third party on paper for distribution to the recipient or may be addressed to him by electronic means. In the latter case, if the recipient is not a business or professional, he must have requested that it be sent in this form or must have accepted this by usage in the course of earlier exchanges. Where the affixing of the date of dispatch or of receipt results from an electronic process, this is presumed, in the absence of contrary evidence, to be reliable if it satisfies the requirements set by decree of the Conseil d’État. An acknowledgement of receipt may be addressed to the sender by electronic means or by any other means which allows him to preserve it. Article 1127-6 In cases other than those set out in articles 1125 and 1126, the delivery of a document in electronic form takes effect when the recipient is able to become aware of it and has then acknowledged receipt. If there is provision for a document to be read to its recipient, the delivery to the person concerned of an electronic document in compliance with the requirements set out in the first paragraph is the equivalent of reading. Article 1366 Electronic writing has the same probative force as writing on paper, provided that it is possible properly to identify the person from whom it originates and that it is created and stored in such conditions as will guarantee its integrity. Article 1367 A signature which is required in order to perfect a juridical act identifies its own author. It demonstrates his consent to the obligations which stem from that act. Where it is placed on the act by a public official, it confers authenticity on it. Where it is in electronic form, it must use a reliable process of identification which guarantees its relationship with the act to which it is attached. The reliability of the process is presumed in the absence of proof to the contrary where an electronic signature is created, the identity of the signatory is ensured and the integrity of the act is guaranteed on the conditions fixed by decree of the Conseil d’État.

VIII. Spanish Código Civil 19

Article 1278 Contracts shall be binding, whatever the form under which they have been entered into, provided that they meet the essential conditions for their validity. Article 1279 If the law should require execution of a public deed or another special form for the obligations inherent to a contract to be effective, the contracting parties may compel each other reciprocally to fulfil such form from the moment when consent has been given and the remaining requirements necessary for its validity are present. Article 1280 The following must be set forth in a public instrument: … The assignment of actions or rights arising from an act which is set forth in a public deed. Likewise, other contracts where the amount of one of the undertakings to be provided by one or both contracting parties exceeds 1,500 pesetas must be set forth in writing, even in a private document.

IX. United States Uniform Commercial Code 20

§ 2-201. Formal Requirements; Statute of Frauds (1) Except as otherwise provided in this section 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 sufficient to indicate that a contract for sale has been made between the parties and signed by the party against whom enforcement

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Chapter 7 Contractual Formalities is sought or by his authorized agent or broker. A writing is not insufficient because it omits or incorrectly states a term agreed upon but the contract is not enforceable under this paragraph beyond the quantity of goods shown in such writing. (2) Between merchants if within a reasonable time a writing in confirmation of the contract and sufficient against the sender is received and the party receiving it has reason to know its contents, it satisfies the requirements of subsection (1) against such party unless written notice of objection to its contents is given within 10 days after it is received. (3) A contract which does not satisfy the requirements of subsection (1) but which is valid in other respects is enforceable (a) if the goods are to be specially manufactured for the buyer and are not suitable for sale to others in the ordinary course of the seller's business and the seller, before notice of repudiation is received and under circumstances which reasonably indicate that the goods are for the buyer, has made either a substantial beginning of their manufacture or commitments for their procurement; or (b) if the party against whom enforcement is sought admits in his pleading, testimony or otherwise in court that a contract for sale was made, but the contract is not enforceable under this provision beyond the quantity of goods admitted; or (c) with respect to goods for which payment has been made and accepted or which have been received and accepted (Section 2-606). § 2-209. Modification, Rescission and Waiver (1) An agreement modifying a contract within this Article needs no consideration to be binding. (2) A signed agreement which excludes modification or rescission except by a signed writing cannot be otherwise modified or rescinded, but except as between merchants such a requirement on a form supplied by the merchant must be separately signed by the other party. (3) The requirements of the statute of frauds section of this Article (Section 2-201) must be satisfied if the contract as modified is within its provisions. (4) Although an attempt at modification or rescission does not satisfy the requirements of subsection (2) or (3) it can operate as a waiver. (5) A party who has made a waiver affecting an executory portion of the contract may retract the waiver by reasonable notification received by the other party that strict performance will be required of any term waived, unless the retraction would be unjust in view of a material change of position in reliance on the waiver.

Uniform Electronic Transactions Act (UETA)19 21 Section 2 Definitions. In this [Act]: (7) “Electronic signature” means an electronic sound, symbol, or process attached to or logically associated with a record and executed or adopted by a person with the intent to sign the record. Section 7 Legal Recognition of Electronic Records, Electronic Signatures, and Electronic Contracts (a) A record or signature may not be denied legal effect or enforceability solely because it is in electronic form. (b) A contract may not be denied legal effect or enforceability solely because an electronic record was used in its formation. (c) If a law requires a record to be in writing, an electronic record satisfies the law. (d) If a law requires a signature, an electronic signature satisfies the law. 15 U.S.C.A. § 7001 Title 15 Commerce and Trade Chapter 96 Subchapter I Electronic Records and Signatures in Commerce § 7001 General rule of validity (a) In general. Notwithstanding any statute, regulation, or other rule of law (other than this subchapter and subchapter II of this chapter), with respect to any transaction in or affecting interstate or foreign commerce

19 1999. The Act applies in 48 states of the US. Two states, Illinois and New York, have not adopted the uniform act, but have statutes pertaining to electronic transactions.

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E. Sampling of Laws (1) a signature, contract, or other record relating to such transaction may not be denied legal effect, validity, or enforceability solely because it is in electronic form; and (2) a contract relating to such transaction may not be denied legal effect, validity, or enforceability solely because an electronic signature or electronic record was used in its formation. § 7006 Definitions (5) Electronic signature The term “electronic signature” means an electronic sound, symbol, or process, attached to or logically associated with a contract or other record and executed or adopted by a person with the intent to sign the record.

X. English Sales Law s 4 of the Sale of Goods Act 1893 required agreements for the sale of goods to the 22 value of £10 or more to be in writing, but this requirement was abolished by the Law Reform (Enforcement of Contracts) Act 1954. 23 Consequently contracts for the sale of goods may be made without formalities.20 Article 9(1) European Community Directive on Electronic Commerce (2000/31) Member States shall ensure that their legal system allows contracts to be concluded by electronic means. Member States shall in particular ensure that the legal requirements applicable to the contractual process neither create obstacles for the use of electronic contracts nor result in such contracts being deprived of legal effectiveness and validity on account of their being made by electronic means.

XI. Chinese Law 1. Chinese Civil Code 24

Article 469 The parties may enter into a contract in writing, orally or in some other form. Written form is a form of a contract, letter, etc., which can show its contents in a tangible way. Data telex messages that can tangibly express the contents they carry and can be accessed and used at any time by means of telegraph, telex, fax, electronic data exchange and email shall be regarded as written forms. Article 490 Where the parties conclude a contract in the form of a contract document, the contract is concluded from the time that each party signs, seals or affixes its signature to the contract document. A contract is formed when one party has performed the principal obligations and the other party has accepted them prior to signature, seal or press the fingerprint. A contract shall be concluded in written form as prescribed by laws and administrative regulations or as agreed upon by the parties. Where the parties fail to conclude the contract in written form but one party has performed the principal obligation and the other party has accepted it, the contract is established.

2. Chinese Supreme Court Interpretations Relating to Sales Law 25

I. Formation and Validity of Sales Contracts Article 1 Where there is no written contract between the parties and one party claims that a sales contract exists on the basis of delivery notes, goods received notes, settlement statements and invoices, the people's court shall determine whether a sales contract has been formed by considering the transaction methods and customary business practices between the parties as well as other relevant evidence.

20

Beale (ed.), Chitty on Contracts (32ndt edn, 2015) para 43-022.

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Chapter 7 Contractual Formalities Article 4 The people's court shall concurrently apply the relevant provisions of the Law on Electronic Signatures when determining the formation and validity of an electronic transaction contract according to the provisions of the Contract Law.

3. Electronic Signature Law of the People's Republic of China 26 Article 2 For the purposes of this Law, electronic signature means the data in electronic form contained in and attached to a data message to be used for identifying the identity of the signatory and for showing that the signatory recognizes what is in the message. Article 3 The parties concerned may agree to use or not to use electronic signature or data message in such documentations as contracts and other documents, receipts and vouchers in civil activities. The legal effect of a document, with regard to which the parties concerned have agreed to use electronic signature or data message, shall not be denied only because the form of electronic signature or data message is adopted. Article 13 If an electronic signature concurrently meets the following conditions, it shall be deemed as a reliable electronic signature: (1) when the creation data of the electronic signature are used for electronic signature, it exclusively belongs to an electronic signatory; (2) when the signature is entered, its creation data are controlled only by the electronic signatory; (3) after the signature is entered, any alteration made to the electronic signature can be detected; and (4) after the signature is entered, any alteration made to the contents and form of a data message can be detected. The parties concerned may also choose to use the electronic signatures which meet the conditions of reliability they have agreed to.

F. Commentary I. CISG Formalities 27

The CISG deals with formalities in Articles 11–13. The point of departure is that no formalities are required,21 but Article 12 read with Article 96 provides for countries to opt out of Article 11 and require formalities.22 Only a few countries have made use of this reservation, namely Argentina, Belarus, Chile, Hungary, Paraguay, the Russian Federation, and the Ukraine.23 Where the rules of private international law lead to the application of one of these legal systems, writing will be required for the formal validity of the sales contract.24 Most commentators also agree that the Article 12 reservation will not apply in cases where the applicable law is that of a non-reservation state but where one of the parties has its place of business in a reservation state.25 There is also case law

Schlechtriem/Schmidt-Kessel, in Schlechtriem/Schwenzer (n 1) para 1; Magnus (n 11) Article 11 para 1. Schlechtriem/Schmidt-Kessel, in Schlechtriem/Schwenzer (n 1) Article 12 para 1; Magnus (n 11) Article 12 para 1. 23 CISG-AC Opinion No. 15, Reservations under Articles 95 and 96 CISG, Rapporteur: Prof. Dr. Ulrich G. Schroeter, University of Mannheim, Germany Comments para 4.3. 24 Schlechtriem/Schmidt-Kessel, in Schlechtriem/Schwenzer (n 1) para 2; Magnus (n 11) Article 12 para 2; Eiselen & Kritzer (n 1) para 81:38. 25 Schlechtriem/Schmidt-Kessel, in Schlechtriem/Schwenzer (n 1) Article 12 para 2; Magnus (n 11) Article 12 para 8; Eiselen & Kritzer (n 1) para 85:75. 21

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to the effect.26 The case law to the contrary all stems from the Russian Federation and has been quite correctly criticized.27 At the time of the drafting of the CISG electronic communication was still in its 28 infancy and the internet did not yet exist for business communications.28 Article 13 stipulates that writing includes telegram and telex. It is generally recognized that Article 13 must be expansively interpreted to also include electronic communications such as email, other internet communications and sms.29 These types of communications should be recognized as writing if they are functionally equivalent to traditional forms of writing.30

II. CISG and United Nations Convention on the Use of Electronic Communications The United Nations Convention on the Use of Electronic Communications in Inter- 29 national Contracts is aimed at augmenting conventions like the CISG by making specific provision for the recognition of electronic communications in international trade.31 Article 8 provides a general rule for the recognition of electronic communications. 32 This is further refined in Article 9(3) which provides that a legal requirement for writing, for instance where the parties require it or one of the reservation states' law require it, that requirement will be met if the information contained in the communication is accessible for subsequent reference.33 The CISG also does not require a signature for the valid conclusion of a sales 30 contract, but a signature may be required by the parties themselves.34 Any agreement on required formalities by the parties will be enforced under the CISG in terms of the principle of freedom of contract under Article 6.35 Unless the parties require a specific 26 Federal District Court [New Jersey] 7 October 2008 (Forestal Guarani, S.A. v Daros International, Inc.) http://cisgw3.law.pace.edu/cases/081007u1.html. 27 See for instance Supreme Arbitration Court (or Presidium of Supreme Arbitration Court) of the Russian Federation 23 December 2009 http://cisgw3.law.pace.edu/cases/091223r1.html; High Arbitration Court (or Presidium of Supreme Arbitration Court) of the Russian Federation 16 February 1998 (Information Letter 29) http://cisgw3.law.pace.edu/cases/980216r1.html; High Arbitration Court (or Presidium of Supreme Arbitration Court) of the Russian Federation 25 March 1997 (Ruling No. 6, Resolution No. 4670/96) http://cisgw3.law.pace.edu/cases/970325r2.html. 28 Eiselen (n 11) pp. 145–146. 29 Eiselen (n 11) pp. 146 et seq.; Magnus (n 11) Article 11 para 2; Schlechtriem/Schmidt-Kessel in Schlechtriem/Schwenzer (n 1) Article 12 para 1; Magnus (n 11) Article 11 para 1; CISG-AC Opinion No. 1, Electronic Communications under CISG, 15 August 2003. Rapporteur: Prof. Dr. Christina Ramberg, Gothenburg, Sweden. 30 CISG-AC Opinion No. 1, Electronic Communications under CISG, 15 August 2003. Rapporteur: Prof. Dr. Christina Ramberg, Gothenburg, Sweden; Eiselen & Kritzer (n 1) para 85:84; Schlechtriem/ Schmidt-Kessel in Schlechtriem/Schwenzer (n 1) Article 13 para 7; Magnus (n 11) Article 13 para 5; Russia, 28 April 1995 (Arbitration proceeding 400/1993) http://cisgw3.law.pace.edu/cases/950428r1.html. 31 UNCITRAL United Nations Convention on the Use of Electronic Communications in International Contracts 2005 Preamble; Explanatory Note paras 18–20; Eiselen ‘The Interaction between the UNECE and the CISG’ in Kilian and Boss (eds), The United Nations Convention on Electronic Communications in International Contracts (UNECE) (2009) pp. 63 et seq.; Eiselen (n 16) pp. 67/115. 32 UNCITRAL United Nations Convention on the Use of Electronic Communications in International Contracts 2005 Preamble; Explanatory Note paras 129 et seq.; Eiselen (n 16) pp. 67/115 et seq. 33 UNCITRAL United Nations Convention on the Use of Electronic Communications in International Contracts 2005 Preamble; Explanatory Note paras 133 et seq.; Eiselen (n 16) pp. 67/115 et seq. 34 Magnus (n 11) Article 11 paras 18–19; Schlechtriem/Schmidt-Kessel in Schlechtriem/Schwenzer (n 1) Article 11 paras 19–19; Magnus (n 11) Article 12 para 1. 35 Magnus (n 11) Article 11 paras 18–19; Schlechtriem/Schmidt-Kessel in Schlechtriem/Schwenzer (n 1) Article 11 paras 19–19; Magnus (n 11) Article 12 para 1.

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form of signature in their agreement, any type of signature which is appended to the communication will be sufficient provided it was intended to serve as a signature or would reasonably be understood to be a signature by a reasonable party under the provisions of Article 8(3) of the CISG.36 There is no need for a certified signature and a simple electronic signature will suffice.37 This approach is also supported by the UN Electronics Convention in Article 9(3) which requires only that the method of signing should be as reliable as appropriate for the purpose for which it was generated in the light of all the circumstances or if it can be proven to have been sufficient to identify the party and indicate the party's intention in regard to the electronic communication.38

III. Modification of Contracts Article 29 CISG provides that a contract may be modified or terminated by mere agreement. This also applies even where the initial agreement was made in writing.39 Article 29 confirms the freedom of form principle contained in Articles 6 and 11. This rule was adopted to provide certainty in common law jurisdictions where consideration may be required as a condition of validity.40 Article 29 applies to all modifications, settlements, waivers and terminations.41 Where the applicable law, however is the legal system of a country which has made an Article 96 reservation, any modifications to the contract need to be made in writing as well.42 32 In accordance with the freedom of contract principle Article 29 recognizes the right of parties to include no oral modification clauses ("NOM-clauses") in their written agreements.43 Where a contract contains such a NOM-clause Article 29(2) stipulates that agreement may not be otherwise modified or terminated, including the NOMclause itself.44 Writing in this context will include electronic communications as understood under the expanded interpretation of Article 13 unless the parties have restricted the meaning of writing in the NOM-clause.45 However, it contains a proviso, in line with the principle of good faith, namely that a party may be precluded from relying on such a clause where its conduct after an oral modification has led to the other party relying on such conduct.46 The rule is also similar to the application of estoppel in common law countries.47 33 Neither the PECL nor the CESL require any formalities for the conclusion of an international sales contract between merchants. Article 2:101(2) PECL clearly states that once parties reach sufficient agreement with the intent to be legally bound, no further 31

36 Magnus (n 11) Article 11 paras 18–19; Schlechtriem/Schmidt-Kessel in Schlechtriem/Schwenzer (n 1) Article 11 para 19. 37 Eiselen (n 11) pp. 158–159. 38 UNCITRAL United Nations Convention on the Use of Electronic Communications in International Contracts 2005 Preamble; Explanatory Note paras 148–150. 39 Schroeter Schlechtriem/Schwenzer (n 1) Article 29 paras 2 & 4; Magnus (n 11) Article 29 para 7; Björkland Article 29 in Kröll et al (eds), UN Convention on Contracts for the International Sale of Goods (CISG) Article 29 para 7. 40 Schroeter Schlechtriem/Schwenzer (n 1) Article 29 para 4; Magnus (n 11) Article 29 para 7. 41 Schroeter Schlechtriem/Schwenzer (n 1) Article 29 para 13; Magnus (n 11) Article 29 para 8. 42 Schroeter Schlechtriem/Schwenzer (n 1) Article 29 para 4; Magnus (n 11) Article 29 para 16. 43 Magnus (n 11) Article 29 para 12; Schroeter Schlechtriem/Schwenzer (n 1) Article 29 para 22. 44 Magnus (n 11) Article 29 para 12; Schroeter Schlechtriem/Schwenzer (n 1) Article 29 para 24; Federal District Court [New York], 22 September (Graves v Chilewich) http://cisgw3.law.pace.edu/cases/94 0922u1.html; OLG Hamm, 30 November 2010, CISG-Online No. 2291. 45 Schroeter Schlechtriem/Schwenzer (n 1) Article 29 para 28. 46 Schroeter Schlechtriem/Schwenzer (n 1) Article 29 para 10. 47 Schroeter Schlechtriem/Schwenzer (n 1) Article 29 para 33.

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requirements are needed; it need not be concluded or evidenced in writing.48 Similarly Article 6 CESL states that a sales contract need not be made or evinced in any form. Article 2:106 PECL provides that a NOM-clause only establishes a presumption that an agreement to modify or terminate an agreement will not be binding unless it is in writing.49 This rule provides only evidential weight to the NOM-clause.50 It would be against the principle of good faith if there is a clear indication at a later stage that the parties wished to amend the contract despite the NOM-clause.51 This is also the case where one party has reasonably relied on the conduct of the other party giving the impression that an oral modification will be binding.52 Like the preceding two instruments the UNIDROIT Principles subscribe to the 34 principle of freedom of form or informality.53 Although no form is required parties are free to derogate from the Principles and stipulate their own form.54 A party may insists prior to conclusion of the contract that the contract shall not become binding until such time as it has been reduced to writing in terms of Article 2.1.13.55 Article 1.11 defines "writing" as "any mode of communication that preserves a record of the information contained therein and is capable of being reproduced in tangible form. The Principles define this formal requirement in functional terms. Thus, a writing includes not only a telegram and a telex, but also any other mode of communication, including electronic communications, that preserves a record and can be reproduced in tangible form.56 The Principles' provision on NOM-clauses in Article 2.1.18 is almost identical to the CISG provision in Article 29. In contrast to some national laws, and similar to the CISG, any derogation from the requirements of the NOM-clause must also meet the requirements stipulated in the NOM-clause.57 Similar to the CISG, Article 2.1.18 also provides for informal modifications where one of the parties has reasonably relied on the conduct of the other party.58 The Official Comment to the Article provides the following example where the exception will be allowed: A, a contractor, contracts with B, a school board, for the construction of a new school building. The contract provides that the second floor of the building is to have sufficient bearing capacity to support the school library. Notwithstanding a “no oral modification” clause in the same contract, the parties orally agree that the second floor of the building should be of non-bearing construction. A completes construction according to the modification and B, who has observed the progress of the construction without making any objections, only at this point objects to how the second floor has been constructed. A court may decide that B is not entitled to invoke the “no oral modification” clause as A reasonably relied on the oral modification, and is therefore not liable for non-performance.

The CISG applies to the international sale of goods in German law unless it has been 35 specifically excluded by the parties.59 There are no formal requirements for sales con-

48 Lando & Beale (eds), Principles of European Contract Law Parts I and II (2000) p. 138; Butler, Comparative Editorial Article 11 CISG and PECL Article 2:101(2) http://www.cisg.law.pace.edu/cisg/text/ peclcomp11.html. 49 Lando & Beale (n 49) p. 155. 50 Lando & Beale (n 49) pp. 155–156. 51 Lando & Beale (n 49) p. 155. 52 Lando & Beale (n 49) p. 155. 53 Official Comment para 1; Vogenauer (n 4) Article 1.2 para 1. 54 Vogenauer (n 4) Article 1.2 para 4. 55 Vogenauer (n 4) Article 1.2 para 4. 56 Article 1.11 Official Comment 4. 57 Vogenauer (n 4) Article 2.1.18 para 2. 58 Vogenauer (n 4) Article 1.2 para 4. 59 Schlechtriem/Schwenzer (n 1) Article 6 paras 6–8; BGH, 23 July 1997, CISG-Online No. 285; OLG Munich, 2 October 2013 CISG-Online No. 2473.

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36

37

38

39

tracts under domestic German law.60 The principle of freedom of form can be found impliedly in § 125 BGB.61 A contract need only be reduced to writing where a statute specifically requires it.62 The German BGB contains no specific section dealing with the modification of contracts and the issue must therefore be determined according to the general principles in regard to the formation of contract.63 Contrary to the position under the CISG, a NOM-clause may be derogated from orally.64 The German BGB makes specific provision for the recognition of contracts concluded in electronic form where writing and signature are required in § 126(3) unless a statute excludes that possibility. As sales contracts are free from form requirements this section will only apply where the parties stipulate writing as a constitutive requirement. These provisions have been included in the BGB to comply with the Article 9(1) of the European Community Directive on Electronic Commerce.65 Where the parties agree to the written form, it is open to the parties to agree whether a signature is necessary or what form an electronic signature should take.66 The CISG applies to the international sale of goods in France unless it has been specifically excluded by the parties.67 In French law no specific formalities are prescribed for international sale of goods contracts. The French Civil Code was substantially redrafted in 2016 and adopted in 2018. The new provisions dealing with contract, like their predecessors require no formalities.68 The sale is complete as soon as the goods and the price have been agreed upon in terms of Article 1113. Like German law, French law also makes provision for using electronic communications for the formation of a contract in compliance with the European Community Directive on Electronic Commerce in Articles 1125–1127. The requirements for an electronic signature as set out in Article 1367 in a contract are simple authentication and integrity requirements similar to the provisions of the UNCITRAL Model on Electronic Commerce and the Electronics Convention of 2005. The CISG applies to the international sale of goods in Spanish law unless it has been specifically excluded by the parties.69 In Spanish law Article 1.278 of the Spanish Civil Code contains the norm of freedom of form for contracts generally.70 A law may however require formalities for specific types of contract in terms of Article 1.279. Article 1280 requires all contracts where the performance exceeds 1,500 pesetas to be contained in writing. However, under Article 1279 non-compliance does not lead to invalidity of the agreement, but it merely remains unenforceable against third parties until such time 60 Ellenberger/Palandt (n 5) § 125 para 1; Danneman/Schulze/Wais (n 5) § 125 para 5; Reinicke & Tiedke, Kaufrecht (8th edn, 2009) paras 7 & 28. 61 Bonell & Beale p. 142. 62 BGB § 126(1). See Ellenberger/Palandt (n 5) § 126 para 1; Danneman/Schulze/Wais (n 5) § 12 para 5. 63 Von Caemmerer & Schlechtriem (eds), Kommentar zum einheitlichen UN-Kaufrecht (2 nd edn, 1995) Article 29 para 19; Bonell & Beale p. 155; Magnus (n 11) Article 29 para 12; Ellenberger/Palandt (n 5) § 125 para 19. 64 Magnus (n 11) Article 29 para 12; Vogenauer (n 4) Article 1.2 para 4; BGH, 26 October 1996; BGH, 20 October 1994; Ellenberger/Palandt (n 2) § 125 para 19; Reinicke & Tiedkte (n 51) para 100. 65 [2000] OJ L178/1. See Ellenberger/Palandt (n 2) § 125 para 6; Triebiger, Der elektronische Vertragschluss im deutschen und spanischen Recht (2010) pp. 149–150. 66 Ellenberger/Palandt (n 2) § 125 para 6. 67 Schlechtriem/Schwenzer (n 1) Article 6 paras 6–8; Cour d'appel Paris, 6 November 2001 available at http://cisgw3.law.pace.edu/cases/011106f1.html; Cour de cassation, 25 October 2005 CISG-Online 1098. 68 Campbell (n 19) p. FRA 8; Endrös, Kaufvertrag in Frankreich (1999) pp. 10–11. 69 Schlechtriem/Schwenzer (n 1) Article 6 paras 6–8; Tribunal Supremo (Spain), 24 February 2006 (Mercantil NERTOR v Autolux F. Strub;, Automobile accessories case) available at http://cisgw3.law.pace.e du/cases/060224s4.html. 70 Piske, Kaufvertrag in Spanien (1998) p. 18; Vaquer (n 12) para 91.

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as it has been reduced to writing.71 Parties may stipulate formalities themselves under the principle of freedom of contract in Article 1255 of the Civil Code.72 Spanish law has also made provision for electronic communications and transactions in compliance with the European Community Directive on Electronic Commerce in a specific act rather than incorporating it into the Civil Code.73

IV. Uniform Commercial Code Formalities The CISG applies to the international sale of goods in American law unless it has 40 been specifically excluded by the parties.74 Under domestic American law writing is required for the enforceability of all sales contracts where the purchase price exceeds $500 under § 2-201 of the Uniform Commercial Code.75 This is an embodiment of the English Statute of Frauds although the latter no longer applies to sales contracts under English law. Any form of writing is sufficient and must be signed to be enforceable against a party. It is not necessary to prove that the parties created a written contract; it is sufficient if the writing describes or refers to the transaction and is signed or adopted by the person against whom it is to be enforced.76 Multiple writings made at different times may be construed together to satisfy the statute of frauds.77 A contract which is not in writing may nevertheless be enforceable if the goods are to be specially manufactured for the buyer and the seller has made a substantial start to the manufacturing, or if payment has been made and accepted or the goods received and accepted in terms of § 2-201(3). 78 A merchant may also confirm the agreement in writing to the other merchant unless the other merchant objects to the writing within a reasonable time under § 2-201(2). 79 Kastely et al remark that since the enactment of the first statute of frauds in the United States many judges and lawyers have resisted the application of the statute especially where there was no real dispute about the existence of the agreement. 80 The law on the Vaquer (n 12) para 93. Vaquer (n 12) para 91. 73 Triebiger (n 12) p. 155. 74 Schlechtriem/Schwenzer (n 1) Article 6 paras 6–8; Circuit Court of Appeals (2 d. Cir.), 6 December 1995 (Delchi Carrier, S.p.A. v Rotorex Corp) http://cisgw3.law.pace.edu/cases/940909u1.html; District Court, Southern District of New York, 26 March 2002 (St Paul Guardian Insurance Company and Travelers Insurance Company v Neuromed Medical Systems GmbH) http://www.cisg.law.pace.edu/cases/020326u1.ht ml; District Court, Pennsylvania, 6 January 2006 (LLC v GOSoftware, Inc.) http://cisgw3.law.pace.edu/case s/050816u1.html; District Court, Southern District of New York, 18 January 2011 (Hanwha Corporation v Cedar Petrochemicals, Inc.); http://cisgw3.law.pace.edu/cases/110118u1.html. 75 Hull, United States and International Sales, Lease, and Licensing Law (2 nd edn, 2012) 51; Blum ‘Making sense of the UCC Statute of Frauds’ (2014) Michigan Bar J p. 36. 76 Kastely, Post & Ota, Contracting Law (2006) p. 373; McKinney's Uniform Commercial Code § 2-201 para 1; United States Metz Beverage Co. v Wyomaing beverages Inc Supreme Court of Wyoming 39 P.3 d (2002); United States Republic Bank, Inc. v West Penn Allegheny Health System, Inc. 475 Fed.Appx. 692, 2012 WL 1223933 (C.A.10 (Utah); United States Copeland Corp. v Choice Fabricators Inc. 345 Fed.Appx. 74 C.A.6 (Ohio), 2009. 77 See United States Beggin v Ft. Worth Mtge. Corp., 93 Ohio App.3 d 333, 638 N.E.2 d 604, 607 (Ohio Ct.App.1994); United States Copeland Corp. v Choice Fabricators Inc. 345 Fed.Appx. 74 C.A.6 (Ohio), 2009; United States Benefit Vision Inc. v Conseco Life Insurance Company 2014 WL 5614711 N.D.Ill., 2014. 78 United States Standard Bent Glass Corp. v Glassrobots Oy 333 F.3 d 440 C.A.3 (Pa.), 2003 p. 445; United States PH Intern. Trading Corp. v Nordstrom, Inc. 555 Fed.Appx. 9 C.A.2 (N.Y.), 2013; McKinney’s (n 78) § 2-201 para 6; United States United Magazine Co. v Murdoch Magazines Distribution, Inc., 2001, 146 F.Supp.2 d 385; United States RIJ Pharmaceutical Corp. v Ivax Pharmaceuticals, Inc., 2004, 322 F.Supp.2 d 406. 79 United States General Trading Intern., Inc. v Wal-Mart Stores, Inc. 320 F.3 d 831 C.A.8 (Ark.), 2003. 80 Kastely, Post & Ota (n 78) p. 374. 71 72

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subject is complex due to the numerous exceptions that have been created by the courts.81 It would therefore seem prudent to ensure that there is a properly signed agreement if American law is to apply. 41 The UCC also deals specifically with no oral modification clauses in § 2-209(2). It states that a contract may not be otherwise modified and that the writing requirements of § 2-201 need to be met. An attempted modification may nevertheless operate as a waiver of the requirement.82

V. Other Electronic Commerce Laws and Conventions American law recognizes electronic communications as valid to fulfil the state of frauds' requirements.83 The provisions of UETA which are applicable in 48 states contain the general principle for the recognition of electronic records and signatures. This is augmented by the provisions of the United States Code in § 7001 read with § 7006. The approach is technically neutral and conforms with the general approach under the UNCITRAL Model Law for Electronic Commerce and the United Nations Electronics Convention. There is no differentiation between various types of electronic signature. The only requirements are that the signature must be logically associated with the contract or record and attached with the intent to sign. Typing one’s name at the bottom of an email may suffice.84 43 The CISG does not apply in England and consequently international sales are governed by English domestic law. The Sale of Goods Act of 1893 initially required agreements of sale to be in writing but this requirement along with the writing requirement in the Statute of Frauds of 1677 was abolished in 1954 by the Law Reform (Enforcement of Contracts) Act 1954.85 Sales contracts may therefore be concluded without any formalities.86 Parties may however insist on the contract being reduced to writing in line with the principle of freedom of contract. The requirements of writing and signature can be fulfilled by electronic means.87 The English Law Commission advised that it would not be necessary to amend any legislation outside of marine insurance to comply with the European Community Directive on Electronic Commerce88 to facilitate electronic commerce in the England.89 44 The CISG applies to the international sale of goods in Chinese law unless it has been specifically excluded by the parties.90 In terms of Article 469 of the Chinese Contract Law sales contracts may be concluded in any form, including orally. The parties may 42

Kastely, Post & Ota (n 78) p. 376; Blum (n 77) pp. 36 et seq. § 2-209(4); United States Westinghouse Credit Corp. v Shelton 645 F.2 d 869 C.A.Okl., 1981, 872; United States Frolow v Wilson Sporting Goods Co. 710 F.3 d 1303 C.A.Fed. (N.J.),2013; United States Copeland Corp. v Choice Fabricators Inc. 345 Fed.Appx. 74 C.A.6 (Ohio), 2009. 83 Kastely, Post & Ota (n 78) p. 374; United States Cloud Corp. v Hasbro, Inc., 314 F.3 d 289, 296 (7th Cir. 2002). 84 United States Cloud Corp. v Hasbro, Inc., 314 F.3 d 289, 296 (7th Cir. 2002). 85 Beatson, Burrows & Cartwright, Anson's Law of Contract (31st edn, 2020) p. 77. 86 Chitty (n 21) para 43-022; Beatson et al (n 87) p. 77; Law Commission Advice to the Government, Electronic Commerce: Formal Requirements in Commercial Transactions (December 2001) para 5.1. 87 Beatson et al (n 87) p. 91; England Perreira Fernandes SA v Mehta [2006] 1 WLR 1543. 88 [2000] OJ L178/1. 89 Beatson et al (n 87) p. 91. See also Law Commission Advice to the Government (n 88) paras 3.23; and 3.39–3.40. 90 Schlechtriem/Schwenzer (n 1) Article 6 paras 6–8; CISG-AC Opinion No. 15, Reservations under Articles 95 and 96 CISG, Rapporteur: Prof. Dr. Ulrich G. Schroeter, University of Mannheim, Germany Comments paras 2.4 & 4.3; CIETAC Arbitration Award May 2006 http://cisgw3.law.pace.edu/cases/06050 0c3.html. 81 82

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however agree to the contract being reduced to writing. Where a contract is reduced to writing but not signed, the contract is concluded if one of the parties has performed its main obligation and the performance was accepted by the other party.91 There is therefore no specific requirement for a sales contract to be in writing. China also recently withdrew their reservation in respect to the written form in international sales under Article 96 of the CISG as the domestic sales law does not require the written form. 92 The usual rules on the formation of contract apply to electronic contracts.93 Article 469 of the Contract Law specifically includes EDI and e-mails under the concept of writing.94 The Electronic Signature Law of 2004 is based on the UNCITRAL Model Law of 1996 but the general signature requirement in Section 13 sets a fairly high standard similar to advanced digital signatures in other jurisdictions. The Section however also allows contractual parties to agree on what shall constitute a valid electronic signature.

G. Illustrations Illustration 1

45

A German seller concludes a sales contract with a Japanese buyer for the sale of certain machinery. The total value of the agreement is USD 2 million. All the negotiations and the agreement take place by telephone. The parties have not agreed to the applicable law.

In this instance the CISG will apply autonomously since both parties have their 46 places of business in CISG. Under CISG the agreement will be valid and enforceable in accordance with the freedom of form principle contained in Article 11. Illustration 2

47

A German seller concludes a sales contract with a Russian buyer for the sale of certain machinery. The total value of the agreement is USD 2 million. All the negotiations and the agreement take place by telephone. The parties have not agreed to the applicable law.

Although the CISG will apply to this agreement as both parties have their places of 48 business in CISG countries, the Russian Federation has made an article 96 declaration excluding the application of Article 11. If the otherwise applicable law according to the rules of private international law is Russian law, the agreement will be invalid because Russian domestic law requires international sales contracts to be reduced to writing. In contrast, if the buyer was American, the agreement would be valid because the United States have not made an Article 96 declaration. Illustration 3

49

A German seller concludes a sales contract with an American buyer for the sale of certain machinery. The total value of the agreement is USD 2 million. All the negotiations and the agreement take place by email. The standard terms of the buyer which are applicable to the transaction stipulates that any amendment to the agreement must be made and signed by the parties. A week after the initial agreement the buyer sends an email ordering an additional USD 1 million worth of machinery. The buyer has typed his name at the bottom of the email. The seller agrees to the additional quantity by email. The seller also typed his name at the bottom of the email

Art 490. CISG-AC Opinion No. 15, Reservations under Articles 95 and 96 CISG, Rapporteur: Prof. Dr. Ulrich G. Schroeter, University of Mannheim, Germany Comments paras 4.3. 93 Rizzi ,E-Commerce Law in China (2013) p. 45. 94 id. p. 45. 91

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51

The CISG will apply to this agreement, but due to the no-oral-modification clause, any amendments need to be in writing and signed by the parties. It is generally accepted that electronic communications such as email will constitute writing under the CISG. The CISG has no rules dealing with signature and it is therefore open to the parties to agree to the kind of signature required. In this case it is likely that the typing of the parties' names in the emails will be sufficient to constitute a simple electronic signature. Illustration 4 A German seller concludes a sales contract with a French/English/Spanish/Chinese/American buyer for the sale of certain machinery. The total value of the agreement is USD 2 million. All the negotiations and the agreement take place by telephone. The parties have agreed that domestic law will apply to the exclusion of the CISG.

Under Article 6 of the CISG parties are free to exclude the application of the CISG. Where the parties have excluded its application the contract will be governed by the domestic law as determined by the rules of private international law. In all of the legal systems under discussion the principle of party autonomy applies in regard to choice of law, i.e. if the parties have included a choice of law clause in their agreement, courts in these countries will recognize that choice. 53 Under German law, French law, English law and Chinese law the agreement will be valid and binding since none of these legal systems require any formalities for an international sales agreement. Under Spanish law the agreement will be valid and binding, but it is unenforceable against third parties until it is reduced to writing. Under American law the agreement will be unenforceable due to requirements of form under the UCC for any commercial contract where the purchase price exceeds $500, but there are a number of exceptions s outlined above. 52

H. Cross References The rules on which legal system will be applicable are normally determined by the rules of private international law. However, where one or both of the parties have their places of business in a CISG country, Article 1 of the CISG will determine whether the Convention applies or not. The issue of the scope of the CISG and other legal systems is dealt with in Chapter 5 on ‘Scope’. 55 This chapter does not deal with the parol evidence rule that applies in certain common law countries. This issue is dealt with in Chapter 23 on ‘Contract Interpretation’. 54

I. Practitioner Tips & Contract Clauses I. Practitioner Tips 56

It is preferable that international sales agreements should at least be reduced to writing and signed if possible. In some jurisdictions such as America sales agreements need to in writing and signed although the bar for meeting both of these requirements are set relatively low. Where there is no written agreement, a party should follow up the oral or informal agreement with a confirmatory writing. In legal systems like the United States and Germany such a confirmatory writing will constitute proof of the agreement unless the other party objects to such confirmatory writing within a reasonable period of time.

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Additionally, under the American UCC such a confirmatory writing fulfils the writing requirement of § 2-201. Where the sales contract is concluded electronically it is advisable for the parties 57 to agree to what type of signature will be accepted for the purpose of concluding or amending the contract, especially where the contract contains a no oral modification clause. Parties should carefully consider whether they need a no oral modification clause 58 and formalities will be required, especially regarding signature. In most legal systems electronic communications are regarded as 'writing' but not all forms of signature such as typing of one's name at the bottom of an email will e sufficient to constitute a valid signature, especially where more stringent requirements are set for electronic signature as for instance in the Chinese Electronic Signature Law.

II. Model Clauses 1. Writing as Constitutive Requirement for Contract Formation No agreement will come into existence between the Parties unless the whole agreement 59 has been reduced to writing, signed by both Parties. It will be sufficient for each Party to sign a separate but identical document.

2. No Oral Modification Clause No amendment, variation, waiver or termination of this agreement shall be valid and 60 binding and unless it has been reduced to writing and signed by both parties.

3. Electronic Communications Clause Any electronic communication that is accessible so as to be usable for future reference 61 and which can be downloaded or stored by the other Party shall be regarded as in writing. Where an electronic signature is required any method of electronic authentication employed by one of the Parties, including but not limited to, typing the Party's name at the bottom of an email or sms, shall be regarded as sufficient for fulfilling a signature requirement in the agreement provided that the method identifies the person and indicates the Party's approval of the information in the data message. Alternatively: Where the contract requires a signature by any Party, that requirement will be met by any of the following methods of electronic signature: (a) method 1; (b) method 2; and (c) method 3.

J. Additional Sources Beale (ed), Chitty on Contracts (32nd edn, Sweet & Maxwell 2015; Beatson, Burrows & Cartwright, Anson's Law of Contract (31st edn, OUP 2020); Björkland, Article 29 CISG in Kröll et al, UN Convention on Contracts for the International Sale of Goods (CISG) (2nd ed C.H. Beck, Hart, Nomos 2018); Blum, 'Making sense of the UCC Statute of Frauds' [2014] Michigan Bar J 36–39; Campbell, Remedies for International Sellers of Goods (Yorkhill Law Publishing 2009); CISG-AC Opinion No. 1, Electronic Communications under CISG, 15 August 2003. Rapporteur: Prof. Dr. Christina Ramberg, Gothenburg, Sweden; CISG-AC Opinion No. 15, Reservations under Articles 95 and 96 CISG, Rapporteur: Prof. Dr. Ulrich G. Schroeter, University of Mannheim, Germany, Comments; Danneman & Schulze German Civil Code (C.H. Beck 2020); Eiselen, 'Electronic commerce and the UN Convention on Contracts for the International Sale of Goods (CISG) (1980)’ (1999) 6 EDI Law Review 21–46; Eiselen, ‘The Integration of the UN Electronic

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Chapter 7 Contractual Formalities Communications Convention and the CISG’ in Schwenzer, Atamer & Butler (eds), Current Issues in the CISG and Arbitration (Eleven International Publishing 2014) pp. 145–166; Eiselen & Kritzer, International Contract Manual Vol IV (Thomson Reuters 2008); Eiselen, ‘The UNECIC: International Trade in the Digital Era’ (2007) (2) Potchefstroom Electronic Law Journal 1–49 available online at http://www.nwu .ac.za/content/volume-10-2007-no-2#contributions; Eiselen, ‘The Interaction between the UNECE and the CISG’ in Kilian and Boss (eds), The United Nations Convention on Electronic Communications in International Contracts (UNECE) (Kluwer 2009) 63 et seq; Ellenberger in Bassenge et al. (eds), Palandt Bürgerliches Gesetzbuch (79th edn, C.H. Beck 2020); Honnold & Flechtner, Uniform law for international sales under the 1980 United Nations Convention (4th edn, Wolters Kluwer 2009); Hull, United States and International Sales, Lease, and Licensing Law (2nd edn, Wolters Kluwer 2012); Kastely, Post & Ota, Contracting Law (Carolina Academic Press 2006); Kilian and Boss (eds), The United Nations Convention on Electronic Communications in International Contracts (UNECE) (Kluwer 2009); Vogenhauer (ed), Commentary on the UNIDROIT Principles of International Commercial Contracts (PICC) (2nd edn, OUP 2015); Kötz, European Contract Law Volume 1: Formation, Validity, Agency, Third Parties and Assignment (Clarendon Press 1998); Lando & Beale (eds), Principles of European Contract Law Parts I and II (Kluwer Law International 2000); Law Commission Advice to the Government, Electronic Commerce: Formal Requirements in Commercial Transactions (December 2001); Leng & Shen, ‘National Report on PRC Contract Law’ 2014 Annual Conference Asian Law & Economics Association – Symposium on the Evolution of Private Law in China and Taiwan (Contract Law Session); Magnus in Martinek (ed), J. Von Staudingers Kommentar zum Bürgerlichen Gesetzbuch mit Einführungsgesetz und Nebengesetze Wiener UN-Kaufrecht (CISG) (Sellier – de Gruyter 2014); Mann & Winn, Electronic Commerce (2nd edn, Aspen Publishers 2005); McKendrick, Contract (9th edn, OUP 2020); Piske, Kaufvertrag in Spanien (Alpmann International 1998); Reed, Computer Law (7th edn, OUP 2012); Reinicke & Tiedtke, Kaufrecht (8th edn, Vahlen 2009); Rizzi, E-Commerce Law in China (Wolters Kluwer 2013); Schlechtriem & Schroeter, Internationales UN-Kaufrecht (6th edn, Mohr Siebeck 2016); Schlechtriem/Schmidt-Kessel in Schwenzer (ed), Schlechtriem & Schwenzer Commentary on the UN Convention on the International Sale of Goods (CISG) (4th edn, OUP 2016); Triebiger, Der elektronische Vertragsschluss im deutschen und spanischen Recht (Wissenschaftlicher Verlag Berlin 2010); UNCITRAL, Guide to Enactment of the UNCITRAL Model Law on Electronic Commerce (United Nations Publication 1996); UNCITRAL, Promoting confidence in electronic commerce: legal issues on international use of electronic authentication and signature methods (United Nations Publication 2009); Van der Merwe et al, Information and Communications Technology Law (2nd ed LexisNexis 2016); Van Huyssteen et al, Contract General Principles (5th edn, Juta 2016); Vaquer, Contract Law in Spain (Wolters Kluwer 2012); Wais in Danneman & Schulze (eds) German Civil Code (C.H. Beck 2020) Zimmerman, China Law Deskbook – A Legal Guide for Foreign-Invested Enterprises (4th edn, American Bar Association 2014); Zimmermann & Whittaker, Good Faith in European Contract Law (CUP 2008); Zweigert &Kötz, An Introduction to Comparative Law (3rd edn, OUP 1998).

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CHAPTER 8 FORMATION OF CONTRACT* Reiner Schulze A. Topics Covered . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B. Introductory Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C. Statement of Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . D. International Sales Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . E. Sampling of Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. CISG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. UNIDROIT Principles of International Commercial Contracts . . . . . . . . . . . III. Principles of European Contract Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Common European Sales Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. German Bürgerliches Gesetzbuch . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI. French Code Civil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VII. Spanish Código Civil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VIII. American Uniform Commercial Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IX. United Kingdom Sale of Goods Act 1979 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . X. English Common Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XI. American Restatement (Second) of Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Common Law as Represented by American Restatement . . . . . . . . . . . . . . . 2. Common Law of Contracts Compared to Uniform Commercial Code XII. Chinese Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F. Commentary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Consensus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Dissent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Intention to be Bound and Additional Requirements . . . . . . . . . . . . . . . . . . . 4. Statements and Conduct . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5. Communication of Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Offer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Concept . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Distinction from Invitatio ad Offerendum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Withdrawal, Revocation and Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Withdrawal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Revocation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Acceptance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Mode . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Silence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Time Frame . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. Modified Acceptance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5. Commercial Letter of Confirmation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Specific Forms of Conclusions of Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Conclusion without Offer and Acceptance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Overlapping Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) ‘Extended’ Conclusion of Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Internet Auctions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Artificial Intelligence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . G. Cross References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . H. Practitioner Tips . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Additional Sources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 2 3 5 7 7 8 9 10 11 12 13 14 15 16 23 23 24 25 26 26 26 32 35 37 39 45 45 46 48 48 49 52 53 53 54 57 60 63 67 67 67 69 73 74 75 76 78

* The author thanks Dr. Martin Weitenberg for providing additional comments from a practioner’s perspective.

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Chapter 8 Formation of Contract

A. Topics Covered 1

The formation of a contract requires an agreement between the parties. Such an agreement is frequently made through the acceptance of an offer, but also through statements and conduct by the parties. The following will consider not only these topics but also the boundaries between offers and non-binding proposals, the lack of consensus in individual issues, the effectiveness of statements, and the idiosyncrasies of concluding contracts via electronic means. Questions concerning the applicable law and formal requirements underlying the conclusion of contracts are dealt with in Chapters 6 and 7 of this volume.

B. Introductory Note 2

The formation of contract is the decisive process that gives rise to contractual obligations between parties. The parties determine their individual duties and bind themselves to performance in accordance with those obligations. Traditionally, this process takes place at a precisely determined point in time through the acceptance of an offer (the ‘magic moment’). The rules on the formation of contract are therefore generally focused on the offer, the acceptance, and sufficient accordance between both of these statements or acts. However, in practice there is often a smooth transition between the formation of contract (in this narrow sense) and the pre-contractual phase. The transition to binding contract through negotiations is not always characterized by a linear process of outlining of the content of the prospective contract step-by-step, but instead, the parties, during the negotiations, often undertake unilateral or bilateral pre-contractual obligations thus gradually solidifying their commitments before the contract is concluded. This Chapter on formation of contract is therefore closely related to the earlier Chapters on pre-contractual liabilities in Civil Law and Common Law (Chapters 3 and 4). The current Chapter focuses primarily on the final stage in the process of contract formation.

C. Statement of Issues Parties are to pay particular attention to the formation of contract as this process is decisive for the creation of the contractual rights and obligations. This Chapter examines the legal framework that often characterizes the transition from individual interests and expectations to reciprocal, binding rights and obligations in international transactions. In this respect, the offer and acceptance deserve special attention as they represent the legal acts that result in the formation of a contract. The offer made by one party to the other already outlines the entire (or at least substantial) scope of the performance for both parties and is irrevocable in some legal systems. 4 The acceptance by the other party will bind both parties to the performance obligations outlined in the offer. A key distinction in concluding contracts is the difference between an offer and an invitatio ad offerendum (invitation to treat). Other issues include the possibility to withdraw or revoke the offer, silence in response to the offer, responding to the offer with modifications, and the moment in which the offer becomes effective. 3

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D. International Sales Transactions The CISG contains a simple and clear set of rules that is in most cases well-suited 5 for the conclusion of an international sales contract. This set of rules has also influenced the development of the PICC, the PECL, the CESL and several national laws (such as Chinese law and the new Dutch, German, and French laws). However, even when the CISG has influenced national laws, it is important to realize that such laws may have additional requirements for the formation of contracts; these aspects should be considered when opting out of the CISG in favour of a national law (see Chapter 7 on ‘Contractual Formalities’). For instance, contracts in Common Law legal systems are subject to the requirement of consideration; Spanish law includes the requirement of causa.1 Contracting parties in choosing applicable law must bear in mind the considerable differences between the Civil Law and Common Law legal systems in determining the sufficient content needed for effective offers and consequently, for a binding contract. The distinction between the requirement of sufficient content in Civil and Common 6 Law is due to the approach in Civil Law legal systems in which the default (i.e. nonmandatory) law found in the codes supplements the agreement between the parties (to the extent that they have not agreed to the contrary). Moreover, the notion of constructive interpretation in many Civil Law legal systems provides for the contract to be interpreted in accordance with the parties’ hypothetical intent. If the parties view the default law as suited to their purposes the contract will tend to be much shorter than is found in Common Law legal systems, where there are no extensive codifications and where the interpretation of the contract is more restrictive (strict interpretation of the words of the contract without recourse to dispositive law or contractual purpose).

E. Sampling of Laws I. CISG 7

Article 14 (1) A proposal for concluding a contract addressed to one or more specific persons constitutes an offer if it is sufficiently definite and indicates the intention of the offeror to be bound in case of acceptance. A proposal is sufficiently definite if it indicates the goods and expressly or implicitly fixes or makes provision for determining the quantity and the price. (2) A proposal other than one addressed to one or more specific persons is to be considered merely as an invitation to make offers, unless the contrary is clearly indicated by the person making the proposal. Article 15 (1) An offer becomes effective when it reaches the offeree. (2) An offer, even if it is irrevocable, may be withdrawn if the withdrawal reaches the offeree before or at the same time as the offer. Article 16 (1) Until a contract is concluded an offer may be revoked if the revocation reaches the offeree before he has dispatched an acceptance.

1 The requirement of cause under French law was abolished through legislative reforms in 2016 (ordonnance no. 2016-131 du 10 février 2016 portant réforme du droit des contrats, du régime général et de la preuve des obligations), in particular due to the influence of the CISG and European sets of rules, see Rowan, ‘The new French law of contract’ (2017) 66(4) International and Comparative Law Quarterly 805.

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Chapter 8 Formation of Contract (2) However, an offer cannot be revoked: (a) if it indicates, whether by stating a fixed time for acceptance or otherwise, that it is irrevocable; or (b) if it was reasonable for the offeree to rely on the offer as being irrevocable and the offeree has acted in reliance on the offer. Article 17 An offer, even if it is irrevocable, is terminated when a rejection reaches the offeror. Article 18 (1) A statement made by or other conduct of the offeree, indicating assent to an offer is an acceptance. Silence or inactivity does not in itself amount to acceptance. (2) An acceptance of an offer becomes effective at the moment the indication of assent reaches the offeror. An acceptance is not effective if the indication of assent does not reach the offeror within the time he has fixed or, if no time is fixed, within a reasonable time, due account being taken of the circumstances of the transaction, including the rapidity of the means of communication employed by the offeror. An oral offer must be accepted immediately unless the circumstances indicate otherwise. (3) However, if, by virtue of the offer or as a result of practices which the parties have established between themselves or of usage, 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, provided that the act is performed within the period of time laid down in the preceding paragraph. Article 19 (1) A reply to an offer, which purports to be an acceptance but contains additions, limitations or other modifications is a rejection of the offer and constitutes a counter-offer. (2) However, a reply to an offer which purports to be an acceptance but contains additional or different terms which do not materially alter the terms of the offer constitutes an acceptance, unless the offeror, without undue delay, objects orally to the discrepancy or dispatches a notice to that effect. If he does not so object, the terms of the contract are the terms of the offer with the modifications contained in the acceptance. (3) Additional or different terms relating, among other things, to the price, payment, quality and quantity of the goods, place and time of delivery, extent of one party's liability to the other or the settlement of disputes are considered to alter the terms of the offer materially. Article 20 (1) A period of time for acceptance fixed by the offeror in a telegram or a letter begins to run from the moment the telegram is handed in for dispatch or from the date shown on the letter or, if no such date is shown, from the date shown on the envelope. A period of time for acceptance fixed by the offeror by telephone, telex or other means of instantaneous communication, begins to run from the moment that the offer reaches the offeree. (2) Official holidays or non-business days occurring during the period for acceptance are included in calculating the period. However, if a notice of acceptance cannot be delivered at the address of the offeror on the last day of the period because that day falls on an official holiday or a non-business day at the place of business of the offeror, the period is extended until the first business day which follows. Article 21 (1) A late acceptance is nevertheless effective as an acceptance if without delay the offeror orally so informs the offeree or dispatches a notice to that effect. (2) If a letter or other writing containing a late acceptance shows that it has been sent in such circumstances that if its transmission had been normal it would have reached the offeror in due time, the late acceptance is effective as an acceptance unless, without delay, the offeror orally informs the offeree that he considers his offer as having lapsed or dispatches a notice to that effect. Article 22 An acceptance may be withdrawn if the withdrawal reaches the offeror before or at the same time as the acceptance would have become effective. Article 23 A contract is concluded at the moment when an acceptance of an offer becomes effective in accordance with the provisions of this Convention.

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E. Sampling of Laws Article 24 For the purposes of this Part of the Convention, an offer, declaration of acceptance or any other indication of intention “reaches” the addressee when it is made orally to him or delivered by any other means to him personally, to his place of business or mailing address or, if he does not have a place of business or mailing address, to his habitual residence.

II. UNIDROIT Principles of International Commercial Contracts 8

Article 2.1.1 A contract may be concluded either by the acceptance of an offer or by conduct of the parties that is sufficient to show agreement. Article 2.1.2 A proposal for concluding a contract constitutes an offer if it is sufficiently definite and indicates the intention of the offeror to be bound in case of acceptance. Article 2.1.3 same as Article 15 CISG Article 2.1.4 same as Article 16 CISG Article 2.1.5 An offer is terminated when a rejection reaches the offeror. Article 2.1.6 (1) Same as Article 18(1) CISG (2) An acceptance of an offer becomes effective when the indication of assent reaches the offeror. (3) However, if, by virtue of the offer or as a result of practices, which the parties have established between themselves or of usage, the offeree may indicate assent by performing an act without notice to the offeror, the acceptance is effective when the act is performed. Article 2.1.7 An offer must be accepted within the time the offeror has fixed or, if no time is fixed, within a reasonable time having regard to the circumstances, including the rapidity of the means of communication employed by the offeror. An oral offer must be accepted immediately unless the circumstances indicate otherwise. Article 2.1.8 A period of acceptance fixed by the offeror begins to run from the time that the offer is dispatched. A time indicated in the offer is deemed to be the time of dispatch unless the circumstances indicate otherwise. Article 2.1.9 (1) A late acceptance is nevertheless effective as an acceptance if without undue delay the offeror so informs the offeree or gives notice to that effect. (2) If a communication containing a late acceptance shows that it has been sent in such circumstances that if its transmission had been normal it would have reached the offeror in due time, the late acceptance is effective as an acceptance unless, without undue delay, the offeror informs the offeree that it considers the offer as having lapsed. Article 2.1.10 same as Article 22 CISG Article 2.1.11 (1) A reply to an offer, which purports to be an acceptance but contains additions, limitations or other modifications is a rejection of the offer and constitutes a counter-offer. (2) However, a reply to an offer, which purports to be an acceptance but contains additional or different terms which do not materially alter the terms of the offer constitutes an acceptance, unless the offeror,

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Chapter 8 Formation of Contract without undue delay, objects to the discrepancy. If the offeror does not object, the terms of the contract are the terms of the offer with the modifications contained in the acceptance. Article 2.1.12 If a writing which is sent within a reasonable time after the conclusion of the contract and which purports to be a confirmation of the contract contains additional or different terms, such terms become part of the contract, unless they materially alter the contract or the recipient, without undue delay, objects to the discrepancy. Article 2.1.13 Where in the course of negotiations one of the parties insists that the contract is not concluded until there is agreement on specific matters or in a particular form, no contract is concluded before agreement is reached on those matters or in that form. Article 2.1.14 (1) If the parties intend to conclude a contract, the fact that they intentionally leave a term to be agreed upon in further negotiations or to be determined by a third person does not prevent a contract from coming into existence. (2) The existence of the contract is not affected by the fact that subsequently (a) the parties reach no agreement on the term; or (b) the party who is to determine the term does not do so; or (c) the third person does not determine the term, provided that there is an alternative means of rendering the term definite that is reasonable in the circumstances, having regard to the intention of the parties.

III. Principles of European Contract Law 9 Article 2:101 (1) A contract is concluded if: (a) the parties intend to be legally bound, and (b) they reach a sufficient agreement without any further requirement. (2) A contract need not be concluded or evidenced in writing nor is it subject to any other requirement as to form. The contract may be proved by any means, including witnesses. Article 2:103 (1) There is sufficient agreement if the terms: (a) have been sufficiently defined by the parties so that the contract can be enforced, or (b) can be determined under these Principles. (2) However, if one of the parties refuses to conclude a contract unless the parties have agreed on some specific matter, there is no contract unless agreement on that matter has been reached. Article 2:201 (1) A proposal amounts to an offer if: (a) it is intended to result in a contract if the other party accepts it, and (b) it contains sufficiently definite terms to form a contract. (2) An offer may be made to one or more specific persons or to the public. (3) A proposal to supply goods or services at stated prices made by a professional supplier in a public advertisement or a catalogue, or by a display of goods, is presumed to be an offer to sell or supply at that price until the stock of goods, or the supplier's capacity to supply the service, is exhausted. Article 2:202 (1) An offer may be revoked if the revocation reaches the offeree before it has dispatched its acceptance or, in cases of acceptance by conduct, before the contract has been concluded under Article 2:205(2) or (3). (2) An offer made to the public can be revoked by the same means as were used to make the offer. (3) However, a revocation of an offer is ineffective if: (a) the offer indicates that it is irrevocable; or (b) it states a fixed time for its acceptance; or

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it was reasonable for the offeree to rely on the offer as being irrevocable and the offeree has acted in reliance on the offer.

Article 2:203 When a rejection of an offer reaches the offeror, the offer lapses. Article 2:204 (1) Any form of statement or conduct by the offeree is an acceptance if it indicates assent to the offer. (2) Silence or inactivity does not in itself amount to acceptance. Article 2:205 (1) If an acceptance has been dispatched by the offeree the contract is concluded when the acceptance reaches the offeror. (2) In case of acceptance by conduct, the contract is concluded when notice of the conduct reaches the offeror. (3) If by virtue of the offer, of practices, which the parties have established between themselves, or of a usage, the offeree may accept the offer by performing an act without notice to the offeror, the contract is concluded when the performance of the act begins. Article 2:206 (1) In order to be effective, acceptance of an offer must reach the offeror within the time fixed by it. (2) If no time has been fixed by the offeror acceptance must reach it within a reasonable time. (3) In the case of an acceptance by an act of performance under Article 2:205 (3), that act must be performed within the time for acceptance fixed by the offeror or, if no such time is fixed, within a reasonable time. Article 2:207 (1) A late acceptance is nonetheless effective as an acceptance if without delay the offeror informs the offeree that he treats it as such. (2) If a letter or other writing containing a late acceptance shows that it has been sent in such circumstances that if its transmission had been normal it would have reached the offeror in due time, the late acceptance is effective as an acceptance unless, without delay, the offeror informs the offeree that it considers its offer as having lapsed. Article 2:208 (1) A reply by the offeree, which states or implies additional or different terms which would materially alter the terms of the offer is a rejection and a new offer. (2) A reply which gives a definite assent to an offer operates as an acceptance even if it states or implies additional or different terms, provided these do not materially alter the terms of the offer. The additional or different terms then become part of the contract. (3) However, such a reply will be treated as a rejection of the offer if: (a) the offer expressly limits acceptance to the terms of the offer; or (b) the offeror objects to the additional or different terms without delay; or (c) the offeree makes its acceptance conditional upon the offeror's assent to the additional or different terms, and the assent does not reach the offeree within a reasonable time. Article 2:210 If professionals have concluded a contract but have not embodied it in a final document, and one without delay sends the other a writing, which purports to be a confirmation of the contract but which contains additional or different terms, such terms will become part of the contract unless: (a) the terms materially alter the terms of the contract, or (b) the addressee objects to them without delay.

IV. Common European Sales Law 10

Article 30 1. A contract is concluded if: (a) the parties reach an agreement; (b) they intend the agreement to have legal effect; and

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the agreement, supplemented if necessary by rules of the Common European Sales Law, has sufficient content and certainty to be given legal effect. 2. Agreement is reached by acceptance of an offer. Acceptance may be made explicitly or by other statements or conduct. 3. Whether the parties intend the agreement to have legal effect is to be determined from their statements and conduct. 4. Where one of the parties makes agreement on some specific matter a requirement for the conclusion of a contract, there is no contract unless agreement on that matter has been reached. Article 31 1. A proposal is an offer if: (a) it is intended to result in a contract if it is accepted; and (b) it has sufficient content and certainty for there to be a contract. 2. An offer may be made to one or more specific persons. 3. A proposal made to the public is not an offer, unless the circumstances indicate otherwise. Article 32 1. An offer may be revoked if the revocation reaches the offeree before the offeree has sent an acceptance or, in cases of acceptance by conduct, before the contract has been concluded. 2. Where a proposal made to the public is an offer, it can be revoked by the same means as were used to make the offer. 3. A revocation of an offer is ineffective if: (a) the offer indicates that it is irrevocable; (b) the offer states a fixed time period for its acceptance; or (c) it was otherwise reasonable for the offeree to rely on the offer as being irrevocable and the offeree has acted in reliance on the offer. Article 33 When a rejection of an offer reaches the offeror, the offer lapses. Article 34 1. Any form of statement or conduct by the offeree is an acceptance if it indicates assent to the offer. 2. Silence or inactivity does not in itself constitute acceptance. Article 35 1. Where an acceptance is sent by the offeree the contract is concluded when the acceptance reaches the offeror. 2. Where an offer is accepted by conduct, the contract is concluded when notice of the conduct reaches the offeror. 3. Notwithstanding paragraph 2, where by virtue of the offer, of practices which the parties have established between themselves, or of a usage, the offeree may accept the offer by conduct without notice to the offeror, the contract is concluded when the offeree begins to act. Article 36 1. An acceptance of an offer is effective only if it reaches the offeror within any time limit stipulated in the offer by the offeror. 2. Where no time limit has been fixed by the offeror the acceptance is effective only if it reaches the offeror within a reasonable time after the offer was made. 3. Where an offer may be accepted by doing an act without notice to the offeror, the acceptance is effective only if the act is done within the time for acceptance fixed by the offeror or, if no such time is fixed, within a reasonable time. Article 37 1. A late acceptance is effective as an acceptance if without undue delay the offeror informs the offeree that the offeror is treating it as an effective acceptance. 2. Where a letter or other communication containing a late acceptance shows that it has been sent in such circumstances that if its transmission had been normal it would have reached the offeror in due time, the late acceptance is effective as an acceptance unless, without undue delay, the offeror informs the offeree that the offer has lapsed.

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E. Sampling of Laws Article 38 1. A reply by the offeree which states or implies additional or different contract terms which materially alter the terms of the offer is a rejection and a new offer. 2. Additional or different contract terms relating, among other things, to the price, payment, quality and quantity of the goods, place and time of delivery, extent of one party's liability to the other or the settlement of disputes are presumed to alter the terms of the offer materially. 3. A reply which gives a definite assent to an offer is an acceptance even if it states or implies additional or different contract terms, provided that these do not materially alter the terms of the offer. The additional or different terms then become part of the contract. 4. A reply which states or implies additional or different contract terms is always a rejection of the offer if: (a) the offer expressly limits acceptance to the terms of the offer; (b) the offeror objects to the additional or different terms without undue delay; or (c) the offeree makes the acceptance conditional upon the offeror’s assent to the additional or different terms, and the assent does not reach the offeree within a reasonable time.

V. German Bürgerliches Gesetzbuch 11

§ 130 (1) A declaration of intent that is to be made to another becomes effective, if made in his absence, at the point of time when this declaration reaches him. It does not become effective if a revocation reaches the other previously or at the same time. (2) The effectiveness of a declaration of intent is not affected if the person declaring dies or loses capacity to contract after making a declaration. (3) These provisions apply even if the declaration of intent is to be made to a public authority. § 145 Any person who offers to another to enter into a contract is bound by the offer, unless he has excluded being bound by it. § 146 An offer expires if a refusal is made to the offeror, or if no acceptance is made to this person in good time in accordance with sections 147 to 149. § 147 (1) An offer made to a person who is present may only be accepted immediately. This also applies to an offer made by one person to another using a telephone or another technical facility. (2) An offer made to a person who is absent may be accepted only until the time when the offeror may expect to receive the answer under ordinary circumstances. § 148 If the offeror has determined a period of time for the acceptance of an offer, the acceptance may only take place within this period. § 149 If a declaration of acceptance received late by the offeror was sent in such a way that it would have reached him in time if it had been forwarded in the usual way, and if the offeror ought to have recognised this, he must notify the acceptor of the delay after receipt of the declaration without undue delay, unless this has already been done. If he delays the sending of the notification, the acceptance is deemed not to be late. § 150 (1) The late acceptance of an offer is considered to be a new offer. (2) An acceptance with expansions, restrictions or other alterations is deemed to be a rejection combined with a new offer. § 151 A contract comes into existence through the acceptance of the offer without the offeror needing to be notified of acceptance, if such a declaration is not to be expected according to customary practice, or if

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VI. French Code Civil 12 Article 1113 A contract is formed by the meeting of an offer and an acceptance by which the parties demonstrate their will to be bound. This may stem from a person’s declaration or unequivocal conduct. Article 1114 An offer, whether made to a particular person or to persons generally, contains the essential elements of the envisaged contract, and expresses the will of the offeror to be bound in case of acceptance. Failing this, there is only an invitation to enter into negotiations. Article 1115 An offer may be withdrawn freely as long as it has not reached the person to whom it was addressed. Article 1116 An offer may not be withdrawn before the expiry of any period fixed by the offeror or, if no such period has been fixed, the end of a reasonable period. The withdrawal of an offer in contravention of this prohibition prevents the contract being concluded. The person who thus withdraws an offer incurs extra-contractual liability under the conditions set out by the general law, and has no obligation to compensate the loss of profits which were expected from the contract. Article 1117 An offer lapses on the expiry of the period fixed by the offeror or, if no period is fixed, at the end of a reasonable period. It also lapses in the case of the incapacity or death of the offeror. Article 1118 An acceptance is the manifestation of the will of the offeree to be bound on the terms of the offer. As long as the acceptance has not reached the offeror, it may be withdrawn freely provided that the withdrawal reaches the offeror before the acceptance. An acceptance which does not conform to the offer has no effect, apart from constituting a new offer. Article 1120 Silence does not count as acceptance except where so provided by legislation, usage, business dealings or other particular circumstances. Article 1121 A contract is concluded as soon as the acceptance reaches the offeror. It is deemed to be concluded at the place where the acceptance has arrived. Article 1122 Legislation or the contract may provide for a period for reflection, which is a period within which the offeree cannot give his acceptance, or a period for withdrawal, which is a period within which a party may withdraw his consent. Article 1123 A pre-emption agreement is a contract by which a party undertakes that, in the event that he decides to enter into a contract, he will make the first proposal for that contract to the beneficiary of the pre-emption agreement. Where a contract has been concluded with a third party in breach of a pre-emption agreement, the beneficiary of that agreement may obtain reparation of the loss that he has suffered. Where the third party knew of the existence of the pre-emption agreement and of the beneficiary’s intention to take advantage of it, the beneficiary may also sue for nullity or may ask the court to substitute him for the third party in the contract that has been concluded.

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E. Sampling of Laws The third party may give written notice to the beneficiary requiring him to confirm, within a period which the former fixes and which must be reasonable, the existence of a pre-emption agreement and whether he intends to take advantage of it. Such a written notice must state that if he does not reply within that period, the beneficiary of the pre-emption agreement will no longer have the right to claim either to be substituted in any contract concluded with the third party, or nullity of the contract. Article 1124 A unilateral promise is a contract by which one party, the promisor, grants another, the beneficiary, a right to have the option to conclude a contract whose essential elements are determined, and for the formation of which only the consent of the beneficiary is missing. Revocation of the promise during the period allowed to the beneficiary to exercise the option does not prevent the formation of the contract which was promised. A contract concluded in breach of a unilateral promise with a third party who knew of its existence, is a nullity. Article 1128 The following are necessary for the validity of a contract: 1. the consent of the parties; 2. their capacity to contract; 3. content which is lawful and certain.

VII. Spanish Código Civil 13

Article 1254 The contract exists from the time where one or several persons consent to bind themselves vis-à-vis another or others to give something or to provide a service. Article 1258 Contracts are perfected by mere consent, and since then bind the parties, not just to the performance of the matters expressly agreed therein, but also to all consequences which, according to their nature, are in accordance with good faith, custom and the law. Article 1261 There is no contract unless the following requirements are present: 1. Consent of the contracting parties. 2. A certain object which is the subject matter of the agreement. 3. Cause of the obligation established. Article 1262 Consent is manifested by the coincidence between the offer and the acceptance over the thing and the cause, which are to constitute the contract. If the person who made the offer and the person who accepted it are in different places, there is consent from the time that the offeror becomes aware of the acceptance, or from the time when, after the recipient has sent his acceptance, the offeror cannot be unaware of it without lacking in good faith. The contract shall, in such case, be presumed to have been entered into at the place where the offer was made. In contracts entered into by means of automatic devices, there is consent from the time when acceptance is manifested. Article 1274 In contracts for valuable consideration, the supply or promise of a thing or service by the other party shall be deemed to constitute the cause applicable to each contracting party; in remunerative contracts, the service or benefit which is remunerated, and in contracts for pure beneficence, the mere liberality of the benefactor.

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VIII. American Uniform Commercial Code 14 § 2-204 Formation in general (1) A contract for sale of goods may be made in any manner sufficient to show agreement, including conduct by both parties, which recognizes the existence of such a contract. (2) An agreement sufficient to constitute a contract for sale may be found even though the moment of its making is undetermined. (3) Even though one or more terms are left open, a contract for sale does not fail for indefiniteness if the parties have intended to make a contract and there is a reasonably certain basis for giving an appropriate remedy. § 2-205 Firm offers An offer by a merchant to buy or sell goods in a signed writing which by its terms gives assurance that it will be held open is not revocable, for lack of consideration, during the time stated or if no time is stated for a reasonable time, but in no event may such period of irrevocability exceed three months; but any such term of assurance on a form supplied by the offeree must be separately signed by the offeror. § 2-206 Offer and acceptance in formation of contract (1) Unless otherwise unambiguously indicated by the language or circumstances (a) An offer to make a contract shall be construed as inviting acceptance in any manner and by any medium reasonable in the circumstances; (b) An order or other offer to buy goods for prompt or current shipment shall be construed as inviting acceptance either by a prompt promise to ship or by the prompt or current shipment of conforming or nonconforming goods, but such a shipment of nonconforming goods does not constitute an acceptance if the seller seasonably notifies the buyer that the shipment is offered only as an accommodation to the buyer. (2) Where the beginning of a requested performance is a reasonable mode of acceptance an offeror who is not notified of acceptance within a reasonable time may treat the offer as having lapsed before acceptance. § 2-207 Additional terms in acceptance or confirmation (1) A definite and seasonable expression of acceptance or a written confirmation, which is sent within a reasonable time operates as an acceptance even though it states terms additional to or different from those offered or agreed upon, unless acceptance is expressly made conditional on assent to the additional or different terms. (2) The additional terms are to be construed as proposals for addition to the contract. Between merchants such terms become part of the contract unless: (a) the offer expressly limits acceptance to the terms of the offer; (b) they materially alter it; or (c) notification of objection to them has already been given or is given within a reasonable time after notice of them is received. (3) Conduct by both parties which recognizes the existence of a contract is sufficient to establish a contract for sale although the writings of the parties do not otherwise establish a contract. In such case the terms of the particular contract consist of those terms on which the writings of the parties agree, together with any supplementary terms incorporated under any other provisions of this Title.

IX. United Kingdom Sale of Goods Act 1979 15 Section 4(1) Subject to this and any other Act, a contract of sale may be made in writing (either with or without seal), or by word of mouth, or partly in writing and partly by word of mouth, or may be implied from the conduct of the parties.

X. English Common Law 16

The absence of a comprehensive codification of general principles of contract law requires considerable reference to case law in relation to fundamental principles sur266

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rounding the conclusion of contract under English law.2 The limited scope here allows only for an outline of very general principles, which does not reflect the intricate nature and full extent of the individual rules (as can be seen, for example, in sample of rules given below in relation to the American Restatement (Second) Contracts)). 3 Further rules will therefore be noted under the relevant topic. In the words of Lord Wilberforce, ‘English Law, having committed itself to a rather 17 technical and schematic doctrine of contract in application takes a practical approach, often at the cost of forcing the facts to fit uneasily into the marked slots of offer, acceptance and consideration’.4 Aside from the practical focus of English contract law, it would appear at first glance that the three requirements of offer, acceptance and consideration are necessary in order to create a binding contract. This is very much the traditional approach and therefore does not take into account that offer and acceptance are merely one method that can be used in order for parties to reach an agreement. 5 The statement however neglects a fourth requirement of an intention to create legal relations: ‘[contracts] must not be the sports of idle hour, mere matters of pleasantry and badinage, never intended by the parties to have any serious effect whatsoever’.6 In essence, an offer expresses the willingness to conclude a contract on particular 18 terms and with the intention that it will be binding upon acceptance by the addressee. Such an intention is ascertained from an objective evaluation of the offeror’s words or conduct.7 The terms of the offer must be certain and must be communicated to the offeree in order to be binding.8 In contrast to other jurisdictions, the offer may be revoked prior to acceptance and is subject to communication to the offeree. 9 An offer can be terminated under a variety of circumstances alongside revocation: lapse of time,10 death of offeror11 (or offeree),12 rejection13 (or counter-offer14) or the failure of a condition attached to the offer for which the validity of the offer is dependent on a particular event or circumstance occurring or not occurring.15 Acceptance is the unconditional, absolute, unequivocal assent to the offer. It requires 19 a willingness to be legally bound by the terms of the offer (the so-called ‘mirror image rule’); a deviation from the terms of the offer will constitute a counter-offer. 16 As also applicable to the offer, the acceptance will be assessed objectively and can be inferred from words or conduct (as reflected in s 4(1) SGA 1979);17 silence will typically not amount to acceptance as it not unequivocal,18 however examination of the facts of the case may render silence a valid form of acceptance.19 In general, acceptance will be valid when communicated to the offeror. However, the Common Law adopted a dispatch rule See, however, Burrows, A Restatement of the English Law of Contract (OUP 2016). See especially Furmston & Tolhurst, Contract Formation (2nd edn., OUP 2016). 4 New Zealand Shipping Co Ltd v A M Satterthwaite & Co Ltd [1975] AC 154, 167. 5 See however the classic case The Satanita [1987] AC 59. 6 Dalrymple v Dalrymple (1811) 2 Hag Con 54, 105. 7 See, e.g., Moran v University College Salford (No. 2) [1994] ELR 187. 8 Raffles v Wichelhaus (1864) 2 H&C 906; Taylor v Laird (1856) 25 LJ Ex 329. 9 Routledge v Grant (1828) 4 Bing 653. 10 See in particular Manchester Diocesan Council for Education v Commercial & General Investments Ltd [1970] 1 WLR 241, 247–248. 11 Meynell v Surtees (1855) 25 LJ Ch 257. 12 If the offer is of a personal nature, Reynolds v Atherton (1921) 125 LT 690. 13 Tinn v Hoffmann & Co (1873) 29 LT 271. 14 Hyde v Wrench (1840) 49 ER 132. 15 Financings Ltd v Stimson [1962] 1 WLR 1184. 16 Hyde v Wrench (1840) 49 ER 132. 17 Brogden v Metropolitan Railway Co (1877) 2 App Cas 666. 18 Allied Marine Transport Ltd v Vale do Rio Doce Navegaco SA (The Leondis D) [1985] 1 WLR 925. 19 Vitol SA v Norelf Ltd [1996] AC 800, 810 per Steyn LJ. 2

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(‘mailbox rule’), which deems that an acceptance is good upon dispatch.20 If properly dispatched, but never received by the offeror (lost in transmission or unduly delayed) a contract is still formed at the moment of dispatch (sending), even though the offeror has no notice of that fact. 20 The doctrine of consideration has deep roots in the development of the Common Law and arises from the courts’ refusal to enforce gratuitous promises. In a number of respects it serves so-called ‘evidentiary’, ‘cautionary’ and ‘channeling’ functions whereby the instrument serves to show the legal intention underpinning the contract.21 Consideration has been defined as: ‘An act of forbearance or the promise thereof is the price for which the promise of the other is bought, and the promise thus given for it to be enforceable’.22 The development of the doctrine of consideration has given rise to the development in case law of a number of different rules, though in essence, reciprocal consideration must exist at the time of agreement;23 it must not be past24 and it must have some value (but the consideration being exchanged need not be adequate or of relative equal value).25 More recently, the UK Supreme Court has indicated the question of whether a practical expectation of benefit can constitute adequate consideration is ‘ripe for reexamination’26. The importance of consideration is not to be underestimated as its presence can change the perception of fundamental approaches. For instance, consideration from the offeree in relation to an offer can prevent revocation by the offeror during a fixed time period. 21 In order to mollify the injustices that may result from a strict application of the consideration requirement, the Common Law developed the doctrine of promissory estoppel.27 Promissory estoppel is used in two types of situations. First, it can be applied in cases where no contract has been concluded, but where a party reasonably relied on another’s promise or assurance to its detriment. The damages rewarded under promissory estoppel are reliance damages (out of pocket expenses) and not expectancy damages (lost profits) awarded for breach of contract. Second, promissory estoppel has been used to recognize a contract, even though a required element is missing, such as consideration or a written form (Statute of Frauds). In this situation it is used as a defence to a party’s argument that due to the missing element there is no contract to be enforced. 22 A rebuttable presumption that the parties intended to create legal relations applies to commercial contracts.28 Such a presumption is generally rebutted by a clear, express provision in the so-called contract, such as a disclaimer of liability. 29 Intention is inferred on the basis of factual assessment.30 The American Restatement (Second) of Contracts provides a general summary of American Common Law, although there are differences from State to State, since each State has its own version of the Common Law. However,

Adams v Lindsell (1818) 1 B&Ald 681. Fuller, ‘Consideration and Form’ (1941) Colum L Rev 799; Smith, Contract Theory (OUP 2004) pp. 285 et seq. 22 Dunlop v Selfridge [1915] AC 847 per Dunedin LJ. 23 Tweddle v Atkinson (1861) 121 ER 762. 24 Re McArdle [1951] Ch 669; cf Lampleigh v Braithwaite (1615) 80 ER 225. 25 Thomas v Thomas (1842) 2 QB 851. 26 Rock Advertising Ltd v MWB Business Exchange Centres Ltd [2018] UKSC 24 at [18] per Sumption LJ. 27 See Central London Property Trust v High Trees House Ltd [1947] KB 130. 28 Esso Petroleum v Commissioners of Customs & Excise [1976] 1 WLR 1; Kleinwort Benson Ltd v Malaysia Mining Corp Berhad [1989] 1 WLR 379, 383. 29 Rose & Frank Co. v Crompton Bros Ltd [1925] AC 445. 30 Jones v Padavatton [1969] 1 WLR 328. 20

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divergences between the states are generally minor in nature, especially in the area of contract formation.

XI. American Restatement (Second) of Contracts 1. Common Law as Represented by American Restatement 23

§ 21 Intention to be legally bound Neither real nor apparent intention that a promise be legally binding is essential to the formation of a contract, but a manifestation of intention that a promise shall not affect legal relations may prevent the formation of a contract. § 24 Offer defined An offer is the manifestation of willingness to enter into a bargain, so made as to justify another person in understanding that his assent to that bargain is invited and will conclude it. § 30 Form of acceptance invited (1) An offer may invite or require acceptance to be made by an affirmative answer in words, or by performing or refraining from performing a specified act, or may empower the offeree to make a selection of terms in his acceptance. (2) Unless otherwise indicated by the language or the circumstances, an offer invites acceptance in any manner and by any medium reasonable in the circumstances. § 32 Invitation of promise or performance In case of doubt an offer is interpreted as inviting the offeree to accept either by promising to perform what the offer requests or by rendering the performance, as the offeree chooses. § 35 Offeree’s power of acceptance (1) An offer gives to the offeree a continuing power to complete the manifestation of mutual assent by acceptance of the offer. (2) A contract cannot be created by acceptance of an offer after the power of acceptance has been terminated in one of the ways listed in § 36. § 36 Methods of termination of the power of acceptance (1) An offeree’s power of acceptance may be terminated by (a) rejection or counter‐offer by the offeree, or (b) lapse of time, or (c) revocation by the offeror, or (d) death or incapacity of the offeror or offeree. (2) In addition, an offeree’s power of acceptance is terminated by the non‐occurrence of any condition of acceptance under the terms of the offer. § 38 Rejection (1) An offeree’s power of acceptance is terminated by his rejection of the offer, unless the offeror has manifested a contrary intention. (2) A manifestation of intention not to accept an offer is a rejection unless the offeree manifests an intention to take it under further advisement. § 39 Counter-offers (1) A counter-offer is an offer made by an offeree to his offeror relating to the same matter as the original offer and proposing a substituted bargain differing from that proposed by the original offer. (2) An offeree's power of acceptance is terminated by his making of a counter-offer, unless the offeror has manifested a contrary intention or unless the counter-offer manifests a contrary intention of the offeree. § 41 Lapse of time (1) An offeree's power of acceptance is terminated at the time specified in the offer, or, if no time is specified, at the end of a reasonable time. (2) What is a reasonable time is a question of fact, depending on all the circumstances existing when the offer and attempted acceptance are made.

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Chapter 8 Formation of Contract (3) Unless otherwise indicated by the language or the circumstances, and subject to the rule stated in § 49, an offer sent by mail is seasonably accepted if an acceptance is mailed at any time before midnight on the day on which the offer is received. § 42 Revocation by communication from offeror received by offeree An offeree's power of acceptance is terminated when the offeree receives from the offeror a manifestation of an intention not to enter into the proposed contract. § 43 Indirect communication of revocation An offeree's power of acceptance is terminated when the offeror takes definite action inconsistent with an intention to enter into the proposed contract and the offeree acquires reliable information to that effect. § 46 Revocation of general offer Where an offer is made by advertisement in a newspaper or other general notification to the public or to a number of persons whose identity is unknown to the offeror, the offeree’s power of acceptance is terminated when a notice of termination is given publicity by advertisement or other general notification equal to that given to the offer and no better means of notification is reasonably available. § 50 Acceptance of offer defined; acceptance by performance; acceptance by promise (1) Acceptance of an offer is a manifestation of assent to the terms thereof made by the offeree in a manner invited or required by the offer. (2) Acceptance by performance requires that at least part of what the offer requests be performed or tendered and includes acceptance by a performance, which operates as a return promise. (3) Acceptance by a promise requires that the offeree complete every act essential to the making of the promise. § 54 Acceptance by performance; necessity of notification to offeror (1) Where an offer invites an offeree to accept by rendering a performance, no notification is necessary to make such an acceptance effective unless the offer requests such a notification. (2) If an offeree who accepts by rendering a performance has reason to know that the offeror has no adequate means of learning of the performance with reasonable promptness and certainty, the contractual duty of the offeror is discharged unless (a) the offeree exercises reasonable diligence to notify the offeror of acceptance, or (b) the offeror learns of the performance within a reasonable time, or (c) the offer indicates that notification of acceptance is not required. § 56 Acceptance by promise; necessity of notification to offeror Except as stated in § 69 or where the offer manifests a contrary intention, it is essential to an acceptance by promise either that the offeree exercise reasonable diligence to notify the offeror of acceptance or that the offeror receive the acceptance seasonably. § 59 Purported acceptance, which adds qualifications A reply to an offer which purports to accept it but is conditional on the offeror's assent to terms additional to or different from those offered is not an acceptance but is a counter-offer. § 60 Acceptance of offer, which states place, time or manner of acceptance If an offer prescribes the place, time or manner of acceptance its terms in this respect must be complied with in order to create a contract. If an offer merely suggests a permitted place, time or manner of acceptance, another method of acceptance is not precluded. § 63 Time when acceptance takes effect Unless the offer provides otherwise, (a) an acceptance made in a manner and by a medium invited by an offer is operative and completes the manifestation of mutual assent as soon as put out of the offeree's possession, without regard to whether it ever reaches the offeror; but (b) an acceptance under an option contract is not operative until received by the offeror. § 64 Acceptance by telephone or teletype Acceptance given by telephone or other medium of substantially instantaneously two-way communication is governed by the principles applicable to acceptances where the parties are in the presence of each other.

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E. Sampling of Laws § 65 Reasonableness of medium of acceptance Unless circumstances known to the offeree indicate otherwise, a medium of acceptance is reasonable if it is the one used by the offeror or one customary in similar transactions at the time and place the offer is received. § 66 Acceptance must be properly dispatched An acceptance sent by mail or otherwise from a distance is not operative when dispatched, unless it is properly addressed and such other precautions taken as are ordinarily observed to insure safe transmission of similar messages. § 67 Effect of receipt of acceptance improperly dispatched Where an acceptance is seasonably dispatched but the offeree uses means of transmission not invited by the offer or fails to exercise reasonable diligence to insure safe transmission, it is treated as operative upon dispatch if received within the time in which a properly dispatched acceptance would normally have arrived. § 69 Acceptance by silence or exercise of dominion (1) Where an offeree fails to reply to an offer, his silence and inaction operate as an acceptance in the following cases only: (a) Where an offeree takes the benefit of offered services with reasonable opportunity to reject them and reason to know that they were offered with the expectation of compensation. (b) Where the offeror has stated or given the offeree reason to understand that assent may be manifested by silence or inaction, and the offeree in remaining silent and inactive intends to accept the offer. (c) Where because of previous dealings or otherwise, it is reasonable that the offeree should notify the offeror if he does not intend to accept. (2) An offeree who does any act inconsistent with the offeror's ownership of offered property is bound in accordance with the offered terms unless they are manifestly unreasonable. But if the act is wrongful as against the offeror it is an acceptance only if ratified by him.

2. Common Law of Contracts Compared to Uniform Commercial Code Unlike the United Kingdom Sale of Goods Act, which is consistent with English 24 Common Law, the Uniform Commercial Code’s § 2 on the Sale of Goods divergences dramatically with the American Common Law of contracts in important ways. Here is a list of the most important ones in the area of contract formation: – –

–

– –

Common Law requires a general intent to form a contract and agreement on all material terms; the UCC only requires a general intent to enter into a contract (under UCC case law there are no material terms) (§ 2-204(3)). Common Law requires the acceptance to be a ‘mirror image’ of the offer (no additional or conflicting terms); the UCC recognizes a contract if the acceptance expresses a general intent to be bound, even though it contains different or conflicting terms, unless the additional or conflicting terms materially alter the offer (but again, in practice no terms are deemed to be material under UCC jurisprudence) (§ 2-207). Common Law has no firm offer rule; the UCC has a firm offer rule but it is a narrow exception to the revocability of an offer because it requires a signed writing, an assurance by a merchant that the offer will remain open for a period of time, and that period cannot exceed 90 days) (§ 2-205). Common Law contracts may be made orally, except for those that are in one of the Statute of Fraud categories; the UCC requires some form of writing for sales of $500 or more (§ 2-201). There is no explicit written confirmation rule under the Common Law, but it may be recognized as trade usage or as subsequent to the formation of an oral contract;

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–

the UCC has a written confirmation rule when both parties are merchants. (§ 2-201(2)). Common Law requires new consideration for modification of contracts; the UCC does not (§ 2-209(1)).

XII. Chinese Law31 25 Article 137 A declaration of will made by dialog shall become valid at the time when the opposite party knows the content of will. A declaration of will not made by dialog shall become valid at the time when it reaches the opposite party. If a declaration of will not made by dialog is in the form of data message, and the opposite party has designated a specific system to receive the data message, the declaration of will shall become valid at the time when the data message enters the specific system designated; or in the absence of such designation, the declaration of will shall become valid at the time when the opposite party knows or should have known that the data message has entered its system. If the parties have otherwise agreed upon the time when a declaration of will made in the form of data message becomes valid, such an agreement shall apply. Article 141 An actor may withdraw his or her declaration of will. The notice of withdrawing his or her declaration of will shall reach the opposite party before his or her declaration of will reaches the opposite party or at the same time when his or her declaration of will reaches the opposite party. Article 469 The parties may contract in written, oral, or any other form. "Written form" means a written contract, letter, telegram, telex, facsimile, or any other form that can tangibly express the contents contained therein. A data message that tangibly expresses the contents contained therein by electronic data interchange, e-mail, or any other means and is readily available for access and inspection shall be treated as a written form. Article 471 The parties may contract by offer and acceptance or any other means. Article 472 An offer is a declaration of will to contract with another person, and the declaration of will shall comply with the following conditions: (1) Its contents shall be specific and definite. (2) It indicates that the offeror will be bound by the declaration of will in case of acceptance by the offeree. Article 473 An invitation for offer is a declaration to invite other parties to make offers thereto. Auction announcements, tender announcements, prospectuses, bond prospectuses, fund prospectuses, commercial advertisements and publicity, and mailed price lists, etc. are invitations for offer. Where the contents of commercial advertising and publicity meet the conditions for an offer, it constitutes an offer. Article 474 The effective time of an offer shall by governed the provisions of Article 137 of this Code. Article 475 An offer may be withdrawn. The withdrawal of an offer shall be governed the provisions of Article 141 of this Code. 31 The provisions given here correspond to the Civil Code of the People’s Republic of China adopted on 28 May 2020 and entering into force on 1 January 2021.

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E. Sampling of Laws Article 476 An offer may be revoked, except under any of the following circumstances: (1) The offeror explicitly states by fixing a time limit for acceptance or otherwise that the offer is irrevocable. (2) The offeree has reasons to rely on the offer as being irrevocable and has made reasonable preparation for performing the contract. Article 477 Where a declaration of will to revoke an offer is made by means of dialog, the contents of the declaration of will shall come to the offeree's knowledge before the offeree accepts; and a declaration of will to revoke an offer made by means other than dialog shall reach the offeree before the offeree accepts. Article 478 An offer lapses under any of the following circumstances: (1) The offer is rejected. (2) The offer is revoked according to the law; (3) The offeree fails to accept before the expiration of the time limit for acceptance. (4) The offeree makes a substantial modification to the contents of the offer. Article 479 An acceptance is the declaration of will by the offeree to assent to an offer. Article 480 An acceptance shall be made in the form of a notice, except where acceptance may be made by an act on the basis of transaction practices or as expressed in the offer. Article 481 An acceptance shall reach the offeror within the time limit prescribed in the offer. Where no time limit is prescribed in the offer, the acceptance shall reach the offeror in accordance with the following provisions: (1) If the offer is made in dialog, the acceptance shall be made immediately. (2) If the offer is made in forms other than a dialog, the acceptance shall reach the offeror within a reasonable time limit. Article 482 Where an offer is made by letter or telegram, the time limit for acceptance shall accrue from the date shown in the letter or from the date on which the telegram is handed in for dispatch. If no such date is shown in the letter, it shall accrue from the postmark date on the envelope. Where an offer is made by means of instantaneous communication, such as telephone, facsimile or email, the time limit for acceptance shall accrue from the moment that the offer reaches the offeree. Article 483 A contract is formed when the acceptance becomes effective, except as otherwise provided by law or agreed by the parties. Article 484 The effective time of an acceptance made in the form of a notice shall be governed by the provisions of Article 137 of this Code. If notice of acceptance is not required, the acceptance shall become effective when an act of acceptance is performed in accordance with transaction practices or as required in the offer. Article 485 An acceptance may be withdrawn. The withdrawal of an acceptance shall be governed by the provisions of Article 141 of this Code. Article 486 Where an offeree makes an acceptance beyond the time limit for acceptance, or makes an acceptance within the time limit for acceptance, which is unable to reach the offeror in a timely manner under normal circumstances, the acceptance shall be a new offer, unless the offeror promptly notifies the offeree that the acceptance is effective.

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Chapter 8 Formation of Contract Article 487 If the offeree makes an acceptance within the time limit specified for acceptance, and under normal circumstances the acceptance would have reached the offeror in due time, but due to other reasons the acceptance reaches the offeror after the time limit for acceptance has expired, such acceptance shall be effective, unless the offeror notifies the offeree in a timely manner that it does not accept the acceptance due to the failure of the acceptance to arrive within the time limit. Article 488 The contents of an acceptance shall correspond to those of the offer. If the offeree makes a substantial modification to the contents of the offer, the acceptance shall constitute a new offer. The modification relating to the subject matter, quality, quantity, price or remuneration, time or place or method of performance, liabilities for breach of contract and method of dispute resolution, etc. shall constitute the substantial modification of an offer. Article 489 If the acceptance does not substantially modify the contents of the offer, it shall be effective, and the contents of the contract shall be subject to those of the acceptance, except as rejected promptly by the offeror or indicated in the offer that an acceptance may not modify the offer at all. Article 490 Where the parties contract in the form of a written contract, the contract is formed when each party affixes its signature, seal, or fingerprint. If a party has performed its principal obligation before the signature, seal or fingerprint is affixed, the contract is formed when the other party accepts. If any law or administrative regulation requires, or the parties agrees on contracting in written form, and the parties fail to contract in written form, but one party has performed the principal obligation, the contract is formed when the other party accepts. Article 491 Where the parties contract by letter, data message, or any other form and require a written confirmation to be signed, the contract is formed when the written confirmation is signed. If the information on goods or service released by one party on an information network such as the Internet meets the conditions for an offer, the contract is formed when the other party selects the goods or service and submits the order successfully, unless the parties agree otherwise.

F. Commentary I. Agreement 1. Consensus 26

The formation of a sales contract requires an agreement between the parties. In principle, this agreement must express a consensus regarding the content of the contract and must be linked with the intention to be legally bound. However, national laws and international sets of rules provide more detailed criteria that differ greatly in nature and, moreover, are often linked to a variation of further requirements, such as consideration under the Common Law. The notion of consensus as the basis for the conclusion of the contract is clearly expressed in Article 2.1.1 PICC, namely, a contract can be concluded by the acceptance of an offer or ‘by a conduct of the parties that is sufficient to show agreement’. This notion of consensus is also reflected in the CISG, PECL, CESL, and in national laws even though it is not expressly stated in such a general manner but is specified through particular provisions on the modes of concluding contracts (in particular through conclusion by offer and acceptance; see e.g. Article 14 et seq. CISG). These provisions are mostly tailored around the consensus between the parties: a buyer

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and a seller. However, the often also apply where there the parties consist of multiple sellers and/or multiple buyers (multi-party agreement).32 The individual laws on the requirement of an agreement between the parties contain 27 variations in relation to the question of the manner and the extent to which the parties have to reach an agreement on the content of the contract. The CISG, PECL, CESL as well as several national laws are subject to the general principle that it will suffice if the agreement between the parties or the underlying offer expressly or implicitly defines the core elements of the content of the contract (such as subject matter, quantity and price) or makes provision for the determination thereof. It is thus not strictly necessary that the contractual declarations contain these core elements but rather that they can be determined; see the second sentence of Article 14(1) CISG). It is therefore also not necessary under the CISG to expressly or implicitly fix the price if the underlying offer contained sufficient information to determine the price,33 for instance an ‘open price term’ (i.e. a term which refers to the seller’s market price). 34 The majority view holds that it will also suffice for a third party to determine the price.35 It is, however, controversial whether a term satisfies the demands of the second sentence of Article 14(2) if one or both parties are to jointly set the price after the contract has been concluded. 36 In as far as one rejects this approach, a similar result can nonetheless be reached if, by applying Article 6 CISG, one views such agreement as a permitted derogation from Article 14(1) CISG. Moreover, Article 55 CISG is used in exceptional cases as a basis for arguing that it may even be possible to conclude a valid contract that does not even allow for the price to be determined.37 Article 55 CISG provides that, in the absence of any indication to the contrary, the parties are to be considered 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.’ Article 2:103 PECL provides a general standard for a sufficient agreement by stating 28 that the terms of the contract must be either sufficiently defined by the parties in order to allow the contract to be enforced, or can be sufficiently defined under the application of the PECL.38

32 For the CISG, Schroeter, in Schlechtriem, Schwenzer & Schroeter (eds), Kommentar zum UNKaufrecht (CISG) (7th edn., C.H. Beck 2019) Vor Art. 14–24 CISG paras 96 et seq. 33 For example, an agreement on a price range between 35 Deutsche Mark and 65 Deutsche Mark for varying quality was considered as sufficient by the Austrian Supreme Court; OGH 10 November 1994, CISG-Online No. 117 = (1995) östJBl 253 with a note by Karollus. However, if the contractual declarations are lacking any agreement on the purchase price and no agreement can be ascertained from other circumstances, the requirements for conclusion of contract under the CISG are not satisfied; Gerechtshof Arnhem-Leeuwarden (Netherlands) 29 August 2017, CISG-Online No. 2933. 34 OLG München (Germany) 19 October 2006, CISG-Online No. 1394; on open-price terms see e.g. Mistelis, ‘Article 55 CISG: The Unknown Factor’ (2005–2006) 25 Journal of Law and Commerce 285. 35 Schroeter, in Schlechtriem, Schwenzer & Schroeter (n 32) Art. 14 CISG para. 71; Spagnolo, in Mankowski (ed), Commercial Law (C.H. Beck/Hart/Nomos 2019) Art. 14 CISG para. 3. 36 Schroeter, in Schlechtriem, Schwenzer & Schroeter (n 32) Art. 14 CISG paras 72–75 with further references. 37 The details are controversial because the determination of the price according to objective standards appears problematic when considering the original intention underpinning the second sentence of Article 14(1) CISG, however this does not always correspond with modern contract practice. For more detail on this contentious issue see Mohs, in Schlechtriem, Schwenzer & Schroeter (n 32) Art. 55 CISG paras 3 et seq.; Schlechtriem & Schroeter, Internationales UN-Kaufrecht (6th edn., Mohr Siebeck 2016) paras 245– 249; Spagnolo, in Mankowski (n 35) Art. 14 CISG para. 4. 38 Article 30(1)(c) CESL expands on this approach with the requirement that the agreement (if necessary to be supplemented by the application of the rules under the CESL) is to have sufficient content and be sufficiently certain in order for it to be given legal effect.

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In Civil Law jurisdictions (such as Germany, France, and Spain) the term essentialia negotii describes the minimum requirements for the agreed content of the contract. 39 However, the differences between the national laws generally do not provide for greater requirements than the CISG. It will suffice under German law if, for example, the quantity and the price are ‘ascertainable’ and therefore German law features a degree of flexibility similar to the CISG’s requirement that the agreement should ‘allow’ for the quantity and the price to be determined.40 Article 472 CCC provides that the offer’s content must be ‘specific and definite’, however does not specify when an offer should be considered as such.41 30 Extensive agreements as to further content are generally unnecessary in Civil Law legal systems because default rules determine the parties’ contractual rights and obligations, as well as providing the remedies; in this respect it can serve as a substitute for an express agreement between the parties. Nevertheless, in practice the parties to an international transaction often refrain from using such default provisions by detailing as many points as possible on the performance, non-performance, remedies, restitutions and possible secondary obligations in the contract. The contract is drafted to an extent that could allow it to function as a ‘stand-alone’ set of rules independent from the applicable default rules under national law. The use of standard forms in cross-border contracting therefore requires a review of whether the terms need to be modified to conform to the applicable national law. This is important for two reasons. First, adjustment or additions to the standard terms manage the possible effects of default national provisions on the contract. Second, the terms need to be reviewed in the context of the applicable national law to ensure that there are no mandatory provisions that could lead to the inoperability (unenforceability) of the term or of the entire contract (see Chapter 9 on ‘Standard Terms’ and Chapter 11 ‘Validity of Contract Terms’). 31 The notion of sufficiency expressed in the PICC and European set of rules can be seen in English Common Law through the requirements of ‘certainty’ and ‘completeness’. The certainty requirement provides that the agreement cannot be too vague so as to be unenforceable, though this does not require a rule concerning every contingency. Moreover, the English courts will strive to enforce a commercial contract as far as possible rather than strike it down for uncertainty, such as by using commercial practice to fill the gaps.42 Completeness concerns relate to the need to agree to all material terms, however, even material terms can be implied by the court, such as a reasonable price or time for performance.43 A key point in relation to enforcing agreements under English law is whether the parties intended to be immediately bound by their agreement or whether core aspects were to be determined at a later date.44 In other words, is the contract binding with open terms to be agreed upon at a later date or did the parties intend to continue negotiations in order to fill the open terms before being bound? There is a 29

39 See for example for German law Wais, in Schulze & Dannemann (eds), German Civil Code Vol I (C.H. Beck, Nomos 2020) § 145 BGB para. 3. 40 However, several courts tend towards a narrow interpretation of this wording in Article 14 CISG; see Schroeter, in Schlechtriem, Schwenzer & Schroeter (n 32) Art. 14 CISG para. 88 with reference to Fovirosi Biróság Budapest (Hungary) 24 March 1992, CISG-Online No. 61. 41 The requirement also featured in Article 14 of the former version of the Chinese Civil Code, which did not provide any clarification on when an offer should be considered as such. For more details on formation of contract under Chinese law see Zhang, Chinese Contract Law (2nd edn., Brill 2019) pp. 115 et seq. 42 Shaw v Lighthouse Express Ltd [2010] All ER (D) 83; Shamrock SS Co v Storey & Co Ltd (1899) 81 LT 413. 43 Harvey v Pratt [1965] 1 WLR 1025; price can however be determined in accordance with s 15(2) Sale of Goods Act 1979 (‘reasonable price’). 44 RTS Flexible Systems v Molkerei Alois Müller GmbH [2010] 1 WLR 753.

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divergence between the Common Law and the American UCC. The Common Law, at least on the surface, maintains the certainty or definiteness requirement (agreement on all material terms, except for requirement and output contracts), while definiteness of terms is not a requirement under the UCC. As stated earlier, the American courts have ‘legislated’ the notion of materiality out of the UCC. If there is a general intent to enter into a sales contract and there is enough content for the court to provide a remedy, then the courts will imply all necessary terms to salvage the contract.

2. Dissent The notion of dissent will apply in relation to the discordance between the parties on 32 a point to be agreed upon. One can refer to an open (or conscious) dissent in relation to the parties’ awareness of discordance; in contrast a hidden (or unconscious) dissent will arise when the parties had not recognized an issue and, therefore, the agreement is lacking a corresponding term. One can question in both instances whether the conclusion of the contract is effective in spite of an incomplete agreement or lack of agreement. Article 2.1.13 PICC, Article 2:103(2) PECL, Article 30(4) CESL and several national laws (e.g. § 154 BGB45) use different wording to express the principle of consensus: the insistence by one of the parties that the contract is not concluded until an agreement has been reached on specific points. The PICC extends this maxim to an agreement that is demanded in relation to a particular form (e.g. in writing). In accordance with the principle of party autonomy, Article 2.1.14 PICC does not prevent the conclusion of the contract if the parties intend to conclude the contract and have intentionally left the agreement on a term to further negotiations or to a third party. 46 The CISG does not contain a specific provision on this matter, however it is accepted that the relevant test is whether – despite the partial absence of an agreement on certain terms – a contract is concluded if the parties intended to conclude the contract despite missing terms or were unaware that the agreement was missing some terms.47 However, a gap will arise in the CISG if it is not possible to ascertain the parties’ intention to conclude the contract and therefore the question of the contract’s validity will have to be answered in accordance with the applicable national law (see Chapters 3 and 4 on ‘Precontractual Liability’, especially the coverage of precontractual instruments, such as the ‘agreement to agree’). The spectrum of variation in the provisions and the corresponding case law in na- 33 tional laws can present serious difficulties in international sales transactions. A precise draft of the contract is recommended whereby the text does not just regulate each of the matters but also clearly states which individual points have intentionally been left open (and if necessary are subject to additional agreement) without preventing the conclusion of the contract on the terms already agreed upon (on the issue of conflicting standard terms see Chapter 9 on ‘Standard Terms’). The dissent referred to here is to be distinguished from the numerous instances in 34 which the parties have reached an agreement but one made due to mistake, misrepresentation or duress. Such cases are not covered by the CISG but have been considered in several more recent international sets of rules (see Article 3.2.1 et seq. PICC and Article 4:101 et seq. PECL) and (though with differences) in national laws (see Chapter 11 ‘Validity of Contract Terms’).

See the corresponding comments on § 154 BGB by Wais, in Schulze & Dannemann (n 39). Brödermann, in Mankowski (n 35) Art. 2.1.14 PICC para. 3. 47 Schroeter, in Schlechtriem, Schwenzer & Schroeter (n 32) Vor Art. 14–24 CISG para. 44. 45

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3. Intention to be Bound and Additional Requirements The intention to be legally bound is a common requirement to the agreement on the content of the contract. The CISG and the PICC describe this requirement for the offer as ‘the intention … to be bound in case of acceptance’ (Article 14(1) CISG; Article 2.1.2. PICC). The PECL extends a similar provision in Article 2:201(1)(a) with the general rule that the party’s intention to be legally bound can be ascertained from its statements or conduct as reasonably perceived by the other party (Article 2:102 PECL). Article 30(1)(b) CESL uses these aforementioned provisions as a basis for its general rule that a contract will be concluded if the parties intend the agreement to have legal effect. 36 It can be seen that national laws, especially in Article 472(2) CCC48, follow the model found in the CISG and PICC. The general notion of Rechtsbindungswille (intention to be legally bound) in German law follows a similar direction as the CESL. Although this notion is not formerly expressed in the German BGB, it is of key importance in case law as a doctrine used to distinguish the conclusion of a contract from relationships that are to have social (not legal) effect (reine Gefälligkeitsverhältnisse;49 ‘Gentlemen’s Agreements’; actes de complaisance). ‘En vue de produire des effets juridiques’50 in French law and a ‘la intención de quedar vinculado’51 in Spanish law indicate the need for an intention to be bound.52 However the concepts of cause and causa in former French law and Spanish law, respectively, contribute not only to a corresponding distinction between contracts and non-binding relationships but also to further functions regarding the validity of the contract (Article 1131 et seq. Code civil (pre 2016 reform); Article 1274 et seq. Código civil).53 An intention to create legal relations is a feature of the English Common Law. An intention can be manifested not only by the offer54 or the context of the agreement but moreover by the doctrine of consideration, which is an additional requirement that indicates the intention of the parties to be bound in contract. The UCC (§ 3-303) and the American Restatement (Second) of Contracts (§ 71) also follow this approach. 55 35

4. Statements and Conduct 37

It can be observed from each of the laws reviewed that two congruent statements can lead to the conclusion of the contract: offer and acceptance. However, Article 2:211 PECL expressly states a contract can be concluded without the elements of offer and acceptance.56 The CISG and other laws do not contain such express rules, nonetheless is Article 14(2) of the former Chinese Contract law contained the same requirement. See Schulze in, Schulze/Dannemann (n 39) § 241 BGB para. 10. 50 Ghestin, Traité de Droit Civil – La Formation du Contrat (3 rd edn., LGDJ 1993) p. 11. 51 Díez-Picazo, Fundamentos del Derecho civil patrimonial. Introducción. Teoría del contrato Vol I (6th edn., Thomson Reuters Civitas 2007) p. 330. 52 Article 3(1) of the new EU Directive 2019/770 on the supply of digital content suggests that the provision or promise to provide personal data is an indication of the intention to be legally bound. This provision only serves to determine the scope of application of the Directive in the field of consumer protection. However, for this purpose it equates the provision of personal data with the payment of a price. Following transposition of this Directive into the national laws of the EU Member States this view could become significant for the question whether it may serve as an indication of the intention to be legally bound (and also for ‘consideration’ in Common Law jurisdictions) when one party provides its personal data as the counter-performance for the performance by the other party; see Schulze & Zoll, European Contract Law (3rd edn., C.H. Beck/Hart/NomosBeck/Hart/Nomos 2021) para. 79. 53 For an overview of the functions see Ranieri, Europäisches Obligationenrecht (3 rd edn., Springer 2009) pp. 1049, 1153–1179; Kötz, Europäisches Vertragsrecht (2nd edn., Mohr Siebeck 2015) pp. 72 et seq. 54 Carhill v Carbolic Smoke Ball Co. [1893] 1 QB 256. 55 For more detail on the requirements for a valid contract see Chapter 11 on ‘Validity of Contract Terms’. 56 Article 469 CCC allows for the conclusion of contract by means other than offer and acceptance. 48

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can be assumed that the same approach is also applicable.57 In addition to the concepts of offer and acceptance, Article 2.1.1 PICC includes a general standard for determining whether a contract has been concluded. According to this principle it is generally possible for a contract to be concluded by any conduct ‘that is sufficient to show agreement’. Conduct will thus be sufficient if (in consideration of the circumstances) a party can recognize the other party’s intention even though this is not expressed in words (irrespective of whether the varying terminology amongst the legal systems understand such conduct as an ‘implied statement’ or as a separate category alongside the ‘statement’). 58 The possibility to conclude a contract free from ‘form’ requirements is recognized 38 under Article 11 CISG, in other international sets of rules (Article 1.2 PICC, Article 2:101(2) PECL, and Article 6 CESL), and in many national laws. 59 Accordingly, the CISG and other laws provide that an oral statement is generally as effective as a statement made in written or electronic form, such as statements made via e-mail or other forms of electronic communication;60 generally it is recommended for express statements to be made in writing in order to clearly fix the content of the contract and to avoid evidentiary problems later on. In contrast, some legal systems stipulate formal requirements for the conclusion or evidence of a sales contract in particular circumstances. 61 It is therefore necessary to not only observe the written or other formal requirements under the applicable national law but also to be aware that such formal requirements may also apply when the CISG applies. For example, a number of countries have made Article 96 CISG declarations opting out of the ‘no formal requirements’ rule under Article 11 CISG. The opt-out will apply when a party has its place of business in a country that has made such a declaration (for more information see Chapter 7 on ‘Contractual Formalities’).

5. Communication of Statements The CISG generally requires the offer, acceptance or other indication of intention 39 to reach the other party in order for it to be effective vis-à-vis the conclusion of a contract. Article 15(1) CISG applies this principle to the offer and Article 18(2) CISG to the acceptance (though with the additional requirement that the acceptance is received within a set time period or within a reasonable time). Other statements also become effective when they reach the other party (withdrawal, revocation and rejection of the offer under Articles 15(2), 16(1), 17 CISG, respectively; fixing a time for acceptance and withdrawal of the acceptance under Articles 20(1) and 22 CISG). Article 24 CISG uses the word ‘reaches’ for all types of communications.62 According- 40 ly, oral statements will reach the recipient when they are made. However, it is doubtful See F.IV.1.a.). For examples see Brödermann, in Mankowski (n 35) Art. 2.1.1 PICC para. 2. For the CISG, Bundesgericht (Switzerland) 5 April 2005, CISG-Online No. 1012; Schlechtriem & Schroeter (n 37) para. 240. 59 The principle of freedom of form is also generally recognized e.g. in German law, Spanish law (Article 1278 Código civil), Chinese law (Article 469 CCC, see also Article 10 former version of the Chinese contract law). 60 In the terminology of several laws the written form encompasses conclusion via electronic means; in other laws the written form and electronic communication, as well as durable medium, are used under the broad heading of ‘text form’; see e.g. § 126 b BGB (text contained in Chapter 7 on ‘Contractual Formalities’ under E. Sampling of Laws) and the comments thereon by Wais, in Schulze & Dannemann (n 39). 61 For overviews see von Bar & Clive (eds), Principles, Definitions and Model Rules of European Private Law. Draft Common Frame of Reference (DCFR) Full Edition (Sellier 2009) Article II.–1:106; Chapter 7 on ‘Contractual Formalities’. 62 If an intermediary is used (i.e. the declaration is not delivered directly to the counter-party but rather to a different person) the receipt by the counter-party depends on the authority this person has under na57

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whether, for example, a statement made via telephone will have reached the recipient if the latter could not correctly understand the statement due to a faulty transmission. It is the general view that for such modes of communication the party making the statement will have to consider Article 8(2) CISG, namely how a reasonable person under the same circumstances would have understood the statement and therefore, if necessary, make certain that the line is clear. Confirmation will allow the statement to be considered as having reached the recipient even though faults in the line have caused misunderstandings that the party making the statement could not recognize.63 An oral statement made on an answering machine ought to be considered as having reached the recipient when the machine has saved the message.64 41 According to the CISG, a statement made on a tangible medium will reach the recipient upon delivery to him ‘personally’ and in any event upon delivery to his place of business or mailing address or, helpfully, to his habitual residence. These specific provisions contained in Article 24 CISG allow one to extract the general principle that a statement made on a tangible medium will reach the recipient when it enters his ‘sphere of influence’ in a manner which affords him the possibility to take notice thereof.65 In this regard it is also necessary that the declaration is made in the language used during the negotiations or in a language understood by the recipient or at least in a language in which one can reasonably assume that it will be understood.66 Even without express rules, statements made electronically (such as via e-mail or SMS) will be considered to have reached the recipient when they are saved in his mailbox or on his server.67 However, this can only apply when the recipient has agreed to such electronic communications as a means of conducting business. This consent may be assumed from the conduct of the party, e.g. in his own use of the given electronic form of communications with the other party.68 42 The PICC and some European set of rules follow a similar approach to the CISG by linking the effectiveness of statements relevant to the conclusion of contract to the receipt principle (see Article 1.10(2) PICC; Article 1:303 PECL; Article 10(3) CESL). The definition of receipt in these sets of rules also follows the CISG.69 43 Communication of the offer is of particular importance in national legal systems in which an offer is generally irrevocable once it has been received (cf. Article 16 CISG; see below F.II.1.b). In Civil Law jurisdictions this concerns, for example, Chinese law (Articles 475–476 CCC) and German law; whereas in French law an offer can generally be revoked but the offeror may be obliged to pay damages. According to §§ 130, 145 BGB the offeror is bound by the offer, as soon as the other party has received it.70 The offer will be ineffective if the other party has received a revocation before or at the same time tional law; for detail see Schroeter, in Schlechtriem, Schwenzer & Schroeter (n 32) Art. 24 CISG para. 15; Spagnolo, in Mankowski (n 35) Art. 24 CISG paras 18–21. 63 Schroeter, in Schlechtriem, Schwenzer & Schroeter (n 32) Art. 24 CISG para. 20; Wey, Der Vertragsabschluß beim internationalen Warenkauf nach UNCITRAL- und schweizerischem Recht (Thesis Basel 1984) para. 779. 64 Schroeter, in Schlechtriem, Schwenzer & Schroeter (n 32) Art. 24 CISG para. 23; Spagnolo, in Mankowski (n 35) Art. 24 CISG para. 41. 65 Schlechtriem & Schroeter (n 37) para. 294; Spagnolo, in Mankowski (n 35) Art. 24 CISG para. 24. 66 See → Chap. 2 mn. 18 et seq. See also Spagnolo, in Mankowski (n 35) Art. 24 CISG paras 50–54. 67 For more detail see CISG-AC Opinion No. 1 (Ramberg) Opinion Article 24 in conjunction with Comment 15.2 (2003) 5 IHR 244, 245 et seq.; Schroeter, in Schlechtriem, Schwenzer & Schroeter (n 32) Art. 24 CISG paras 22–23; Spagnolo, in Mankowski (n 35) Art. 24 CISG paras 32–40. 68 CISG-AC Opinion no 1 (Ramberg) Comment 15.4 (2003) 5 IHR 244, 249. 69 However, it is considerably more developed in relation to consumer contracts and electronic communications in Article 10(4) CESL. 70 See the comments on §§ 130, 145 BGB by Wais, in Schulze & Dannemann (n 39).

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as the offer. An offer or other statement to a recipient will – similar to the CISG – have been received once it has entered into the recipient’s ‘sphere of influence’ (post-box or email account). The statement will nonetheless be considered as received if the recipient knowingly prevents the statement from entering into his ‘sphere of influence’. 71 However, in German case law72 it is, on the one hand, not by itself decisive that the statement has entered into the recipient’s sphere of influence, but, on the other hand, it is not necessary that the recipient actually was aware thereof. A statement entering the recipient’s sphere of influence will be presumed to have been received when the recipient can – under normal circumstances – become aware of its content (e.g. when the recipient usually empties his postbox; a letter delivered on a Sunday will therefore be received on the Monday). In general, the Common Law of contract requires communication of the statement in 44 order for it to be effective.73 However, an important exception exists in relation to an acceptance, which is deemed effective upon dispatch (‘mailbox rule’), whereby an acceptance that is properly dispatched becomes effective at the time that the offeree is no longer in possession thereof (offer is in the mailbox);74 it needs not be received by the offeror, though application of the rule can be excluded by the contract.75 The dispatch or ‘mailbox’ rule is also adopted by § 63(a) American Restatement (Second) of Contracts.

II. Offer 1. Concept The offer can be defined as the manifestation of willingness to enter into a bargain 45 (§ 24 American Restatement (Second) of Contracts) or as a proposal for concluding a contract addressed to one or more specific persons (Article 14(1) CISG). The CISG and other sets of rules contain further requirements that the offer is to be sufficiently definite and indicates the offeror’s intention to be bound should the offer be accepted (see above F.I.3). The second sentence of Article 14(1) CISG lists the goods, the quantity or the price as the minimum content.76 Furthermore, the identity of the offeror must be determinable from the offer; it may also have to outline further content of the contract, depending on the circumstances. The general standard for such ‘essentialia negotii’ that the offer must contain stems from the principle that the content of the contract must be ascertainable to the extent that it may be performed upon acceptance of the offer. 77 In order to distinguish the offer from pre-contractual statements, § 24 American Restatement (Second) of Contracts provides that the offer is made in such a manner so as to justify the offeree in understanding that his assent is not only invited but will also conclude the 71 German law considers negligent conduct by the recipient (e.g. leaving no forwarding address or not filling a fax machine with paper) as a breach of a pre-contractual duty; the recipient will be treated as having received the statement at the time of the first attempt at delivery if the recipient causes the late delivery. In contrast, the statement will not have been communicated if the recipient is entitled to refrain from accepting delivery (e.g. payment of excess postage). For more detail see Markesinis, Unberath & Johnston, The German Law of Contract (2nd edn., Hart 2006) p. 69; Wais, in Schulze & Dannemann (n 39) § 130 BGB para. 3. 72 BGH 11 April 2002 in (2002) NJW 2391 et seq. 73 Entorres v Miles Far East [1955] 2 QB 327. 74 Adams v Lindsell (1818) 106 ER 250. 75 Holwell Securities v Hughes [1974] 1 WLR 155. 76 See above, para. 27. 77 This principle is, for example, expressed in Article 2:103 PECL und Article 30 (1)(c) CESL and corresponds mostly to the essentialia negotii doctrine present in several national laws, see above paras 28–29).

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contract. Other legal systems also follow a similar approach in providing that an offer will have been made when acceptance by the other party will conclude the contract. § 2-206(1)(a) UCC expresses the function of the offer as inviting the other party to accept and therefore to conclude the contract.

2. Distinction from Invitatio ad Offerendum It is of considerable practical importance to distinguish the offer from other statements and conduct made by a party prior to the formation of a contract. A statement made during negotiations can only be viewed as an offer when it states the core elements of the contract (goods, quantity, price) or if it at least allows such elements to be determined (Article 14(1) 2nd sentence CISG).78 A statement cannot therefore be perceived as an offer if, for instance, it does not contain any information which allows the quantity to be determined.79 However, this requirement will be satisfied by a term allowing one party to determine the quantity to be delivered (e.g. to the buyer as required; ‘requirement contract’80). Fixing the subject matter of the contract (or at least allowing it to be determined) is not the only requirement for an offer – the offeror must also intend to be legally bound.81 The offeror must therefore intend to be legally bound when the other party accepts his proposal. Ascertaining whether a party has such an intention requires an interpretation of his statement in accordance with Article 8 CISG. 82 Precise information on the type of good, the quantity and the price may serve as an indication of such intention,83 but are not necessarily definitive. In light of the circumstances, the criteria under Article 8(2) CISG are relevant as a whole unless the recipient, pursuant to Article 8(1) CISG, did not know or could not have known what the intent was. If the intention to be legally bound is lacking, there is merely an invitation to the other party to make an offer (invitatio ad offerendum; invitation to treat). The response by the other party (with the requisite intent to be bound and other applicable requirements) is considered to be an offer; acceptance of which will result in the conclusion of the contract. 47 It will often not be in the interest of the seller for proposals to be considered as an offer, especially if they are not directed towards particular persons (e.g. information given on a website). Article 14(2) CISG therefore determines that such proposals are only to be considered as an invitation to make an offer, unless the contrary is clearly indicated. However, not all laws contain such a presumption in favour of the proposer; and clarity can be difficult to gain from the case law of some legal systems. In contrast to the CISG, Article 2:201(3) PECL provides a presumption in favour of finding an offer (though this is limited by the supplier’s stock) when a professional supplier proposes 46

See above para. 27. See US Dist. Ct. (E.D.N.Y.) 5 August 2014, CISG-Online No. 2950. 80 Secretariat Commentary, Art. 12 CISG, No. 12. In exercising his authority to determine the quantity, the entitled party must observe the limits of good faith pursuant to Art. 7(1) CISG and take into account, for example, what quantity the other party is able to deliver. 81 See above, paras 35–36. 82 For example, the wording ‘Validity: 6 weeks’ is a clear indication of an intention to be bound; BGH (Germany) 25 March 2015, CISG-Online No. 2588, para. 28 = (2015) NJW 2584. The statement does not require an express designation as an ‘offer’ in order to be considered such, e.g. a pro-forma invoice or an invoice may constitute an offer when applying Article 8 CISG: Bezirksgericht der Saane (Switzerland) 20 February 1977, CISG-Online No. 426; Oberlandesgericht Jena (Germany) 27 August 2008, CISG-Online No. 1820; ICC Arbitration, Case No. 17020, Yearbook Commercial Arbitration XL (Kluwer 2015) 294; U.S. District Court for the Northern District of Illinois 31 May 2017, CISG-Online No. 2827. 83 In such cases the expression ‘subject to prior sale’ does not always express the lack of an intention to be legally bound but can be directed towards a right of withdrawal: BGH (Germany) 25 March 2015, CISG-Online No. 2588, para. 28 = (2015) NJW 2584. 78

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in a public advertisement or by other similar means to supply goods or services at stated prices. Outside of contract law, some legal systems enforce such advertisements under consumer protection law. For example, numerous American States have ‘rainy day’ statutes, which require the advertising party to provide ‘checks’ to parties in case the seller runs of out of the advertised good, which enables the parties to return at a future date to buy the good at the stipulated price. In light of the possible risks, it is therefore generally recommended that the seller stipulate that the ‘advertisement’ is a proposal and not an offer (e.g. ‘without engagement’; ‘indicative offer’; ‘without obligation’; ‘sine obligio’). A further recommendation is to include words such as ‘while stocks last’ or ‘subject to availability’, limiting the seller’s obligation to goods that the seller has in stock.84

3. Withdrawal, Revocation and Termination a) Withdrawal As far as the effectiveness of the offer requiring communication to the other party 48 (see above F.I.5) is concerned, there is no apparent reason for the offeror to be bound beforehand by his offer. Article 15(2) CISG therefore provides that even an irrevocable offer (firm offer) can be withdrawn by a corresponding statement that reaches the offeree before or at the same time as the offer (see also Article 2.1.1(2) PICC, Article 1:303(5) PECL, Article 10(5) CESL; Article 475 CCC85, § 130(1) BGB; French and Spanish doctrine also follow the same approach).86 b) Revocation The various laws give contrasting answers to the question of whether the offeror is 49 bound by his offer after its communication or if it revocable prior to acceptance by the other party. The offeror will bear the risk of changes in market value or the loss of more lucrative transactions during the time frame before acceptance if his offer cannot be revoked, whereas the possibility of revocation prior to acceptance places the risk of delay in sending an acceptance on the offeree. Article 16 CISG generally favours the latter approach, however the right to revoke terminates upon the dispatch of an acceptance (and not upon the receipt by the offeror). Furthermore, the CISG contains two important limitations: a revocation of the offer is excluded when the offer indicates that it is irrevocable – Article 16(2)(a) CISG gives the example of the offer that fixes a time for acceptance. However, it is debatable whether an offer containing such a fixed time is always irrevocable or whether fixing a time period creates a presumption of irrevocability that can be rebutted through consideration of other circumstances in interpreting the statement.87 For example, if it is clear that the offeror did not intend 84 In several national laws, such as in Germany, an invitatio ad offerendum (although distinguished from an offer) under particular circumstances can give rise to a pre-contractual relationship between the parties and potentially lead to damages claims; see (and to similar questions for the CISG) Schroeter, in Schlechtriem, Schwenzer & Schroeter (n 32) Art. 14 CISG para. 101. 85 See also Article 141 CCC. The new structural changes to the Chinese Civil Code are noticeable in this context: Article 475 provides that an offer may be withdrawn and refers to the general provision on the withdrawal of a statement of intent under Article 141, contained in the General Provisions of the Civil Code. 86 See for French law, Ghestin (n 50) p. 324; for Spanish law, Díez-Picazo (n 51) p. 340. 87 See Farnsworth, ‘Formation of Contract’ in Galston & Smit (eds), International Sales: The United Nations Convention on Contracts for the International Sale of Goods (Matthew Bender 1984) paras 3.11 et seq.; Schroeter, in Schlechtriem, Schwenzer & Schroeter (n 32) Art. 16 CISG paras 26 et seq.; Spagnolo, in Mankowski (n 35) Art. 16 CISG para. 3; Piltz, Internationales Kaufrecht (2nd edn., C.H. Beck 2008) para. 3-48. See also on Article 16(2) CISG Furmston & Tolhurst (n 3) paras 3.61 et seq.

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to create a firm offer, but was merely fixing the time upon which the offeree must accept the offer. On the other hand, Article 16(2)(b) CISG (following the concept of venire contra factum proprium found in Civil Law legal systems and the Common Law principle of estoppel) states that an offer cannot be revoked if it was reasonable for the offeree to rely on the offer being irrevocable and the offeree has acted in reliance on the offer remaining open. Article 2.1.4 PICC, Article 2:202 PECL, and Article 32 CESL contain the same or similar rules favouring revocation of the offer. The PECL and CESL also make clear that an offer made to the public can be revoked by the same means as were used to make the offer.88 50 Several national laws follow a similar approach (Spanish law89 and Article 476 CCC). In Anglo-American law an offer can generally be revoked at any time prior to acceptance.90 English Common Law provides that revocation is permissible even though a set time frame for acceptance has been given by the offeror and has not yet expired; 91 however this rule will not apply if the offeror has provided consideration in relation to the acceptance period. American law contains exceptions in relation to firm offers: § 2-205 UCC outlines that firm offers (where the offeror assures that the offer will remain open) cannot be revoked during the time stated in the offer. However, this is a limited exception to the revocability of offers because of its numerous requirements: (1) offer must be made by a merchant, (2) be in a written or electronic form, (3) signed by the offeror, and (4) cannot fix a time beyond ninety days.92 It should be noted that if the time fixed is beyond ninety days it is still a firm offer for a ninety-day period if the other requirements are satisfied. § 87(2) American Restatement (Second) of Contracts concerns an option contract whereby acts of reliance by the offeree (which do not amount to performance) can render the offer irrevocable. However, this is a misuse of the concept of an option ‘contract,’ which is a contract (payment for the right to exercise the contract in the future) and not a firm offer. 51 Variations can be seen in Civil Law legal systems. For example, German law provides that the offeror is generally bound by the offer (§ 145 BGB). A proviso will be required if the offeror does not wish to be bound, for example, by the insertion of a ‘subject to prior sale’ clause. Such a proviso should always be included in the offer if the offeror does not wish to be bound and when German law is potentially the applicable law in a cross-border transaction. French law contains a combination of approaches: an offer can generally be revoked prior to acceptance, but the offeror will be liable for damages if he revokes within the fixed time frame for acceptance.93 c) Termination 52

According to Article 17 CISG, the offer will be terminated when a rejection reaches the offeror; an irrevocable offer is also terminated when it is rejected within the acceptance period. The same applies when the offer is withdrawn (Article 15 CISG) or revoked (Article 16 CISG) or once the time frame for acceptance has expired (except in rare cases in which determining the time frame is to be interpreted as only concerning

See also § 46 American Restatement (Second) of Contracts. See Díez-Picazo (n 51) p. 341. 90 Routledge v Grant (1828) 4 Bing 653; § 42 American Restatement (Second) of Contracts; the provision of consideration in relation to the offer may prevent withdrawal. 91 Routledge v Grant (1828) 4 Bing 653. 92 See Furmston & Tolhurst (n 3) paras 3.56 et seq. 93 Zweigert & Kötz, An Introduction to Comparative Law (3 rd edn., OUP 1998) p. 359. 88

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Article 16(2)(a) CISG, the offer shall continue to be effective after this time). 94 Similar approaches to termination are followed under Article 2.1.5 PICC, Article 2:203 PECL, Article 33 CESL, Article 478 CCC, and Spanish law. German law also provides that an offer is terminated upon rejection by the offeree or when it is not accepted within the allotted time frame (§§ 146, 148 BGB95). If no time frame has been fixed, an offer made to a person who is absent will be terminated if it is not accepted within the time the offeror may expect to receive the answer under ordinary circumstances (§§ 146, 147(2) BGB). French law provides that an offer will be terminated by rejection (also before expiry of the acceptance period) or if it remains unanswered for a long period of time.96 § 36 American Restatement (Second) of Contracts summarizes neatly the various circumstances, which will give rise to termination in English and American law. A particular issue relevant to contract drafting concerns terms which set a time frame for the acceptance, but do not clear stating how the end of the time period is to be determined. Vague wording such as ‘reply within one week’ does not give any clear indication as to the starting point and will, more likely, give rise to litigation that could have been avoided through clearer drafting.97

III. Acceptance 1. Mode The acceptance of the offer results in the conclusion of the contract. According to 53 Article 18(1) CISG the acceptance does not necessarily require a statement as certain conduct will suffice to indicate assent to the offer; the interpretation of such statements or conduct will also require interpretation under the requirements of Article 8 CISG. 98 Acceptance implied by conduct will often be seen by payment of the price, the dispatch of the goods (or partial dispatch) or by cashing a cheque that was sent with the offer.99 As with the offer, the acceptance becomes effective when it reaches the offeror and can be withdrawn by a prior or simultaneous statement to that effect (Articles 18(2), 22 CISG). However, under Article 18(3) CISG, an acceptance via conduct will be effective upon performance of such act (e.g. the dispatch of the goods), if this corresponds to the practices or uses between the parties or the offeror has waived receipt of notice. For instance, the acceptance occurs once the cheque is submitted to the bank and not through payment of the stated amount.100 Chinese law also allows acceptance to be made either by notice or, where in accordance with transaction practices or as required in the offer, by performing an act (Article 480 CCC).

94 However, the CISG does not expressly regulate whether an offer (or another statement made by a party to the contract) is terminated by the death or incapacity of a natural person or through dissolution of a company; Magnus, in Staudinger CISG (16th edn., de Gruyter 2012) Art. 15 paras 14–15 conclude that in such cases the statement should not be terminated. In contrast, Schroeter, in Schlechtriem/Schwenzer/ Schroeter (n 32) Art. 15 para. 20 concludes that this is not regulated by the CISG and is a gap that cannot be filled by the CISG itself. 95 See the comments on §§ 146, 148 BGB by Wais, in Schulze & Dannemann (n 39). 96 On ineffectiveness due to lapse of time see Civ. 1re, 6 January 2001, No. 9-71201, Bull Civ I No. 4; Bénabent, Droit des obligations (18th edn., LDGJ 2019) paras 318 et seq. 97 See Furmston & Tolhurst (n 3) paras 3.04 et seq. 98 See → Chapter 23 on ‘Contract Interpretation’. 99 Also for example by issuing a letter of credit; U.S. District Court for the Northern District of Illinois 7 December 1999, CISG-Online No. 439. 100 LG Kassel (Germany) 15 February 1996, CISG-Online No. 190.

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2. Silence According to Article 18(1) CISG, silence or inactivity will not ‘in itself ’ amount to acceptance (see also Article 2.1.6(1) PICC, Article 2:204(2) PECL, and Article 34(2) CESL). National laws also follow the principle that mere silence will not amount to acceptance.101 A contract will generally not be concluded when a supplier sends unsolicited goods accompanied by an offer even if the supplier expressly states that silence is to be considered an acceptance.102 55 Under certain circumstances, however, silence can be perceived as a form of conduct that amounts to an acceptance. Article 18(1) CISG recognizes this exception through the modifying phase that, by ‘itself ’, silence or inactivity does not amount to acceptance. The courts have found that silence amounts to an acceptance in certain cases, such as by customs and practices between the parties, when applying Article 8(3) CISG.103 56 Some national laws recognize other types of circumstances where silence is to be considered as an acceptance. German law, for example, recognizes that silence may constitute acceptance in cases where a merchant remains silent (whose business includes the solicitation or conclusion of commercial transactions for others) to an offer sent by a person with whom he has a business relationship (§ 362(1) German Commercial Code (HGB); commercial confirmation letter).104 § 69 of the Restatement (Second) of Contracts provides that silence does not in principle constitute acceptance, however the provision outlines three exceptions. Despite the absence of such statutory provisions, the courts in Germany, France and other countries have considered silence to amount to an acceptance under consideration of the facts of the individual case, for instance due to prior contractual relations between the parties, by request of the recipient of the offer, or the inclusion of an offer during extended negotiation of a contract. Although the details of this (highly fact-based) case law cannot be considered here, one can refer to a principle of French law that acquiescence to a counter-offer made in the process of negotiations between merchants can be considered as acceptance when the other party was sufficiently made aware of the offer.105 54

3. Time Frame 57

Article 18(2) CISG provides that an acceptance is only effective when it reaches the offeror within a fixed time frame. An offer made orally must generally be accepted immediately. The period fixed by the offeror for acceptance is of primary relevance; the absence of such a time frame will give rise to a ‘reasonable’ time, which requires consideration of the circumstances of the transaction including the nature of the means of communication used by the offeror. Details for determining the time period are outlined in Article 20 CISG and require consideration of the means of communication 101 Overviews in Kötz (n 53) pp. 39 et seq.; Schmidt, Der Vertragsschluss – ein Vergleich zwischen dem deutschen, französischen, englischen Recht und dem CESL (Mohr Siebeck 2013) pp. 508 et seq.; Furmston & Tolhurst (n 3) paras 4.62 et seq. 102 In EU consumer law, the delivery of unsolicited goods will also result in the loss of non-contractual claims against the recipient, see Article 27 Directive 2011/83/EU, [2011] OJ L 304/64; Schulze & Zoll, European Contract Law (3rd edn., C.H. Beck/Hart/NomosBeck/Hart/Nomos 2021) § 3 paras 92 et seq. 103 US Dist. Ct. (S.D.N.Y.) 14 April 1992, CISG-Online No. 45; OLG Köln (Germany) 22 February 1994, CISG-Online No. 127. 104 See Wais, in Schulze & Dannemann (n 39) § 147 BGB para. 3. Similar provisions can also be seen outside of sales law, in particular in insurance law, e.g. Article L 112–2 of French Code des assurances and § 5(3) of the German Pflichtsversicherungsgesetz. 105 Cass Comm 21 May 1951, Bull Civ II No. 168; Cass Comm, 6 July 1966, Bull Civ. II No. 737; further examples in Kötz (n 53) pp. 40 et seq.; Schmidt (n 101) pp. 519 et seq.

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employed by the offeror.106 The time periods in various circumstances are to be calculated without making exceptions for national and regional holidays thereby ensuring uniform standards in international trade. However, a too strict approach here would have implications for the timely receipt of the acceptance by the offeror: the offeror will often be aware of the national holidays at his place of business, thus Article 20(2) CISG extends the deadline for delivery of the acceptance to the following business day.107 Late acceptance can be effective under the particular requirements set out in Article 58 21 CISG; the offeror notifies the offeree without delay of the effectiveness of the acceptance.108 Dispatch of written notice will be sufficient; consequently, the contract will be concluded at the time of the receipt of the late acceptance (and not receipt of the notification by the offeree) even if the notification is lost or delayed. The offeror is not required to send a notification if the lateness of the acceptance was due to an irregular delay in transmission and it is apparent to the offeror that the acceptance was sent in a timely manner. The late acceptance is effective unless the offeror provides timely notice (orally or in writing) to the offeree that he considers the offer to have lapsed. The PICC, PECL and CESL generally follow the CISG approach, whereas national 59 laws do contain different provisions concerning the standards for time periods and have varying requirements for the situations in which a late acceptance can be rendered effective. Although the various approaches cannot be discussed in full here,109 it can be said that in some jurisdictions, late acceptance is viewed as a new offer (as in § 150 BGB110) and is not recognized as an acceptance (such as, under Article 21(1) CISG; notice sent without delay). English Common Law is particularly noteworthy as there is no authority on the issue of the effect of late acceptance. However, it has been suggested that the possibility to recognize the late acceptance would be appropriate in commercial contracts,111 thereby tending towards the approach outlined in the CISG.

4. Modified Acceptance Article 19(1) CISG generally considers responses containing additions, limitations 60 or other changes to the offer to be a rejection and a counter-offer, even if the offeree perceives his response to constitute an acceptance. The contract can only be concluded if the original offeror accepts this counter-offer (e.g. by conduct, such as accepting the goods). However, Article 19(2) CISG outlines a different approach if the additions or deviations do not materially alter the terms of the offer. In such cases the offeror 106 Whereas Article 20(1) CISG expressly refers to forms of telecommunication at the time the CISG was drafted, the modern forms of electronic conclusion of contract are principally covered by the general wording ‘other means of instantaneous communication’ but are not regulated in further detail. The Opinions of the Advisory Council can serve to expand on this general term. Further details on technical aspects of acceptance in e-commerce are already included in Articles 24 and 25 CESL. 107 For more detail see Schroeter, in Schlechtriem, Schwenzer & Schroeter (n 32) Art. 20 CISG para. 16; Spagnolo, in Mankowski (n 35) Art. 20 CISG paras 7–8. 108 Whether a notification is without delay depends on the circumstances of the case, though is certainly doubtful after more than 12 days; Piltz, ‘Neue Entwicklungen im UN-Kaufrecht’ (2019) NJW 2516, 2519. 109 For an overview of the different approaches see Kötz (n 53) pp. 46 et seq. 110 It is disputed whether the wording ‘without delay’ in Article 21(1) CISG in contrast to ‘without undue delay’ in Article 19(2) CISG is merely an editorial mistake or shall set a shorter period (see Schroeter, in Schlechtriem/Schwenzer/Schroeter (n 32) Art. 21 CISG para. 16 with further references; Spagnolo, in Mankowski (n 35) Art. 21 CISG para. 10, states that the ‘without delay’ is faster than ‘without undue delay’). More than two working days after receiving the acceptance will generally exceed the permitted time frame. However, approval the day after receipt will suffice; BGH (Germany) 7 January 2014, CISG-Online No. 2477. 111 Furmston & Tolhurst (n 3) para. 4.24.

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must object without undue delay, either orally or in writing, if he wants to prevent the conclusion of the contract on the terms contained in the acceptance. The contract will otherwise be concluded with such changes.112 61 The key factor113 on whether the changes are material requires reference to the high threshold provided in Article 19(3) CISG, namely the rebuttable presumption of materiality for such terms as the price, payment, quality and quantity of the goods, place and time of delivery, and the extent of one party’s liability to the other. For example, there will be a material change of the offer if the offeree provides for a price increase, 114 partial payment, advance payment,115 profit participation,116 changes the delivery date and place, inserts an arbitration clause or a jurisdiction clause.117 Legal doctrine, however, contains the widespread view that Article 19(3) CISG is to be interpreted narrowly – in light of particular circumstances surrounding the conclusion of the contract one can present evidence that such modification is immaterial in the exceptional case. 118 Case law also acknowledges that the question of a material modification to the elements listed in Article 19(3) CISG requires consideration of all the surrounding circumstances. 119 The assessment of modifications, for example concerning the details of notification periods120 and the details underlying the exercise of remedies, the type of delivery or provision of securities, is especially difficult and requires consideration of the circumstances of the individual case. However, if the modification clearly favours the (original) offeror, it can be argued that such a change is immaterial and the contract is concluded with this content without the need for further acceptance by the offeror. 121 On the other hand, the list in Article 19(3) CISG is not exhaustive (‘among other things’). For example, one may often consider a material modification to be present in relation to the proposal that oral agreements are invalid and only written terms are relevant,122 though this is not included under Article 19(3) CISG. A material modification may, for example, consist of a forum selection clause in a counter-offer.123 62 Article 2.1.11 PICC, Article 2:208 PECL and Article 38 CESL have substantially adopted the rule in Article 19 CISG. German law contains a provision (§ 150(2) BGB) that also corresponds to the basic rule in Article 19(1) CISG but which is not extended by provisions concerning immaterial modifications (although in such cases similar results as under the CISG can occasionally be reached through different provisions, in particular the principle of good faith). French and Spanish legal doctrine also follow the approach that modified acceptance is in principle a counter-offer.124 Article 488 CCC has, for the most part, adopted the CISG approach. § 59 Restatement (Second) of Contract 112 On the consequences for the inclusion of conflicting standard contract terms (‘battle of the forms’) see → Chap. 9 paras 18 et seq. 113 For example, OLG Stuttgart (Germany) 18 April 2011, CISG-Online No. 2226; even if delivery of two consignments is planned instead of one complete delivery, High Court of New Zealand 3 June 2015, CISG-Online No. 2735. 114 Cour d'appel de Rennes (France) 27 May 2008, CISG-Online No. 1746. 115 OLG Frankfurt a.M. (Germany) 4 March 1994, CISG-Online No. 110. 116 Provided, for example, by the term ‘joint sale’; Bundesgericht (Switzerland) 5 April 2005, CISG-Online No. 1012. 117 US Dist. Ct. (D. Md.) 8 February 2011, CISG-Online No. 2177; US Dist. Ct. (S.D.N.Y.) 18 January 2011, CISG-Online No. 2178; BGH (Germany) 25 March 2015, CISG-Online No. 2588. 118 Piltz (n 87) para. 3–99; Spagnolo, in Mankowski (n 35) Art. 24 CISG para. 14. 119 Seoul High Court (South Korea) 19 July 2013, CISG-Online No. 2831. 120 LG Baden-Baden (Germany) 14 August 1991, CISG-Online No. 24. 121 OGH (Austria) 20 March 1997, CISG-Online No. 269. 122 Bianca & Bonnell, Commentary on the International Sales Law (Giuffrè 1987) Article 19 para. 3.1. 123 US Dist. Ct. (E.D.N.Y.) 5 August 2014, CISG-Online No. 2950. 124 See for French law, Cass Comm, 17 July 1967, Bull Civ III No. 299; for Spanish law, Díez-Picazo (n 51) pp. 356 et seq.

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also follows the approach that additional or different terms from the offer will constitute a counter-offer. English Common Law also provides that acceptance on new terms will amount to a rejection and a counter-offer, though the acceptance will nevertheless be effective if the offeror reasonably regards the purported acceptance as a clear acceptance of the offer without introducing any new terms.125 However, as discussed previously, under § 2-207(2) UCC, most all purported acceptances with additional terms will be deemed as binding the contract unless the offeror objects within a reasonable time.

5. Commercial Letter of Confirmation Silence in relation to a ‘commercial letter of confirmation’ can – especially under German law – result in the conclusion of a contract although the requirements of the general rule on conclusion have not been fulfilled. This approach contradicts Article 18(2) CISG, in which the ‘commercial letter of confirmation’ would only have meaning under the narrow requirements of Article 9 CISG, as a trade usage or international practice applicable to the transaction. In short, ‘commercial letters of confirmation’ play a considerable role in the application of German law, but would rarely be recognized under CISG rules. The ‘commercial letter of confirmation’ requires both parties to be merchants under the terms of commercial law or participate to a considerable extent as merchants in commercial activity. The parties must have actually held negotiations followed by one of the party’s sending a written correspondence confirming the ‘conclusion of the contract’. This means that it must be apparent from the content of the letter that the sender presumes that a contract has already been successfully concluded. Furthermore, the letter must repeat the material content of the contract. Modifications are only permissible as long as one can expect their approval. Finally, the ‘letter of confirmation’ must be sent to the other party immediately after the negotiations and may not contradict the content of the negotiations. A rule similar to German law can be seen in Article 2.1.12 PICC and Article 2:210 PECL (the former does not, however, require both parties to be acting in a commercial capacity).126 French law does not contain a general instrument in the form of a ‘commercial letter of confirmation’. The case law does however show two groups of cases in which a letter of confirmation can function as an acceptance. Further circumstances are required in addition to the negotiations, for example a continuous contractual relationship (‘relations d’affaires antérieures’), which forms the basis of reliance, or a corresponding practice (‘usage commercial’), which provides a period for objection.127 The American UCC also has a ‘written confirmation rule.’ § 2-201(2) UCC states that: ‘Between merchants if within a reasonable time a writing in confirmation of the contract and sufficient against the sender is received and the party receiving has reason to know its contents, it satisfies the [UCC’s writing requirement] unless written notice of objection to its contents is given within ten days after it is received.’

125 Clive v Beaumont (1847) 1 De G & Sm 397, VCC; Global Tankers Inc v Amercoat Europea N.V. (The Diane) [1977] 1 Lloyd’s LR 666, 671. 126 Lando & Beale, Principles of European Contract Law Parts I & II (Kluwer 2000) p. 186. 127 Kröll & Hennecke, ‘Kaufmännisches Bestätigungsschreiben beim internationalen Warenkauf ’ (2003) 67 RabelsZ 448–493, 479–480; Ranieri (n 53) pp. 250 et seq.

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IV. Specific Forms of Conclusions of Contract 1. Conclusion without Offer and Acceptance a) Overlapping Statements The CISG and numerous national laws do not contain any express provisions concerning whether (and under which circumstances) a contract is concluded if it is not possible to classify statements or conducts by the parties as offer and acceptance (whereas Article 2:211 PECL stipulates that the rules on offer and acceptance are applicable with ‘appropriate adaptations even though the process of conclusion of a contract cannot be divided into offer and acceptance’). Although the CISG and national laws generally do not contain express rules,128 legal doctrine does recognize (though with various approaches and extent) that the principle of agreement can allow a contract to be concluded even if not all the requirements of the traditional model of offer and acceptance are present. 68 Such an approach particularly applies in respect of statements that cross in delivery.129 When both statements contain an offer to conclude the contract there is indeed the lack of the traditional acceptance in relation to the offer. However, if both statements correspond in content there is no objective reason not to favour the conclusion of a contract. There is an intention to create legal relations and an implied agreement as in the ordinary chronological order of delivery of offer and corresponding acceptance. Although England and the United States adopt the contrary approach, the facts of the underlying case law show that the offers were not identical and thus (at least in England) there is at present no conclusive case law on identical cross-offers.130 67

b) ‘Extended’ Conclusion of Contract 69

Crossing statements are by far not the only means by which the conclusion of a contract cannot be categorized into offer and acceptance. Business needs in relation to contract practice have therefore given rise to numerous methods that allow a contract to be concluded ‘step-by-step’ or through an ‘extended’ process which prevent analysis into offer and acceptance. The gradual consolidation of contractual intention and content can be achieved with the aid of traditional legal instruments which have, in part, become more significant in modern contracting, such as preliminary contracts and option contracts (regulated in Article 1124 Code civil under ‘unilateral promises’). In addition, one can observe the development of several new legal instruments131 such as a ‘Letter of Intent’, ‘Head of Agreement’, ‘Terms Sheet’ and ‘Memorandum of Understanding’. Such instruments, as well as others, allow for partial determination or substantiation of content in one or several steps at different stages by one party, or a third party, and play an important role in sales law. Legal literature has given various explanations to these instruments.132 The use of such instruments to strive to conclude a contract in various 128 See, however, Article 471 CCC: ‘The parties may conclude a contract in the form of an offer, an acceptance or any other means.’ (emphasis added). 129 See for CISG Schroeter, in Schlechtriem, Schwenzer & Schroeter (n 32) Art. 18 CISG para. 39; for German law see Wertenbruch, BGB Allgemeiner Teil (4th edn., C.H. Beck 2017) pp. 139 et seq. 130 See Furmston & Tolhurst (n 3) para. 2.52. 131 On such instruments see also Chapter 3 on ‘Precontractual Liability: Civil Law’ and Chapter 4 on ‘Precontractual Liability: Common Law’. 132 Schulze & Zoll (n 102) § 3 para. 72; Cordero-Moss, ‘The Function of Letters of Intent and their Recognition in Modern Legal Systems’ in Schulze (ed), New Features in Contract Law (Sellier 2007) pp. 139–159; Furmston & Tolhurst (n 3) paras 7.01 et seq.; Heussen, Letter of Intent (2 nd edn., Dr. Otto Schmidt 2014); Schulze, ‘The Formation of Contract: New Features and Developments in Contracting’ in

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steps without a formal offer and acceptance is also underpinned by the same reasons for crossing statements in allowing the application of the provisions of international and national laws on the conclusion of contract. A contract will therefore be concluded as long as an agreement aims to fulfil the general requirements of the applicable law, for example the intention to be legally bound and sufficient content of agreement. A gradual exchange of statements is particularly characteristic in complex mergers 70 and acquisitions, joint ventures and project agreements (for example, in relation to the construction of a wind farm). A common practice is to first outline the transaction before entering into the actual documentation phase that, once completed, will lead to the written (or notarized) conclusion of not one but rather multiple contracts. This process often occurs through a document, signed beforehand by all parties, under various titles, such as ‘Heads of Agreement’ or using one of the other terms indicated above. Negotiations prior to such documents allow the parties to agree on the material economic and legal cornerstones that will form the basis of the detailed contracts to be drafted and negotiated further; alternatively the early negotiations allow the parties to come to the conclusion to cease pursuing a transaction, thereby, saving the time and expense of further negotiations and the costs of drafting the contract documents. However, parties generally do not intend to create an obligation to conclude the contract that is described in the ‘Letter of Intent’,133 ‘Heads of Agreement’ or other similar documents. This is usually clarified by provisions to this effect and sometimes further clarified by statements such as ‘subject to contract’ given in the header.134 However, a Letter of Intent may nevertheless constitute a binding contract upon analysis of the circumstances of the case.135 The parties to early or preliminary agreements do not seek a high degree of specifici- 71 ty on all contract terms, which often results in the document containing insufficient content to be considered a legally binding contract.136 For example, in an acquisition the buyer often requires the seller to provide additional guarantees that may arise as a result of the findings from the due diligence process to be performed. Furthermore, additional provisions after the signing of the Letter of Intent may arise due to the demands of a third party financing the transaction. The Letter of Intent should therefore make clear reference to the due diligence to be completed as well as possible conditions imposed by the financing bank. Although the Letter of Intent generally does not contain any obligations in relation to the intended conclusion of contract it does represent, at least to some extent, a de facto binding agreement on terms agreed upon prior to the Letter of Intent and that would prove difficult to ‘reopen’. In particular, highly detailed provisions of a Letter of Intent are often included unamended in the final contracts; in some instances they may even provide the basis for the contract itself. 137 In contrast, the unbinding Letter of Intent in relation to the conclusion of the contract is often accompanied by binding rules on confidentiality and on the duty to conduct the

Schulze & Perales Viscasillas (eds), The Formation of Contract (Nomos 2016) pp. 17 et seq.; Thümmel, ‘Letter of intent (Absichtserklärung)’ in Schütze, Weipert & Rieder (eds), Münchener Vertragsbuch Vol 4 (7th edn., C.H. Beck 2012) pp. 1–17. 133 Furmston & Tolhurst (n 3) paras 7.17 et seq. See especially British Steel Corp v Cleveland Bridge Engineering Co [1984] 1 All ER 504. 134 On the effect of ‘subject to contract’ see Furmston & Tolhurst (n 3) paras 9.15 et seq. 135 British Steel Corporation v Cleveland Bridge and Engineering Co Ltd [1984] 1 All ER 504. 136 See Kitsons Insulation Contractors Ltd v Balfour Beatty Buildings Ltd [1989] ORB 1461: cf Harris Canlan Construction Co Ltd v Ridgewood (Kensington) Ltd [2007] EWHC 2378 (TCC). 137 Twintek Ltd v GSE Building and Civil Engineering [2003] EWHC 605 (TCC).

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negotiations in good faith.138 The parties also may include an obligation to afford one of the party’s exclusivity, which requires the other party to only negotiate with the first party for a particular period of time. 72 A decisive aspect of contract practice is for the parties to foresee when their statements will likely lead to the desired contractual relationship. Foreseeability and clarity are important in respect of statements made in the pre-contractual phase (as part of the negotiation process in which the contract’s content is gradually outlined), which bring the possible conclusion ever closer but still allows the parties to avoid the contract. This is especially applicable to cross-border contracts in which one of the parties is often not entirely familiar with the details of the rules on formation of contract under the applicable law. Clarifications of meaning and understandings should be clearly stated in writing throughout the negotiation process and drafting of the contract.

2. Internet Auctions 73

An Internet auction represents a specific form of concluding a contract. Article 2(b) CISG excludes auction sales from the CISG’s scope of application; accordingly the question is posed whether this provision also extends to Internet auctions. Although the rationale underlying Article 2(b) CISG suggests that Internet auctions do not fall within this exception and therefore the CISG can, in principle, be applied,139 case law has excluded the application of the CISG to Internet auctions.140 The conclusion of the individual sales contract via an Internet auction requires consideration of the terms employed by the respective auction platform, for instance in relation to revocation of offers. The acceptance of these terms will usually follow through mouse clicks prior to participation in the auction. In the absence of the contrary, one will therefore have to apply the applicable national law in order to interpret whether, under the circumstances, the online presentation of the goods is merely an invitatio ad offerendum or an offer to conclude a contract with the highest bidder.141 For example, German case law held that advertising goods on an Internet auction platform constituted a binding offer which would result in a contract with the highest bidder once the time period for bidding had expired.142 The default rule in the Common Law is that the bids are offers allowing the auctioneer (seller) to withdraw the goods if the highest bid is deemed to be insufficient or the seller changes his mind. However, the Common Law defers to the auction rules that can dictate that the auction is ‘without reserve’ or ‘absolute’ requiring the goods to be sold to the highest bidder.

3. Artificial Intelligence 74

Neither the CISG, the PICC, the European sets of rules nor the aforementioned national laws have developed specific provisions to react to the increasing changes to the processes and methods of contract formation resulting from digitalization, especially the

138 Provisions of national law may, irrespective of an agreement between the parties, require the parties to negotiate in good faith. See Chapter 3 on ‘Precontractual Liability: Civil Law’. 139 Schroeter, in Schlechtriem, Schwenzer & Schroeter (n 32) Vor Art. 14–24 CISG para. 93. 140 Bundesgericht (Switzerland) 8 November 2016, CISG-Online No. 2803. See Ferrari, in Schlechtriem, Schwenzer & Schroeter (n 32) Art. 2 CISG para. 28. 141 For a discussion on this point see Chwee Kin Keong and Others v Digilandmall.com Pte Ltd [2004] 2 SLR 594 paras 91 et seq. 142 BGH 7 November 2001 in (2002) NJW 363. See also the Australian decision Smythe v Thomas (2007) NSWLR 537 which also came to this conclusion.

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use of artificial intelligence (‘AI’).143 For example, in contracts concluded ‘machine-tomachine’, AI may decide which contract to conclude with which party. Moreover, AI can be used to change the content of contracts, for instance in accordance with the current market situation, without human involvement in these particular decisions. Often, the operator may not initially be able to foresee or explain the decision (‘black-box effect 144). Various approaches are considered in order to legally capture the role of AI in the conclusion of contract (e.g. the development of particular criteria in order to hold the operator responsible for all activities undertaken by AI, or the application of rules concerning agency145). The suggestion to afford AI its own legal personality146 and thus to recognize it as a party to the contract appears, however, to be very problematic. This would result in serious disadvantages for the other party with regard to the enforceability of contractual claims and liability for non-conformity, and would also put third parties at a disadvantage with regard to non-contractual liability.147 Legal certainty for the parties involved in the conclusion of a contract will in future require these issues to be clarified by legislation and case law at national and international level.

G. Cross References As has been shown by the above examination of several core aspects of contract 75 formation, the formation of contract is closely linked to other aspects of other Chapters of this book. The outcome of the contract formation process is a binding contract between the parties, but the contract may not be fully understood as intended without reviewing its links to the formation process starting with the early advertisement of the good or product and continuing the precontractual negotiations. More detail on these phases prior to conclusion of contract is given in Chapter 3 ‘Precontractual Liability: Civil Law’ und Chapter 4 ‘Precontractual Liability: Common Law’. Where contractual formalities or standard terms are concerned, the reader is invited to refer to Chapter 7 and Chapter 9. Questions on language and translation (which can play a key role in cross-border contracts) are covered in Chapter 2. Information on the application of the CISG and its relationship to national laws in the conclusion of contract is provided in Chapter 6 ‘Jurisdictional Issues: Sales Law and the CISG’. Chapter 11 ‘Validity of Contract Terms’ provides, inter alia, core information on defects in agreement and in formal requirements.

143 Lohsse, Schulze & Staudenmayer, ‘Data as Counter-Performance – Contract Law 2.0? An Introduction’ in Lohsse, Schulze & Staudenmayer (eds), Data as Counter-Performance – Contract Law 2.0? (Nomos, Hart 2020) p. 10 et seq. 144 See, for example, Spindler, ‘User Liability and Strict Liability in the Internet of Things and for Robots’ and Zech, ‘Liability for Autonomous Systems: Tackling Specific Risks of Modern IT’ in Lohsse, Schulze & Staudenmayer (eds), Liability for Artificial Intelligence and the Internet of Things (Nomos, Hart 2019). 145 See Lohsse, Schulze & Staudenmayer, ‘Liability for Artificial Intelligence’, in Lohsse, Schulze & Staudenmayer (n 144) 19 et seq. 146 European Parliament resolution of 16 February 2017 with recommendations to the Commission on Civil Law Rules on Robotics (2015/2103(INL)). 147 See, for example, the criticisms expressed in the ‘Open Letter to the European Commission Artificial Intelligence and Robotics’ available under http://www.robotics-openletter.eu (last accessed 19 November 2020); see also Eidenmüller, ‘The Rose of Robots and the Law of Humans’ (2017) ZEuP 765, 775.

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H. Practitioner Tips The initiation and conclusion of contracts, especially in international transactions, can be eased through the use of standard contract forms drafted by third parties for particular types of transactions, such as the ICC Model International Sale Contract or by using industry-related rules, such as those drafted by the European Federation of Energy Traders (EFET) in relation to transactions for electricity and gas.148 Such sets of rules often comprise a general part (‘General Conditions’; ‘General Agreement’), which contains extensive general provisions including rules on delivery, billing, non-performance, limitations of liability and termination rights, and a specific part (‘Specific Conditions’; ‘Election Sheet’), which the parties complete in accordance with their needs by excluding or altering the application of certain rules from the general part. 77 Concluding contracts via adapted standard forms is particularly favourable in relation to recurring transactions. The general part – as modified by the specific part – can serve as a basis for future transactions through the use of model ‘Confirmation of Individual Contract’ forms that may be contained in an annex to the general part. Using such a form allows future contracts to be concluded simply – if necessary orally – and quickly. The aforementioned sufficient agreement regarding the content of the contract (under F.I.1.) is ensured through the reference to rules of the general part in the Confirmation of Individual Contract. Furthermore, the rules of the general part function, as far as possible, as an independent set of rules, which is separate from the law chosen by the parties. Regarding mandatory national provisions or rules, legal counsel should be consulted to confirm that the standard terms (contract rules) are enforceable under the applicable law. Such opinions are provided to parties upon request (as occurs, for example, in relation to the EFET). 76

I. Additional Sources 78 Beale et al., Cases, Materials and Text on Contract Law (3rd edn., Hart 2019); Burrows, Principles of the

English Law of Obligations (OUP 2015); Dannemann & Vogenauer (eds), The Common European Sales Law in Context (OUP 2013); Díez-Picazo, Fundamentos del Derecho civil patrimonial. Introducción. Teoría del contrato Vol I (6th edn., Thomson Reuters Civitas 2007); Huber & Mullis, The CISG (2nd edn., Sellier 2015); Jansen & Zimmermann, Commentaries on European Contract Laws (OUP 2018); Kadner-Graziano, Comparative Contract Law (2nd edn., Edward Elgar 2019); Kötz, ‘Comparative Contract Law’ in Reiman & Zimmermann (eds), The Oxford Handbook of Comparative Law (2nd edn., OUP 2006); Furmston & Tolhurst, Contract Formation (2nd edn., OUP 2016); Kötz, Europäisches Vertragsrecht (2nd edn., Mohr Siebeck 2015); Kröll, Mistelis & Perales Viscasillas, Convention on International Sale of Goods (CISG) (2 nd edn., C.H. Beck/Hart/Nomos 2019); Mankowski (ed), Commercial Law (C.H. Beck/Hart/Nomos 2018); Peel, Treitel on The Law of Contract (15th edn., Sweet & Maxwell 2020); Schulze & Zoll, Europäisches Vertragsrecht (3rd edn. Nomos 2021); Schulze & Dannemann (eds), German Civil Code Vol I (C.H. Beck, Nomos 2020); Schulze & Zoll, European Contract Law (3rd edn. Beck/Hart/Nomos 2021); Schwenzer (ed), Schlechtriem & Schwenzer: Commentary on the UN Convention on the International Sale of Goods (4th edn., OUP 2016); Schwenzer, Hachem & Kee, Global Sales and Contract Law (OUP 2012).

148 See https://efet.org/standardisation/standard-contracts--gas--power/ (last accessed 19 November 2020).

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CHAPTER 9 INCORPORATION OF STANDARD TERMS Ulrich Magnus A. Topics Covered . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B. Introductory Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C. Statement of Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . D. International Sales Transaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . E. Sampling of Laws and Commentary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. CISG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Notion of Standard Contract Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Incorporation of Standard Contract Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Express Incorporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Implied Incorporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Consumer Cases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d) “Battle of the forms” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . e) Consequences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. UNIDROIT Principles of International Commercial Contracts . . . . . . . . . . . . . . 1. Notion of Standard Contract Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Incorporation of Standard Contract Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Express Incorporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Implied Incorporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Consumer Cases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d) Battle of the forms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . e) Consequences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Principles of European Contract Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Notion of Standard Contract Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Incorporation of Standard Contract Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Express Incorporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Implied Incorporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Battle of the forms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Draft Common European Sales Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Notion of Standard Contract Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Incorporation of Standard Contract Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Express Incorporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Implied Incorporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Consumer Cases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d) Battle of the forms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . e) Consequences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. German Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Notion of Standard Contract Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Incorporation of Standard Contract Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Express Incorporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Implied Incorporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Consumer Cases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d) Battle of the forms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . e) Consequences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI. American Uniform Commercial Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Notion of Standard Contract Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Incorporation of Standard Contract Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Express Incorporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Implied Incorporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Consumer Cases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d) Battle of the forms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . e) Consequences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VII. English Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Notion of Standard Contract Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Incorporation of Standard Contract Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Express Incorporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Chapter 9 Incorporation of Standard Terms b) Implied Incorporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Consumer Cases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d) Battle of the forms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . e) Consequences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VIII. French Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Notion of Standard Contract Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Incorporation of Standard Contract Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Express Incorporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Implied Incorporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Consumer Cases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d) Battle of the forms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . e) Consequences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IX. Spanish Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Notion of Standard Contract Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Incorporation of Standard Contract Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Express Incorporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Implied Incorporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Consumer Cases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d) Battle of the forms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . e) Consequences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . X. Chinese Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Notion of Standard Contract Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Incorporation of Standard Contract Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Express Incorporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Implied Incorporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Consumer Cases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d) Battle of the forms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . e) Consequences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XI. Comparative Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F. Illustrations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . G. Cross References & Additional Commentary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . H. Practitioner Tips . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Additional Sources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

74 75 76 77 78 78 79 79 81 82 83 84 85 85 86 86 87 88 89 90 91 91 92 92 95 96 97 98 99 103 107 108 110

A. Topics Covered The control of standard contract terms generally raises two separate issues: whether the terms have become part of the contract and whether their content is valid. This Chapter focuses on the incorporation issue including the problem of conflicting standard terms (‘battle of forms’) while the validity of content is dealt with in Chapter 11 on ‘Validity of Contract Terms’. 2 At the outset, the incorporation problem sounds simple: In order to be incorporated into a contract, standard terms must be part of the offer and the corresponding acceptance. But a number of issues have evolved relating to how to incorporate standard terms. Views differ particularly as to whether the terms must be attached or brought to the attention of the other party, whether they need only be mentioned or referred to, and whether they can be incorporated through commercial usage. Special interest deserves the question whether and when conflicting standard terms can be incorporated. Provisions on incorporation had been rare in the time-honoured civil codes or statutes whereas newer enactments or code-amendments and in particular soft law regulations like the Principles of European Contract Law (PECL), the UNIDROIT Principles 2016 (PICC) – and also the withdrawn Draft Common European Sales Law (CESL) – contain such provisions. 1

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B. Introductory Note Most enterprises prefer to use their own standard terms and, therefore, the incor- 3 poration of such terms is an important issue. Whether a party has successfully incorporated its standard terms has been the basis for many disputes. When a party contracts under its own standard contract terms the question is often whether the other party had sufficient knowledge of the existence and content of the terms. On the extremes, the answers are clear. On one hand, if there is no hint or available information at all about the standard terms, as well as no pertinent trade usage, then, the terms are not part of the contract. On the other hand, if the other party received the terms and all relevant information prior to or at the time of contract formation (opportunity to read terms), then the terms are incorporated into the contract when the receiving party unconditionally accepts the offer, unless their content violates mandatory legal rules or is deemed to be against public policy. It is the variety of cases between these extremes, which causes problems. To the problematic cases also B2B transactions belong where each party tries to rely on the own standard terms which, however, differ from those of the other party. Any solution has to balance the contradicting interests of the parties: the offeror of 4 the terms is not interested in making costly and timely efforts to bring the terms to the knowledge of the other party; in particular, the offeror disfavors rules that place a duty on him to insure the awareness of the other party in order for the standard terms to be enforceable. The other party is in turn not interested in being bound by terms, which it could not easily take notice of or gain access to. A fair balance between these interests requires differentiating types of cases: the rules for the incorporation of standard terms for professional or commercial parties and consumers should not be the same due to their differences in degree of expertise, knowledge and experience. In addition, the standard for domestic and international transactions may vary because of differing national rules and practices concerning the use and content of standard contract terms.

C. Statement of Issues The issues reviewed in this Chapter include: (1) Do standard terms become a part 5 of international sales contracts? (2) How does a party effectively incorporate standard terms into a contract? (3) What are the requirements found in international legal instruments and national laws for incorporating standard terms into a contract? (4) What role does the use of pre-formulated forms have on the incorporation process? (5) Are there different rules for the incorporation of standard terms in consumer and commercial contracts? (6) Can rules enacted to regulate consumer standard term contracts be applied by analogy to commercial contracts? (7) How is the problem of conflicting standard terms, the battle of forms solved?

D. International Sales Transaction It seems to be a widely if not generally acclaimed principle that any sending, handing 6 over of, or reference to, standard terms after the conclusion of the contract, for instance on an invoice, as such cannot change the contract and remains without effect unless clearly accepted as a change of the existing contract by the receiving party.

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In international transactions it is of particular importance for a party to be sure of under which conditions (under the applicable law) their standard contract terms will become part of the contract. A party should know whether it is obliged to send or hand over the terms or whether a mere reference to them would suffice, or whether the party can even rely on a usage to that the terms apply. Since the incorporation standards vary between legal systems a uniform solution is certainly preferable.

E. Sampling of Laws and Commentary 8

This part examines the notion of standard terms and the rules of incorporation of standard terms under the CISG, PICC, PECL, as well as, German, American (UCC), English, French, Spanish, and Chinese laws. Still, the Draft Common European Sales Law is mentioned as a recently proposed though finally withdrawn model.

I. CISG 1. Notion of Standard Contract Terms 9

The CISG does not contain a specific provision that regulates the incorporation of standard contract terms. Nor does the CISG define the notion of standard contract terms. Nevertheless, it is widely recognized that standard terms are those contract terms that have been “prepared in advance for general and repeated use.”1 Courts and writers dealing with standard terms under the CISG often do not refer to any national definition of standard terms. At least there is no CISG case law on this point. Also, CISG case law is lacking relating to whether standard terms should be treated differently from individually negotiated terms. It may be doubted whether this distinction between individual and standard clauses plays a role under the CISG. Given the fact that the CISG leaves the control of the validity of specific types of contract terms to applicable national law (Article 4(a) CISG), it is questionable whether the incorporation of standard terms rests upon the distinction between individually negotiated terms and standard terms.

2. Incorporation of Standard Contract Terms 10

It is the prevailing view in CISG case law that in CISG cases the question of incorporation of standard terms must be answered within the framework of the CISG provisions.2 The courts have applied the CISG’s formation part (Part II, Articles 14–24 CISG), Article 8 CISG on contract interpretation, and CISG Article 9 on practices and usages3 in dealing with the issue of the incorporation of standard terms. Legal doctrine confirms this view.4 Whether the incorporation follows from agreement or from a one-sided incorporation has not mattered. 1 See UNCITRAL Digest of Case Law on the United Nations Convention on Contract for the International Sale of Goods (3rd edn, 2016) pre Article 14 CISG para. 11. 2 BGH in (2002) NJW 370. 3 In particular BGH 31 October 2001, BGHZ 149, 113; OGH 17 December 2003 in (2004) IHR 148 (153); for further supporting case law see the decisions cited in n 24 UNCITRAL Digest before Article 14 CISG, stemming from Argentina, Austria, Belgium, France, Germany, Italy, the Netherlands and the US; however contra few older decisions: for instance Rechtbank Zutphen in (1998) NIPR No. 110; AG Langenfeld in (1998) NJW-RR 1524. 4 See, e.g., Achilles, Kommentar zum UN-Kaufrechtsübereinkommen (CISG) (2 nd edn, 2019) Article 14 CISG para. 6; Brunner/Gottlieb (eds), Commentary on the UN Sales Law (CISG) (2019) Article 4 CISG para. 39; Dornis, in Honsell (ed), Kommentar zum UN-Kaufrecht (2nd edn, 2010) Introduction to

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a) Express Incorporation With respect to the incorporation of standard terms in international commercial 11 sales, CISG case law requires the offeror or offeree to clearly inform the other party that its standard contract terms shall apply – by way of a clear indication in the oral or written contract declaration itself – and secondly, the terms must be made reasonably accessible to the other party so that the party can read them before concluding the contract.5 As a rule, this means that the terms must be handed over or sent to the other party.6 The mere fact that terms are printed on the back of an offer, without any reference to them on the front of the offer, is itself insufficient for their incorporation.7 Furthermore, the standard terms must be in a language that the recipient can be expected to understand, normally in the language of the contract or the language of the recipient.8 Communication of the standard terms via an e-mail attachment or by providing a hyperlink suffices if the terms can be immediately read and downloaded.9 A mere reference to standard terms without allowing such immediate access to them does not satisfy the incorporation requirement.10 The reason given for this rather strict information duty is that in international transactions the content of standard contract terms varies considerably. Even a commercial party cannot be expected to already know the content of such terms prior to their sending or handing over. CISG jurisprudence requiring the sending of standard terms has been strongly criti- 12 cized as too restrictive and hampering international trade.11 The sending requirement, it is said, leads to an inefficient waste of time and effort. Instead, the onus should be on the other party to request the sending of the standard terms. The stronger argument is in favor of the prevailing doctrinal view12 since it places 13 the burden on the party who wants to incorporate and to profit from the application of its own standard terms. It is more than reasonable to expect that the incorporator Articles 14–23 CISG para. 6; Herber/Czerwenka, Internationales Kaufrecht (1991) Article 14 CISG para. 11; Ferrari, in Kröll/Mistelis/Perales Viscasillas (eds), UN Convention on Contracts for the International Sale of Goods (CISG) (2011) Article 14 CISG para. 38; Schroeter, in Schlechtriem/Schwenzer/Schroeter (eds), Kommentar zum Einheitlichen UN-Kaufrecht – CISG (7th edn, 2019) Article 14 CISG para. 117; see also, Lookofsky, Understanding the CISG (4th edn, 2012) para. 7.2. 5 See in particular BGH 31 October 2001, BGHZ 149, 113. 6 See BGH 31 October 2001, BGHZ 149, 113; also to the same effect: Tribunale di Rovereto 21 December 2007, CISG-Online No. 1590; Rechtbank Rotterdam 25 February 2009, CISG-Online No. 1812; Obergericht Bern 19 May 2008, CISG-Online No. 1738. 7 See Cour d’appel de Paris 13 December 1995, UNILEX (signature of the other party on the front of the offer does not include the terms on the backside into the contract). 8 See, e.g., OGH 9 November 2005, CISG.pace; OLG Düsseldorf, 21 April 2004, CISG.pace; Cour d’appel de Paris 10 September 2003, CLOUT No. 490; AG Heilbronn 15 September 1995, CLOUT No. 345. 9 See, e.g., Golden Valley Grape Juice and Wine, LLC v Centrisys Corp. et al., US Dist. Ct. (E.D. Cal.) 21 January 2010, CISG-Online No. 2089; in this sense see also Brunner/Murrmann/Stucki, in Brunner/Gottlieb (n 4) Article 4 CISG para. 42; Magnus, ‘Incorporation of Standard Contract Terms under the CISG’, in FS for Albert H. Kritzer (2008) p. 303 (322–323); Schroeter, in Schlechtriem/Schwenzer/Schroeter (n 4) Article 14 CISG para. 137. 10 See, e.g., LG Hamburg 17 July 2017, (2018) IHR 17; Rechtbank Rotterdam 19 December 2010, CISG-Online No. 2180; Schroeter, in Schlechtriem/Schwenzer/Schroeter (n 4) Article 14 CISG para. 137. 11 See Berger, ‘Die Einbeziehung von AGB in internationale Kaufverträge’ in FS Horn (2006) pp. 3 et seq.; Kindler, ‘Ob Walzfräsmaschine oder Schreibtischsessel: keine Obliegenheit zur AGB-Übersendung nach CISG!’ in FS Heldrich (2005) 225 et seq.; Schmidt-Kessel, ‘Einbeziehung von Allgemeinen Geschäftsbedingungen unter UN-Kaufrecht’ (2002) NJW 3444. 12 See Ferrari, in Kröll/Mistelis/Perales Viscasillas (n 4) Article 14 paras 38 et seq.; Magnus, in von Staudinger, Kommentar zum Bürgerlichen Gesetzbuch mit Einführungsgesetz und Nebengesetzen – CISG (edn, 2018) Article 14 CISG paras 41 et seq.; Mankowski, in Ferrari et al. (eds), Internationales Vertragsrecht (3rd edn, 2018) Article 14 CISG para. 28; Schroeter, in Schlechtriem/Schwenzer/Schroeter (n 4) Article 14 CISG paras 137 et seq.

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of the terms to have the duty to ensure (act in due care) that the other party has a reasonable chance to see and understand the terms. If a mere reference would suffice this would create the risk that the terms when they have to be produced later in litigation have been changed in the meantime and no longer correspond to those under which the contract was concluded. It is for this reason that terms sent via email should be immediately downloadable. Electronic communication is an especially efficient means of transmitting standard terms and the inefficiency argument, noted above, is at its weakest. 14 The relevant point of time at which standard terms must be made available is the time of the conclusion of contract.13 Any sending of terms subsequent to contract formation is considered as an offer to modify the contract for which the recipient must expressly accept or make sufficiently clear through conduct (mere silence would not suffice) (Article 18(1) sent. 2 CISG). b) Implied Incorporation However, there are exceptions to the ‘making available rule’.14 If the other party already knows the content of the offeror’s standard terms, for instance from prior transactions, their renewed sending is unnecessary unless the content of the terms has been changed. The standard terms then impliedly form part of the contract (or the respective offer or acceptance). The same is true when the parties always negotiate on the basis of certain standard contract terms. Another implied incorporation is the case where certain standard terms apply as international usage in the trade or business in which the parties are active. 16 The registration of standard terms in a public registry or at a chamber of commerce, such as in the Netherlands, is not sufficient communication of the terms.15 Again, this would place the burden to find the content of the terms on the party against whom the terms shall be used. 15

c) Consumer Cases 17

With respect to consumers to whom the CISG in rare cases can apply the sending requirement must also be met (although there is no case law to the point). In the case of consumer contracts, the notice that standard terms shall apply should be particularly clear and visible.16 d) “Battle of the forms”

18

As already indicated rather often both parties refer to, and send their own standard terms on which they want to rely. Regularly, the mutual terms contain at least some conflicting provisions. Although the CISG does not specifically address this issue it is the clearly prevailing opinion that the Convention covers this so-called battle of the forms.17 As in national law, also under the CISG primarily two different theories compete in 13 See, e.g., Chateau des Charmes Wines Ltd. v Sabaté Inc. (Ont. Sup. Ct., 28 October 2005) CISG-Online No. 1139; Hof Arnhem 21 October 2000 in (2001) NIPR No. 14; Magnus, in von Staudinger (n 12) Article 14 CISG para. 42; Mankowski, in Ferrari et al. (n 12) Article 14CISG para. 47. 14 See already BGH 31 October 2001, BGHZ 149, 113 et seq. 15 See Hof Arnhem in (1999) NIPR No. 245; Rechtbank van Koophandel te Hasselt 2 December 1998, CISG.pace; Piltz, (2004) IHR 134; still differently Rechtbank Arnhem in (1999) NIPR No. 251. 16 See Magnus, ‘UN-Kaufrecht und Verbraucher’ in FS Siehr (2010) p. 405 (421–422). 17 See for many: BGH 9 January 2002, CISG-Online No. 651; Norfolk Southern Railway Company v Power Source Supply, Inc, US Dist. Ct. (W.D.Pa) 25 July 2008, CISG-Online No. 1776; Schroeter, in Schlechtriem/Schwenzer/Schroeter (n 4) Article 14 para. 74; Spagnolo, in Mankowski (ed), Commercial Law (2019) Article 19 CISG para. 25.

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this battle: the last shot rule and the knock-out rule. A strict reading of Article 19 CISG appears to favour the last shot rule and indeed a number of courts and authors supports this view:18 the party who sends the own terms last (fires the last shot) with the other party no longer rejecting them but performing the contract would win the battle over the incorporation of the terms even if the other party had sent the own terms before. For, any acceptance with material alterations constitutes a new offer (Article 19 (1) CISG) which must be accepted and would be accepted by an unconditional performance. Under the contrary approach of the knock-out rule the conflicting provisions of 19 both sets of terms neutralize each other and fall away while the consistent parts are incorporated into the contract at least if the parties have indicated, for instance by part performance, that they intend to execute the contract.19 This solution does not mean that the standard terms of both sides as a whole drop out. This is only true as far as they cannot be reconciled. An eventual gap is filled by the CISG or the otherwise applicable law. If, for example, as often, the jurisdiction clauses in the standard terms contradict each other the jurisdiction rules apply which the seized court in international cases generally applies. The knock-out rule is the preferable approach because it avoids random results and 20 hinders manipulations by sending or referring to standard terms again and again. If both parties intend to execute the contract the rule meets the expectations of both parties rather than the last shot rule. Furthermore, it complies better with good faith in international trade (Article 7 (1) CISG) that in case of conflicting terms the terms of none party prevail but are replaced by neutral provisions. Article 19 CISG does not stand in the way. The provision is dispositive; the parties can even implicitly exclude its application. They have done so if their conduct documents their will to execute the contract despite any conflicting standard contract terms.20 This is certainly the case if, for instance, the parties have already made partial delivery and partial payment. e) Consequences Standard terms that do not validly form part of an offer or acceptance or have not 21 been incorporated into the contract have no effect. The contract declaration or the contract must be understood and interpreted without reference to the omitted terms.

18 See, e.g., Roser Technologies, Inc v Karl Schreiber GmbH, US Dist.Ct. (W.D. Pa) 10 September 2013, CISG-Online No. 2490; Nucap Industries, Inc & anor v Robert Bosch LLC & ors, US Dist. Ct. (N.D. Ill.) 31 March 2017, (2018) IHR 110 (115); OLG Linz 23 March 2005, cisg.pace; Farnsworth, in Bianca/Bonell (eds), Commentary on the International Sales Law. The 1980 Vienna Sales Convention (1987) Article 19 CISG para. 2.5; Dornis, in Honsell (n 4) Article 19 CISG para. 40. 19 See, e.g., BGH 9 January 2002, CISG-Online No. 651; French Cour de cassation 16 July 1998, CISG-Online No. 344; Rechtbank Overijssel 3 December 2014, CISG-Online No. 2568; Brunner/Murmann/Stucki, in Brunner/Gottlieb (n 4) Article 4 CISG para. 42; Magnus, in Staudinger (n 12) Article 19 CISG para. 24; Schroeter, in Schlechtriem/Schwenzer/Schroeter (n 4) Article 14 CISG para. 74; Spagnolo, in Mankowski (n 17) Article 19 CISG para. 26. 20 For a detailed reasoning see Magnus, in Staudinger (n 12) Article 19 para. 24 et seq.; Mankowski, in Ferrari et al. (n 12) Article 9 CISG para. 32 et seq.; Schroeter, in Schlechtriem/Schwenzer/Schroeter (n 4) Article 14 CISG para. 74 et seq.

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II. UNIDROIT Principles of International Commercial Contracts 1. Notion of Standard Contract Terms Article 2.1.19(2) of the PICC (2016 version), drafted for commercial contracts (although it can also be applied to consumer contracts) defines standard terms as follows: “Standard terms are provisions which are prepared in advance for general and repeated use by one party and which are actually used without negotiation with the other party.” 23 This definition is essentially identical with the understanding of standard contract terms under the CISG in that it requires the terms to be prepared in advance, to be intended for general and repeated use and to be not individually negotiated.21 Taken strictly, a contract form entirely prepared in advance by one party does not qualify as a standard terms contract unless the party intends to re-use the form in the future. 22 22

2. Incorporation of Standard Contract Terms Article 2.1.19(1) PICC regulates the incorporation of standard contract terms in a relatively general way: “Where one party or both parties use standard terms in concluding a contract, the general rules on formation apply, subject to Articles 2.1.20–2.1.22”. 25 In principle the general formation provisions apply. Neither Articles 2.1.20–2.1.22 PICC, nor the general black letter rules on contract formation, contain specific provision on the incorporation of standard terms. They thus leave open whether standard terms must be made available to the other party or whether a mere reference effects their incorporation. However, the UNIDROIT Comment to the PICC gives some guidance and also CISG case law is thought to be instructive for the interpretation of Article 2.1.19 PICC.23 24

a) Express Incorporation 26

According to the UNIDROIT Comment to Article 2.1.19 PICC, standard terms become ‘binding upon the mere signature of the contract document as a whole, as long as they are reproduced above that signature and not, for instance, on the reverse side of the document.’24 This corresponds to the CISG solution. When signing a document it is presumed that the signor had a sufficient opportunity to read its terms. Where the terms are reproduced on the back of the form or in a separate document or in an electronic file and are not separately signed, there needs to be a clear reference to them indicating that they shall apply.25 Whether a mere reference suffices or whether additional steps must be taken to make the terms reasonably known to the other party is unanswered under the PICC. A prior Draft of the PICC provided a duty of the recipient to ask for the standard terms; but this formulation was not included in the final UNIDROIT Comment to the PICC,26 which does not address the issue. Legal doctrine based on the PICC advocates an obligation of the user to reasonably bring the terms to the attention of the other

21 See Naudé, in Vogenauer/Kleinheisterkamp (eds), Commentary on the UNIDROIT Principles of International Commercial Contracts (PICC) (2nd edn, 2015) Article 2.1.19 PICC paras 1 et seq. 22 See Naudé, in Vogenauer/Kleinheisterkamp (n 21) Article 2.1.19 PICC para. 2. 23 Naudé, in Vogenauer/Kleinheisterkamp (n 21) Article 2.1.19 PICC para. 24. 24 UNIDROIT PICC Comment on Article 2.1.19 PICC para. 3 and Illustration 1; see Naudé, in Vogenauer/Kleinheisterkamp (n 21) Article 2.1.19 PICC para. 11. 25 UNIDROIT PICC Comment on Article 2.1.19 PICC para. 3; see Naudé, in Vogenauer/Kleinheisterkamp (n 21) Article 2.1.19 PICC paras 12 et seq. with references to CISG case law and CISG doctrine. 26 See Naudé, in Vogenauer/Kleinheisterkamp (n 21) Article 2.1.19 PICC para. 16.

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party.27 As part of this duty it is further required that the terms must be in a language that the recipient can be expected to understand.28 b) Implied Incorporation Rather similar to the situation under the CISG, an implied incorporation of standard 27 terms may occur through commercial usage or through practices established between the parties.29 Usages must be of an international character.30 c) Consumer Cases The PICC are specifically addressed to purely commercial transactions and exclude 28 consumer contracts.31 This is also true with respect to the use of standard contract terms. d) Battle of the forms Article 2.1.22 PICC specifically addresses the battle of the forms:

29

Where both parties use standard terms and reach agreement except on those terms, a contract is concluded on the basis of the agreed terms and of any standard terms which are common in substance unless one party clearly indicates in advance, or later and without undue delay informs the other party, that it does not intend to be bound by such a contract.

Article 2.1.22 PICC evidently adopted the knock-out rule in a rather similar form 30 as advocated for the CISG, namely that the conflicting standard terms drop out while substantially identical terms survive and become part of the contract.32 The Article in its “unless” part allows that a party may nonetheless declare its intent not to be bound by such a ‘reduced’ contract. The UNIDROIT Comment explains that a clause in the standard terms which rejects any conflicting provision in the other party’s standard terms “will not normally be sufficient since what is what is necessary is a specific declaration by the party concerned in its offer or acceptance.”33 Only a separate – individual – declaration will do which expresses in a clear and timely fashion that a contract will not be concluded except on the basis of the own terms.34 By such a declaration it is suggested that “each party can effectively switch to the ‘last shot’-doctrine”. 35 However, the distinction between an objection clause in standard terms and an objection made routinely in a separate way is a fine one which is not fully convincing.

27 Id. at (n 21) Article 2.1.19 PICC para. 18; Brödermann, in Mankowski (n 17) Article 2.1.19 PICC para. 3. 28 Naudé, in Vogenauer/Kleinheisterkamp (n 21) Article 2.1.19 PICC para. 23; Brödermann, in Mankowski (n 17) Article 2.1.19 PICC para. 4. 29 See UNIDROIT PICC Comment on Article 2.1.19 PICC para. 3 and Illustration 3; Naudé, in Vogenauer/Kleinheisterkamp (n 21) Article 2.1.19 PICC paras 28 et seq.; Brödermann, in Mankowski (n 17) Article 2.1.19 PICC para. 3. 30 See Article 1.9 PICC. 31 See Michaels, in Vogenauer/Kleinheisterkamp (n 21) Preamble I para. 26. 32 In the same sense Naudé, in Vogenauer/Kleinheisterkamp (n 21) Article 2.1.22 PICC para. 1; Brödermann, in Mankowski (n 17) Article 2.1.22 PICC para. 1. 33 UNIDROIT PICC Comment on Article 2.1.19 PICC para. 3 and Illustration 3. 34 See Naudé, in Vogenauer/Kleinheisterkamp (n 21) Article 2.1.22 PICC para. 6; Brödermann, in Mankowski (n 17) Article 2.1.22 PICC para. 1. 35 Brödermann, in Mankowski (n 17) Article 2.1.22 PICC para. 1.

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e) Consequences 31

The PICC do not expressly mention the consequences if standard terms are not incorporated in the prescribed way. But the consequences are clear: the terms do not become part of the contract.

III. Principles of European Contract Law 1. Notion of Standard Contract Terms The PECL address contracts as such.36 They do not provide special rules for commercial contracts or for consumer contracts and do not differentiate between merchants and consumers. The PECL are an attempt to develop a pure general contract law suitable for any kind of contract that also covers the case of transactions between consumers. Nonetheless, PECL constitute a just and fair contract law that can form the basis both for business transactions as well as consumer contracts. 33 The PECL define standard contract terms in Article 2:209(3) PECL: 32

(3) General conditions of contract are terms which have been formulated in advance for an indefinite number of contracts of a certain nature, and which have not been individually negotiated between the parties.

34

A first requirement for standard contract terms or general conditions of contract is that they are ‘terms, which have not been individually negotiated’. However, what is meant by “individually negotiated” is not further explained in the ‘black letter’ text. The Commentary to Article 2:209 PECL indicates that standard terms must be formulated by one of the parties without any influence from the other party.37 A second requirement is that the terms must be prepared in advance, i.e. before the conclusion of the contract. As third element Article 2:209(9) PECL requires that the standard terms must be intended for repetitive use. Thus, the first use is most likely sufficient if only the terms are intended for further cases.

2. Incorporation of Standard Contract Terms a) Express Incorporation 35

The PECL deal with the express incorporation of standard terms in Article 2:104 PECL: (1) Contract terms which have not been individually negotiated may be invoked against a party who did not know of them only if the party invoking them took reasonable steps to bring them to the other party’s attention before or when the contract was concluded. (2) Terms are not brought appropriately to a party’s attention by a mere reference to them in a contract document, even if that party signs the document.

36

This PECL provision is much in line with CISG case law on the incorporation issue. First, a reference that standard terms shall apply is necessary. However, the mere reference alone even in an offer signed by the other party – without the accompanying terms – does generally not suffice to incorporate the terms into the contract. 38 Likewise, the mere attaching of the terms without a reference to them in the offer is also insufficient

See Article 1:101(1) PECL: ‘general rules of contract law’. Lando/Beale (eds), Principles of European Contract Law (Part I and II) (2000) p. 181. 38 See Article 2:104(2) PECL and Lando/Beale (n 37) pp. 149–150.

36 37

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for their incorporation.39 Secondly and in addition to referencing the standard terms, the user must take reasonable steps to bring the terms to the other party’s attention, such as by sending or handing over the terms (see Chapter 8 on ‘Formation of Contract’). With respect to electronic communication, it remains an open question as to whether a mere link to a webpage of the offeror or access to a downloadable version is sufficient. Article 2:104(1) PECL expressly mentions the point of time when the standard con- 37 tract terms must be made available to the other party: this must occur ‘before or when the contract was concluded.’ A subsequent sending of standard terms does not change the contents of the already concluded contract unless the parties reach agreement on a modification of the original contract.40 b) Implied Incorporation The ‘black letter text’ of the PECL does not expressly mention the possibility of an 38 implied incorporation of standard contract terms. However, the Comments to Article 2:104 PECL mention the possibility of an implied incorporation of terms through trade usage.41 If a respective usage exists, the terms become part of the contract without any reference and any further necessary steps. Towards consumers, however, such trade practices should not be invocable. The Comments also indicate that the recipient can waive – even impliedly – its right to have the standard terms be made available.42 So, although the PECL do not expressly state that the parties can dispense with the sending of standard terms, the requirement can be set aside either by a trade usage, under Article 2:104 PECL, or by practices developed between the parties, under Article 1:105(1) PECL. Article 1:105(1) PECL provides that the parties are bound by practices established between them. c) Battle of the forms Article 2:209(1) and (2) PECL provides explicit rules on conflicting standard terms 39 (to paragraph (3) see supra para. 28): (1) If the parties have reached agreement except that the offer and acceptance refer to conflicting general conditions of contract, a contract is nonetheless formed. The general conditions form part of the contract to the extent that they are common in substance. (2) However, no contract is formed if one party: (1) has indicated in advance, explicitly, and not by way of general conditions, that it does not intend to be bound by a contract on the basis of paragraph (1); or (a) without delay, informs the other party that it does not intend to be bound by such contract.

The first paragraph of Article 2:209 PECL clearly installs the knock-out rule as the primary rule43 whereas paragraph (2) allows each party to rely on the last shot theory if, like in the PICC, this party takes sufficient steps to clarify that it will not accept a contract unless based on the own standard terms. Lando/Beale (n 37) p. 150. See also the comment by Lando/Beale (n 37) p. 150. 41 Lando/Beale (n 37) p. 150. 42 Lando/Beale (n 37) p. 150 with the following Illustration: ‘On Friday A sends an advertisement to B, a newspaper, asking B to publish it on Sunday. B receives A’s letter on Saturday. It (sc. B) cannot be required to inform A about its general conditions regarding advertising before it publishes the advertisement in the paper.’ The Comments evidently assume that B’s standard contract terms have impliedly become part of the contract. In the age of email and Internet, A’s information seems not inappropriate. 43 Lando/Beale (n 37) p. 182 et seq. 39 40

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IV. Draft Common European Sales Law 1. Notion of Standard Contract Terms 40

The withdrawn Draft Common European Sales Law (CESL) still deserves interest as an example for a recently proposed model. As will be seen, there were – also with respect to the complex of standard contract terms – some critical points and shortcomings which finally justified the withdrawal. CESL defined standard contract terms in Article 2(d) of the Introductory Regulation to the CESL as follows: ‘standard contract terms’ mean contract terms which have been drafted in advance for several transactions involving different parties, and which have not been individually negotiated by the parties within the meaning of Article 7 of the CESL.

41

Article 7 CESL specified the ‘individually negotiated’ requirement: (1) A contract term is not individually negotiated if it has been supplied by one party and the other party has not been able to influence its content. (2) Where one party supplies a selection of contract terms to the other party, a term will not be regarded as individually negotiated merely because the other party chooses that term from that selection. (3) A party who claims that a contract term supplied as part of standard contract terms has since been individually negotiated bears the burden of proving that it has been. (4) In a contract between a trader and a consumer, the trader bears the burden of proving that a contract term supplied by the trader has been individually negotiated. (5) In a contract between a trader and a consumer, contract terms drafted by a third party are considered to have been supplied by the trader, unless the consumer introduced them to the contract.

2. Incorporation of Standard Contract Terms 42

Concerning the incorporation of standard contract terms, Article 70 CESL provides the following: Duty to raise awareness of not individually negotiated contract terms. (1) Contract terms supplied by one party and not individually negotiated within the meaning of Article 7 may be invoked against the other party only if the other party was aware of them, or if the party supplying them took reasonable steps to draw the other party’s attention to them, before or when the contract was concluded. (2) For the purposes of this Article, in relations between a trader and a consumer contract terms are not sufficiently brought to the consumer’s attention by a mere reference to them in a contract document, even if the consumer signs the document. (3) The parties may not exclude the application of this Article or derogate from or vary its effect.

a) Express Incorporation 43

Article 70(1) CESL required at least reasonable steps of the sender of standard terms to bring them to the other party’s attention so that the other party could be aware of them. However, Article 70(2) supported the impression – by argumentum e contrario – that between merchants a mere reference to the own terms would generally suffice to incorporate them into the contract. Since CESL was designed to cover also transborder sales,44 this would have contradicted the solution favoured under the CISG.45 In international sales it appears to be a commandment of good faith that the party which wants to rely on the own standard terms has to bring them to the other party’s attention so that this party can easily take notice of them. 44 45

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Moreover, according to Article 70(3) CESL the whole Article is mandatory not only 44 for purchases by consumers but also for purely commercial or professional sales. This means that any agreement between traders that standard terms must be sent, handed over or the like for their incorporation would be invalid. Traders seemed to be forced to incorporate their standard terms exclusively through mere reference. There was and is no convincing reason for such a far-reaching restriction of the autonomy of professional parties. b) Implied Incorporation CESL did not provide a specific rule for the implied incorporation of standard 45 contract terms or non-individually negotiated terms. Although Article 68 CESL dealt in general with terms, which could be implied, the provision did not concern standard terms but only unwritten terms necessary for the purpose of the contract. 46 Under Article 67 CESL, standard terms could become part of a contract if they corresponded to a usage or a practice established between the parties. c) Consumer Cases As already stated, in consumer cases the incorporation of standard terms required 46 more than a mere reference in the contract (Article 70(2) CESL). The consumer must have been aware of the terms or the user must have taken reasonable steps to bring the terms to the consumer’s attention. The somewhat vague term ‘reasonable steps’ would have probably required the user to make the terms available to the consumer so that the latter would have had an opportunity to read them before concluding the contract. d) Battle of the forms With respect to the battle of forms, Article 39 CESL adopted almost entirely Article 47 2:209(1) and (2) PECL: (1) Where the parties have reached agreement except that the offer and acceptance refer to conflicting standard contract terms, a contract is nonetheless concluded. The standard contract terms are part of the contract to the extent that they are common in substance. (2) Notwithstanding paragraph 1, no contract is concluded if one party: (a) has indicated in advance, explicitly, and not by way of standard contract terms, an intention not to be bound by a contract on the basis of paragraph 1; or (b) without undue delay, informs the other party of such an intention.

e) Consequences Although not expressly stated it must be inferred from Article 70(1) CESL that stan- 48 dard terms or non-individually negotiated terms do not become part of a contract (‘may not be invoked’) unless the mentioned requirements for incorporation were fulfilled.

46

Article 68(1)(a)–(c) CESL.

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V. German Law 1. Notion of Standard Contract Terms 49

The EU Directive on Unfair Contract Terms of 199347 contains a definition on standard contract terms, which all EU Member States had to transform into national law. Although the Directive addresses exclusively contracts to which one party is a consumer its definition of standard contract terms can also be applied to business contracts. Article 3 of the Directive defines standard terms as ‘not individually negotiated terms’. According to Article 3(2) of the Directive a not individually negotiated term is one that has been drafted in advance and the other party was not able to influence the substance of the term. Article 3 of the Directive reads as follows: (1) A contractual term which has not been individually negotiated shall be regarded as unfair if, contrary to the requirement of good faith, it causes a significant imbalance in the parties’ rights and obligations arising under the contract, to the detriment of the consumer. (2) A term shall always be regarded as not individually negotiated where it has been drafted in advance and the consumer has therefore not been able to influence the substance of the term, particularly in the context of a pre-formulated standard contract. The fact that certain aspects of a term or one specific term have been individually negotiated shall not exclude the application of this Article to the rest of a contract if an overall assessment of the contract indicates that it is nevertheless a pre-formulated standard contract. Where any seller or supplier claims that a standard term has been individually negotiated, the burden of proof in this respect shall be incumbent on him (3) The Annex shall contain an indicative and non-exhaustive list of the terms which may be regarded as unfair.

50

German law now defines the notion of standard contract terms (Allgemeine Geschäftsbedingungen, AGB) in § 305(1) BGB in the following way: (1) Standard business terms are all contract terms pre-formulated for more than two contracts (sc. verbally ‘for a variety of contracts’) which one party to the contract (the user) presents to the other party upon the entering into the contract. It is irrelevant whether the provisions take the form of a physically separate part of a contract or are made part of the contractual document, what their volume is, what typeface or font is used for them and what form the contract takes. Contract terms do not become standard business terms to the extent that they have been negotiated in detail between the parties.

51

The definition is based on the pre-formulation requirement, the intended repeated use requirement,48 and on the condition that the parties did not individually negotiate the respective term. According to case law, standard terms must be pre-formulated for more than two occasions (use towards the same party suffices);49 intention of the user is sufficient.50 Individual negotiation means that the other party is granted the chance to influence the contents of the terms.51 It will often though not necessarily require a change of the pre-formulated text. Acceptance of the unchanged term after thorough discussion can suffice.52

Directive 93/13/EEC of 5 April 1993 on unfair terms in consumer contracts, [1993] OJ L 95/29. For certain other control aspects of consumer contracts (not the incorporation aspect) an intended single use of the pre-formulated term is sufficient; see § 310(3) No. 2 BGB. 49 BGH in (1998) NJW 2286; Federal Labour Court (Bundesarbeitsgericht, BAG) in (2006) DB 1377; BGH in (2004) NJW 1454. 50 See BGHZ 115, 391 (394). 51 See BGH in (2013) NJW 856; BGH in (2014) NJW 1725. 52 BGH in (2013) NJW 856. 47

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2. Incorporation of Standard Contract Terms a) Express Incorporation The German BGB regulates the express incorporation of standard contract terms in 52 its § 305(2): Standard business terms only become a part of a contract if the user, when entering into the contract, 1. 2.

refers the other party to the contract to them explicitly or, where there is explicit reference, due to the way in which the contract is entered into, is possible only with disproportionate difficulty, by posting a clearly visible notice at the place where the contract is entered into, and gives the other party to the contract, in an acceptable manner, which also takes into reasonable account of any physical handicap of the other party to the contract that is discernible to the user, the opportunity to take notice of their contents, and if the other party to the contract agrees to their applying.53

However, this provision applies only to consumer contracts. Its application to B2B 53 contracts is expressly excluded (§ 310(1) sent. 1 BGB). In purely professional cases, the courts are generally satisfied that standard terms are effectively incorporated if the supplier had referred to them; a mere reference before or at the conclusion of the contract is sufficient for the incorporation,54 at least where ordinary or customary standard terms are used.55 It is then the ‘obligation’ of the recipient to ask the other party to send the terms or otherwise make their content available. Furthermore, in order to be bound a merchant must have agreed to the proposed standard terms.56 There are cases where consent is presumed, namely where the merchant must know that the other party uses standard terms, which are usual in the respective business or industry. This is for instance the case in the banking field where banks generally contract under common (banking) standard terms. In such cases express consent is unnecessary. As indicated previously, for international CISG sales between professionals the Fed- 54 eral Court requires that – in addition to the reference and the consent – the terms must be sent or otherwise made actually available. The main reason for this deviation from internal law is the diversity of standard terms in the international arena.57 Their content may differ much more than in a purely national environment. It is likely that the Court will extend this jurisprudence also to international commercial sales that do not fall within the scope of the CISG. The latest point of time at which the respective requirements for incorporation must 55 be fulfilled is the conclusion of the contract.58 b) Implied Incorporation The German BGB does not contain a special provision on the implied incorporation 56 of standard terms. § 305 a BGB which applies both to consumer and professional trans53 The original version in German is as follows: ‘Allgemeine Geschäftsbedingungen werden nur dann Bestandteil eines Vertrags, wenn der Verwender bei Vertragsschluss 1. die andere Vertragspartei ausdrücklich oder, wenn ein ausdrücklicher Hinweis wegen der Art des Vertragsschlusses nur unter unverhältnismäßigen Schwierigkeiten möglich ist, durch deutlich sichtbaren Aushang am Orte des Vertragsschlusses auf sie hinweist und 2. der anderen Vertragspartei die Möglichkeit verschafft, in zumutbarer Weise, die auch eine für den Verwender erkennbare körperliche Behinderung der anderen Vertragspartei berücksichtigt, von ihrem Inhalt Kenntnis zu nehmen, und wenn die andere Vertragspartei mit ihrer Geltung einverstanden ist.’. 54 See for instance BGH in (1976) NJW 1886; BGH in (1992) NJW 1232. 55 See MüKoBGB/Basedow (2019) § 305 BGB para. 97. 56 BGHZ 102, 293. 57 See BGH in (2002) NJW 370 (with respect to a CISG case). 58 § 305(1) sent. 1 BGB.

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actions indirectly regulates a good deal of such cases: it provides that only the consent of the recipient is necessary – no reference, no availability of the terms – if standard terms for transport and telecommunication contracts are concerned and if these terms have been officially confirmed, and implied consent is inferred where the recipient merely takes the service.59 However, since sales contracts are not included the regulation is of no avail here. 57 For professional sales standard contract terms can be impliedly incorporated (even without the consent of the recipient), where their incorporation constitutes a usage, which is the case in certain branches.60 c) Consumer Cases 58

In consumer sales the incorporation of standard terms is effective if the requirements of § 305(2) BGB are fulfilled. These are: a reference that the terms will be part of the contract, the availability of the terms to the recipient, and the latter’s consent. The availability requirement obliges the supplier of standard terms to provide the consumer with a reasonable possibility to take notice of the terms. Ordinarily, the terms must be sent or handed over to the consumer.61 In certain cases that are not relevant here (authorized standard terms of transport or telecommunication businesses) is the sending and handing over are unnecessary.62 d) Battle of the forms

59

The German Civil Code does not contain a special provision dealing with the problem of conflicting standard contract terms. Actually, the Code follows the last shot rule: any acceptance with deviations from the original offer is a new offer.63 Thus, those terms would become part of the contract which were brought in last. However, the Federal Court held that in such cases neither party can trust that the other party will accept the terms of the other side. Where the parties have partly or fully performed the contract it would offend the overarching principle of good faith (§ 242 BGB) if a party still insists either on the application of the own standard terms or alternatively on the non-conclusion of the contract.64 Instead of the conflicting terms, the legal provisions of the Civil Code or other relevant statutes apply.65 In essence, the knock-out rule is the primary approach unless a party makes it sufficiently clear that it will only be bound if the own terms are part of the contract. A mere standard clause to this effect will however not suffice.66 e) Consequences

60

If standard terms have not been effectively incorporated then the rest of the contract remains intact.67 If necessary, statutory provisions fill any gaps due to the unenforceability of the standard terms.68 The courts are not allowed to uphold ineffective terms or to Grüneberg, in Palandt (79th edn, 2020) § 305 a BGB para. 1. An example that is relevant for sales law is the timber trade usages in Tegernsee in Bavaria: BGH in (1987) NJW-RR 94. 61 See BGH in (2009) NJW 1486. 62 § 305 a BGB. 63 § 150(2) BGB. 64 BGHZ 61, 282 (288 et seq.). 65 See BGH in (2001) NJW-RR 484 (485). 66 BGH ibid. 67 § 306(1) BGB. 68 § 306(2) BGB. 59

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fill the gaps by judicial discretion.69 Only in cases where upholding the contract leads to an unacceptable hardship for one party can the whole contract be invalid.70

VI. American Uniform Commercial Code 1. Notion of Standard Contract Terms The UCC does not expressly define standard contract terms.

61

2. Incorporation of Standard Contract Terms a) Express Incorporation The UCC does not contain a general provision on the incorporation of standard 62 terms but deals partly with the problem in its § 2-207 UCC: (1) A definite and seasonable expression of acceptance or a written confirmation which is sent within a reasonable time operates as an acceptance even though it states terms additional to or different from those offered or agreed upon, unless acceptance is expressly made conditional on assent to the additional or different terms. (2) The additional terms are to be construed as proposals for addition to the contract. Between merchants such terms become part of the contract unless: (a) the offer expressly limits acceptance to the terms of the offer; (b) they materiality alter it; or (c) notification of objection to them has already been given or is given within a reasonable time after notice of them is received. (3) Conduct by both parties which recognizes the existence of a contract is sufficient to establish a contract for sale although the writings of the parties do not otherwise establish a contract. In such case the terms of the particular contract consist of those terms on which the writings of the parties agree, together with any supplementary terms incorporated under any other provisions of this Act.

US courts have used this provision to fashion a solution to the general incorporation 63 issue. They interpret the formulation ‘materially alter it’ in § 2-207(2)(b) UCC in a broad sense: “A material alteration is one that would result in surprise or hardship if incorporated without express awareness by the other party”.71 The courts therefore generally require that the term must have been sufficiently brought to the attention of the other party.72 Between merchants (professional people) but probably also in consumer cases mere reference to standard terms that are not attached suffices if ‘the incorporated provisions are specifically set forth or identified’73 and if a prudent recipient would have asked for the full text.74 But, it has also been held in a consumer case that a webpage inviting gratuitous downloads, terms do not become part of the contract if they could be Grüneberg, in Palandt (79th edn, 2020) § 306 BGB para. 12. § 306(3) BGB. 71 Standard Bent Glass Corp. v Glassrobots Oy, 333 F. 3 d 440, 448 (3 d Cir. 2003); cited with approval by Roser Technologies, Inc. v Carl Schreiber GmbH, 81 UCC Rep. Serv. 2 d 693 (W.D. Pa. 2013). 72 See, e.g., Egan v Kollmans Instrument Corp., 21 N.Y. 2 d 160 (1967); Calamari/Perillo § 9.42 (b). 73 See Citisteel USA, Inc. v General Electric Co., 78 F. Appendix 832 (3 d Cir. 2003) (under II.B.; reference to seller’s standard terms in the buyer’s order while the buyer’s own general conditions were printed on the backside of the order: sufficient incorporation of seller’s terms), quoting State v Black, 83 A.2 d 678, 681 (Del. Super. 1951). 74 Larrus v First National Bank, 122 Cal. App. 2 d 884 (888), 266 P. 2 d 143, 147 (1967); see also Shacket v Roger Smith Aircraft Sales, Inc. 651 F. Supp. 675, 691 (N.D. Ill. 1986); Walker v Carnival Cruise Lines, 63 F. Supp. 2 d 1083 (1089) (N.D. Cal. 1999); Specht v Netscape Communications Corp. 306 F. 3 d 17 (2 d Cir. 2002). 69

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found only by scrolling further down and where they were ‘printed in such a manner that it tended to conceal the fact that it was an express acceptance of (sc. the offeror’s) rules and regulations.’75 Thus, while the legal principles appear to be more or less the same for business people and consumers with respect to incorporation of standard terms by mere reference the level of attention that is expected seems to be higher for merchants than for consumers. b) Implied Incorporation 64

According to § 1-201 UCC ‘course of performance, course of dealing, or usage of trade’76 can form an integral part of the parties’ agreement. Thus, if a respective usage exists certain terms can be incorporated into the contract by way of the usage. c) Consumer Cases

65

As mentioned above the legal standard for the incorporation of standard terms is more or less the same for business people and consumers. However, the level of awareness or attention may in fact be lower for consumers who often are unaware of the standard terms and their importance. Thus, in ProCD, Inc. v. Zeidenberg77 where the defendant, a student, had purchased a telephone directory database and had used it commercially although the plaintiff had restricted the commercial use in the license terms inside the CD, the court held that the license terms were validly incorporated into the contract because the use of the CD required acceptance which the defendant had expressed by clicking. On the other hand, in Specht v. Netscape Communications Corp.,78 the terms were held not to be sufficiently conspicuous and not incorporated into the contract even though the consumer downloaded the object by clicking ‘acceptance’. d) Battle of the forms

66

The battle of the forms is addressed by the already mentioned § 2-207(3) UCC: Conduct by both parties which recognizes the existence of a contract is sufficient to establish a contract for sale although the writings of the parties do not otherwise establish a contract. In such case the terms of the particular contract consist of those terms on which the writings of the parties agree, together with any supplementary terms incorporated under any other provisions of this Act.

67

First, it must be remembered that standard terms which do not materially alter, or which add to, the standard terms of the other party become part of the contract (§ 2-207(2)(b) UCC).79 Second, if the terms materially or immaterially contradict the other party’s terms, the courts let the conflicting standard terms knock each other out and assume the existence of a contract, if there are sufficient signs of agreement, 80 in particular by the parties’ conduct. e) Consequences

68

Where standard contract terms are not incorporated the rest of the contract remains valid and can be filled by the default rules provided in the UCC. Specht v Netscape Communications Corp. 306 F. 3 d 17, 32 (2 d Cir. 2002). These three forms are further defined in § 1-303(a)–(c) UCC. 77 86 F 3 d 1447 (7th Cir. 1996). 78 306 F. 3 d 17, 32 (2 d Cir. 2002). 79 For the standard of materiality see supra para. 56. 80 See, for instance, Richardson v. Union Carbide Industrial Gases, Inc., 347 N.J. Super. 524 (App. Div. 2002). 75

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VII. English Law 1. Notion of Standard Contract Terms Like other EU Member States, the former EU member UK had to transform (imple- 69 ment) the EU Directive on Unfair Contract Terms into national law. Most likely, the implemented provisions will remain in force after the full and final Brexit. Whether the UK will change or amend them remains to be seen. As mentioned above, Article 3 of the Directive defines standard terms as ‘not individually negotiated terms’. This means that the term has been drafted in advance and the other party has not been able to influence the substance of the term. The UK transposed this definition into statutory law, namely in s 5(2) and (3) Unfair 70 Terms in Consumer Contracts Regulations 1999 as follows: (2) A term shall always be regarded as not having been individually negotiated where it has been drafted in advance and the consumer has therefore not been able to influence the substance of the term. (3) Notwithstanding that a specific term or certain aspects of it in a contract has been individually negotiated, these Regulations shall apply to the rest of the contract if an overall assessment of it indicates that it is a pre-formulated standard contract.

Although the Regulations apply only to consumer contracts the courts use the 71 essence of this definition for commercial contracts.81 Standard terms are those which are prepared in advance and whose essence was not subject to negotiation (offered on a ‘take it or leave it basis’).82 A recognized definition is the one given by Lord Dunpark in McCrone v Boots Farm Sales Ltd.: ‘any contract, whether wholly written or partly oral, which includes a set of fixed terms or conditions which the proponer (proposer) applies, without material variation, to contracts of the kind in question.’83

2. Incorporation of Standard Contract Terms a) Express Incorporation As a first requirement, the parties must have and express the intent to include 72 standard terms into their contract. A clause ‘terms and conditions available on request’ was held to be a sufficient expression of intent.84 An e-mail footer, on the contrary, stating that contracts would be documented by means other than by e-mail was held to be insufficient to exclude an agreement by e-mail.85 Further, in principle a signature under a document, which contains standard terms irrespective of whether or not the party read the terms, binds a party.86 Standard terms printed on the back of an offer or acceptance without a reference to them on the front page are not incorporated into the contract.87 In order to incorporate standard terms that are contained outside the actual contract it is necessary that reasonably sufficient notice of the term musts be 81 See for instance Oval Ltd. v Aegon Insurance Co. (UK) Ltd. (1997) Bus LR 97; Salvage Association v CAP Financila Services Ltd. [1995] FSR 654; see also Lawson, Exclusion Clauses and Unfair Contract Terms (11th edn, 2014) para. 8-010. 82 See Fillite (Runcorn) Ltdx. v AVP Pasilac Ltd. [1995] FSR 654. 83 [1981] SLT 103 (105). Followed, e.g., in Pegler Ltd. v Wang (UK) Ltd. [2000] EWHC 137 (TCC) para. 72. 84 Rooney v CSE Bournemouth Ltd. [2010] EWCA (Civ) 1364. 85 Salkeld Investments Ltd. v Wet One Loans Ltd. [2012] EWHC 2701. 86 L’Estrange v F. Graucob Ltd. [1934] 2 KB 394; see also Treitel, The Law of Contract (by Peel, 14 th edn, 2015) para. 7-004. 87 Transformers & Rectifiers Ltd. v. Needs Ltd. [2015] EWHC 269 (TCC).

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given. In principle, a clear reference in the contract document to outside terms suffices. 88 However, particularly onerous or unusual terms must be specifically brought to the attention of the other party.89 73 The relevant time at which intent and notice must be expressed is before or at the conclusion of the contract.90 b) Implied Incorporation 74

Usual trade terms can become part of the contract even without reference to them if both parties are in the trade and knew or should have known the standard terms (and their essential content).91 Furthermore, a respective course of dealing or usual practice between the parties can establish that certain standard terms are regularly and impliedly incorporated into their contracts.92 c) Consumer Cases

75

With respect to standard terms in consumer contracts the above quoted provisions of the Unfair Terms in Consumer Contracts Regulations directly apply. Concerning the incorporation of standard terms there appears to be no substantive difference between consumer and professional contracts. However, it can be assumed that certain terms are impliedly included in consumer contracts because of respective usages. d) Battle of the forms

76

Hardly surprisingly, in the UK no statutory regulation of the battle of the forms has ever been enacted. The courts follow the traditional last shot approach.93 Generally, “(a)n offer to buy containing the purchaser’s terms which is followed by an acknowledgment of the purchase containing the seller’s terms which is followed by delivery will (other things being equal) result in a contract on the seller’s terms.”94 Only in rare situations will the purchaser’s terms apply.95 One such situation is a longstanding business relationship between the parties where the buyer’s terms were the basis in the past.96 e) Consequences

77

Where standard terms have not been incorporated, the contract survives without these terms. Dispositive statutory or judge-made law fills the gaps in the contract. 88 Thompson v L.M. & S. Ry. [1930] 1 KB 41; Smith v South Wales Switchgear Ltd. [1978] 1 WLR 165; Treitel Id. para. 7-008. 89 J. Spurling Ltd. v Bradshaw [1956] 1 WLR 461, 465: ‘Some clauses which I have seen would need to be printed in red ink on the face of the document with a red hand pointing to it before the notice could be held to be sufficient’ (Denning LJ); see also Goodlife Foods Ltd. v. Hall Fire Protection Ltd. [2018] EWCA Civ 1371; further Chitty on Contracts Vol I (33rd edn, 2018) para. 12-015 with further references to case law. 90 Olley v Marlborough Court Ltd. [1949] 1 KB 532. 91 British Crane Hire Corp. Ltd. v Ipswich Plant Hire Ltd. [1975] QB 303; Balmoral Group Ltd. v Borealis UK Ltd. [2006] EWHC 1900 (Comm.). 92 J. Spurling Ltd. v Bradshaw [1956] 1 WLR 461; Chitty para. 12-011. 93 See, e.g., Tekdata Interconnections Ltd. v. Amphenol Ltd. [2009] EWCA Civ 1209. 94 Tekdata Interconnections Ltd. v. Amphenol Ltd. [2009] EWCA Civ 1209 (per Longmore LJ at para. 1; assented to by Dyson LJ para. 25 and Pill LJ para. 33); see also Hamad M. Aldrees & Partners v. Rotex Europe Ltd. [2019] EWHC 574 (TCC) para. 168 (per Edwards-Stuart J); Transformers & Rectifiers Ltd. v. Needs Ltd. [2015] EWHC 269 (TCC) para. 42 (per Edwards-Stuart J). 95 See Tekdata Interconnections Ltd. v. Amphenol Ltd. ibid. 96 Tekdata Interconnections Ltd. v. Amphenol Ltd. ibid.

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VIII. French Law 1. Notion of Standard Contract Terms France had transposed the EU Directive on Unfair Contact Terms into French law in 78 the Code de la Consommation however with some extensions. The notion of standard terms has now been incorporated into the amended Code civil of 2016. Article 1110(2) Code civil reads as follows: A standard form contract is one whose general conditions are determined in advance by one of the parties without negotiation.97

This definition responds to the general European standard. In accordance with the Unfair Contract Terms Directive, the control of the content of standard contract terms is extended to all clauses abusives in consumer contracts.98

2. Incorporation of Standard Contract Terms a) Express Incorporation Until the recent reform of the French Code civil French statutory law did not 79 specifically deal with the incorporation of standard terms (conditions générales) into the contract. Only Article 441-6(1) Commercial Code provided the following: All producers, service providers, wholesalers and importers are required to send their general terms of sale to all buyers of products or all requesters of services who ask for this for a professional activity. These terms will form the basis of the sales negotiations. …

Now, the amended Article 1119(1) Code civil provides the following: General conditions put forward by one party have no effect on the other party unless they have been brought to the latter’s attention and that party has accepted them.99

In requiring that standard terms are being brought to the other party’s attention 80 the new provision follows the general view that the user of the terms must sufficiently inform the addressee. The provision also requires that the recipient must accept the terms. What the courts will request for that acceptance remains to be seen. Already before the reform the courts regularly required the parties’ consent to the incorporation of standard terms, a respective reference to the terms, and the opportunity for the recipient to take notice of them. Thus, standard terms are certainly incorporated if the party has received a copy of the terms and has not objected to their use.100 b) Implied Incorporation General contract terms can be implied where there is a respective usage. 101

81

c) Consumer Cases The general rule that the terms must be sent applies as well to consumer cases.

82

97 The original reads as follows: ‘Le contrat d’adhésion est celui qui comporte un ensemble de clauses non négociables, déterminées à l’avance par l’une des parties.’. 98 See Article L 132-1 Code de la Consommation. 99 The French text reads: ‘Les conditions générales invoquées par une partie n’ont effet à l’égard de l’autre que si elles ont été portées à la connaissance de celle-ci et si elle les a acceptées.’. 100 See, e.g., Civ. 1re 10 April 1996, (1996) JCP II 22694 with note Claret and Paisant. 101 This can be based on Article 1194 Code civil (former Article 1135 Code civil), which includes usages into the contract.

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d) Battle of the forms 83

Since the 2016 reform the French Civil Code contains a specific provision on the battle of the forms. Article 1119(2) Code civil runs as follows: In case of inconsistency between general conditions relied on by each of the parties, incompatible clauses have no effect.102

This provision states the knock-out rule in its clearest form. Evidently, the contract shall be validly concluded despite any contradicting standard terms and apparently the Code shall fill any eventual gap. Article 1119(2) Code civil must, however, be reconciled with Article 1118(3) Code civil which provides that ‘(a)n acceptance which does not conform to the offer has no effect, apart from constituting a new offer.’103 Since only Article 1119 Code civil deals with standard contract terms this Article should prevail as the more specific provision over Article 1118 Code civil which deals generally with all conditions in an acceptance. e) Consequences 84

If not validly incorporated into the contract standard terms remain ineffective.

IX. Spanish Law 1. Notion of Standard Contract Terms 85

Spain transposed the EU Directive on Unfair Contract Terms in its Law 7/1998 on Standard Terms in Contracts (with later amendments).104 The Act applies both to commercial and consumer contracts.105 Article 1(1) Standard Terms Law defines standard terms as those that have been pre-formulated by one party with a view to repeated use. Article 1(2) Standard Terms Law further specifies that individually negotiated terms do not hinder the application of the Act to the rest of the contract. This adds to the definition that standard terms are only those that are not individually negotiated.

2. Incorporation of Standard Contract Terms a) Express Incorporation 86

Article 5 of the Standard Terms Law regulates the conditions for the incorporation of standard terms. According to par. 1 of this provision,106 standard contract terms are validly incorporated into the contract only if the recipient accepted their incorporation and if the contract refers to them. Further, the offeror of the terms must provide the recipient with a copy of them (Article 5 Standard Terms Law).

102 In the original: ‘En cas de discordance entre des conditions générales invoquées par l’une et l’autre des parties, les clauses incompatibles sont sans effet.’. 103 In the original: ‘L’acceptation non conforme à l’offre est dépourvue d’effet, sauf à constituer une offre nouvelle.’. 104 Ley sobre Condiciones Generales de Contractación of 13 April 1998 (Standard Terms Law). 105 See Article 2 Standard Terms Law. 106 ‘Las condiciones generales pasarán a formar parte del contrato cuando se acepte por el adherente su incorporación al mismo y sea firmado por todos los contratantes. Todo contrato deberá hacer referencia a las condiciones generales incorporadas.’ (‘The standard terms will become part of the contract when they are accepted by the recipient and signed by all parties. Every contract must refer to the incorporated standard terms’).

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b) Implied Incorporation Article 5(1) sent. 2 Standard Terms Law requires that the party which intends to 87 use standard contract terms must expressly (‘expresamente’) inform the other party of their existence and make available a copy of them. Even where a contract is orally concluded the other party must be given an effective opportunity to know the existence and the contents of standard terms (Article 5(3) Standard Terms Law). An implied incorporation appears to be excluded. c) Consumer Cases The provisions of the Ley sobre Condiciones Generales de Contractación apply both to 88 consumers and professionals107 to whom therefore the same incorporation rules apply. d) Battle of the forms Neither the Spanish Código civil nor the Ley sobre Condiciones Generales de Con- 89 tractación contain a specific provision on the battle of the forms. Article 1262(1) Código civil requires the coincidence between the offer and acceptance (‘concurso de la oferta y de la aceptación’) and thus follows the mirror image rule that offer and acceptance must fully conform to each other. e) Consequences Terms that are not validly incorporated do not become part of the contract.

90

X. Chinese Law 1. Notion of Standard Contract Terms The CCC of 2021 expressly defines standard contract terms as ‘terms drawn up by 91 one party in advance for repeated use and not negotiated with the other party at the time of contracting.’108 The definition is, like the other provisions on standard contract terms in the new Code, more or less identical with the respective Article [39(2)] of the antecedent Chinese Contract Law of 1999. The definition contains the element of preformulation by one party for intended repeated use and a lack of influence of the other party on the content of the terms. Compared with the other definitions quoted above the rule provides for three limitations: it does not include terms that were pre-formulated by third parties or organizations; it does not cover pre-formulated terms for only one transaction; and it does not clearly state how far the ‘negotiation with the other party’ has to go. A simple notice of the existence of the terms on a take it or leave it basis is probably not sufficient for their incorporation; it is unclear whether a full rejection of the other party’s wishes after a short discussion rises to the level of a ‘negotiation’.

107 108

See Article 2 Standard Terms Law. Article 496(1) Chinese Civil Code.

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2. Incorporation of Standard Contract Terms a) Express Incorporation 92

Article 496(2) CCC states: Where standard terms are adopted for contracting, the party furnishing the standard terms shall define the rights and obligations between the parties abiding by the principle of fairness, so inform in a reasonable manner as to enable the other party to note the terms excluding or limiting its liability or otherwise related to the material interest of the other party, and explain the terms upon request of the other party. If the party furnishing the standard terms fails to perform the informing or explanation obligation, resulting in the other party failing to note or understand the terms in which it has a material interest, the other party may argue that the terms are not a part of the contract.

The provision is not very precise on how standard terms are regularly incorporated. However, at the very least particularly burdensome terms (especially those which limit liability) must be specifically brought to the other party’s attention. This appears to require sending or reading of the terms to the other party, or communicating them in another reasonable way. If a set of standard terms is communicated exemption or exclusion clauses must be particularly highlighted (made conspicuous by print, colour or otherwise).109 The same is true for other terms which affect the ‘material interest of the other party.’ The terms must have some significant importance for the party to whom the terms are addressed. To avoid uncertainty about the valid incorporation of terms their clear communication with highlighting specifically important terms appears recommendable. Besides the duty to inform about the contents of the standard terms their sender is further obliged to explain the contents although only ‘upon request of the other party.’ 94 By argumentum e contrario it could be inferred from Article 496(2) CCC that other standard terms need not be specifically highlighted so that a mere reference to them could suffice. Article 470 sent. 2 CCC supports this understanding, by providing that: 93

The parties may contract by referring to the model text of various contracts.

Here, a mere reference seems to suffice. On the other hand, Article 496(2) CCC could also be understood to implicitly prescribe that standard terms generally become part of the contract only if the other party had reasonable notice of them. b) Implied Incorporation 95

Chinese contract law grants trade usages an important supplementary function.110 Therefore, Chinese courts would in all probability also accept the incorporation of certain standardized terms that are usually regarded as incorporated by a commercial usage. c) Consumer Cases

96

Like the antecedent Chinese Contract Law the CCC applies both to business people and consumers alike.111 Article 496 CCC appears therefore to be applicable to commercial and consumer contracts.112 The Consumer Protection Law of 1993 provides some Ling, Contract Law in China (2002) p. 111 (to the former though more or less identical law). See Mo, Chinese Contract Law. Theory and Practice (2006) pp. 127–128 with further references. 111 See Article 2 CCC. 112 See in this sense to the Chinese Contract Law Zhang Yuqing/Huang Danhan, ‘The New Contract Law in the People’s Republic of China and the UNIDROIT Principles of International Commercial Contracts: A Brief Comparison’ (2000) Uniform Law Review 429 (430–431). 109

110

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protection as to the content of consumer contracts, however, it does not regulate the incorporation aspect of standard contract terms.113 d) Battle of the forms The CCC does not contain a specific provision on the battle of the forms. Its Article 97 488 requires – in close adherence to the CISG – that ‘(t)he contents of an acceptance shall correspond to those of the offer’ and that an acceptance with material alterations ‘shall constitute a new offer.’114 Like the CISG rule this provision could be interpreted in the sense of the last shot or knock-out rule. Also, the General Rules of Civil Law of 2017 had not enacted a special rule concerning the problem of conflicting standard terms. e) Consequences Standard terms that should be, but are not, reasonably brought to the attention of the 98 other party are not binding.115 The addressee may choose either to accept them or to insist on their invalidity.116

XI. Comparative Conclusions There is wide unanimity concerning the starting point: first, the offer, the accep- 99 tance and finally the contract must clearly (though not necessarily expressly) state that standard contract terms shall apply. Without such clear and visible or audible intent, particularly in consumer cases, standard terms cannot form part of the contract even if they were sent or handed over. Secondly, the addressee of the terms must be given a fair chance to take notice of them. However, views differ about how far this requirement reaches. The reason for placing the burden on the offeror of the terms is the fact that it is the offeror who wants to benefit from incorporating the standard terms. The other party cannot be expected to search for the terms or for their correct version. The fair notice requires that the offeror of the terms make them reasonably accessible 100 to the other party.117 Yet, the actual reading or knowledge of the terms is not necessary. The possibility to take notice of them is sufficient. With respect to reasonable access the preferable solution is for the standard terms to be sent, handed over or, in case of electronic communication, be immediately downloadable. A mere reference to standard terms that are not attached in one of these ways should not lead to their incorporation into the contract. Accessibility, however, is not required where the other party already knew or should 101 have known the contents of the standard terms, for instance from prior transactions or negotiations or where there is a commercial usage that certain standard terms are regularly used in a particular business or industry.

See Mo, Chinese Contract Law. Theory and Practice (2006) p. 139 et seq. See to the identical provision of the Chinese Contract Law (its Article 30) Kornet, ‘Contracting in China: Comparative Observations on Freedom of Contract, Contract Formation, Battle of Forms and Standard Contract Terms’ (2010) 14.1 Electronic Journal of Comparative Law 20 et seq., who acknowledges that the Chinese Contract Law actually follows the last shot rule but she recommends the use of the knock-out rule (p. 24). 115 See Kornet (preceding fn) 25–26. 116 See Article 496(2) sent. 2 Chinese Civil Code. 117 In this sense also Jansen, ‘Art. 2:104: Terms not Individually Negotiated’, in Jansen/Zimmermann (eds), Commentaries on European Contract Laws (2018) 272 et seq. 113

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The battle of the forms concerns merely business parties. The battlefield of how the problem of conflicting standard contract terms should be solved is still governed by the last shot theory and the knock-out rule. The comparison shows an increasing sympathy for the knock-out rule (see CISG and German practice, PICC, PECL, CESL, UCC, French Civil Code).118 The conflicting terms should therefore fall away while the terms in common form the contract. However, the principles of freedom of contract and party autonomy require that a party must still have the possibility to reject the terms of an acceptance which deviates from the offer. This is the justified core of the last shot theory. The knock-out rule should therefore be the starting point which is modified by a reasonable and serious objection of the party not willing to accept the other party’s terms. Such objection merely in standard terms or in another standard formulation should not suffice but a separate, clear and individual declaration should be required.

F. Illustrations Case 1: Standard terms are sent with the offer and the offer clearly states that the terms are part of it. If there is an unconditional acceptance the terms are part of the contract. 104 Case 2: The contract offer contains a mere reference to standard terms, which a party intends to be applied to the contract, but which are not attached. In international sales it is the prevailing view that a mere reference does not incorporate the standard terms unless there is a practice among the parties to contract under the terms, an international commercial usage to that effect, or the recipient already knows the content of the terms. 105 Case 3: In face-to-face contract negotiations the offeror shows its standard terms for a short moment but does not hand them over. It is this author’s view that this does not suffice to incorporate the terms even if the offeree accepts that the terms shall apply. The offeree should have a fair chance to take notice of the content of the standard terms and she or he should have the possibility to have and store the terms because otherwise the offeror can easily change its standard terms afterwards; the offeree would then have great difficulties to prove the version current at the time of the conclusion of the contract. Both possibilities are lacking here. 106 Case 4: The seller of an international sales transaction refers to, and sends in its offer the own standard contract terms, the buyer accepts the offer referring to the attached own standard terms. The terms differ as to the place of jurisdiction and applicable law. The seller delivers the goods. If a dispute between the parties ensues neither party’s term on jurisdiction and applicable law should apply. Instead the jurisdiction and conflicts rules of the seized court should govern the case. It would be unfair and contra good faith to prefer the terms of one party over those of the other unless further – and here lacking – circumstances make it unequivocally clear that the buyer intended to be bound only if the own terms prevailed. 103

G. Cross References & Additional Commentary 107

Merger clauses are familiar in international contracts. Their purpose is to exclude redress to material outside the contract document including its attachments. If the con118 For a comparison of the battle of the forms-provisions of the UCC, CESL and PICC see Christandl, ‘Art. 2-209: Conflicting General Conditions’, in Jansen/Zimmermann (eds), Commentaries on European Contract Laws (2018) 339 et seq.

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tract merely refers to standard contract terms but does not attach them it may become additionally questionable whether the standard terms have been validly incorporated due to the merger clause. This is a further argument to avoid doubt by attaching the standard terms to the contract. For more details see → Chapter 23.

H. Practitioner Tips In international sales, to safely incorporate standard terms, would be wise to give 108 a clear visible or audible notice that your standard contract terms shall be part of the contract. The terms should also be made easily available to the other party by sending, handing over, or linking to a downloadable version of the terms. Only if it is beyond doubt that the addressee of the terms already knows them is their sending or availability become unnecessary. With respect to the battle of the forms problem it is advisable if a party will insist 109 on the application of the own standard terms to make this abundantly clear by an individual, not pre-formulated declaration.

I. Additional Sources Beale, ‘Legislative Control of Fairness: The Directive on Unfair Terms in Consumer Contracts’ in Beatson & Friedmann, Good Faith and Fault in Contract Law (OUP 1995) 231; Cordero-Moss, Boilerplate Clauses, International Commercial Contracts and Applicable Law (CUP 2011); Jansen/Zimmermann (eds), Commentaries on European Contract Laws (OUP 2018); Kornet, ‘Contracting in China: Comparative Observations on Freedom of Contract, Contract Formation, Battle of Forms and Standard Contract Terms’ (2010) 14.1 Electronic Journal of Comparative Law 25; Lawson, Exclusion Clauses and Unfair Contract Terms (11th edn, 2014); Symposium, ‘Boilerplate: Foundations of Market Contracts’ (2006) 104 Mich LR 821–1246; Ben-Shahar, Boilerplate: The Foundation of Market Economics (CUP 2007 (published version of Symposium); Treitel, The Law of Contract (by Peel, 14th edn, Sweet & Maxwell 2015).

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CHAPTER 10 TRADE TERMS AND INCOTERMS Ulrich Magnus and Burghard Piltz A. Topics Covered . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B. Introductory Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C. Brief History of the INCOTERMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . D. The Nature of the INCOTERMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . E. Brief Description of Each Clause of the INCOTERMS . . . . . . . . . . . . . . . . . . . . . . . I. In General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Rules for Any Mode or Modes of Transport . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. EXW – Ex Works . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. FCA – Free Carrier . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. CPT – Carriage Paid To . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. CIP – Carriage and Insurance Paid to . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5. DAP – Delivered at Place . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6. DPU – Delivered at Place Unloaded . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7. DDP – Delivered Duty Paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Rules for Sea and Inland Waterway Transport . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. FAS – Free Alongside Ship . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. FOB – Free on Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. CFR – Cost and Freight . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. CIF – Cost, Insurance and Freight . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F. Important Differences Between 2010 and 2020 INCOTERMS . . . . . . . . . . . . . . . I. New Order and Horizontal Presentation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Explanatory Notes and Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Changes in Substance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Major General Changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Major Changes for Certain Terms Only . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . G. Coverage of the INCOTERMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. In General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Place of Delivery/Passage of Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Responsibility for Performance Aspects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Responsibility for Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . H. Application of the INCOTERMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Express Reference in Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Indirect Reference in Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Application as Trade Usage? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Consequences of Incorporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. Interpretation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI. Relationship to CISG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VII. Inconsistent Contract Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Similar Trade Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . J. Cross References & Additional Commentary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . K. Practitioner Tips & Contract Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Correct Incorporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Derogation from Certain INCOTERMS Aspects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Best INCOTERM for ‘Outsourcing’ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Wrong Combinations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. Time of Essence? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . L. Additional Sources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 2 4 5 6 6 11 11 12 13 14 15 16 17 18 18 19 20 21 22 23 25 27 27 30 33 33 34 36 38 39 40 42 43 45 46 48 49 50 52 53 53 55 56 58 60 61

A. Topics Covered 1

This Chapter deals with trade terms and in particular with the INCOTERMS 2020. As the subject is particular and somehow different from most other Chapters in this

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C. Brief History of the INCOTERMS

book (there cannot be a ‘comparative’ part) the normal template could not be followed here.

B. Introductory Note In international trade, time is money and if three single letters like CIP or FCA 2 can incorporate large contract parts this saves a lot of time and paper. Trade terms in form of standardized abbreviations have therefore a long tradition in international trade. In a short form they denote a common international understanding of typical rights and obligations of the parties of an international contract. With relevance for international sales transactions the best known and most used clauses worldwide are the INCOTERMS. The focus of this Chapter is therefore on them. Besides them further trade terms exist which may also be relevant for international sales (for instance, ‘delivery free house’, ‘free border’ etc.). However, they often have a more locally or regionally uniform meaning, if at all. Though trade terms serve the aim of rationalization this is not their only objec- 3 tive. They also aim at facilitating trade and enhancing legal certainty in trade, the INCOTERMS in particular in international trade. Globally uniform trade terms with a precise content help to avoid costly and time-consuming negotiations and legal disputes. In addition, they are evidence for common or widely accepted trade practices and though they generally must be agreed upon they form a kind of international soft law and are part of a modern law merchant. On a non-binding and quasi-private level, they add significantly to the unification of international trade law.

C. Brief History of the INCOTERMS It was in 1936 when the International Chamber of Commerce (ICC) in Paris pub- 4 lished the first version of the INCOTERMS.1 Based on information from its member-organizations the ICC by then formulated for the first time extensive and precise legal rules for certain commonly used delivery clauses for overseas sales. After studies limited to 6 commonly used terms in just 13 countries carried out in 1923 had revealed disparities in interpretation the aim was to fix and unify the content of clauses which had been in wide use since at least the middle of the 19th century when the British Empire dominated the overseas trade. Clauses like CIF (cost, insurance, freight), FOB (free on board) and alike were frequently agreed upon. However, its interpretation, though mainly uniform, nonetheless differed on certain aspects between the major trading countries. In order to remove these differences and to foster a uniform understanding the ICC undertook the task to develop as precisely as possible rules for the most common trade terms. Since 1936 almost every ten years the ICC prepared and published a revised version of the INCOTERMS (1953, 1967, 1976, 1980, 1990, 2000, 2010, and 2020) which adapted them to current developments as for instance the container transport, electronic communication or security clearance. Despite every attempt to preserve continuity of the INCOTERMS, over time the number of defined clauses as well as their content

1 On the history of development of the INCOTERMS see Ramberg, ‘CISG and INCOTERMS 2000 in connection with International Commercial Transactions’ in Andersen/Schroeter (eds), Sharing International Commercial Law across National Boundaries, FS for Albert H. Kritzer (2008) pp. 394 et seq.

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and order varied considerably. The present eighth revision, the ‘INCOTERMS® 2020’,2 became usable as of 1 January 2020.3

D. The Nature of the INCOTERMS 5

The INCOTERMS do not have the force of statutory law. They are not enacted by a democratic legislator and do not apply automatically. They have been developed by the initiative of an international commercial organization as a set of rules which the parties may incorporate into their contract if they so wish. Moreover, the INCOTERMS offer – since 2010 eleven – alternatives from which the parties may select one clause. Only to the extent the parties agree on a specific Incoterm clause with the accompanying rules set up by the ICC to specify the obligations of the seller and those of the buyer typical for the respective clause they can become binding between the parties. The INCOTERMS in their entirety cannot be regarded as binding trade usages though some of their single rules may have reached this status. The reason is the rather frequent change of many rules whereas customary law requires a longstanding unaltered practice. According to the predominant view the clauses of the INCOTERMS thus constitute internationally unified standard contract terms which apply to a contract only if validly incorporated. The application of the corresponding rules specifying the obligations of the seller and the buyer related to the clause chosen is predominantly based on Art. 9 CISG. 4 Their international background influences their interpretation.

E. Brief Description of Each Clause of the INCOTERMS I. In General Generally speaking, the INCOTERMS deal with certain important aspects of international sales though by far not with all relevant aspects. They regulate only aspects connected with the movement of the goods from the seller to the buyer and in this context in particular when the risk passes from the seller to the buyer and which party has to arrange to which extent for transport, insurance and customs clearance of the goods and to bear the respective costs. Also, specific information duties and corresponding rights are regulated. These regulations are laid down in ten single rules for each Incoterm which distinguish between obligations of the seller (A1-10) and of the buyer (B1-10). The INCOTERMS do, however, not regulate the conclusion of the contract of sale, nor the kind, quantity or quality of the goods to be delivered, the issue of title, the applicable law, the exemption from a party's obligation to perform and the consequences of improper performance. Nor do they contain detailed provisions on delivery times or further specifications of the buyer's obligation to pay the price. The INCOTERMS do not regulate dispute resolution. 7 Although the ten single A- and B-rules of each term all follow the same pattern and address the same issues under identical headings they allocate the risks and costs 6

2 INCOTERMS® 2020 by the International Chamber of Commerce (ICC), as ICC-Publication 723 E published by ICC Publications, 38 Cour Albert 1er, 75008 Paris, France. 3 See on the 2020 version Graf von Bernstorff, INCOTERMS® 2020 (2020); Oertel, ‘INCOTERMS 2020‘ (2019) RIW 701; Piltz, ‘INCOTERMS® 2020‘ (2019) IHR 177; Niggebrugge/Alink, ‘De INCOTERMS‘ 2020 (2019) NTHR 286. 4 See for instance Piltz, in Piltz/Bredow, INCOTERMS (2016) paras A-300 et seq.

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E. Brief Description of Each Clause of the INCOTERMS

differently from term to term. Like on a sliding scale the eleven INCOTERMS can be used to shift the full burden step by step from the side of the buyer to the side of the seller. The extremes of the scale are EXW and DDP: Under EXW the buyer must collect the goods at the seller and see to their transport etc.; under DDP the seller must deliver the goods quasi to the buyer’s door, the buyer has only the duty to take them there. The other nine INCOTERMS offer medium solutions in between placing to different degrees parts of the obligations on the seller and parts on the buyer. The INCOTERMS as a whole thus offer a broad variety of alternative possibilities to tailor the contract according to the parties’ needs and wishes. By choosing an Incoterm and incorporating it into their contract, the parties avoid the need to negotiate and formulate in detail all the aspects regulated by the Incoterm in question. Apart from the fact that the clauses FAS, FOB, CFR and CIF are designed for 8 transport by vessel only and not appropriate for container shipments the relevant considerations for the choice of a specific Incoterm are mainly of an economic nature. Since the respective costs of transport, insurance etc. significantly influence the price for the transaction each party must calculate whether it is cheaper to take the burden and to organize transport etc. itself or to accept that the other party bears this burden with the respective repercussion on the overall price. If the parties agree on a specific Incoterm clause, they must also nominate a specific 9 place that fits to the term: for instance, the port of shipment for the FOB-clause and the port of destination for the CIF-clause. This nomination should be as precise as possible (for instance the number of the quay or of the loading or unloading place etc.) in order to avoid problems with the correct performance. The eleven clauses of the INCOTERMS® 2020 distinguish on the one hand between 10 those clauses that fit for all modes of transport including multimodal transport (EXW, FCA, CPT, CIP, DAP, DPU, DDP) and those that are only intended for water transport (FAS, FOB, CFR, CIF). On the other hand, the INCOTERMS can also be divided in 4 groups distinguishing certain systematic criteria which are common for all terms of that group but different to other groups: E-clause (EXW; buyer must pick up goods), F-clauses (FCA, FAS, FOB; seller must deliver to carrier); C-clauses (CPT, CIP, CFR, CIF; seller must deliver to carrier, and additionally arrange and pay for carriage to destination) and D-clauses (DAP, DPU, DDP; seller must deliver at destination). The following overview of the single terms begins with the seven INCOTERMS usable for any mode of transport and then adds the four clauses for water transport.

II. Rules for Any Mode or Modes of Transport 1. EXW – Ex Works Under this term, the buyer has maximal and the seller minimal obligations. The seller 11 is merely obliged to place the goods at the agreed place (usually seller’s seat or work) and time at the buyer’s disposal. The rest, even the loading on a vehicle, is the buyer’s duty, risk5 and costs, in particular the transport, insurance and export/import clearance. If the loading is carried out by the seller the parties are well advised to agree in advance who is to bear the risk.6

5 6

Risk means the loss of the goods or any damage to them for which the seller is not responsible. See explanatory note no. 5 to EXW.

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2. FCA – Free Carrier 12

FCA obliges the seller to deliver the goods to the carrier usually contracted by the buyer and to clear them for export. If the named place is at the seller’s premises delivery is only finalized if the seller has loaded the goods on the carrier’s vehicle. No such duty exists where another place of delivery is agreed upon. Then, placing the goods at the carrier’s disposal is sufficient. All further costs must be borne by the buyer. FCA was particularly designed for transport by containers.7

3. CPT – Carriage Paid To 13

The seller has to clear the goods for export, to hand them over to the first carrier and to arrange at his cost for the transport to the agreed destination. The buyer must clear the goods for import and receive them at the named place of destination; however, the risk passes to him with the handing over of the goods to the first carrier. As is characteristic for all C-clauses the place of delivery to be performed by the seller and the place of taking delivery by the buyer are at different locations.8

4. CIP – Carriage and Insurance Paid to 14

CIP is almost identical to CPT. The only difference is that under CIP the seller must additionally provide at its own costs an – All Risks – insurance that complies with Institute Cargo Clauses (A) and benefits the buyer.

5. DAP – Delivered at Place 15

The seller has to bear all risks and costs until the goods have reached the agreed destination – including export and transit clearance and carriage to the destination. The seller is not obliged to unload the goods there. By placing the loaded goods at the buyer’s disposal at the destination the risk passes to the buyer who has to care for import clearance, for unloading the goods and to bear the respective costs.

6. DPU – Delivered at Place Unloaded 16

The term obliges the seller in the same way as DAP but imposes the additional obligation on the seller that he has to unload the goods at the destination.

7. DDP – Delivered Duty Paid 17

Under DDP the seller bears maximal and the buyer minimal obligations. Like under DAP delivery is effected once the goods are placed at the buyer’s disposal at the agreed destination ready for unloading. Then the risk passes. The seller has to arrange for the carriage and to clear the goods not only for export and transit, but also for import and bear all respective costs. The buyer’s obligations are to take delivery of the goods and to arrange at its own costs for their unloading and any eventual further transport.

7 8

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Compare Bredow/Seiffert, INCOTERMS 1990 (2nd ed. 1994) paras 27 et seq. Compare Piltz, in Piltz/Bredow, INCOTERMS (2016) para. C-2.

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F. Important Differences Between 2010 and 2020 INCOTERMS

III. Rules for Sea and Inland Waterway Transport 1. FAS – Free Alongside Ship This term fits only for water transport though it is not appropriate for the water 18 transport of containerized goods.9 For delivery the seller has to place the goods alongside the ship (either on the quay or in another boat). The transport by ship must be arranged and paid for by the buyer. The seller has the further duty to clear the goods for export. The import clearance is the buyer’s obligation.

2. FOB – Free on Board This is one of the most common INCOTERMS. It is apt for water transport though 19 for containerized goods FCA is better suited.10 The seller is obliged to deliver the goods on board the ship that the buyer must arrange – and pay – for. The seller has the further duty to clear the goods for export but not for import. The risk passes when the goods have been loaded on the ship in the port of departure. Costs arising up to this point fall on the seller; all further costs from that point on (transport costs to destination; eventual insurance, import clearance etc.) are for the buyer’s account.

3. CFR – Cost and Freight CFR is a marine Incoterm, too. The delivery duty is performed if the goods are placed 20 on or in the ship that the seller has to arrange and pay for the whole carriage to the port of destination. The risk and other than the transport costs pass with the delivery in the port of departure; the seller has no duty to insure the goods but must clear them for export. For containerized shipments the parties should select CPT instead of CFR. 11

4. CIF – Cost, Insurance and Freight This famous term, again, fits only for water transport. CIF is almost identical to CFR. 21 The only difference is that under CIF the seller must additionally provide at its own costs for a – minimum cover – insurance till the port of destination that complies with Institute Cargo Clauses (C) and benefits the buyer. The risk passes to the buyer already with the loading of the goods on the ship.

F. Important Differences Between 2010 and 2020 INCOTERMS Under an overall perspective the substantive changes from the 2010 INCOTERMS 22 to the 2020 INCOTERMS are moderate. Some of them concern all clauses, some only certain terms.

I. New Order and Horizontal Presentation The internal order in which the rules are presented under the headings A1-10 and 23 B1-10 has been changed. The delivery obligations being the core obligations addressed by the INCOTERMS around which the further stipulations would revolve are moved 9 Since containers are usually delivered to special container terminals FCA is the appropriate clause; see ICC Explanatory Note to FAS. 10 See ICC Explanatory Notes to FOB and fn. 9. 11 See ICC Explanatory Notes to CFR and fn. 9.

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to a more prominent location (A2 and B2). The following headings are located in a sequence a user would apply when selecting a clause or working with a clause of the INCOTERMS. 24 In order to facilitate the choice between the different clauses and to make the differences between them easier comprehensible, the rules are presented also in a horizontal format. This new resource at the back of the ICC booklet on the 2020 INCOTERMS summarizes the rules which the 11 INCOTERMS clauses present under a heading. So, without any necessity to turn over the pages of the booklet one can easily compare the different positions the 11 clauses take with regard to a specific issue.

II. Explanatory Notes and Introduction Each clause of the INCOTERMS is introduced by ‘Explanatory Notes for User’. These notes highlight special features of the respective clause and give recommendations with regard to their use. The notes are supplemented by improved pictures which should be helpful to understand the characteristics of the respective clause and to choose the right Incoterm. 26 Furthermore, the ICC 2020 booklet offers an ‘Introduction to INCOTERMS 2020’ elaborated by Charles Debattista, Special ICC Advisor INCOTERMS 2020 Drafting Group. The Introduction explains on 17 pages what the INCOTERMS rules do, what they do not do, how INCOTERMS are incorporated in a sales contract and comment on certain aspects a user should bear in mind when applying a clause of the INCOTERMS. 25

III. Changes in Substance 1. Major General Changes Whereas the 2010 version of the INCOTERMS mentioned the term ‘security clearances’ only in the headline of A2/B2, the INCOTERMS 2020 deal with this issue in more detail, reflecting the fact that over the last decades and due to increasing terrorist-like acts security arrangements have become more important. As the provisions implemented to achieve greater security are usually mandatory it is ultimately up to the seller or the buyer to account for them vis-à-vis the other party. The INCOTERMS 2020 differentiate: If the custom authorities are the addressee of the security provisions the rules under A7/B7 regulate whether they are part of the sphere the seller or the buyer is responsible for. However, if the provisions require the carrier to warrant security for the transport the issue is assigned to the party responsible for the transport according to A4/B4.12 28 The INCOTERMS generally give electronic communication the same effect as paper communication if the parties so agree or where it is customary. However, whereas the INCOTERMS 2010 referred only to documents related to in the rules the INCOTERMS 2020 address any document that has to be provided under the contract. 29 INCOTERMS present under A9/B9 a one-stop cost account where all the costs the seller and the buyer have to undertake when applying a clause of the INCOTERMS are put together. 27

12

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For more details compare Piltz, in Piltz/Bredow, INCOTERMS (2016) paras F-122 et seq.

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G. Coverage of the INCOTERMS

2. Major Changes for Certain Terms Only For 30 years the ICC has recommended the use of FCA instead of FOB when 30 shipping containers, as the seller loses sight and control of the container after unloading it in the port. If the parties even though agree to FOB the seller remains liable vis-à-vis the buyer for all costs and risks until the container is onboard the ship. On the other hand, the bill of lading is the document usually used when agreeing a letter of credit. Thus, if the seller sells under the clause FCA he has little chance of getting an onboard bill of lading. He is more likely to get the onboard bill of lading if he is an FOB seller and puts the container onboard. B6 and A6 of the FCA clause offer a solution for this situation. If the parties so agree the buyer has to ensure that the seller gets the onboard bill of lading even though he is not contracting the transport. It has to be born in mind that these rules work well for the buyer whereas for the seller risks remain if the goods are damaged while handed over at the port but not yet loaded on the ship or the expiry date of a letter of credit expires before the container is loaded on board.13 The INCOTERMS 2010 clauses CIP and CIF obliged the seller to take out insurance 31 covering the risks detailed in Clauses (C) Institute Cargo Clauses or their equivalent. Clauses (C) Institute Cargo Clauses is a really basic insurance which was considered unsatisfactory for the transport of manufactured goods. To reconcile the different positions presented during the process of drafting the INCOTERMS 2020, the CIP seller now has to take out insurance in accordance with Clauses (A) Institute Cargo Clauses. The insurance for CIF sellers remains under Clauses (C) Institute Cargo Clauses. In principle, the INCOTERMS do not regulate the time of delivery in detail but 32 require the seller only to deliver the goods at the agreed date or within the agreed period. A2 and B10(b) of the F-clauses of the INCOTERMS 2020 now clearly state that if an F-clause is applied, the right to determine the date of delivery within the agreed period of delivery is on the buyer’s side. With regard to the other clauses the INCOTERMS remain silent und it is up to the underlying sales law to decide which party has the right to determine the date of delivery.14 In this context also the text of the INCOTERMS regarding the transfer of risks prior to delivery under F-INCOTERMS has been corrected and the word “seller” under (ii) has been replaced by “buyer”.

G. Coverage of the INCOTERMS I. In General As already mentioned, the INCOTERMS cover only some – albeit very important 33 – aspects of international sales transactions. With the transport of the goods and their insurance they address even further contracts which are unavoidably linked with overseas sales but as such are no sales. To give clear guidance for the complex interplay between these different contracts is tremendously helpful.15 It is also helpful that the INCOTERMS address and specify duties which national sales laws rarely, if at all, explicitly mention: the duty to clear the goods for export and import, information duties, delivery of documents and the distribution of costs. Yet, it is always necessary that besides the INCOTERMS a further legal system is applicable that provides solutions for the remaining sales problems. Very often this will be the Vienna Sales Convention of For more details see Piltz, ‘INCOTERMS® 2020’ (2019) IHR 177 (182). For more details see Art. 33 CISG. 15 See also ICC Guide on Transport and the INCOTERMS 2010 Rules, ICC Publication 775E. 13 14

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1980 (CISG). In the absence of the CISG’s applicability the applicable national sales law must be determined in accordance with the private international law rules of the forum.

II. Place of Delivery/Passage of Risk A core issue of the INCOTERMS is the regulation of delivery and of taking delivery (A2 and B2). In that respect it is a central aim of the INCOTERMS to fix the place where the goods have to be delivered as precisely and practically as possible. Only if the goods are delivered at this place on time has the seller performed his main duty. For all INCOTERMS, with delivery also the risk of loss or damage concerning the goods passes to the buyer (A3 and B3). For most terms, risk passes at the same time and point from where on the buyer must bear any further costs. Four terms however distinguish between the point where the risk and where the liability for costs passes to the buyer: CPT, CIP, CFR and CIF burden the seller with costs even for the transport period after delivery. Unlike many national laws, the INCOTERMS regulate certain situations where the risk is transferred to the buyer prior to delivery (B3). 35 The place of delivery has in many legal systems a procedural implication as well: often parties can sue at that place (the place of performance).16 34

III. Responsibility for Performance Aspects Another core element of the INCOTERMS is the great precision with which certain, practically important obligations are circumscribed. Each Incoterm defines a number of specific obligations for each party to the sales contract. Besides the basic obligations to deliver and to pay (A1 and B1) and the precise definition of delivery (A2 and B2) each term distributes between the parties the duty concerning eventual pre-shipment inspection and the duty to clear the goods, if necessary,17 for export, transit and import (A7 and B7). Each term further states whether and which party has to procure a transport (A4 and B4) and insurance contract (A5 and B5) with respect to the goods and which party has to bear which costs (A9 and B9). In addition, each party must provide the other with the information relevant and necessary for the performance and completion of the transaction (A10 and B10). Also, duties to provide the transport document (A6 and B6) are assigned. Finally, duties concerning packaging, quality control etc. and their costs are distributed between the parties (A8 and B8). 37 The INCOTERMS refrain from any regulation of remedies in case of breach of a duty. Except for the “additional costs” regulated under B9 this is entirely left to the – uniform or national – legal system that applies as basis to the sales transaction. 36

IV. Responsibility for Costs 38

Probably the practically most important aspect of the INCOTERMS is the clear allocation of costs which each party has to bear. Certainly, in economic respect this is most relevant for the parties and their calculation of the transaction. With few exceptions the 16 This is true, for instance, for all 27 EU Member States, see Article 7(1) Brussels I bis Regulation which is directly applicable in the Member States (in Denmark via a separate treaty). 17 In purely domestic cases for which the INCOTERMS 2020 are also designed ex- and import clearance is evidently unnecessary. With the exception of some special situations the same can hold true in integration blocs like the EU.

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assignment of a duty includes the liability for the ensuing costs. However, with respect to information generally the party has to bear the costs that needs, or profits from, the information even if the other has to provide it.

H. Application of the INCOTERMS The INCOTERMS do not apply as such; the parties must always select, and agree 39 on, a specific of its terms. This may be done by express reference to a term or even indirectly. It is further questionable whether some rules of the INCOTERMS can already be regarded as commercial customs.

I. Express Reference in Contract Since the three-letter-acronyms used by the INCOTERMS are also used in interna- 40 tional trade with partly other meanings an express reference to the INCOTERMS of the ICC clarifies which meaning is meant. A reference that clearly incorporates an Incoterm into the parties’ contract would be the following: ‘FCA Hamburg INCOTERMS 2020’. This would clearly indicate that the clause FCA should be understood in the sense the INCOTERMS 2020 define it. Such an express reference is always recommendable in order to avoid uncertainty.18 Already the formulation ‘FCA Hamburg INCOTERMS’ leaves open which version of the INCOTERMS should be used and raises doubts whether the 2020, the 2010 or even a prior version should be applicable.19 Where no other indications can be found the parties most likely meant the version in force when the contract was concluded.20 Whether an Incoterm is validly incorporated into a contract is not regulated by 41 the INCOTERMS themselves. It must be determined by the applicable – uniform or national – legal system. Also, the material validity of the respective term is regulated by national law (the CISG excludes this issue).21 However, because of their international preparation and worldwide acceptance it is more than unlikely that a national law will ever invalidate a specific rule of an Incoterm or even a full term. However, if the parties modify the content of the respective Incoterm considerably this may violate the national standard on unfair contract clauses.

II. Indirect Reference in Contract Where the parties merely use formulations such as ‘FOB Hamburg’ in their contract 42 this leaves open whether they intended to refer to the INCOTERMS or to a national understanding of the term. Indeed, there exist national interpretations which deviate in certain respects from the ICC definition (see, for instance, § 2-319(1), (3) and (4) UCC).22 Whether one or the other alternative should apply is a matter of interpretation of the respective contract. Generally, the interpretation of an international contract is See also ICC-Publication 723 E Introduction to INCOTERMS 2020 paras 9 et seq. With respect to the question of insurance, security clearance and other issues the difference may matter. 20 Compare Piltz, in Piltz/Bredow, INCOTERMS (2016) para. A-305. 21 See Article 4(a) CISG. 22 This is also true for other INCOTERMS, e.g., for CIF; see §§ 2-320 UCC et seq. The 2003 revision of Article 2 of the UCC intended to eliminate these definitions. However, the revision was withdrawn. 18

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governed by the lex contractus.23 However, for the determination whether FOB means INCOTERMS or a certain domestic or regional concept a supranational interpretation should be accepted because it requires a globally uniform answer to this interpretation question, emancipated from any national law.24 Therefore, if there are any indications for the parties’ intentions they should be followed since the parties’ autonomy is the prevailing principle in the INCOTERMS themselves, in the CISG25 and also in probably all national sales laws for merchants. If there are no such indications whatsoever the internationally uniform and globally used understanding of the INCOTERMS should be given preference over any deviating domestic or regional interpretation.26 In case of doubt ‘FOB Hamburg’ in an international contract therefore means ‘FOB Hamburg INCOTERMS (in the version current at the time of conclusion of contract)’.

III. Application as Trade Usage? 43

Partly, it is advocated that the rules of the INCOTERMS apply as the result of an international usage to resort to the rules set up and published by the ICC once the parties have agreed on a specific Incoterm. According to this view the express reference to ‘INCOTERMS 2020’ should be regarded as a reference to a usage on which the parties agreed in the sense of Article 9(1) CISG.27 The usage would then be the following: any use of an Incoterm three-letter-code with express reference to the INCOTERMS would mean agreeing on a usage to resort to the rules set up by the ICC for the respective clause. However, the rules of the INCOTERMS as such and in their entirety do not constitute trade usages but widely used contract terms with an internationally standardized content.28 There are several reasons for this view: (1) A specific Incoterm clause can become binding only by the will of the parties not by itself. (2) A trade usage regularly needs to be accepted over a longer period of time.29 Resorting to the rules set up by the ICC to interpret the INCOTERMS clauses is practiced for more than 80 years now. However, most single rules changed over time. (3) Trade usages are widely respected by the CISG which governs the vast majority of international sales. The same is true for English law which applies to a large extent to international sales transactions. (4) If no express reference to the INCOTERMS is formulated and doubts remain whether a trade 23 See for instance Article 12(1)(a) Rome I Regulation or Article 14(a) Inter-American Convention on the Law Applicable to International Contracts of 1994. 24 See thereto Magnus, ‘Fremdsprachige Verträge unter deutschem Vertragsstatut – Auslegungsregeln für internationale Verträge’ in Büchler/Müller-Chen (eds), Private Law, national – global – comparative. FS für Ingeborg Schwenzer zum 60. Geburtstag Vol II (2011) pp. 1153 et seq. 25 Article 6 CISG. 26 In the same sense already OLG Munich in (1957) NJW 426; also BP Oil International, Ltd. and BP Exploration & Oil, Inc. v Empresa Estatal Petroleos de Ecuador et al. (2003) IHR 189 (CFR without reference to INCOTERMS) and BGH in (2013) IHR 15 (DDP without reference to INCOTERMS). 27 See, for instance, St. Paul Guardian Insurance Co. v Neuromed Medical Systems & Support, GmbH, 26 March 2002 (S. D. N.Y.) 2002 WL 465312; Graffi, Remarks on Trade Usages and Business Practices in International Sales Law (2001) LIX Belgrade L Rev 102 (112); Honnold/Flechtner, Uniform Law for International Sales under the 1980 UN Convention (2009) para. 114; Piltz, in Bredow/Piltz, CISG. Kommentar (2014) para. A-304. For a general analysis see Johnson, ‘Analysis of INCOTERMS as Usage under Article 9 of the CISG’ (2014) 35 University of Pennsylvania Journal of International Law 380 et seq. 28 See the references in n 4. Further Ramberg (n 1) p. 403. See also the decision of the European Court of Justice in Case C-87/10 Electrosteel Europe SA v Edil Centro SpA [2011] ECR I-4987: Although the Court mentions the INCOTERMS in connection with usages, it distinguishes between usages and contract clauses such as the Incoterm EXW whose ICC definition can be used for the interpretation of the clause ‘Resa: Franco sede’ (paras 22 et seq.). 29 Though under Article 9(2) CISG a usage must merely be widely known and regularly observed by the relevant circles.

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H. Application of the INCOTERMS

term is to be understood as a reference to the ICC version Art. 9(2) CISG opens a further possibility to apply the rules set up by the ICC. On the other hand, single rules of the INCOTERMS that stand unaltered for a long 44 time may have become a trade usage.

IV. Consequences of Incorporation Where the parties have validly incorporated an ICC Incoterm into their contract, 45 the rules as defined by the ICC have to be applied unless there are clear indications that the parties agreed on another meaning. The ICC rules for the respective term also prevail over any dispositive rules of the applicable national law whereas the applicable mandatory law cannot be excluded. For issues not addressed by the INCOTERMS the applicable uniform or national law must be applied.

V. Interpretation The ICC INCOTERMS should be interpreted in an objective way rather like statutory 46 provisions than normal contract terms; intentions of the parties do only matter where they are clearly expressed as deviations from the ICC text. Moreover, the INCOTERMS must be interpreted in an internationally uniform manner in order to achieve their purpose of providing internationally uniform rules.30 In case of doubt, the English version is the decisive text. In addition, the Introduction to INCOTERMS 2020 as well as the Explanatory Notes for Users to each term provide guidance for the interpretation. Further, since the INCOTERMS have closely adapted its terms to the CISG also the interpretation of respective terms and provisions of the CISG can be resorted to. As the European Court of Justice held in Electrosteel,31 the INCOTERMS may in turn 47 serve as interpretative aid for the construction of other trade clauses.

VI. Relationship to CISG If the CISG is applicable to a sales contract which contains an Incoterm the rules 48 of the term prevail over any deviating provision of the CISG. This holds particularly true where the Incoterm modifies the general rule of the CISG on the place of delivery (Article 31 CISG) and on the passage of risk (Articles 67–69 CISG). In no event does the incorporation of an Incoterm exclude the CISG as such.32 The CISG applies to all questions not covered by the Incoterm. The close coordination between CISG and INCOTERMS effects that both instruments fit precisely together. With the regulation which party has to provide for the export/transit/import clearance, transport and insurance the INCOTERMS add and detail further very useful solutions which for most CISG sales are relevant.

OLG Nürnberg (2017) TranspR 382 (no. 44, 45). Fn 28. 32 See OGH 22 October 2001 (2002) IHR 24 (incorporation of an Incoterm does not exclude CISG as such); Hof Antwerp 22 January 2007, CISG-online No 1586. 30

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VII. Inconsistent Contract Terms 49

Where the contract contains stipulations that are inconsistent with one or more of the rules of the respective Incoterm the parties have chosen for their contract then the concrete contract stipulations prevail. For, the INCOTERMS are also based on the principle of party autonomy. However, it is first a matter of construction whether there is an inconsistency between the contract terms and the Incoterm.

I. Similar Trade Terms There exist many trade terms more or less used in international trade for which a globally uniform definition – such as for the INCOTERMS – is still lacking. From 1923 on and for the last time 1953 the ICC had collected and published such trade terms. However, these collections merely assembled the reports of a number of national chambers of commerce and industry which had reported the national understanding of certain terms to the ICC. The collections thus gave information about differences in the understanding of certain terms but did not further their uniform interpretation. 51 An example of a trade term with no precisely fixed meaning is the term ‘franco’ or ‘free’.33 It is open whether the term merely means that the seller must bear the transport costs to the agreed place, or whether also the risk passes at the agreed place, or whether in addition even the place of delivery and performance is located at the named place. In the first place it is always a matter of construction of the concrete contract which of these interpretations is to be accepted in the light of the circumstances. Where the circumstances shed no light on the interpretation there seems to be a tendency to understand ‘franco’ as a mere cost term that places the costs for transport on the seller but does not affect the passage of risk and the place of delivery.34 50

J. Cross References & Additional Commentary 52

See in particular → Chapter 12 ‘Delivery of Goods’ by Sörren Kiene.

K. Practitioner Tips & Contract Clauses I. Correct Incorporation 53

If an Incoterm shall be incorporated into the contract and the ICC definition shall be applicable it is always recommendable to denote the term with a precise reference to the INCOTERMS and their intended version. A formulation with respect for instance to FCA would be ‘FCA INCOTERMS 2020’ or ‘FCA INCOTERMS® 2020’ since ‘IN33 See again thereto Electrosteel Europe SA v Edil Centro SpA (n 29) (however, leaving it to the national court to decide on the exact content of the term ‘Franco “seat”’). 34 See, e.g., BGH in (1997) Zeitschrift für Wirtschaftsrecht 519; Hojesteret (Danish Supreme Court) in (2003) European Legal Forum 70; Hoge Raad (Dutch Supreme Court) in (1999) NIPR No. 166; OLG Cologne in (2002) IHR 66; OLG Koblenz in (2003) IHR 66; OLG Munich in (2009) IHR 201; also Dimsey, in Brunner, UN-Kaufrecht – CISG (2nd edn, 2014) Article 31 para. 5 n 1029; Piltz, ‘Neue Entwicklungen im UN-Kaufrecht’ (2003) NJW 2061; but see also contra – not only costs term but also fixing the place of delivery – OGH 10 September 1998, UNILEX; OLG Karlsruhe in (1993), NJW-RR 1316; Cour d’appel Orleans 29 March 2001, CISG France; Cour d’appel Versailles 28 November 2001, CISG France.

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COTERMS® 2020’ is the registered trademark for the INCOTERMS of the ICC and identifies the INCOTERMS as those of the ICC. If instead of ‘FOB INCOTERMS 2020’ only ‘FOB’ is used the seized court may apply the national interpretation of that clause. It is further necessary to specify as precisely as possible the place that has to be 54 named for each Incoterm. A correct FCA clause would therefore not only read ‘FCA Hamburg INCOTERMS® 2010’ but, if already possible, contain the precise point or address in Hamburg.

II. Derogation from Certain INCOTERMS Aspects The INCOTERMS are in no way mandatory. The parties can modify or exclude 55 any single rule the ICC has fixed for the respective Incoterm. For instance, it may be preferable under FCA to burden the seller with the terminal handling charges. However, whether such a modification or exclusion is advisable needs thorough consideration and, if agreed upon, careful formulation in order to avoid ambiguities.35

III. Best INCOTERM for ‘Outsourcing’ Where the seller wants to be relieved from all duties except the duty to have the goods 56 available for the buyer EXW seems to be the appropriate term and DDP has the same effect for the buyer. However, it is rarely mere comfort and convenience that governs the choice of a specific Incoterm. As mentioned, the choice of the best-suited Incoterm depends primarily on which party can provide the different ‘services’ (export/transit/import clearance, transport, insurance) at cheaper costs. This will influence the overall price of the transaction which not only comprises the price for the goods but also the costs of these other services. Where, for instance, the seller has own vehicles and staff it is probably cheaper that he transports the goods to the next convenient point (port, airport, border or else) or even further than to employ an independent carrier for the same route. Therefore, the term FCA may be advisable instead of EXW. Even if EXW is in principle more convenient for the seller the overall cost calculation may reveal that the seller’s offer is cheaper for the buyer than to employ an independent carrier who picks up the goods at the seller’s place. Under competition aspects the seller may thus be able to offer a considerable advantage. Similar considerations apply with respect to the export/transit/import clearance. It is certainly more practical and probably cheaper that the seller cares for the export clearance and the buyer for the import clearance than vice versa. This is particular true for EXW sellers and DDP buyers whose place of business is within the EU.36 EXW for the buyer and DDP for the seller may lead to substantial and unexpected hurdles to satisfy the clearance conditions. This should be taken into account before choosing EXW or DDP. Further, with respect to transport and insurance it may be that one party has cheaper sources, better conditions and/or more experience to arrange for these services than the other party. This again can influence the overall costs of the transaction and has to be considered for the choice of the right Incoterm.

35 For instance, ‘CIF landed’ does not explicitly clarify if only a different allocation of costs or also continuing consequences are intended. ‘CIF Buenos Aires, arrival not later than …’ does not clarify whether it is the seller’s or the buyer’s responsibility if the goods do not arrive in Buenos Aires on time. 36 Art. 170(2) Union Customs Code requires that the person filing a declaration shall be established in the customs territory of the Union.

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For containerized goods it is recommendable that the seller should use the FCA clause37 instead of FAS/FOB and CPT/CIP instead of CFR/CIF since under FCA the risk regularly passes to the buyer already when the container is delivered ready for unloading from the seller’s truck at the container terminal and under CPT/CIP when delivered to the carrier whereas under FAS/FOB and CFR/CIF the risk passes only when loading the container on board of the nominated vessel or placing it alongside is completed. Since at the container terminal the container is no longer under the control of the seller from his perspective it is advisable to shift the risk.

IV. Wrong Combinations The INCOTERMS 2020 just like the INCOTERMS 2010 make it even clearer than their predecessor that the terms designed for water transport (FAS, FOB, CFR, CIF) are rather inappropriate for other modes of transport. The marine terms are even not suitable for containerized goods. Parties must therefore be careful to choose the corresponding Incoterm for the specific mode of transport. 59 It is further necessary to combine an Incoterm with a suitable place. FCA should be combined with the place of delivery that means the place of departure (generally in the country of the seller). C-clauses, on the contrary, have to be combined with the place/port of destination, generally in the country of the buyer. Equally D-clauses must name the place of destination and not of departure. 58

V. Time of Essence? 60

The INCOTERMS do not regulate the time of delivery. This aspect is entirely left to the agreement of the parties and in the absence of an agreement to the applicable uniform or domestic law. Nonetheless, it has been held that in particular FOB and CIF make time of the essence.38 However, since the INCOTERMS are silent on the time of delivery this consequence can only be assumed if there is a specific stipulation to this effect in the contract,39 or if the circumstances so require, or if a respective trade usage exists. For FOB it can be argued that the buyer must nominate the vessel and in order to avoid extra-cost the delivery must be in time, namely as soon as the ship has arrived. However, to be sure that time is of the essence the parties should expressly agree on this condition.

L. Additional Sources 61 See the references in n 3. Further von Bernstorff, INCOTERMS® 2010 der Internationalen Handelskammer

(ICC) (Bundesanzeiger Verlag 2015); Magnus, ‘INCOTERMS’ in Basedow/Hopt/Zimmermann (eds), The Max Planck Encyclopedia of European Private Law vol I (OUP 2012) 855 et seq; Piltz, ‘INCOTERMS® 2010’ (2011) 11 IHR 1 et seq; Ramberg, ‘CISG and INCOTERMS 2000 in connection with International Commercial Transactions’ in Andersen/Schroeter (eds), Sharing International Commercial Law across National Boundaries, Festschrift for Albert H. Kritzer on the Occasion of his Eightieth Birthday (Wildy, Simmonds & Hill Publishing 2008) 394; Ramberg, ICC Guide to INCOTERMS 2010 – Understanding and Practical Use (ICC 2011).

See also the recommendation in the ICC’s Explanatory Notes for Users to FAS, FOB, CFR and CIF. See, for instance, OLG Karlsruhe in (1975) RIW 225; Baumbach/Hopt/Merkt, Handelsgesetzbuch, INCOTERMS FOB para. 3. 39 See, for instance, OLG Cologne, 24 April 2013, BeckRS 2014, 03701 (agreement on ‘fix’ delivery date). 37

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CHAPTER 11 VALIDITY OF CONTRACT TERMS Edoardo Ferrante A. Topics Covered . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B. Introductory Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. General Issues on Contractual Validity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Different Grounds for and Degrees of Invalidity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. ‘Structural’ Invalidity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Invalidity on the Grounds of Private and Public Policy . . . . . . . . . . . . . . . . . . . III. Mandatory Rules and Open Spaces for Party Autonomy . . . . . . . . . . . . . . . . . . . . . IV. The Consequences of Invalidity: from the ‘Black Hole’ to the ‘0’ or ‘No’Consequence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C. Statement of Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . D. International Sales Transaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . E. Sampling of Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. CISG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. CISG and Formal Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Beyond the CISG-text . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Autonomous Interpretation of ‘Validity’ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Initial Impossibility under the CISG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Mistake as to Quality of the Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. UNIDROIT Principles of International Commercial Contracts . . . . . . . . . . . . . . III. Common European Sales Law (CESL) and the ‘New’ European Sales Law . . . IV. Draft Common Frame of Reference (and Principles of European Contract Law) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. National Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F. Commentary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . G. Practitioner Tips . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Balanced Contractual Relationships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Unbalanced Contractual Relationships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . H. Sample Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Additional Sources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 2 2 6 6 12 16 23 29 32 36 36 36 40 40 45 51 52 55 61 63 67 68 70 71 77 83

A. Topics Covered The current Chapter concerns invalidity of the contract or any of its terms in 1 the frame of international contractual transactions. The starting point will be a brief overview on general theory (B. Introductory Note; → mn. 2), as invalidity has always been a highly disputed issue among scholars. The focus will then shift to the conflict between the needs of contractual practice and those expressed by national rules on validity requirements and the consequences of a lack thereof (C. Statement of Issues; → mn. 29). Those provisions are in fact the pin around which the whole subject revolves, given that international sources, especially the CISG, usually neglect it. For this reason, international contracts are expected to face, as far as possible, all that raw legal material critically, either putting it aside or taking it by the hand towards the desired outcomes, filling its gaps or correcting its possible imperfections (D. International Sales Transaction; → mn. 32). The next step will therefore be an outline of the leading provisions on the subject (E. Sampling of Laws; → mn. 36), absent which an overall assessment could hardly be made (F. Commentary; → mn. 67 et seq.). At this stage, the time has come for practical tips, designed for parties either on an equal footing or in different bargaining positions. For this purpose, a short sampling of clauses will be provided to illustrate the possible outcomes of contractual dealings (H. Sample Clauses; → mn. 77).

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Finally, the Chapter will suggest further literature on international contractual practice (I. Additional Sources; → mn. 83).

B. Introductory Note I. General Issues on Contractual Validity The parties’ agreement is insufficient to make a binding contract, provided with effective and enforceable clauses, if it does not meet its own validity requirements. 1 From this perspective, it must be acknowledged that party autonomy, though commonly considered as the basis of whatever transaction, can neither apply to the whole contract nor manipulate each and every rule and usage related to it. In fact, there is a limit, i.e. the validity requirements, imposed by mandatory provisions. 3 A conflict thus arises between the parties’ ambition to regulate every single aspect of their relationship freely and the legislator’s demand to keep such ambition within a frame of legality that makes it complant with the legal system. As often happens in private law, a balance between the parties’ diverging interests feels necessary; such balance is neither predictable nor imposed by any matter of logic or natural principle, but results from specific policy choices.2 In order to grant the parties a wider margin, the frame of legality should be widened and lightened; in fact, as the frame becomes narrower and heavier, the parties’ freedom is further limited and increasingly difficult to exercise.3 4 As it is well known, countries belonging to the Western legal tradition generally tend to shift the balance in favor of party autonomy rather than imposing excessive limitations.4 5 The key idea is that frequent and quick transactions, agreements as spontaneous and informal as possible, are welcomed both from an economic and a social point of view. Contract is the exchange-tool par excellence: it allocates assets according to the respective needs of the parties, it makes them ‘move’ how they want, and prevents or solves disputes in the way they decide. Obviously, all this is regarded favorably. It is a forgone conclusion that, in such context, burdens and counterweights play a secondary role, restricted to what is barely necessary to assure that freedom of contract is not detrimental to other paramount values or even to itself.5 2

1 In such context validity and effectiveness must be considered as one the respective ground for the other: see on these topics, Hellmann, ‘Zur Terminologie der römischen Rechtsquellen in der Lehre von der Unwirksamkeit der juristischen Thatsachen’, 24 Zeitschrift der Savigny-Stiftung für Rechtsgeschichte, Romanistische Abteilung (1903) 50 et seq. 2 Calderai, ‘L’eclissi in una luce diversa. Note sullo statuto epistemologico dei concetti giuridici nell’epoca del diritto post-nazionale’, Rivista di diritto civile (2016) 1621 et seq. 3 Westerman, Hage, Kirste & Mackor (eds), Legal Validity and Soft Law (2018) passim; Shelton, ‘Introduction: Law, Non-Law and the Problem of Soft Law’, in: Id (ed), Commitment and Compliance: The Role of Non-Binding Norms in the International Legal System (2000), p. 466. 4 Alpa, ‘Il contratto in generale, I, Fonti, teorie, metodi’ in: Trattato di diritto civile e commerciale Cicu, Messineo e Mengoni, continuato da Schlesinger (2014), pp. 385 et seq., 416–418. 5 Mazzamuto, Il contratto di diritto europeo (2017), pp. 23 et seq.

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B. Introductory Note

II. Different Grounds for and Degrees of Invalidity 1. ‘Structural’ Invalidity It would be impossible within this scope to write more than a brief summary on the foundations of validity requirements, as transmitted by the Western legal tradition, and one preliminary remark is absolutely necessary: usually statutes do not display contractual invalidities as a system, but this latter is reconstructed a posteriori by scholars, called to acknowledge the chaos which tends to arise in statutory law and to make something coherent out of it.6 Firstly, it is a matter of preserving those elements the lack of which undermines the very possibility of identifying a certain agreement as a contract. Those can be referred to as ‘structural’ validity requirements. Beside the different methods and technicalities that each applicable law can adopt under this ratio, there are some elements a contract cannot do without: the parties’ agreement with the intention to be legally bound, the certainty of contract terms, a specific form, and legal requirements to ascertain whether the contract is legally binding.7 A more indefinite and controversial requirement is referred to by Common Lawyers as consideration and described in some continental systems as causa.8 On that ground, freedom of contract bears the limits of reliability, certainty and (sometimes) compliance with specific formalities.9 Those limits, though, are designed in favor of party autonomy, rather than against it. Furthermore, they are meant to protect freedom of contract from itself, i.e. to prevent a possible abuse of this latter by altering its final purposes. Strictly speaking, it is not a matter of balancing the parties’ freedom with possible competing external values or interests, but rather of keeping its internal mechanisms under control, avoiding possible degenerations. A noteworthy point concerns the requirement of parties’ agreement. In fact, all contracts are agreements, but not all agreements are contracts. It means that for a contractual agreement to be binding, its mere existence – the extrinsic convergence of the parties’ pre-contractual declarations – is not sufficient per se: it must necessarily be the product of a real intention to be bound. Legal systems often prove to be unsatisfied with a simple, literal and almost passive overlapping of intents and therefore require the agreement to be ‘true’. We can read in this light contractual invalidity for lack of capacity, mistake, duress, fraud and any other defect of consent, due to events that have impaired its normal and correct development process. Currently, a new idea seems to be more and more en vogue: setting a fair balance of the bargain as an additional validity requirement.10 The range of remedies aiming at the 6 Zimmermann, The Law of Obligations (1996), pp. 678 et seq.; Hellwege, ‘Invalidity’, in: Basedow, Hopt, Zimmermann & Stier (eds), The Max Planck Encyclopedia of European Private Law Vol II (2012), p. 990; Polidori, Nullità di protezione e sistematica delle invalidità negoziali (2016), pp. 1 et seq. 7 In this respect, soft law-texts are quite ‘minimalist’: see in particular Article 3.1.2 PICC (also below, E.II, → mn. 52) and Article II.–4:101 DCFR. 8 See, ex multis, Bassani & Mincke, ‘Europa sine causa?’, ZEuP (1997) 599, 604; Barcellona, La causa. Il contratto e la circolazione della ricchezza (2015) passim; Stanca, ‘Note in tema di causa nel Draft Common Frame of Reference e nella proposta sulla Cesl’, Contratto e impresa (2015) 719 et seq.; G.B. Ferri, ‘Une cause qui ne dit pas son nom. Il problema della causa del contratto e la riforma del terzo libro del Code civil’, Rivista di diritto commerciale (2017) 1 et seq.; Casas, ‘Die causa-Lehre in der französischen und argentinischen Privatrechtsreform’, ZEuP (2017) 68 et seq.; Ferrante, La vendita nell’unità del sistema ordinamentale (2018), pp. 126 et seq. 9 Article II.–4:103 DCFR and Article 30 CESL. 10 See, in the italian debate, Navarretta, ‘Europa cum causa’, in: AA.VV., Diritto comunitario e sistemi nazionali: pluralità delle fonti e unitarietà degli ordinamenti (Atti del 4° Convegno Nazionale SISDiC)

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protection of such balance is too wide and heterogeneous to be summarized, even if we focus – as we are actually doing – only on ‘genetic’ defects, such as invalidity. Remedies such as hardship and unfair exploitation still pertain to contractual enforceability and thus to the field of validity. Again, in these terms we can explain – but it would be beyond the scope of this Chapter – the increasing global commitment to the defense of the weaker parties in unbalanced contractual relationships, such as consumer contracts (also referred to as business-to-consumer or ‘B2C’ contracts): new figures of invalidity restrict freedom of contract in order to grant the weaker party additional protection. 11 In this field, the response of the law to contractual ‘defects’ is generally committed to optional remedies, which only one party can invoke. However, this ‘privatization’ of the remedies does not prove indifference or inactivity of the law, it simply shows an intention to let the parties choose themselves, case by case, the most effective and proportionate tool. After all, even if validity requirements have to be imposed by mandatory provisions, they cannot but be left to private enforcement and therefore be subdued to the principle that judicial protection is optional.

2. Invalidity on the Grounds of Private and Public Policy Secondly, some provisions are intended to preserve the compliance of the contract with its own legal system, i.e. with fundamental rules and principles, sharing a mandatory nature and being of such utmost importance as to prevail over the parties’ interests (whether they are commercial or consumption purposes, or both). This deals with what is usually referred to as legality or lawfulness, a narrower concept meaning conformity of the agreement to the system as a whole. Those can be called ‘policy’ validity requirements.11 13 However, the above-mentioned conformity can once again carry different levels of meaning. Traditionally, the concept has been given two, somehow homogeneous but not identical, meanings: conformity as something bending the contract towards heteronomous and super-individual purposes, just as if the agreement could or had to become the guardian of public interests; conformity as the ability of contract to pass an external validity test, not in order to play a leading role in the protection of higher values, but, at least, in order not to contradict them. Thus, a passive and external conception of conformity replaces an active and internal one. 14 According to the Western legal tradition, this latter conception has been permanently abandoned, while the other seems to be more and more appreciated.12 At present, it is generally out of the question that contract could or should pursue aims other than ‘private’ as if it was a sort of longa manus of public policies.13 15 Here, party autonomy or freedom of contract is limited by the system’s demand to grant a certain standard of protection to public interest; but judicial protection is still optional in the domain of policy validity requirements. This confirms the trend to let 12

(2010), pp. 330 et seq.; Id, ‘Il contratto “democratico” e la giustizia contrattuale’, Rivista di diritto civile (2016) 1262 et seq. 11 Villa, ‘Le invalidità fra modello tradizionale e nuove discipline’, in: Macario & Miletti (eds), Tradizione civilistica e complessità del sistema. Valutazioni storiche e prospettive della parte generale del contratto (2006), pp. 413 et seq. 12 Sirena & Zoppini (eds), I poteri privati e il diritto della regolazione (2018), pp. 367 et seq.; Comparato, Micklitz & Svetiev, ‘The regulatory character of European private law’, in: Twigg-Flesner (ed), Research Handbook on EU Consumer and Contract Law (2016), pp. 35 et seq. 13 Perlingieri, Il diritto civile nella legalità costituzionale secondo il sistema italo-comunitario delle fonti (2006), pp. 403 et seq.

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individuals achieve objectives going far beyond their personal interests and to make party autonomy work together with the system as a whole.14

III. Mandatory Rules and Open Spaces for Party Autonomy In any case, as already outlined, the trait d’union of invalidity rules lies in their mandatory nature. Given that they are intended to limit and ‘define’ freedom of contract – for the above-mentioned purposes – they cannot but prevail over that freedom and avoid whatever manipulation. Nevertheless, a new complexity arises in the field of contractual invalidity. In fact, on one hand, the mandatory nature of the rules does not necessarily imply that their infringement should be invoked by both contracting parties or third parties, or that the contract should be held void by the judge ex officio. So, there are different degrees of invalidity: serious infringements can normally be invoked also by third parties or ascertained ex officio, whilst in several other cases the remedy is only granted to one party – for instance the victim of fraud or unfair exploitation – and this victim can surely waive its right, even impliedly (for example by executing the due performance despite being aware of invalidity). Such cases are often referred to as relative invalidity. Therefore, the mandatory nature does not automatically mean an indiscriminate access to legal remedies. On the other hand, the infringement of the validity rule does not necessarily lead to the ‘fall’ of the entire contract. Instead, legal systems tend to provide tools for restraining the destructive effects of invalidity to the bare necessities (in line with the Roman formula utile per inutile non vitiatur). Thus, as a matter of principle, partial invalidity is preferred to full invalidity.15 The strategies to encourage or prevent the extension of invalidity from a single clause to the whole contract vary depending on the system, thus influencing the allocation of the burden of proof.16 However, while the establishment of validity requirements is committed to mandatory provisions, in the definition of its boundaries and procedural aspects some space seems to be left to party autonomy. Finally, one last point should be underlined, which is not of secondary importance from a practical point of view. In the event that a ground for invalidity occurs, one option is to require a preliminary judicial check; an alternative is to allow the avoidance of the contract by simple notice, following a self-help remedy logic.17 In other words, the law could subordinate the consequences of invalidity either to a judicial action or to a mere allegation of one party: in the first case invalidity could not lead to ineffectiveness without a judicial decision, normally producing ex tunc effects between the parties; in the second case ineffectiveness could also result from a mere notice by one party, without prejudice for the other party’s right to challenge the grounds for that claim. In this latter event, a judicial decision, even though unnecessary, could nevertheless be requested by the objecting party, who will still bear the burden of proof.18 14 Harder, ‘Die historische Entwicklung der Anfechtbarkeit von Willenserklärungen’, AcP (1973) 209; Scalisi, ‘Autonomia privata e regole di validità: le nullità conformative’, Rivista di diritto civile (2011) 741 et seq. 15 See in particular Article 3.2.13 PICC (part E.II. below, → mn. 52); Article 54(2) CESL (part E.III below, → mn. 55); Article II.–7.213 DCFR (part E.IV below, → mn. 61); Article 4:116 PECL. 16 Hellwege (n 6) p. 993. 17 O’Sullivan, ‘Rescission as a Self-help Remedy: A Critical Analysis’, 59 CLJ (2000) 509 et seq. 18 For instance, Article 3.2.11 PICC (part E.II below, → mn. 52; and Article 52(1) CESL (part E.III below, → mn. 55.

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Such alternative does not affect validity requirements, but influences the parties’ strategic choices, i.e. the decision to file a suit and the allocation of the burden of proof, given that the party who bears the burden of action also bears the burden of proving the grounds for the claim. 22 Yet, even in that case, party autonomy has some power: here it is not a matter of deciding if and when a contract is invalid, but of choosing which of the parties should bear the burden of action. In this field, clauses derogating from statutory provisions are unlikely to be automatically ‘out of play’. 21

IV. The Consequences of Invalidity: from the ‘Black Hole’ to the ‘0’ or ‘No’-Consequence At an even more general level, a careful distinction must be drawn between grounds for invalidity and its consequences. Normally, invalidity leads to ineffectiveness and unenforceability and these two consequences have an ex tunc effect, as if the clause or the whole contract had never existed. Even in such context, party autonomy might recover a certain margin of manoeuvre.19 24 Nevertheless, regardless if the burden of action is on one party or the other, or both, and regardless if the defect affects single clauses or the entire contract, there is no reason why the binding effects of an agreement being unable to pass the validity test ought to be maintained or enforced. This is what lies behind the phrase ‘all that is invalid is tamquam non esset’, a black hole the contract is destined to fall into and never re-emerge from. 25 Yet, such expression has to be taken for what it is, otherwise theory will betray practice. It is true that invalidity is a synonym for ineffectiveness, so that invalid contracts are not legally binding for the parties, as if they had never been concluded; but it is nevertheless true that invalidity can remain unknown to the parties themselves, or they can decide to perform despite being aware of it. Hence, the ‘tamquam non esset’ rule must be coordinated with the principle that judicial protection is optional. So, is it not too much to say that the contract is tamquam non esset? An invalid contract is still a contract, and its binding effect, even though formally neutralized, can still recover in practice, thanks to the parties’ intention to perform and waive their right to invoke invalidity. It is not wrong to believe that many contracts, though partially or fully invalid, share that very destiny. 26 Otherwise the reason why case-law on validity requirements is so poor, especially at an international level, would be inexplicable. As far as we know – but here decisions are often restricted to arbitration awards, and thus are less accessible – parties rarely litigate on issues related to invalidity, in spite of its mandatory nature and the seriousness of its consequences. Case-law is mostly focused on the exact performance of the agreed obligations and in particular, talking about sales, on the conformity of the goods sold and delivered; even more on the time and mode of examination and the notice of the lack of conformity, which is preliminary to whatever remedy. In the buyer’s defensive perspective this is the high road to avoid performance by terminating the contract or reducing the price. On the contrary, the buyer is unlikely to try avoiding performance by alleging defects in consent or the infringement of public policy provisions: in fact, these 23

19 Hellwege (n 6) p. 991; Schmidlin, ‘Der Rücktritt vom Vertrag: Von der Nichtigkeit ex tunc zum vertraglichen Liquidationsverhältnis – ein dogmengeschichtlicher Wandel’, in: FS Theo Mayer-Maly (2002) pp. 677 et seq.; Moser, Vertragsabschluß, Vertragsgültigkeit und Parteiwille im internationalen Obligationenrecht (1948), pp. 253 et seq.

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grounds would be more difficult to prove and the defensive strategy far riskier from a procedural point of view. On the other hand, the seller (usually an export company) requires the buyer to 27 make a full and timely payment of the price, at the cost of complementing or renewing performance, so that, normally, the seller has no interest in discharging the contract, which would instead be the natural effect of invalidity; accordingly, the seller will hardly ever invoke such invalidity. In other words, getting down to brass tacks rather than getting up to theory building, 28 one cannot help remarking that – despite its cultural and systematic importance – the issue has not lead to relevant case-law at a global level. This cannot be neglected, also when legal advice is addressed to a company that intends to act effectively on a cross-border market.20

C. Statement of Issues Given that validity issues belong to national law, are mainly dealt with by mandatory 29 rules, and this does not favor the development of international trade, the key-point is to understand how contractual practice could mitigate their negative impact. In other words, it is a matter of assessing how such practice could preserve the independence of international contracts from the demand of national laws to lure back the grounds for and consequences of invalidity.21 The problem shows up more evidently in transactions where both parties are on 30 equal footing, have the ability to influence the formation and management of contractual terms and aim at reaching a balanced situation, simply because this is the only way to meet their mutual consent. On the contrary, in transactions where one party is in a stronger bargaining position 31 and has the power to draft contractual terms unilaterally, while the other party faces the fateful dilemma ‘take it or leave it’, a balanced regulation will give way to a much stronger-party-friendly approach; this latter will often do nothing but imposing its own national law (even when, by chance, it happens not to be the most favorable).22

D. International Sales Transaction Several references have been made (also in the introductory note) to the legal system 32 or the applicable law, but nothing has been said yet on which law should be applied to validity or invalidity issues and how it should be identified. It is not difficult to figure that the level of criticality increases, especially when the contract deals with international elements, such as in the field of international contractual practice. 23 In fact, contractual validity and invalidity are the typical heritage of national laws. 33 Their very mandatory nature makes them hardly accessible by international customs

See part G below, → mn. 68. See Castronovo, ‘Diritto privato generale e diritti secondi. La ripresa di un tema’, Europa e diritto privato (2006) 409 et seq.; more recently, Gentili, ‘Contratti del consumatore e diritto comune dei contratti’, Rivista di diritto civile (2016)1488. 22 Ferrante, ‘Thirty Years of CISG: International Sales, ‘Italian Style’’, The Italian Law Journal (2019) 87 et seq. 23 Hesselink, ‘Contract theory and EU contract law’, in: Twigg-Flesner (n 12) pp. 508 et seq., pp. 525 et seq. 20

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and steadily resistant to any transnational harmonization.24 As will be better explained below, a uniform regulation on invalidity does not exist in private international law. 34 That circumstance is not favorable to the development of cross-border transactions. It is well-known that at an international level – parties sitting in different countries, goods to be transported, performances meant to involve several contractors, distant from where the agreement has been reached – the revival of local mandatory provisions makes (or might make) both negotiations and performance far more complicated. 25 Given that the parties (usually large or medium import-export companies) cannot rely on a uniform law in case they are incapable of reaching an agreement, they will often come to a deadlock. During the negotiations, each party will try to make its own national law or the more favorable one prevail, provided that such professio juris is compliant with private international law.26 Otherwise, it is this latter that will determine, once and for all, the law applicable. Thus, the focus moves to the balance of power between the parties within the single contractual relationship.27 35 Therefore, even the stronger party, as powerful as to impose to the other the preferred professio juris, could view it as a disadvantage to apply mandatory provisions issued by national law, or at least by the selected law; not only considering that this could lead to less straightforward and predictable dealings, but above all because the choice of a certain law could entail a number of drawbacks even for the stronger party himself. Moreover, it is the stronger parties who fear mandatory provisions most, even though issued by their national law: such parties have the power to impose a different regulation, perhaps more familiar to them, but they would need the opposite, i.e. the maximum flexibility as to validity requirements and validity tests.

E. Sampling of Laws I. CISG Article 4(a) This Convention governs only the formation of the contract of sale and the rights and obligations of the seller and the buyer arising from such a contract. In particular, except as otherwise expressly provided in this Convention, it is not concerned with: (a) The validity of the contract or of any of its provisions or of any usage.

Drobnig, ‘Substantive validity’, 40 Am J Comp L (1992) 635. Rabel, Das Recht des Warenkaufs. Eine rechtsvergleichende Darstellung (1936), passim; Vassalli, ‘Estrastatualità del diritto civile’, in: Scritti in onore di Cicu II (1951), pp. 479 et seq.; David, ‘The Methods of Unification’, Am J Comp L (1968) 13 et seq.; Markesinis, The Gradual Convergence, Foreign Ideals, Foreign Influences and English Law on the Eve of the 21st Century (1994), passim; more recently, Rüthers, Die heimliche Revolution vom Rechtsstaat zum Richterstaat (3rd edn, 2016), passim. 26 Rome I has followed that direction: see Pfeiffer, ‘Choice of Law and Choice of Court: The Rome I and Brussels I bis Regulations’, in: Pfeiffer & Wais (eds), Judicial Control of B2B Contracts (2021), passim; Weller, Benz & Thomale, ‘Rechtsgeschäftsähnliche Parteiautonomie’, ZEuP (2017) 250 et seq.; Sirena, ‘Diritto comune europeo della vendita vs. Regolamento di Roma I: quale futuro per il diritto europeo dei contratti?’, Contratti (2012) 634; Sendmeyer, ‘The Freedom of Choice in European Private International Law: An Analysis of Party Autonomy in the Rome I and Rome II Regulation’, Contratto e impresa/Europa (2009) 792 et seq.; from a more general perspective, Basedow, ‘Art. 114 AEUV als Rechtsgrundlage eines optionalen EU-Kaufrechts, Editorial’, EuZW (2012) 1 et seq.; Id, ‘Theorie der Rechtswahl oder Parteiautonomie als Grundlage des Internationalen Privatrechts’, (2011) RabelsZ 54–56. 27 Giesecke, Interessengerechte Rechtswahl im Kaufrecht (2014) passim. 24

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1. CISG and Formal Requirements As it is well known, the CISG does not provide an exhaustive regulation on international sales, but does cover the topics which are thought to be the most delicate in respect of how international trade works, or at least those on which a political compromise has been reached.28 The cut-off between matters dealing with the Convention and matters not dealing with it cannot be explained merely in terms of major or minor importance of these aspects, but is also influenced by matters of Realpolitik, i.e. reasons of major or minor ease of the legislative iter. As to Article 4(a) CISG – ruling that validity, either of the whole contract or single terms or any usage, is not a matter dealt with by the Convention – reasons of Realpolitik go along with a strong belief that matters such as invalidity belong to national law ‘by nature’. As already mentioned,29 experiments of uniform international law, at least those like the CISG, which had a successful outcome, have generally chosen not to intervene in the complex and multi-faced landscape of contractual invalidities. Thus, by virtue of Article 4(a) CISG, such landscape is left to international private law rules, which are meant to identify the law applicable on a case by case basis. This leads to a ‘dangerous’ entanglement between national and transnational provisions30: the CISG does indeed cover the most practically relevant issues in cross-border transactions, but the basis of any transaction is still a valid contract, and validity is committed to national law.31 First of all, one thing should be underlined: the very wording of Article 4 CISG begins by stating that the exclusion applies ‘except as otherwise expressly provided’ in the Convention, and only then lists the single matters dealing or not dealing with it. This means, as a matter of principle, that whenever the CISG expressly chooses to provide some rules on invalidity, it is not only competent, but even prevailing over the national law applicable. What immediately stands out is Article 11 CISG, according to which ‘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’.32 Despite being commonly included among the grounds for invalidity, form finds a specific regulation in Article 11 CISG, which must be applied even to the detriment of the law applicable by virtue of private international law rules. 33 Consequently, if we include form among the validity requirements – as it is standard in practice – it will be inaccurate to claim that the CISG refuses to deal with invalidity.34 28 Meyer, ‘The CISG: Divergences between Success-Scarsity and Theory-Practice’, in: DiMatteo (ed), International Sales Law (2014), pp. 23 et seq. 29 See part D above, → mn. 32. 30 On this topic, recently, Ragno, ‘I Princìpi dell’Aja sulla scelta della legge applicabile ai contratti commerciali internazionali: mero esercizio di stile o strumento utile in àmbito europeo?’, Contratto e impresa/Europa (2017) 320 et seq. 31 Drobnig (n 24) p. 636. The ‘silence’ on invalidity, therefore, is not so obvious, despite what has been claimed, among others, by Khoo, Art. 4, in: Bianca & Bonell (eds), Commentary on the International Sales Law. The 1980 Vienna Sales Convention (1987), pp. 45 et seq.; Hellwege (n 6) p. 990; Harder (n 14) 209. 32 In the same direction Article 1.2 PICC, Article 2.101 PECL and Article II-1:106 DCFR. See Ferrari, ‘The formal validity of contracts for the international sale of goods governed by the CISG – an overview of case law’, International Business LJ (2004) 85; recently Schwenzer & Spagnolo (eds), The Electronic CISG (2017) passim. 33 This does not apply, though, when the State in which one of the contracting parties has its place of business made the reservation under Article 96 CISG. The parties are not entitled to provide otherwise, as the reservation under the mentioned provision is irrefutable; the only option for the parties would be to exclude tout court the applicability of the Convention under Article 6 CISG. 34 Among others, U.S. District Court, Southern District of New York, 8 th August 2000, in www.unilex. info/case.cfm?id=725.; Kantonsgericht Zug (CH), 14th December 2009, in globalsaleslaw.com/content/api/

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2. Beyond the CISG-text a) Autonomous Interpretation of ‘Validity’ Article 7 (1) In the interpretation of this Convention, regard is to be had to its international character and to the need to promote uniformity in its application and the observance of good faith in international trade. (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.

What has just been said opens up a whole new world: validity itself is a polysemous concept. In fact, once having excluded invalidity from the scope of the CISG, it still remains to establish the scope of its domain, the matters it does and does not encompass, and where the cut-off should be set. Actually, the problem has not been solved yet, but only put aside and the mere use of the world ‘validity’ is not enough. 41 One thing is still certain: the meaning of ‘validity’ must be reconstructed and applied by virtue of the CISG, that is to say by virtue of the ‘general principles’ guiding, under Article 7 CISG, the filling of the so-called internal gaps (i.e. matters dealing with the CISG but not expressly regulated by it).35 Validity requirements, the validity test and the consequences of invalidity still are external gaps, but the meaning of the word ‘validity’ is internal, and thus it cannot be subdued to the same rules of autonomous and internationally oriented interpretation governing the ‘internal gap’ filling.36 42 Here is the best remedy against homeward trend in drawing the line between what is in and what is out of the CISG, a trend that would be the inevitable consequence of letting the applicable law define invalidity. It would in fact be up to such law to establish the scope of Article 4 CISG. This way, systems providing many validity requirements would impose a restriction on the CISG, whereas systems lacking such requirements would grant it a larger margin. Therefore, giving such a power to national law will make the outcome of transnational litigation less predictable and weaken the role of both international customary law and autonomous interpretation. Whatever experience of international convention aims at fixing a standard for the contracting parties or Member States to comply with, that leads to a consequent proportional limitation of national sovereignty. A different conclusion would instead leave that standard at the mercy of municipal laws, letting them maintain their power to shape it as they like, by reducing or increasing its impact.37 Nothing could be more against the spirit of the CISG and the harmony this latter is intended to spread in cross-border transactions. 43 However, the same conclusions should be drawn also in the comparison of laws that are both national. Provisions such as Article 4(a) CISG must be constructed in light of the system they belong to, rather than of the one they refer to; that is to say in light of the CISG rather than of the national law applicable. Otherwise, the width of the referral would depend upon the target’s provision rather than upon the source.38 40

cisg/urteile/2026.pdf; see also Piltz, ‘Litigation Costs as Reimbursable Damages’, in: DiMatteo (n 28) p. 290. 35 Schwenzer, ‘Divergent Interpretations: Reasons and Solutions’, in: DiMatteo (n 28) p. 113; Caterini, ‘Princìpi e clausole generali nella proposta di regolamento europeo della vendita transfrontaliera’, Contratto e impresa/Europa (2014) 590–591; see also Date-bah, Art. 29, in: Bianca & Bonell (n 31) pp. 240 et seq. 36 Magnus, ‘Wiener UN-Kaufrecht (CISG)’, in: J. von Staudingers Kommentar zum BGB (2013), pp. 132–133; Schwenzer & Hachem, Article 4, in: Schlechtriem & Schwenzer (eds), Commentary on the UN Convention on the International Sale of Goods (CISG) (4th edn, 2016). 37 D’Alfonso, ‘I contratti di vendita transfrontaliera. Prospettive de jure condendo di disciplina europea’, Rassegna di diritto civile (2017) 1279–1280. 38 Schwenzer & Hachem (n 36) pp. 88 et seq.; Magnus (n 36) pp. 132–133.

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In other words, for reasons of interpretation and general theory, the concept of validi- 44 ty has to come from the CISG itself, not from the national law to which it (impliedly) refers. That is a key issue: despite the first impression, the different points of view from which the concept of validity can be regarded are likely to lead to equally different applications. b) Initial Impossibility under the CISG The easiest case to consider on the subject is initial impossibility to perform. 39 This 45 occurs, for instance, in the contract of sales when the goods sold do not even exist at the time of its conclusion, so that the agreed performance to transfer or deliver inexistent goods shall be deemed as impossible from the outset. Now, in some national legal systems such impossibility leads to avoidance of the contract for lack of its object – see, for all, France (Article 1128 and 1178 Code Civil), Italy (Articles 1346 and 1418 Codice Civile, (2), Spain (Article 1.272 Còdigo Civil), but also Germany before the Schuldrechtsreform of 2002 (§ 306 BGB former version); in some others, the same impossibility releases the contracting party from its obligation, following the Latin formula nemo ad impossibilia tenetur,40 but does not affect the validity of the contract. The contracting party is deemed liable for it only when the impossibility was attributable to his own conduct (in that sense the ‘new’ § 311 a BGB after the Schuldrechtsreform of 2002). 41 On one hand, the CISG declares that it does not cover the field of invalidity (Article 46 4(a) CISG), but, on the other, it provides a comprehensive regulation of exemptions (Articles 79–80 CISG), among which initial impossibility is included.42 In particular, Article 79(1) CISG provides:

Zimmermann (n 6) pp. 686–697. The duty to perform did not even arise, because initial impossibility affects the bound from the beginning: Huber, ‘Das geplante Recht der Leistungsstörungen’, in: Ernst & Zimmermann (eds), Zivilrechtswissenschaft und Schuldrechtsreform (2001), pp. 103–104. This does not impair the application of what the German law refers to as Nebenpflichten, now contained in the ‘new’ § 311 a BGB: Medicus, ‘Leistungsstörungsrecht’ in Haas, Medicus, Rolland, Schäfer & Wendtland (eds), Das neue Schuldrecht (Beck 2002) p. 96; recently, among others, Schwarze, Das Recht der Leistungsstörungen (2017) pp. 479 et seq. See also Dannemann & Schulze, BGB Kommentar (Beck, Nomos 2020), §§ 311–360. 41 ‘§ 311 a BGB Obstacle to performance when contract is entered into: ‘(1) A contract is not prevented from being effective by the fact that under § 275 (1) to (3) the obligor does not need to perform and the obstacle to performance already exists when the contract is entered into.’; see Dannemann & Schulze (n 40), §§ 311-360. The provision is intended to deprive of its relevance an element which is most of the time accidental: the exact moment when the impediment arose. From another equally important perspective, the provision is intended to deprive of its relevance an element which is most of the time critical: the exact moment in which the contract has been concluded. Nevertheless, as far as remedies are concerned, the rules on initial impossibility cannot be equal to the ones on ‘supervening’ impossibility (see Zimmermann [n 6] pp. 687–688). According to § 311a(2) BGB, ‘§ 311a(2) Obstacle to performance when contract is entered into: The obligee may, at his option, demand damages in lieu of performance or reimbursement of his expenses in the extent specified in § 284. This does not apply if the obligor was not aware of the obstacle to performance when entering into the contract and is also not responsible for his lack of awareness. § 281 (1) sentences 2 and 3 and (5) apply with the necessary modifications.’; see Canaris, ‘Schadenersatz wegen Pflichtverletzung, anfänglicher Unmöglichkeit und Aufwendungsersatz im Entwurf des Schuldrechtsmodernisierungsgesetzes’, DB (2001) 1815; Dauner-Lieb, ‘Das Leistungsstörungsrecht im Überblick’, in: Dauner Lieb, Heidel, Lepa & Ring, Das neue Schuldrecht (2002), p. 118; Pohlmann, Die Haftung wegen Verletzung von Aufklärungspflichten (2002), pp. 132–134; Grundmann, ‘Der Schadenersatzanspruch aus Vertrag’, 204 AcP 581. 42 Though the mentioned provisions are literally referred to ‘damages’ (Articles 74 et seq. CISG), they must be considered applicable to all ex empto remedies; see Tallon, ‘Art. 79’, in: Bianca & Bonell (n 31) pp. 572 et seq.; Ponzanelli, ‘Art. 79’, in: Bianca (ed), Convenzione di Vienna sui contratti di vendita internazionale di beni mobile. Le nuove leggi civili commentate (1989) 310 et seq. 39

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Chapter 11 Validity of Contract Terms A party is not liable for a failure to perform any of his obligations if he proves that the 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 it or its consequences.

It can be inferred a contrario from such provision that if the impediment, although not under the party’s control, is reasonably foreseeable or removable at the time of the formation of the contract, the same party will be liable for breach regardless of the impossibility to perform. It means that the contract is valid. Liability for breach of a merely ‘apparent’ obligation would in fact be inconceivable.43 48 If it is so, Article 79(1) CISG leads to believe that, within the scope of the CISG, initial impossibility does not entail invalidity of the sales, but liability of the contracting party, who could reasonably be expected to have taken the impediment into account, to have avoided or overcome it or its consequences.44 This way, opting out under Article 6 CISG also means eliminating the last wall against the infiltration of national laws: if validity is already committed to the latter in bulk, initial impossibility will also be at their mercy with the opt-out. 49 It would thus be incorrect to claim that in matters of validity the choice to opt out or not is of no practical consequence: actually, choosing not to opt out means committing the identification of which remedies deal with invalidity to the Convention, rather than to the law applicable by virtue of private international law. That could mean, for instance, taking initial impossibility away from the field of invalidity.45 50 Incidentally, the solution adopted by the CISG, particularly the one under Article 79(1) CISG is mirrored even more expressly in Article 3.1.3 PICC, 46 in Article 4.102 PECL and in Article II.–7:102 DCFR (and, as already mentioned, in the ‘new’ § 311 a BGB, too).47 This is further evidence of how well the CISG has played, also under this point of view, a leading role, the one of a real tool box, in the building up of a new common European sales law.48 47

c) Mistake as to Quality of the Goods 51

In the same direction – just to make further examples – the choice not to opt out of the CISG under its Article 6 means maintaining the system of remedies provided to protect the parties and, above all, preserving the right of the buyer to the conformity of the goods purchased. Therefore, according to the majority of scholars,49 not only would such system remain intact by applying the CISG but it would also be exhaustive and Scholars also mention Article 68 CISG (3rd statement): See Magnus (n 36) p. 143. Schwenzer & Hachem (n 36) p. 89. The consequence will be the application of Articles 45 et seq. CISG, dealing with the remedies of the buyer for breach of contract by the seller (see also Article 68 CISG); Bonelli, ‘Art. 74–77 CISG’, in: Bianca (n 42) pp. 297 et seq. 45 Sacco & De Nova, Il contratto (2016), p. 987. 46 See E.II below; Huber, ‘Article 3.2 PICC’, in: Vogenauer & Kleinheisterkamp (eds), Commentary on the UNIDROIT Principles of International Commercial Contracts (PICC) (2009), pp. 408–409. 47 Huber (n 40) pp. 128–131; more generally, Bach, Leistungshindernisse (2017), pp. 233 et seq., 465 et seq. 48 Lando, ‘CISG and its Followers: A Proposal to Adopt Some International Principles of Contract Law’, 53 Am J Comp L (2005) 379; Bonell, ‘The CISG, European Contract Law and the Development of a World Contract Law’, 56 Am J Comp L (2008) 1; DiMatteo, ‘How Innovative is the Common European Sales Law? Using the CISG as a Benchmark’, Contratto e impresa/Europa (2013) 512. 49 Huber, ‘UN-Kaufrecht und Irrtumsanfechtung’, ZeuP (1994) 585–602; Id., Irrtumsanfechtung und Sachmängelhaftung. Eine Studie zur Konkurrenzfrage vor dem Hintergrund der internationalen Vereinheitlichung des Vertragsrechts (2001); Niggemann, ‘Erreur sur une qualité substantielle de la chose et application de la C.V.I.M.’, International Business LJ (1994) 397. 43

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would prevail over the domestic remedies dealing with quality of the goods sold.50 This way, the buyer would be prevented from invoking the avoidability for mistake as to the quality of goods, which is a typical tool of national legislation, and so the only options available will be exact performance or the other remedies provided by Article 45 et seq. CISG. Here is another consequence of the due autonomous interpretation by virtue of Article 4(a) CISG.51

II. UNIDROIT Principles of International Commercial Contracts In dealing with invalidity the PICC chose a compromise-solution, which is quite 52 frequent in soft law experiments: referral to national laws is neither provided in bulk, unlike in Article 4(a) CISG, nor an exhaustive regulation exists on each of the issues mentioned in part B of this Chapter. Moreover, the model rules have not lost a certain trend towards self-restraint, even after their updating in 2016. A major role in this trend has been played by the ‘inherent complexity’ of the subject and its being dealt with by the national legal systems in an ‘extremely divers manner’.52 53 Articles 3.1.1 to 3.3.2 PICC, that is to say Chapter 3 PICC, need to be considered. Chapter 3: Validity Section 1: General Provisions Article 3.1.1 PICC Matters not covered. This Chapter does not deal with lack of capacity. 53 Article 3.1.2 PICC Validity of mere agreement. A contract is concluded, modified or terminated by the mere agreement of the parties, without any further requirement. 54 Article 3.1.3 PICC Initial impossibility. (1) The mere fact that at the time of the conclusion of the contract the performance of the obligation assumed was impossible does not affect the validity of the contract.55 (2) The mere fact that at the time of the conclusion of the contract a party was not entitled to dispose of the assets to which the contract relates does not affect the validity of the contract.

50 As masterfully said by Magnus (n 36) p. 133, ‘Die Konvention verdrängt das unvereinheitlichte nationale Recht (…) in allen Fällen, in denen sie bei funktional-autonomer Betrachtung einen Sachverhalt erfasst.’ (but see also p. 146); Schwenzer & Hachem (n 36) p. 90; Nivarra, ‘Rimedi: un nuovo ordine del discorso civilistico?’, Europa e diritto privato (2015) 586–587. 51 Niggemann (n 49) 397 et seq. More generally, Huber (n 49) pp 95 et seq., 177 et seq.; Ferrari, ‘The Interaction between the United Nations Conventions on Contracts for the International Sale of Goods and Domestic Remedies (Rescission for Mistake and Remedies in Tort Law)’, RabelsZ (2007) 52 et seq.; Tescaro, ‘Il concorso tIa i rimedi contrattuali di cui alla Convenzione di Vienna sulla vendita internazionale di beni mobile (CISG) e i rimedi domestici’, Contratto e impresa/Europa (2007) 321 et seq.; Favale, ‘Invalidità del contratto e vizi della cosa: la loro interferenza nel modello tedesco’, Rassegna di diritto civile (2014) 234 et seq. 52 See the official Comment to Article 3.1.1. PICC; Boodman, ‘The Myth of Harmonization of Laws’, Am J Comp L (1991) 701 et seq.; Mistelis, ‘Is Harmonisation a Necessary Evil? The Future of Harmonisation and New Sources of International Trade law’, in: Fletcher, Mistelis & Cremona (eds), Foundations and Perspectives of International Trade Law (2001), pp. 3 et seq.; Femia, ‘Desire for Text: Bridling the Divisional Strategy of Contract’, Law and Contemporary Problems (2013) 151 et seq. 53 In the 2004 edition Article 3.1 PICC excluded from the ‘matters covered’ not only the lack of capacity, lett. ‘a)’, but also the immorality or illegality of the agreement, lett. ‘b)’. The introduction to the 2010 edition of Articles 3.3.1 PICC (Contracts infringing mandatory rules) and 3.3.2 PICC (Restitution) made it necessary to modify the previous version of Article 3.1 by erasing lett. ‘b’. From the 2010 edition, PICC also deal with immorality or illegality, but in a very passive way (below, in text). This trend has been confirmed in the 2016 edition. 54 I.e. according to the PICC the ‘structural’ invalidity of the contract (B.II.1 above; → mn. 6) can only concern the parties’ agreement and not the possible additional requirements set by domestic rules: See the official Comment to Article 3.1.2 PICC; Huber (n 46) pp. 405 et seq. 55 Also the legislative concept of ‘impossibility’ has to be subject to autonomous interpretation, within the scope of the PICC, instead of transferred at a national level: Huber (n 46) p. 410.

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Chapter 11 Validity of Contract Terms Article 3.1.4 PICC Mandatory character of the provisions. The provisions on fraud, threat, gross disparity and illegality contained in this Chapter are mandatory.56 Section 2: Grounds for avoidance Article 3.2.1 PICC Definition of mistake. Mistake is an erroneous assumption relating to facts or to law existing when the contract was concluded. Article 3.2.2 PICC Relevant mistake. (1) A party may only avoid the contract for mistake if, when the contract was concluded, the mistake was of such importance that a reasonable person in the same situation as the party in error would only have concluded the contract on materially different terms or would not have concluded it at all if the true state of affairs had been known, and (a) the other party made the same mistake, or caused the mistake, or knew or ought to have known of the mistake and it was contrary to reasonable commercial standards of fair dealing to leave the mistaken party in error; or (b) the other party had not at the time of avoidance reasonably acted in reliance on the contract. (2) However, a party may not avoid the contract if (a) it was grossly negligent in committing the mistake; or (b) the mistake relates to a matter in regard to which the risk of mistake was assumed or, having regard to the circumstances, should be borne by the mistaken party. 57 Article 3.2.3 PICC Error in expression or transmission. An error occurring in the expression or transmission of a declaration is considered to be a mistake of the person from whom the declaration emanated. Article 3.2.4 PICC Remedies for non-performance. A party is not entitled to avoid the contract on the ground of mistake if the circumstances on which that party relies afford, or could have afforded, a remedy for non-performance.58 Article 3.2.5 PICC Fraud. A party may avoid the contract when it has been led to conclude the contract by the other party’s fraudulent representation, including language or practices, or fraudulent non-disclosure of circumstances which, according to reasonable commercial standards of fair dealing, the latter party should have disclosed.59 Article 3.2.6 PICC Threat. A party may avoid the contract when it has been led to conclude the contract by the other party’s unjustified threat which, having regard to the circumstances, is so imminent and serious as to leave the first party no reasonable alternative. In particular, a threat is unjustified if the act or omission with which a party has been threatened is wrongful in itself, or it is wrongful to use it as a means to obtain the conclusion of the contract. Article 3.2.7 PICC Gross disparity. (1) A party may avoid the contract or an individual term of it if, at the time of the conclusion of the contract, the contract or term unjustifiably gave the other party an excessive advantage.60 Regard is to be had, among other factors, to (a) the fact that the other party has taken unfair advantage of the first party’s dependence, economic distress or urgent needs, or of its improvidence, ignorance, inexperience or lack of bargaining skill, and (b) the nature and purpose of the contract. (2) Upon the request of the party entitled to avoidance, a court may adapt the contract or term in order to make it accord with reasonable commercial standards of fair dealing. (3) A court may also adapt the contract or term upon the request of the party receiving notice of avoidance, provided that that party informs the other party of its request promptly after receiving such notice and before the other party has reasonably acted in reliance on it. Article 3.2.10(2) applies accordingly.

56 Article 3.1.4 PICC was introduced in the 2010 edition and substitutes the previous Article 3.19 PICC (2004 edition). The 2016 edition PICC has confirmed this rule. 57 On this ground it has been underlined that ‘The PICC (…) set very high requirements for the avoidance of the contract for mistake’ and ‘are more in line those national legal systems that emphasize protecting the reliance of the other party on the contract rather than protecting the true will of the mistaken party’: Huber (n 46) 415. 58 See the official Comment to Article 3.2.4 PICC: ‘(…) preference is given to the remedies for non-performance since they seem to be better suited and are more flexible than the radical solution of avoidance’. 59 See the official Comment to Article 3.2.5 PICC: ‘(…) Fraud may be regarded as a special case of mistake caused by the other party’; Du Plessis, Article 3.8 PICC, in: Vogenauer & Kleinheisterkamp (n 25) pp. 434 et seq. 60 But according to the official Comment to Article 3.2.7 PICC, ‘(…). What is required is that the disequilibrium is in the circumstances so great as to shock the conscience of a reasonable person’; see Cartwright & Schmidt-Kessel, ‘Defects in Consent: Mistake, Fraud, Threats, Unfair Exploitation’, in: Dannemann & Vogenauer (eds), The Common European Sales Law in Context (2013), pp. 373 et seq.

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E. Sampling of Laws Article 3.2.8 PICC Third persons. (1) Where fraud, threat, gross disparity or a party’s mistake is imputable to, or is known or ought to be known by, a third person for whose acts the other party is responsible, the contract may be avoided under the same conditions as if the behaviour or knowledge had been that of the party itself. (2) Where fraud, threat or gross disparity is imputable to a third person for whose acts the other party is not responsible, the contract may be avoided if that party knew or ought to have known of the fraud, threat or disparity, or has not at the time of avoidance reasonably acted in reliance on the contract. Article 3.2.9 PICC Confirmation. If the party entitled to avoid the contract expressly or impliedly confirms the contract after the period of time for giving notice of avoidance has begun to run, avoidance of the contract is excluded. Article 3.2.10 PICC Loss of right to avoid. (1) If a party is entitled to avoid the contract for mistake but the other party declares itself willing to perform or performs the contract as it was understood by the party entitled to avoidance, the contract is considered to have been concluded as the latter party understood it. The other party must make such a declaration or render such performance promptly after having been informed of the manner in which the party entitled to avoidance had understood the contract and before that party has reasonably acted in reliance on a notice of avoidance. (2) After such a declaration or performance the right to avoidance is lost and any earlier notice of avoidance is ineffective. Article 3.2.11 PICC Notice of avoidance. The right of a party to avoid the contract is exercised by notice to the other party. Article 3.2.12 PICC Time limits. (1) Notice of avoidance shall be given within a reasonable time, having regard to the circumstances, after the avoiding party knew or could not have been unaware of the relevant facts or became capable of acting freely. (2) Where an individual term of the contract may be avoided by a party under Article 3.2.7, the period of time for giving notice of avoidance begins to run when that term is asserted by the other party. Article 3.2.13 PICC Partial avoidance. Where a ground of avoidance affects only individual terms of the contract, the effect of avoidance is limited to those terms unless, having regard to the circumstances, it is unreasonable to uphold the remaining contract. Article 3.2.14 PICC Retroactive effect of avoidance. Avoidance takes effect retroactively. Article 3.2.15 PICC Restitution. (1) On avoidance either party may claim restitution of whatever it has supplied under the contract, or the part of it avoided, provided that such party concurrently makes restitution of whatever it has received under the contract, or the part of it avoided. (2) If restitution in kind is not possible or appropriate, an allowance has to be made in money whenever reasonable. (3) The recipient of the performance does not have to make an allowance in money if the impossibility to make restitution in kind is attributable to the other party. (4) Compensation may be claimed for expenses reasonably required to preserve or maintain the performance received. 61 Article 3.2.16 PICC Damages. Irrespective of whether or not the contract has been avoided, the party who knew or ought to have known of the ground for avoidance is liable for damages so as to put the other party in the same position in which it would have been if it had not concluded the contract. Article 3.2.17 PICC Unilateral declarations. The provisions of this Chapter apply with appropriate adaptations to any communication of intention addressed by one party to the other. Section 3: Illegality Article 3.3.1 PICC Contracts infringing mandatory rules. (1) Where a contract infringes a mandatory rule, whether of national, international or supranational origin, applicable under Article 1.4 of these Principles, the effects of that infringement upon the contract are the effects, if any, expressly prescribed by that mandatory rule. (2) Where the mandatory rule does not expressly prescribe the effects of an infringement upon a contract, the parties have the right to exercise such remedies under the contract as in the circumstances are reasonable. (3) In determining what is reasonable regard is to be had in particular to: (a) the purpose of the rule which has been infringed; (b) the category of persons for whose protection the rule exists; (c) any sanction that may be imposed under the rule infringed; (d) the seriousness of the infringement; (e) whether one or both parties knew or ought to have known of the infringement; (f) whether the performance of the contract necessitates the infringement; and (g) the parties’ reasonable expectations. 61 The 2010 edition Articles 3.2.14 and 3.2.15 PICC, replace former 2004 edition, Article 3.17 PICC. The edition 2016 has confirmed the previous rule dating back to 2010.

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Chapter 11 Validity of Contract Terms Article 3.3.2 PICC Restitution. (1) Where there has been performance under a contract infringing a mandatory rule under Article 3.3.1, restitution may be granted where this would be reasonable in the circumstances. (2) In determining what is reasonable, regard is to be had, with the appropriate adaptations, to the criteria referred to in Article 3.3.1(3). (3) If restitution is granted, the rules set out in Article 3.2.15 apply with appropriate adaptations.

54

The PICC thus provide a set of model-rules on contractual validity, but among the possible grounds for and the different degrees of invalidity more attention is certainly paid to ‘structural’ invalidities (and above all to the defects of consent) while policy invalidities, even after the amendments of 2010 and the 2016 ‘new’ edition, are materially referred to other national or transnational sources.

III. Common European Sales Law (CESL) and the ‘New’ European Sales Law 55

The challenging project ‘on a Common European Sales Law’ (CESL)62 has been withdrawn by the EU Commission, as stated in Annex 2 to its 'Work Programme 2015. A New Start'.63 From the ashes of the CESL and, going further back, the preparatory work by the Draft Common Frame of Reference (DCFR),64 in December 2015 the EU Commission proposed a Directive ‘on certain aspects concerning contracts for the online and other distance sales of goods’ a Directive ‘on certain aspects concerning contracts for the supply of digital content’.65 At least in consumer contracts, this meant the return of two old ideas: the harmonization of the guarantees for lack of conformity and, what is more, the need for it to be a maximum harmonization, ‘homeward-trend-proof ’ even when inclined towards a stronger consumer protection.66 62 COM (2011) 635 final. Within the ordinary procedure (first reading) the EU Commission’s Draft had been submitted to the European Parliament legislative resolution of 26 February 2014 on the proposal for a regulation of the European Parliament and of the Council on a Common European Sales Law (COM [2011] 635); on that point, Groß, ‘Kaufrecht: Zustimmung des Parlaments zum Kommissionsvorschlag für ein Europäisches Kaufrecht’, EuZW (2014) 204 et seq.; Mayer & Lindemann, ‘Zu den aktuellen Entwicklungen um das Gemeinsame Europäische Kaufrecht auf EU-Ebene’, ZEuP (2014) 1 et seq.; Svoboda, ‘The Common European Sales Law – Will the Phoenix rise from the Ashes again?’, ZEuP (2015) 689 et seq. As to scholarly contributions, while they are numerous on the general issue of harmonization, on the CESL-Draft they have not had enough time to develop and then have been rarer: Schulze (ed), Common European Sales Law (CESL). Commentary (2012); Schmidt-Kessel (ed), Ein einheitliches europäisches Kaufrecht? (2012); Galgano, ‘Dai Princìpi UNIDROIT al Regolamento europeo sulla vendita’, Contratto e impresa/Europa (2012) 5–6; Gsell, ‘Der Verordnungsentwurf für ein Gemeinsames Europäisches Kaufrecht und die Problematik seiner Lücken’, in: Remien, Herrler & Limmer (eds), Gemeinsames Europäisches Kaufrecht für die EU (2012), pp. 145 et seq.; Alpa, Conte, Perfetti & Graf v. Westphalen (eds), The Proposed Common European Sales Law – The Lawyers’ View (‘2013); DiMatteo, ‘How Innovative is the Common European Sales Law? Using the CISG as a Benchmark’, Contratto e impresa/Europa (2013) 513. 63 COM(2014) 910 final, No. 60. See Canavan, ‘Contracts of sale’, in: Twigg-Flesner (n 12) p. 281 et seq. 64 See below IV., → mn. 61. 65 Respectively, COM(2015) 635 final and COM(2015) 634 final. Both are part of ‘A Digital Single Market Strategy for Europe’, COM (2015) 192, dating back to 6th May 2015; see Schulze, Staudenmayer & Lohsse (eds), Contracts for the supply of Digital Content (Nomos, Hart 2017); Schulze & Staudenmayer (eds), Digital Revolution: Challenges for Contract Law in Practice (Nomos, Hart 2016); De Franceschi (ed), European Contract Law and the Digital Single Market (Beck, Hart, Nomos 2016); Basedow, ‘European Contract Law and the Digital Agenda’, Contratto e impresa/Europa (2016) 423 et seq. 66 Among others, Howells, Twigg-Flesner & Wilhelmsson (eds), Rethinking EU Consumer Law (2018), pp. 167 et seq.; Stempel, ‘Der lange Weg zur Teilvereinheitlichung der AGB-Kontrolle in Europa – Die Rechtsprechung des EuGH zur Richtlinie 93/13’, ZEuP (2017) 106 et seq.; Fries, Verbraucherrechtsdurchsetzung (2016), pp. 108 et seq., pp. 187 et seq.; Tonner, ‘CESL and consumer contract law: integration or separation?’, Contratto e impresa/Europa (2012) 316 et seq.; Schulze, ‘The CESL’s Innovative Features – a Brief Overview’, Contratto e impresa/Europa (2013) 500–501.

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Yet, such proposals, for their very ambition towards full uniformity and their being 56 limited to ‘B2C’ online and distance sales, would have contributed to the disaggregation of the subject rather than to its cohesion.67 That is why the EU-Commission proved willing to fix such legislative fracture with the ‘Amended proposal' for a Directive on certain aspects concerning contracts for the online and other distance sales of goods, 68 the scope of which includes the offline and face-to-face sales (a compound of uniform rules meant to replace, rather than exist alongside, Directive 1999/44/EC). 69 The topic of digital contents and digital services, which would have required the amendment of COM(2015) 634, meanwhile remained dormant.70 The destiny of the ‘Amended Proposal’ seemed unfortunate. The experience with 57 Directive 11/83/EU and the increasing Euro-scepticism of the other institutions, above all the Council, made the iter advocated by the Commission little promising.71 A first sign of such difficulties came soon after from the Parliament with the ‘Motion for a legislative resolution’ that Parliamentary Commission IMCO, competent on the merits, had approved for the first reading on 22 February 2018.72 Yet, on 7 December 2018, almost unexpectedly, there was a speeding up by the very Council’s ‘general orientation’ that, far from hindering the procedure, basically maintained the layout suggested by the Commission and the Parliament.73 Thus, after the last cross-institutional negotiation and the final amendments, on 15 April 2019 the new ‘Directive (EU) 2019/771 of the European Parliament and of the Council of 20 May 2019 on certain aspects concerning contracts for the sale of goods, amending Regulation (EU) 2017/2394 and Directive 2009/22/EC, and repealing Directive 1999/44/EC’ was approved.74 On 15 April 2019 it was the turn of the new ‘Directive (EU) 2019/770 of the European Parliament and of the 67 Wagner, ‘Der Verbrauchsgüterkauf in den Händen des EuGH: Überzogener Verbraucherschutz oder ökonomische Rationalität?’, ZEuP (2016) 87 et seq. 68 COM(2017) 637 final. See Ferrante, ‘The Amended Proposal COM (2017) 637: a ‘New’ European Sales Law?’, in: Janssen & Schulte-Nölke (eds), Researches in European Private Law and Beyond (Contributions in Honour of Reiner Schulze’s Seventieth Birthday) (2020), pp. 43 et seq. 69 Directive 1999/44, with its almost ‘fearful-of-national-peculiarities’ attitude, did not actually bring any uniformity. At most, it reconnected some aspects of the guarantees for lack of conformity; see Grundmann, Medicus & Rolland (eds), Europäisches Kaufgewährleistungsrecht (2000); Grundmann & Bianca (eds), EU-Kaufrechts-Richtlinie (2002); Schermaier (ed), Verbraucherkauf in Europa (2003); Mazzamuto, La vendita di beni di consumo, in: Castronovo & Mazzamuto (eds), Manuale di diritto privato europeo II (2007), pp. 879 et seq.; Zerres, Die Bedeutung der Verbrauchsgüterkaufrichtlinie für die Europäisierung des Vertragsrechts (2007), passim. This way, the original fragmentation of national systems had been replaced by a new one, introduced by the divergent implementation choices made by national legislators and by the necessity to coordinate them with the extant normative framework; see Basedow, ‘Der Europäische Gerichtshof und das Privatrecht’, 210 AcP (2010) 157 et seq.; Id, ‘Der Europäische Gerichtshof und die Klauselrichtlinie 93/13: Der verweigerte Dialog’, in: FS Hirsch (2008), pp. 51 et seq. Indeed, the idea of the ‘Amended proposal’ was all but new: the EU Commission had already tried once to replace Directive 1999/44 and its minimum harmonization, namely when it issued the original project of what would have then become Directive 2011/83/EU. The result was far below expectations: that, which had been announced as the ‘maxi-Directive’ on consumer protection, turned into nothing but a maquillage of extant provisions (perhaps with a few exceptions). As it is well-known, the attempt was vane: the final version of Directive 2011/83 did not provide any uniform regulation for the remedies at issue; see Gsell, ‘Europäischer Richtlinien-Entwurf für vollharmonisierte Mängelrechte beim Verbraucherkauf – Da capo bis zum Happy End?’, ZEuP (2018) 502. 70 Basedow, ‘Verbrauchermobilität und europäisches Konsumentenrecht’, ZEuP (2016) 1 et seq. 71 Zoll, ‘The problems associated with the implementation of directives into national legal systems – a few examples from the codified legal traditions’, in: Twigg-Flesner (n 12) pp. 68 et seq.; Nivarra (n 50) 586–587; Moscati, ‘La vendita di beni di consumo: un dilemma tra garanzia e responsabilità’, Rivista di diritto civile (2016) 354–355. 72 A8-0043/2018, 27 February 2018, available on the EU Parliament website. 73 https://data.consilium.europa.eu/doc/document/ST-14951-2018-COR-1/it/pdf. 74 In [2019] OJ L136/28.

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Council of 20 May 2019 on certain aspects concerning contracts for the supply of digital content and digital services’.75 According to Article 24 Directive 19/771/EU, the Member States must implement it by 1 July 2021 and apply the measures adopted from 1 January 2022.76 58 So the CESL is, at least temporarily, out of the legislative dialogue, but it cannot and must not be left aside from interpretative reflection.77 It is a gamble that European private law cannot afford to lose, even though, after the latest developments, the whole movement seems to be ‘in a headwind’.78 It can be considered however as the ripest attempt of providing European sales law with a ‘common home’ and has reached a width and depth of contents unachieved by any other subsequent experience79, including the two 2019 Directives (EU 2019/770 and 2019/771). Though, the latter do not provide any rule on contract validity, while the CESL devotes to the issue a rather substantial set of provisions, which basically resume some of the guidelines just illustrated in the sampling of PICC.80 59 Articles 48 to 57 CESL (i.e. Chapter 5): Chapter 5 Defects in consent Article 48 CESL Mistake. 1. A party may avoid a contract for mistake of fact or law existing when the contract was concluded if: (a) the party, but for the mistake, would not have concluded the contract

75 In [2019] OJ L136/1, which fulfils the programmatic plan of Draft COM (2015) 634. See Ferrante, ‘La Direttiva 19/771/UE in materia di vendita al consumo: primi appunti’, in: D’Angelo & Roppo (eds), Annuario del Contratto 2018 (2019), pp. 23 et seq. 76 Under Directive (EU) 2019/771, Article 19(1) ‘Member States shall ensure that adequate and effective means exist to ensure compliance with this Directive'; while point 2, again in the name of effectiveness, makes reference to collective litigation tools, which seem to be the object of a growing interest by European Institutions (the topic is anticipated in recitial 64 of Directive (EU) 2019/771; see furthermore COM (2018) 184, of 11 April 2018, containing the 'Proposal for a Directive of the European Parliament and of the Council on representative actions for the protection of the collective interests of consumers, and repealing Directive 2009/22/EC’). 77 Wagner (n 67) 87 et seq.; Graziadei, ‘Fostering a European legal identity through contract and consumer law’, in: Twigg-Flesner (n 12) pp. 82 et seq.; Alpa, ‘Comparazione e diritto straniero nella giurisprudenza della Corte di Giustizia dell’Unione europea’, Contratto e impresa (2016) 879 et seq.; Fries (n 66) pp. 108 et seq., 187 et seq. 78 With these words, Schulze, ‘Europäisches Privatrecht im Gegenwind’, ZEuP (2014) 691; recently Id, ‘Towards a European Business Code?’, Contratto e impresa/Europa (2016) 413 et seq.; Alpa, Diritto privato europeo (2016), p. 23. The debate is old: Hondius, ‘Towards a European Civil Code: the debate has started’, ERPL (1997) 455 et seq.; Basedow, ‘Un comune diritto dei contratti per il mercato commune’, Contratto e impresa/Europa (1997) 83–84 (more recently Id, ‘Codification of Private Law in the European Union: The Making of a Hybrid’, ERPL (2001) 35); Bonell, ‘Verso un codice europeo dei contratti?’, Europa e diritto privato (1998) 183 et seq.; Kötz, ‘Alte und neue Aufgaben der Rechtsvergleichung’, JZ (2002) 259 et seq.; Id, ‘Savigny v. Thibaut und das gemeineuropäische Zivilrecht’, ZEuP (2002) 432; Schwintowski, ‘Auf dem Wege zu einem Europäischen Zivilgesetzbuch’, JZ (2002) 205 et seq.; Grundmann, ‘Harmonisierung, Europäischer Kodex, Europäisches System der Vertragsrechte’, NJW (2002) 393 et seq.; Rodotà, ‘Il codice civile e il processo costituente europeo’, in: Somma (ed), Giustizia sociale e mercato nel diritto europeo dei contratti (2007), pp. 195 et seq.; Max-Planck-Institut, ‘Policy Options for Progress Towards a European Contract Law’, RabelsZ (2011) 420 et seq.; Alpa, ‘Towards a European Contract Law’, Contratto e impresa/Europa (2012) 124. 79 Battelli, I contratti-tipo (2017), p. 115; Id, ‘La contrattazione secondo schemi negoziali nell’evoluzione del diritto privato europeo’, Contratto e impresa/Europa (2017) 292; Magnus, ‘UN-Kaufrecht – Konsolidierung und Ausbau nach innen und gleichzeitig Erodierung von außen? Aktuelles zum CISG’, ZEuP (2015) 178; Peleggi, ‘Il progetto di Regolamento sul diritto comune europeo della vendita: una breve analisi nell’ottica dell’applicazione ai rapporti tra imprese’, Contratto e impresa/Europa (2014) 635. 80 Pietrzyk, ‘General Standards for the Interpretation of Contracts under the Common European Sales Law’, ZEuP (2014) 371 et seq.; Mak, ‘The Role of Trade Usages in the CESL’, ECLR (2014) 64 et seq.

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E. Sampling of Laws or would have done so only on fundamentally different contract terms81 and the other party knew or could be expected to have known this; and (b) the other party: (i) caused the mistake; (ii) caused the contract to be concluded in mistake by failing to comply with any pre-contractual information duty under Chapter 2, Sections 1 to 4; (iii) knew or could be expected to have known of the mistake and caused the contract to be concluded in mistake by not pointing out the relevant information, provided that good faith and fair dealing would have required a party aware of the mistake to point it out; or (iv) made the same mistake. 2. A party may not avoid a contract for mistake if the risk of the mistake was assumed, or in the circumstances should be borne, by that party.82 3. An inaccuracy in the expression or transmission of a statement is treated as a mistake of the person who made or sent the statement.83 Article 49 CESL Fraud. 1. A party may avoid a contract if the other party has induced the conclusion of the contract by fraudulent misrepresentation, whether by words or conduct, or fraudulent nondisclosure of any information which good faith and fair dealing, or any pre- contractual information duty, required that party to disclose. 2. Misrepresentation is fraudulent if it is made with knowledge or belief that the representation is false, or recklessly as to whether it is true or false, and is intended to induce the recipient to make a mistake. Non-disclosure is fraudulent if it is intended to induce the person from whom the information is withheld to make a mistake. 3. In determining whether good faith and fair dealing require a party to disclose particular information, regard should be had to all the circumstances, including: (a) whether the party had special expertise; (b) the cost to the party of acquiring the relevant information; (c) the ease with which the other party could have acquired the information by other means; (d) the nature of the information; (e) the apparent importance of the information to the other party; and (f) in contracts between traders good commercial practice in the situation concerned.84 Article 50 CESL Threats. A party may avoid a contract if the other party has induced the conclusion of the contract by the threat of wrongful, imminent and serious harm, or of a wrongful act. 85 Article 51 CESL Unfair exploitation. A party may avoid a contract if, at the time of the conclusion of the contract: (a) that party was dependent on, or had a relationship of trust with, the other party, was in economic distress or had urgent needs, was improvident, ignorant, or inexperienced; and (b) the other party knew or could be expected to have known this and, in the light of the circumstances and purpose of the contract, exploited the first party’s situation by taking an excessive benefit or unfair advantage.86 Article 52 CESL Notice of avoidance. 1. Avoidance is effected by notice to the other party. 87 2.A notice of avoidance is effective only if it is given within the following period after the avoiding party

81 As Article II.–7.201 DCFR, Article 48 CESL requires ‘fundamentally different contract terms’, whereas Article 3.2.2(1) PICC sets the broader standard of ‘materially different terms’; for that reason Article 48 CESL has been criticized by Pfeiffer, Article 48 CESL, in: Schulze (n 62) p. 264. 82 Article II.–7.201 DCFR (part E.IV below); Article 4:103 PECL; Article 3.2.2 PICC (part E.II above). As well as the DCFR, the CESL neither contains a definition of ‘mistake’, which can be found instead in Article 3.2.1 PICC, nor expressly exclude the right of the mistaken party to avoid the contract in case of gross negligence, as provided by Article 3.2.2 PICC. 83 Article II.–7.202 DCFR (part E.IV below); Article 3.2.3 PICC (part E.II above; → mn. 52). 84 Article II.–7.205 DCFR (part E.IV below); Article 4:107 PECL; Article 3.2.5 PICC (part E.II above; → mn. 52), where the expression ‘reasonable commercial standards of fair dealing’ is preferred to the ‘good faith and fair dealing’ in the CESL. But one cannot underestimate that the CESL includes provisions for both ‘B2B’ and ‘B2C’ contracts: see Ferrante, ‘Alcune considerazioni “malgrado” o “contro” la buona fede dopo la rettifica della dir. Ce 13/93’, Rivista trimestrale di diritto e procedura civile (2017) 559 et seq.; whereas the PICC are only concerned with ‘commercial’ i.e. ‘B2B’ contracts, and with ‘reasonable commercial standards’ (Pfeiffer (n 82) p. 267; Kötz, Europäisches Vertragsrecht (2015), p. 198; Navarretta, ‘Good Faith and Reasonableness in European Contract Law’, in: Rutgers & Sirena (eds), Rules and Principles in European Contract Law (2015), pp. 135 et seq. 85 Article II.–7:206(1) DCFR (part E.IV below; → mn. 61), where the additional concept of ‘coercion’ is addressed; Article 3.2.6 PICC (‘a more precise rule’: Pfeiffer (n 82) p. 273). 86 Article II.–7.207 DCFR (part E.IV below); Article 4:109 PECL; Article 3.2.7 PICC (part E.II above; → mn. 52), dealing with ‘gross disparity’ instead of ‘unfair exploitation’. 87 Article II.–7.209 DCFR (part E.IV below; → mn. 61); Article 4:112 PECL; Article 3.2.11 PICC (part E.II above, → mn. 52).

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Chapter 11 Validity of Contract Terms becomes aware of the relevant circumstances or becomes capable of acting freely: (a) six months in case of mistake; and (b) one year in case of fraud, threats and unfair exploitation.88 Article 53 CESL Confirmation. Where the party who has the right to avoid a contract under this Chapter confirms it, expressly or impliedly, after becoming aware of the relevant circumstances, or becoming capable of acting freely, that party may no longer avoid the contract.89 Article 54 CESL Effects of avoidance. 1. A contract which may be avoided is valid until avoided but, once avoided, is retrospectively invalid from the beginning.90 2. Where a ground of avoidance affects only certain contract terms, the effect of avoidance is limited to those terms unless it is unreasonable to uphold the remainder of the contract.91 3. The question whether either party has a right to the return of whatever has been transferred or supplied under a contract which has been avoided, or to a monetary equivalent, is regulated by the rules on restitution in Chapter 17.92 Article 55 CESL Damages for loss. A party who has the right to avoid a contract under this Chapter or who had such a right before it was lost by the effect of time limits or confirmation is entitled, whether or not the contract is avoided, to damages from the other party for loss suffered as a result of the mistake, fraud, threats or unfair exploitation, provided that the other party knew or could be expected to have known of the relevant circumstances.93 Article 56 CESL Exclusion or restriction of remedies. 1. Remedies for fraud, threats and unfair exploitation cannot be directly or indirectly excluded or restricted. 2. In relations between a trader and a consumer the parties may not, to the detriment of the consumer, directly or indirectly exclude or restrict remedies for mistake.94 Article 57 CESL Choice of remedy. A party who is entitled to a remedy under this Chapter in circumstances which afford that party a remedy for non-performance may pursue either of those remedies.95

60

In the same direction of the PICC, but with an even more synthetic approach, the CESL only focused on what the continental-Europe tradition generally refers to as Willensmängel or vices du consentement or vizi del volere. One more ground was added, which does not belong either to such tradition or to the PICC (whose Article 3.2.7. refers to ‘gross disparity’) but is borrowed from the DCFR (Article II.–7:207 DCFR): unfair exploitation (Article 51 CESL).96

IV. Draft Common Frame of Reference (and Principles of European Contract Law) 61

It could sound redundant to give so much consideration to the DCFR (and to its predecessor, the Principles of European Contract Law or PECL) in this context 97: on 88 Article II.–7.210 DCFR (part E.IV below; → mn. 61); Article 4:113 PECL; Article 3.2.12 PICC (part E.II above; → mn. 52). 89 Article II.–7.211 DCFR (part E.IV below; → mn. 61); Article 4:114 PECL; Article 3.2.9 PICC (part E.II above; → mn. 52). 90 Article II.–7.212(1) DCFR (part E.IV below; → mn. 61); Article 3.2.14 PICC (part E.II above). 91 Article II.–7.213 DCFR (part E.IV below; → mn. 61); Article 4:116 PECL; Article 3.2.13 PICC (part E.II above; → mn. 52). 92 Article II.–7.212(2) DCFR (part E.IV below; → mn. 61); Article 4:115 PECL; Article 3.2.15 PICC (part E.II above; → mn. 52). 93 Article II.–7.214(1) DCFR (part E.IV below); Article 4:117 PECL; Article 3.2.16 PICC (part E.II above; → mn. 52). 94 Article II –7.215 DCFR, with some differences (see part E.IV below; → mn. 61); Article 4:118 PECL. 95 Article II.–7.216 DCFR (part E.IV below; → mn. 61); Article 4:119 PECL; Article 3.2.4 PICC (part E.II above; → mn. 52), whose diversity from Article 57 CESL is remarkable (see Pfeiffer (n 82) p. 301). 96 Cartwright & Schmidt-Kessel, ‘Defects in Consent: Mistake, Fraud, Threats, Unfair Exploitation’, in: Dannemann & Vogenauer (n 60) pp. 373 et seq. 97 Alpa & Conte, ‘Riflessioni sul progetto di Common Frame of Reference e sulla revisione dell’Aquis Communautaire’, Rivista di diritto civile (2008) 141 et seq.; Eidenmüller et al., ‘Der Gemeinsame Referenzrahmen für das Europäische Privatrecht’, JZ (2008) 529 et seq.; Schulte-Nölke, ‘Restatement – nicht

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one side, the DCFR (as well as the PECL) has found its ‘natural precipitate’ in the CESL, so that the background to the provisions of the CESL could be widely recalled, too;98 on the other side, the DCFR (as well as the PECL) will hardly earn any direct practical relevance, so that the importance awarded to it in this seat would not be easily justifiable. Therefore, the growth of the CESL – as a possible basis for future European legisla- 62 tion— and its subsequent (maybe temporary) ‘collapse’, as well as the low chance that the DCFR (and PECL) will one day become the law in force, do not prevent this latter restatement from being a necessary reference point for a wide range of scholars across the globe.99 Chapter 7: Grounds of invalidity Section I: General provisions II.–7:101 DCFR Scope. (1) This Chapter deals with the effects of: (a) mistake, fraud, threats, or unfair exploitation; and (b) infringement of fundamental principles or mandatory rules. (2) It does not deal with lack of capacity. (3) It applies in relation to contracts and, with any necessary adaptations, other juridical acts. II.–7:102 DCFR Initial impossibility or lack of right or authority to dispose. A contract is not invalid, in whole or in part, merely because at the time it is concluded performance of any obligation assumed is impossible, or because a party has no right or authority to dispose of any assets to which the contract relates. Section 2: Vitiated consent or intention II.–7:201 DCFR Mistake. (1) A party may avoid a contract for mistake of fact or law existing when the contract was concluded if: (a) the party, but for the mistake, would not have concluded the contract or would have done so only on fundamentally different terms and the other party knew or could reasonably be expected to have known this; and (b) the other party; (i) caused the mistake; (ii) caused the contract to be concluded in mistake by leaving the mistaken party in error, contrary to good faith and fair dealing, when the other party knew or could reasonably be expected to have known of the mistake; (iii) caused the contract to be concluded in mistake by failing to comply with a pre-contractual information duty or a duty to make available a means of correcting input errors; or (iv) made the same mistake. (2) However a party may not avoid the contract for mistake if: (a) the mistake was inexcusable in the circumstances; or (b) the risk of the mistake was assumed, or in the circumstances should be borne, by that party. II.–7:202 DCFR Inaccuracy in communication may be treated as mistake. An inaccuracy in the expression or transmission of a statement is treated as a mistake of the person who made or sent the statement. II.–7:203 DCFR Adaptation of contract in case of mistake. (1) If a party is entitled to avoid the contract for mistake but the other party performs, or indicates a willingness to perform, the obligations under the contract as it was understood by the party entitled to avoid it, the contract is treated as having been concluded as that party understood it. This applies only if the other party performs, or indicates a willingness to perform, without undue delay after being informed of the manner in which the party entitled to avoid it understood the contract and before that party acts in reliance on any notice of avoidance. (2) After such performance or indication the right to avoid is lost and any earlier

Kodifikation: Arbeiten am Gemeinsamen Referenzrahmen für ein europäisches Vertragsrecht’, in: Remien (ed), Schuldrechtsharmonisierung und Europäisches Vertragsrecht (2008), pp. 26 et seq.; Alpa et al. (eds), Il Draft Common Frame of Reference del diritto privato europeo (2009); Schmidt-Kessel (ed), Der gemeinsame Referenzrahmen: Entstehung, Inhalte, Anwendung (2009); Castronovo, ‘L’utopia della codificazione europea e l’oscura Realpolitik di Bruxelles dal DCFR alla proposta di regolamento di un diritto comune europeo della vendita’, Europa e diritto privato (2011) 837 et seq.; Vogenauer, ‘The DCFR and the CESL as Models for Law Reform’, in: Dannemann & Vogenauer (n 60) pp. 732 et seq. The core idea of DCFR has been the research of the ‘best rule’: Schulze, ‘Vom Entwurf für einen Gemeinsamen Referenzrahmen zum optionalen Europäischen Vertragsrecht’, in: Ebke et al. (eds), Das deutsche Wirtschaftsrecht unter dem Einfluss des US-amerikanischen Rechts (2011), pp. 120 et seq. 98 Vogenauer (n 98) pp. 732 et seq. 99 Schulze (n 78) 413 et seq.; Dupichot, ‘Vom Brexit zum Europäischen Wirtschaftsgesetzbuch’, ZEuP (2017) 245 et seq.

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Chapter 11 Validity of Contract Terms notice of avoidance is ineffective. (3) Where both parties have made the same mistake, the court may at the request of either party bring the contract into accordance with what might reasonably have been agreed had the mistake not occurred. II.–7:204 DCFR Liability for loss caused by reliance on incorrect information. (1) A party who has concluded a contract in reasonable reliance on incorrect information given by the other party in the course of negotiations has a right to damages for loss suffered as a result if the provider of the information: (a) believed the information to be incorrect or had no reasonable grounds for believing it to be correct; and (b) knew or could reasonably be expected to have known that the recipient would rely on the information in deciding whether or not to conclude the contract on the agreed terms. (2) This Article applies even if there is no right to avoid the contract. II.–7:205 DCFR Fraud. (1) A party may avoid a contract when the other party has induced the conclusion of the contract by fraudulent misrepresentation, whether by words or conduct, or fraudulent non-disclosure of any information which good faith and fair dealing, or any pre-contractual information duty, required that party to disclose. (2) A misrepresentation is fraudulent if it is made with knowledge or belief that the representation is false and is intended to induce the recipient to make a mistake. A non-disclosure is fraudulent if it is intended to induce the person from whom the information is withheld to make a mistake. (3) In determining whether good faith and fair dealing required a party to disclose particular information, regard should be had to all the circumstances, including: (a) whether the party had special expertise; (b) the cost to the party of acquiring the relevant information; (c) whether the other party could reasonably acquire the information by other means; and (d) the apparent importance of the information to the other party. II.–7:206 DCFR Coercion or threats. (1) A party may avoid a contract when the other party has induced the conclusion of the contract by coercion or by the threat of an imminent and serious harm which it is wrongful to inflict, or wrongful to use as a means to obtain the conclusion of the contract. (2) A threat is not regarded as inducing the contract if in the circumstances the threatened party had a reasonable alternative. II.–7:207 DCFR Unfair exploitation. (1) A party may avoid a contract if, at the time of the conclusion of the contract: (a) the party was dependent on or had a relationship of trust with the other party, was in economic distress or had urgent needs, was improvident, ignorant, inexperienced or lacking in bargaining skill; and (b) the other party knew or could reasonably be expected to have known this and, given the circumstances and purpose of the contract, exploited the first party’s situation by taking an excessive benefit or grossly unfair advantage. (2) Upon the request of the party entitled to avoidance, a court may if it is appropriate adapt the contract in order to bring it into accordance with what might have been agreed had the requirements of good faith and fair dealing been observed. (3) A court may similarly adapt the contract upon the request of a party receiving notice of avoidance for unfair exploitation, provided that this party informs the party who gave the notice without undue delay after receiving it and before that party has acted in reliance on it. II.–7:208 DCFR Third persons. (1) Where a third person for whose acts a party is responsible or who with a party’s assent is involved in the making of a contract: (a) causes a mistake, or knows of or could reasonably be expected to know of a mistake; or (b) is guilty of fraud, coercion, threats or unfair exploitation, remedies under this Section are available as if the behaviour or knowledge had been that of the party. (2) Where a third person for whose acts a party is not responsible and who does not have the party’s assent to be involved in the making of a contract is guilty of fraud, coercion, threats or unfair exploitation, remedies under this Section are available if the party knew or could reasonably be expected to have known of the relevant facts, or at the time of avoidance has not acted in reliance on the contract. II.–7:209 DCFR Notice of avoidance. Avoidance under this Section is effected by notice to the other party. II.–7:210 DCFR Time. A notice of avoidance under this Section is ineffective unless given within a reasonable time, with due regard to the circumstances, after the avoiding party knew or could reasonably be expected to have known of the relevant facts or became capable of acting freely. II.–7:211 DCFR Confirmation. If a party who is entitled to avoid a contract under this Section confirms it, expressly or impliedly, after the period of time for giving notice of avoidance has begun to run, avoidance is excluded. II.–7:212 DCFR Effects of avoidance. (1) A contract which may be avoided under this Section is valid until avoided but, once avoided, is retrospectively invalid from the beginning. (2) The question

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E. Sampling of Laws whether either party has a right to the return of whatever has been transferred or supplied under a contract which has been avoided under this Section, or a monetary equivalent, is regulated by the rules on unjustified enrichment. (3) The effect of avoidance under this Section on the ownership of property which has been transferred under the avoided contract is governed by the rules on the transfer of property. II.–7:213 DCFR Partial avoidance. If a ground of avoidance under this Section affects only particular terms of a contract, the effect of an avoidance is limited to those terms unless, giving due consideration to all the circumstances of the case, it is unreasonable to uphold the remaining contract. II.–7:214 DCFR Damages for loss. (1) A party who has the right to avoid a contract under this Section (or who had such a right before it was lost by the effect of time limits or confirmation) is entitled, whether or not the contract is avoided, to damages from the other party for any loss suffered as a result of the mistake, fraud, coercion, threats or unfair exploitation, provided that the other party knew or could reasonably be expected to have known of the ground for avoidance. (2) The damages recoverable are such as to place the aggrieved party as nearly as possible in the position in which that party would have been if the contract had not been concluded, with the further limitation that, if the party does not avoid the contract, the damages are not to exceed the loss caused by the mistake, fraud, coercion, threats or unfair exploitation. (3) In other respects the rules on damages for non-performance of a contractual obligation apply with any appropriate adaptation. II.–7:215 DCFR Exclusion or restriction of remedies. (1) Remedies for fraud, coercion, threats and unfair exploitation cannot be excluded or restricted. (2) Remedies for mistake may be excluded or restricted unless the exclusion or restriction is contrary to good faith and fair dealing. II.–7:216 DCFR Overlapping remedies. A party who is entitled to a remedy under this Section in circumstances which afford that party a remedy for non-performance may pursue either remedy. Section 3: Infringement of fundamental principles or mandatory rules II.–7:301 DCFR Contracts infringing fundamental principles. A contract is void to the extent that: (a) it infringes a principle recognised as fundamental in the laws of the Member States of the European Union; and (b) nullity is required to give effect to that principle. II.–7:302 DCFR Contracts infringing mandatory rules. (1) Where a contract is not void under the preceding Article but infringes a mandatory rule of law, the effects of that infringement on the validity of the contract are the effects, if any, expressly prescribed by that mandatory rule. (2) Where the mandatory rule does not expressly prescribe the effects of an infringement on the validity of a contract, a court may: (a) declare the contract to be valid; (b) avoid the contract, with retrospective effect, in whole or in part; or (c) modify the contract or its effects. (3) A decision reached under paragraph (2) should be an appropriate and proportional response to the infringement, having regard to all relevant circumstances, including: (a) the purpose of the rule which has been infringed; (b) the category of persons for whose protection the rule exists; (c) any sanction that may be imposed under the rule infringed; (d) the seriousness of the infringement; (e) whether the infringement was intentional; and (f) the closeness of the relationship between the infringement and the contract. II.–7:303 DCFR Effects of nullity or avoidance. (1) The question whether either party has a right to the return of whatever has been transferred or supplied under a contract, or part of a contract, which is void or has been avoided under this Section, or a monetary equivalent, is regulated by the rules on unjustified enrichment. (2) The effect of nullity or avoidance under this Section on the ownership of property which has been transferred under the void or avoided contract, or part of a contract, is governed by the rules on the transfer of property. (3) This Article is subject to the powers of the court to modify the contract or its effects. II.–7:304 DCFR Damages for loss. (1) A party to a contract which is void or avoided, in whole or in part, under this Section is entitled to damages from the other party for any loss suffered as a result of the invalidity, provided that the first party did not know and could not reasonably be expected to have known, and the other party knew or could reasonably be expected to have known, of the infringement. (2) The damages recoverable are such as to place the aggrieved party as nearly as possible in the position in which that party would have been if the contract had not been concluded or the infringing term had not been included.

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V. National Laws Although the sampling of laws above is limited to the CISG, PICC, CESL, DCFR (and PECL), it illustrates the extent of the topics involved as well as the many associated provisions. Accordingly, any attempt to summarize the single national rules on contractual validity in this framework would be unrealistic, if not useless. It would in fact be impossible to reduce to a short report such rich and diverse contents as those displayed by the ‘old’ European codes, Anglo-American statutory and case law, and Chinese legislation. 64 In this place one can only remark that new provisions on contract validity were introduced in France by Ordonnance n° 2016-131 (of 10 February 2016), that amended Articles 1128–1171 Code civil. 65 Moreover, the ‘General Rules of the Civil Law of the People’s Republic of China’, come into force on 1 October 2017, devote a specific ‘Chapter VI’, ‘Section 3’, to the ‘Validity of Civil Juristic Acts’, including provisions on contracts. 66 At the same time, this forgone conclusion explains why international traders and frequent-contracting parties normally aim to exclude any possible interference from national laws by shaping their own contractual relationship themselves. 63

F. Commentary 67

A summary assessment of the above sampling of laws allows to identify different legislative strategies related to invalidity: –

–

–

–

360

the CISG contains a bulk reference to the law applicable by virtue of international private law, as results from Article 4(a) CISG, but this applies unless otherwise expressly provided by the Convention itself (bear in mind freedom of form under Article 11 CISG); therefore, if the Convention is applicable, also the meaning of invalidity will have to be reconstructed in light thereof rather than under the system to which it (impliedly) refers; the consequence is that, once the Convention is deemed applicable, some issues considered by certain systems as grounds for invalidity will have to be solved ‘autonomously’ and such solution will thus potentially differ from the one imposed by strictly national rules. The PICC, above all in their 2010 version, have chosen the road less travelled, as they provide specific rules on invalidity (Chapter 3, Articles 3.1.1–3.3.2. PICC); therefore, more attention is paid to the ‘structural’ invalidities and, in particular, to the defects of consent (mistake, fraud, duress, gross disparity), while, as far as illegality is concerned – which encompasses public or private policy matters – the PICC essentially refer to other national or transnational sources (Articles 3.3.1 et seq. PICC); the same happens for the lack of capacity issue (Article 3.1.1 PICC). In the same direction, but with more sober rules, the CESL only deals with defects of consent (among which the unfair exploitation under Article 51 CESL, instead of the gross disparity provided by Article 3.2.7. PICC); it is a compact and operational set of provisions, though deliberately non-exhaustive. But the CESL is not going to be law in force, at least not soon and certainly not in its original version. As to the DCFR, summa of contemporary European private law, it is easy to remark that its acquis on validity has been implemented and filtrated by the CESL, which

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G. Practitioner Tips

–

should have been its ‘practical’ version, suitable for both judicial and extra-judicial application.100 Finally, what remains in the background, but is not less remarkable, is national law, i.e. the natural seat of invalidity and its grounds; and, as already outlined, their role, either in the negotiations or in the drafting of the regulation, will relevantly vary depending on the balanced or unbalanced nature of the contractual relationship; in the first case, the parties will tend to give it a role as marginal as possible, thus making it easier to reach the agreement; in the second case, national law of the stronger party will ultimately prevail, even when it is not so favorable to such party.

G. Practitioner Tips In an international trade-friendly perspective, practitioner tips cannot refrain from 68 an accurate case-by-case assessment. First, we should understand if the company asking for legal advice in the drafting and management of the transnational contract is in a bargaining position equal to the other party (I) or finds itself (as often occurs) in a highly unbalanced relationship (II). In fact, the subject cannot be regarded from a neutral point of view: one matter is 69 to consider a scenario in which the other party can actually have an impact, a different aspect is to consider one where a party has the power to establish contractual terms unilaterally and the other can only ‘take it or leave it’. Tips must be designed by taking those variables into account: especially at an international stage, the parties’ bargaining power is fixed by an ‘in-the-wild’ market and provisions on invalidity, despite their mandatory nature, are ultimately subdued to the economic game rules.101

I. Balanced Contractual Relationships In the context of balanced cross-border transactions the parties’ ambition is gener- 70 ally to make the contract as ‘national-law proof ’ as possible, in order to help the parties reach an agreement (neither party would accept being subject to the validity requirements and tests imposed by the national law of the other). Given that it is both unrealistic and inconvenient to impose whatever national law, different and competing strategies will be possible to safeguard the above-mentioned impenetrability: –

To agree on arbitration clauses aiming at detaching the contract from national jurisdiction and committing it to international arbitrators;102 this can favor the (even just partial) disapplication of national laws and thus the application of soft-law texts such as the PICC, which cannot be used in court but are normally appreciated by international arbitrators.

100 Lando, ‘CESL or CISG? Should the proposed EU Regulation on a Common European Sales Law (CESL) replace the United Nations Convention on International Sales (CISG)?’, in: Remien, Herrler & Limmer (eds), Gemeinsames Europäisches Kaufrecht für die EU (2012), pp. 15 et seq.; Piers & Vanleenhove, ‘The Common European Sales Law. A Critical Assessment of a Valuable Initiative’, Contratto e Impresa/Europa (2012) 447. 101 Weatherill, The Internal Market as a Legal Concept (2017), pp. 27 et seq. 102 Janssen & Spilker, ‘The CISG and International Arbitration’, in: DiMatteo (n 28) pp. 135 et seq.

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To avoid opting out of the CISG (where applicable),103 under Article 6 CISG.104 It is true that by virtue of Article 4(a) CISG, the Convention does not deal with the ‘validity of the contract or of any of its provisions or of any usage’, but it is also true that, as already said, choosing not to opt the CISG out means preventing a lack of formal requirements (Article 11 CISG),105 or initial impossibility (Article 79(1) CISG),106 or mistake as to quality of the goods sold,107 from affecting the validity of the sales. In any case, to push party autonomy to its limits, by filling whatever gap left by mandatory provisions or by accurately manipulating the ones which can be derogated from; this subject is not entirely out of the parties’ reach, mainly when it is a matter of regulating aspects not dealing with the grounds for invalidity, but with their consequences, especially the burden of action, the means for extending invalidity from a single clause to the whole contract, its judicial or extra-judicial nature, its retrospective or non-retrospective effects. 108

–

–

II. Unbalanced Contractual Relationships The scenery dramatically changes when the relationship is, as it often occurs, unbalanced. In this case each decision will be up to the one, between the contracting parties, who is able to impose the rules of the game and the choice of the law applicable. At the same time, contractual terms on invalidity will be under the form of clauses unilaterally established by the stronger party.109 This way, negotiating the solutions described in the previous paragraph will become less realistic. 72 However, also the stronger parties’ legal advisors will have to carefully wager the pros and cons of the clauses. As is well known, the stronger parties always tend to impose their national law in order to minimize the risk of unpredicted and disadvantageous outcomes; risk which is assumed to be averagely low in applying rules coming from one’s home country. 73 Therefore, choosing one’s own national law does not automatically mean applying the best law, in spite of what can be expected. To make an example, which is commonly known all over Europe, German export-companies— ‘serial’ and frequent cross-border sellers – have continued to impose German law and in particular the BGB even after the latter has become more favorable to the buyer, either professional or not, as a result of the Schuldrechtsreform of 2002 and the implementation of several EU Directives (such as the Unfair Terms Directive 1993/13/EEC and the Consumer Sales Directive 1999/44/EC, now replaced by the Consumer Sales Directive 2019/771/EU). Opting out of the CISG 71

Spagnolo, The CISG as Soft Law and Choice of Law: Gōjū Ryū?’, in: DiMatteo (n 28) p. 154. Mankowski, ‘Artikel 6 CISG und Abbedingung der CISG’, in: Mankowski & Wurmnest (eds), Festschrift für Ulrich Magnus (2014), pp. 255 et seq. 105 See E.I.1 above; → mn. 36. 106 See E.I.2.b) above; → mn. 45. 107 See E.I.2.c) above; → mn. 51. 108 See B.III above, → mn. 16 and H. below; → mn. 77. 109 Femia, ‘Autonomia e autolegislazione’, in: Mazzamuto & Nivarra (eds), Giurisprudenza per princìpi e autonomia privata (2016), pp. 37 et seq.; Basedow, ‘An Optional Instrument and the Disincentives to Opt in’, Contratto e impresa/Europa (2012) 38; Sefton-Green, ‘Choice, Certainty and Diversity: Why More is Less’, ERPL (2011) 134 et seq.; Lando, ‘Comments and Questions Related to the European Commission’s Proposals for a Regulation on a Common European Sales Law’, ERPL (2011) 720; Jansen & Zimmermann, ‘Restating the Aquis Communautarie? A Critical Examination of the ‘Principles of the Existing EC Contract Law’’, MLR (2008) 505 et seq.; Eidenmüller et al., Revision des Verbraucher-acquis (2011) passim; Bonell, ‘The need und possibilities of a codified European contract law’, ERPL (1997) 505 et seq. 103

104

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H. Sample Clauses

proved to be a drawback, especially due to the news coming from Europe: nowadays there is no doubt that the CISG is more favorable to the seller than the BGB. Obviously, here the example is not perfectly suited, as the CISG does not deal with 74 the issue of validity in full, and opting out still remains per se insufficient to the purpose. At most, the stronger party might have considered, as soon as he was given such opportunity, whether it would be worth selecting the CESL. This latter though, would neither have provided an exhaustive regulation nor solved the problem as a whole. The most likely scenario will be the following: the stronger party will draft complex 75 clauses, intended to subdue contractual validity to the CISG and to the drafter’s national law, yet amended as far as possible by provisions which could backfire on the drafter himself. The weaker party’s legal advisor will have at least the ‘right’ to expect transparent 76 general terms and conditions from the other party, i.e. the ‘right’ to understand them. Not even the weaker party could be asked to be bound by an ambiguous text where sources get ‘dangerously’ entangled and the unfamiliarity of the language further complicates matters. A draft combining a non-opt out of the CISG with a partial professio juris towards the drafter’s national law (revised and sometimes distorted according to the stronger bargaining position) must be at least transparent, not only as to language, but also as to content. A lack of this latter requirement could turn into what in most legal systems is considered as a ground for invalidity: the indefiniteness of contractual terms. Whoever takes charge of writing the rules of the play, having the authority to do so, must at least perform such duty correctly, which means putting them not only in a way that is favorable, but also in a way that respects high quality standards. With this ‘minimum care’, his prevailing power will lower the risk of handling unfavorable rules and the amount of disputes.

H. Sample Clauses –

Severance (long version)

77

If any one or more of the provisions contained in this Agreement or in any other document delivered pursuant hereto shall, for any reason, be held to be invalid, illegal or unenforceable in any other respect, such invalidity, illegality or unenforceability shall not affect any other provision of this Agreement or any such document.

–

Severance (short version)

78

If any provision of this contract shall be invalid or without effect in accordance to applicable law, the remaining provisions shall be valid and enforceable in accordance with their terms.110

–

Option for one party to severe

79

If any one or more of the provisions contained in this Agreement or in any other document delivered pursuant hereto shall, for any reason, be held to be invalid, illegal or unenforceable in any other respect, the parties shall amend that provision or those provisions in such reasonable manner as achieves their intention (without invalidity, illegality or unenforceability), or at the discretion of A that provision or those provisions may be severed from this Agreement.111

Fontaine & De Ly, Drafting International Contracts (2006), p. 169; see also part I below; → mn. 83. The words from ‘the parties’ to ‘this Agreement’ have been inspired, with some adjustments, by Anderson & Warner, A–Z Guide to Boilerplate and Commercial Clauses (2006), p. 431; see also part I; → mn. 83. 110

111

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Option for one party to terminate If any one or more of the provisions contained in this Agreement or in any other document delivered pursuant hereto shall, for any reason, be held to be invalid, illegal or unenforceable in any other respect, such invalidity, illegality or unenforceability shall not affect any other provision of this Agreement or any such document, unless A, in A’s discretion decides that the effect of such invalidity, illegality or unenforceability is to defeat the original intention of the parties, in which event A shall be entitled to terminate this agreement by … day’s notice to B.112

81 –

Self-help remedy clause A party may declare the contract avoided, if the other party has induced the conclusion of the contract by fraudulent misrepresentation or fraudulent non-disclosure of any information concerning previous articles from … to …113

82 –

No retroactive voidability If any one or more of the provisions contained in this Agreement or in any other document delivered pursuant hereto shall, for any reason, be held to be invalid, illegal or unenforceable in any other respect, such invalidity, illegality or unenforceability shall not affect performances already given by the parties before that or those provisions are held to be invalid by the court or other competent authority.

I. Additional Sources 83 Anderson & Warner, A–Z Guide to Boilerplate and Commercial Clauses (4th edn., 2017); Bortolotti, Drafting and negotiating international commercial contracts: a practical guide (2013); Burrows & Peel (eds), Contract Terms (2007); Collins (ed), Standard contract terms in Europe: a basis for and a challenge to European contract law (2008); Cordero-Moss (ed), Boilerplate Clauses, International Commercial Contracts and the Applicable Law (2011); Foglia (ed), Il contratto ‘apolide’. La contrattazione transnazionale nel mercato globale (2019); Fontaine & De Ly, Drafting International Contracts (2006); Nollkaemper (ed), International law in domestic courts: a casebook (2018).

112 The words from ‘unless’ to ‘notice to B’ have been inspired, with some adaptation, by Anderson & Warner (n 117) pp. 431–432; see also part I; → mn. 83. 113 Guidelines on that clause have been Article 49(1) CISG, and Article 49(1) CESL (see also E.III above; → mn. 55).

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CHAPTER 12 DELIVERY OF GOODS Sörren Kiene Part 1:

Place and Manner of Delivery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1

A. Topics Covered . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B. Introductory Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C. Statement of Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . D. International Sales Transaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . E. Sampling of Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. CISG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Subject Matter and Function of Article 31 CISG . . . . . . . . . . . . . . . . . . . . . . . . . . 2. The Cases Covered by Article 31 CISG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Delivery by Handing the Goods over to the Carrier, Article 31(a) CISG b) Delivery by Placing the Goods at the Buyer’s Disposal, Article 31(b) and (c) CISG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Agreement to Deliver at ‘Any Other Particular Place’ . . . . . . . . . . . . . . . . . . . d) International Jurisdiction of the Courts can be Dependent Upon the Place of Delivery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. UNIDROIT Principles of International Commercial Contracts . . . . . . . . . . . . . . III. Principles of European Contract Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. German Bürgerliches Gesetzbuch . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. French Code Civil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI. Spanish Código Civil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VII. United Kingdom Sale of Goods Act 1979 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VIII. American Uniform Commercial Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IX. Chinese Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F. Commentary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . G. Illustrations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . H. Cross References & Additional Commentary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Practitioner Tips . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . J. Sample Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . K. Additional Sources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2 4 5 6 7 7 7 9 9

Part 2:

18 21 22 23 24 25 27 28 29 31 33 37 40 41 42 47 49

Time of Delivery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

50

A. Topics Covered . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B. Introductory Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C. Statement of Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . D. International Sales Transaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . E. Sampling of Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. CISG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. UNIDROIT Principles of International Commercial Contracts . . . . . . . . . . . . . . III. Principles of European Contract Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. German Bürgerliches Gesetzbuch . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. French Code Civil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI. Spanish Código Civil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VII. United Kingdom Sale of Goods Act 1979 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VIII. American Uniform Commercial Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IX. Chinese Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F. Commentary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . G. Illustrations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . H. Practitioner Tips . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Sample Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . J. Additional Sources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

50 51 52 53 54 54 59 61 62 63 64 65 67 68 69 70 72 77 79

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Chapter 12 Delivery of Goods

Part 1: Place and Manner of Delivery 1

This Chapter on the delivery of the goods consists of two parts. The first part deals with the place and manner of delivery while the second part focuses on the time of delivery.

A. Topics Covered Place of Delivery

2

– –

Importance and function of Article 31 CISG Relevance of Incoterm-clauses within Article 31 CISG Manner of Delivery

3

– – – –

Handing over to the first carrier for transmission to the buyer Placing at the buyer’s disposal Identification or marking of the goods Packaging of the goods

B. Introductory Note 4

Whenever a sales contract is concluded, the goods sold need to be delivered to the buyer.1 Despite the fact that delivery is therefore an essential element of all sales contracts, practice shows that there are still some misunderstandings in the legal concept of ‘delivery’ as well as its practical implications from a procedural point of view. This Chapter will first focus on the place and manner of delivery, and thereafter on the time of delivery.

C. Statement of Issues 5

The issues that will be focused on are: (1) Where does the seller have to ‘deliver’ the goods? (2) How does the seller ‘deliver’? (3) Why is an in-depth understanding of ‘delivery' and of the actions necessary to deliver so important? (4) Which practical implications, also from a procedural point of view, does the place of delivery have? (5) What can the practicing lawyer do to best protect the client’s interests?

D. International Sales Transaction 6

In international sales transactions it is especially important that both the buyer and the seller thoroughly understand when and how the goods are delivered. Only then can they fully assess the costs for the seller and the buyer involved with transporting the goods to the buyer’s place of business (or any other place agreed to), the risks involved with delivery, whether or not one of the parties wants to have these risks insured, which activity leads to a timely delivery and if the buyer will be able to meet time limits agreed to with his own customers. Quite importantly, the place of delivery can also have an 1

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impact on the jurisdiction of the courts. Of course, these aspects can become relevant also in purely domestic sales contracts. However, they are significantly less important in purely domestic sales contracts. Whether or not e.g. a seller from an Asian country has delivered on time, when the goods are dispatched in Asia and not when they reach the European buyer six weeks later if transported upon a vessel, is much more significant than in a case where the seller is e.g. situated in Venice and the buyer has his place of business in Rome. Also, in international sales transactions jurisdictional issues have an impact on the daily practice which cannot be overestimated. The seller claiming for payment of the contract price will very often rather want to revert to his home jurisdiction than to start court proceedings against the buyer in a foreign jurisdiction.2

E. Sampling of Laws I. CISG Article 31 If the seller is not bound to deliver the goods at any other particular place, his obligation to deliver consists: (a) If the contract of sale involves carriage of the goods – in handing the goods over to the first carrier for transmission to the buyer; (b) If, in cases not within the preceding subparagraph, the contract relates to specific goods, or unidentified goods to be drawn from a specific stock or to be manufactured or produced, and at the time of the conclusion of the contract the parties knew that the goods were at, or were to be manufactured or produced at, a particular place – in placing the goods at the buyer's disposal at that place; (c) In other cases – in placing the goods at the buyer's disposal at the place where the seller had his place of business at the time of the conclusion of the contract.

1. Subject Matter and Function of Article 31 CISG Whereas Article 30 stipulates an obligation upon the seller to deliver the goods, the 7 details of this obligation are governed in Article 31 CISG. Article 31 CISG primarily deals with the question where the seller has to deliver the goods, meaning the place of delivery. The place of delivery is however closely connected to the second aspect governed by Article 31 CISG, which is how the seller has to deliver. If Article 31(a) CISG is applicable, the seller has to hand over the goods to the first carrier for transmission to the buyer. In situations governed by Article 31(b) and (c) CISG, the seller has to place the goods at disposal at the relevant place. In accordance with Article 6 CISG, Article 31 CISG is only applicable to the extent that the parties have not agreed otherwise. Article 31 CISG does not deal with the obligation to deliver only. The duty to deliver 8 substitute goods (Article 46(2) CISG) also needs to be performed at the place of deliv-

2 The seller will not only have the advantage of fully understanding the language. He might have established a trustful relationship with the lawyer he knows. Moreover, there will usually be no need to translate documents if he can call upon the courts in his home jurisdiction. On the other hand, starting legal proceedings in a foreign country will very often lead to the fact that this party needs two lawyers, one where the proceedings take place and one at its place of business who manages communication etc. Procedural aspects play an important role here, too. E.g. in Spain, the defendant only has 20 working days to (i) find a lawyer who represents him, (ii) perform all organizational issues like signing a power of attorney, have it proved by a notary and apostilled and (iii) file the defense, which has to contain all information and defenses the defendant wants to bring forward. Moreover, in some jurisdictions there is no or only a very limited reimbursement of court and lawyer’s fees. For any negotiations on a settlement, this puts the ‘foreign’ party in a very disadvantageous position.

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ery.3 According to some case law, the place of delivery is also the place where restitution of the performed obligations shall take place after the avoidance of a contract.4

2. The Cases Covered by Article 31 CISG a) Delivery by Handing the Goods over to the Carrier, Article 31(a) CISG The expression ‘if the contract of sale involves carriage of the goods’ is used in several Articles of the CISG, among others in Article 31(a) CISG. However, the CISG does not establish when a contract of sale involves carriage of the goods. There are numerous, albeit differing and wide-ranging approaches in legal literature on how to interpret this expression. The most convincing approach, based on an in-depth analysis, is to qualify a contract of sale involving carriage of the goods whenever the place of delivery and the place where the seller takes delivery of the goods differ.5 If the seller and the buyer agree on any of the C-clauses of the INCOTERMS 2020, the place of delivery and the place where the seller takes delivery of the goods differ, as can be seen from the explanatory notes under ‘A2’ and ‘B2’ of the ICC rules for the use of the INCOTERMS 2020. 6 Should the seller or the buyer however agree on the Incoterm-clause EXW or any of the F- or D-clauses, the place of delivery and the place where the seller takes delivery coincide, which is why in these situations the contract of sale does not involve carriage of the goods.7 10 There is differing case law on the question whether Article 31(a), (b) or (c) CISG is applicable if the parties have made no provision on where and how the seller has to deliver. While Article 31(a) CISG is sometimes seen as the general rule, 8 there is also case law which suggests that Article 31 (c) CISG is applicable if the parties have not agreed otherwise.9 In international sales contracts the seller and the buyer are situated at different places and in different countries, which is why, in case of doubt, Article 31(a) CISG is applicable.10 11 In daily practice however, this question plays a minor role, as the buyer and the seller almost always agree on the use of a trade term such as the INCOTERMS, thereby specifying the place of delivery, which actions the seller must undertake to deliver and numerous further aspects. The buyer and the seller are well advised to use not only the three-letter-code of the respective Incoterm (like EXW for ex works, FOB for free on board etc.), but also to explicitly refer to the INCOTERMS and its version (e.g. FOB INCOTERMS 2020). By doing so, the buyer and the seller make it clear that the guidelines issued by the ICC govern the interpretation of the respective Incoterm. 11 Likewise, they stipulate which version shall be applicable. Should the parties however only agree on clauses like ‘franco …’, case law interprets these clauses more often than 9

HG Montargis 6 October 2000, (2001) 1 IHR 205 (206). OLG Karlsruhe 19 December 2002 in (2003) 3 IHR 125 (126); LG Gießen 17 December 2002 in (2003) 3 IHR 276 (276 et seq.). 5 Piltz, ‘Sales involving Carriage of the Goods’ (2012) 9 Nederlands Tijdschrift voor Handelsrecht 86 (87) with numerous further references. 6 See INCOTERMS 2020, ICC Rules for the use of domestic and international trade terms, International Chamber of Commerce. 7 Piltz (n 4) p. 87 with numerous further references. 8 AG Duisburg 13 April 2000 in (2001) 1 IHR 114 (116); LG Bamberg 23 October 2006 in (2007) 7 IHR 113 (116); LG Flensburg 24 March 1999 in (2001) 1 IHR 202 (202). 9 LG Aachen 14 May 1993, CISG-Online No. 86. 10 Piltz, Internationales Kaufrecht, (2nd edn, 2008) paras 4–22. 11 Even if the buyer and the seller do not explicitly refer to the INCOTERMS, but merely agree that delivery shall be ‘DDP Cologne’ for example, then also generally the guidelines issued by the ICC shall govern the interpretation of the Incoterm, see BGH 7 November 2012, CISG-Online No. 2374. 3

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not as pure agreements on the costs of the transport, but not as an agreement of the place of delivery.12 If Article 31(a) CISG applies, the buyer has to ‘hand the goods over to the first carrier for transmission to the buyer’. The carrier is understood as an independent contractor who is obliged to transport (at least partially) the goods to the buyer, such as e.g. postal services, courier services or transporting companies. The forwarding agent, who generally only organizes the carriage but does not transport the goods himself, is no carrier within the meaning of Article 31(a) CISG. However, if the forwarding agent wholly or partially undertakes to carry the goods himself, he is a carrier within the meaning of Article 31(a) CISG, despite the fact that the forwarding agent is also obliged to organize the transport. Also, if the carrier takes possession of the goods (instead of instructing a transportation company to undertake the carriage, in which situations the goods will not be handed over to the forwarding agent), the forwarding agent should be classified as a carrier within the meaning of Article 31(a) CISG.13 So, in these situations, the seller fulfils his duty to deliver by handing over the goods to the forwarding agent. If the seller undertakes to transport the goods himself with his employees, this does not constitute handing over the goods to the first carrier. The carrier must be independent from the seller and his employees. As long as the goods are in the seller’s custody, the seller has not handed over the goods to the first carrier and therefore not fulfilled his obligation to deliver. As the seller has to hand over the goods to the first carrier to fulfil his obligation to deliver, previous marking or separation of the goods is irrelevant to fulfil the obligation to deliver. Whether or not the goods are clearly identified to the contract by markings on the goods is only relevant for effectuating the transfer of risk, Articles 32(1) and 67(2) CISG.14 It is decisive that the first carrier actually takes custody of the goods. As the seller is also responsible for the loading of the means of transportation (such as e.g. the lorry, etc.), the goods are not delivered until they are loaded upon the vehicle used for transportation.15 The goods must be handed over to the carrier for transmission to the buyer. This basically means that the seller must contract for carriage to the buyer. The mere fact that the seller has to conclude the contract of carriage does not necessarily mean that the seller also has to bear the costs of transportation. The seller is only obliged to bear all costs until he has delivered. The costs involved with the transportation to the buyer are borne by the buyer, unless the parties agree otherwise. If the seller has delivered the goods by handing them over to the first carrier for transmission to the buyer, his duty to deliver is fulfilled. The seller is therefore not responsible and not liable for any damage, destruction or loss of the goods which occurs after delivery, unless such damage is due to the seller not having packed the goods prop12 Hof van Beroep te Gent 29 March 2000, http://cisgw3.law.pace.edu/cases/000329b1.html; BGH 11 December 1996, CISG-Online No. 225 (‘Lieferung: frei Haus’); dissenting Cour d’Appel d’Orleans in (2003) 3 IHR 146. For more details see Piltz, in Kröll, Mistelis, Viscasillas (eds), UN-Convention on the International Sale of Goods (CISG) (2nd edn. 2018) Article 31 CISG para. 34. 13 For further references on this controversial issue see Huber/Widmer, in Schlechtriem, Schwenzer (eds), Commentary on the UN Convention on the International Sale of Goods (CISG) (4th edn, 2016) Article 31 CISG paras 24 et seq. The persuasive argument for this classification is that if the goods are actually handed over to the freight forwarder, custody of the goods is transferred to an independent undertaking for the goods to be transmitted to the buyer, so the freight forwarder assumes (at least partially) responsibilities to transport the goods, instead of merely organizing the transport. 14 If the goods are not clearly identified to the contract by marking on the goods, the seller must give the buyer notice of consignment specifying the goods, Article 32(2) CISG. 15 LG Bamberg 23 October 2006 in (2007) 7 IHR 113 (116).

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erly. Moreover, any delay during the transportation is not the seller’s responsibility. So the goods are delivered on time, even if they get delayed or lost during transportation. 17 If the goods can only be safely transported when packed, the seller’s obligation to deliver also includes the obligation to pack the goods. However, non-compliance with the duty to pack the goods does not amount to non-delivery. Instead, the seller then delivers goods which do not conform with the contract, Article 35(2)(d) CISG. b) Delivery by Placing the Goods at the Buyer’s Disposal, Article 31(b) and (c) CISG If the contract does not involve carriage of the goods and the parties have not agreed on the place of delivery, either Article 31(b) CISG or Article 31(c) CISG are applicable. Both provisions have in common that the place of delivery and the place of taking delivery coincide. Article 31(b) CISG, which is not applicable if the goods are in transit, provides that, if the contract relates to specific goods or unidentified goods to be drawn from a specific stock or to be manufactured or produced, the seller has to place the goods at that place. However, at the time of the conclusion of the contract, the parties must have known that the goods were at or were to be manufactured or produced at a particular place. If Article 31(b) CISG is not applicable, the seller has to place the goods at the buyer’s disposal at the place where the seller had his place of business at the time of conclusion of the contract. Should the seller have several places of business, the place of business which has the closest relationship to the contract is decisive, Article 10(a) CISG. 19 Placing the goods at the buyer’s disposal entails performing all acts which enable the buyer to collect the goods.16 The seller is not obliged to assist in or even conduct the loading of the goods onto the means of transportation. The CISG is silent on the question whether previous separation of the goods or identifying the goods to the contract by marking is necessary.17 The prevailing opinion is that previous separation or marking of the goods is not necessary as long as this can be done without any significant efforts when the goods are collected by the buyer.18 Also, the CISG does not govern the question whether or not the seller has to inform the buyer that the goods have been made available. If the buyer and seller have not agreed on a specific delivery date,19 the seller has to deliver within a reasonable time after the conclusion of the contract, Article 33(c) CISG. In these situations, the buyer will generally not know the specific delivery date and therefore not be aware of the fact that he can collect the goods. As a reason of this, it is reasonable to impose upon the seller a duty to inform the buyer that the goods can be collected. Therefore, in these situations, the seller delivers when dispatching (Article 27 CISG) this information to the buyer. 20 If the goods can only be safely transported when they are packed, the seller’s obligation to deliver also includes the obligation to pack the goods. However, non-compliance with the duty to pack the goods does not amount to non-delivery. Instead, the seller then delivers goods which do not conform with the contract, Article 35(2)(d) CISG. 18

16 Oberster Gerichtshof Austria 29 November 2017, CISG-Online No. 3043: the goods must be individualized and genuinely available for collection by the buyer. 17 Article 32(2) CISG is not applicable in these situations as Article 32(2) CISG only refers to situations where the contract involves carriage of the goods, Article 31(a) CISG. 18 Piltz, in Kröll, Mistelis, Viscasillas (eds), UN-Convention on the International Sale of Goods (CISG) (2nd edn,2018) Article 31 CISG para. 26. 19 Leaving agreed time periods (Article 33(b) CISG) aside.

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c) Agreement to Deliver at ‘Any Other Particular Place’ The parties are of course free to agree that the goods shall be delivered at any other 21 particular place, Article 31 CISG. This is generally the case if the buyer and the seller agree on a D-clause of the INCOTERMS 2020. In these situations, both the place of delivery and the place of taking delivery are at the buyer’s place of business. d) International Jurisdiction of the Courts can be Dependent Upon the Place of Delivery The place of delivery can have an influence upon the international jurisdiction of 22 the courts, which cannot be overestimated in daily practice. As regards cross-border sales within the European Union and the European Economic Area20 as well as vis-à-vis a contractual party having its place of business in Switzerland, in the absence of a valid jurisdiction clause the place of delivery is decisive for determining the court’s international jurisdiction. Article 5(1)(b) 1st indent Regulation 44/200121 provides that a person domiciled in a Member State may be sued in another Member State at the place of performance of the obligation in question, which is in the case of the sale of goods the place in a Member State where, under the contract, the goods were delivered or should have been delivered.22 So basically, the courts at the agreed or actual place of delivery23 have jurisdiction to hear a case. It has to be noted however, that Regulation 44/2001 is subject to autonomous interpretation.24 This leads to the fact that the place of performance (which is in the case of the sale of goods the place in a Member State where, under the contract, the goods were delivered or should have been delivered) according to Article 5(1)(b) 1st indent Regulation 44/2001 and Article 7(1)(b) 1st indent Regulation 1215/2012 respectively is not always identical with the place of delivery under the CISG. In summary, the following can be noted: –

If the parties agree on an E- or F-clause of the INCOTERMS or if Article 31(b) or (c) CISG are applicable, the courts at the place of delivery have international jurisdiction. This will usually be the seller’s place of business, the agreed port (e.g. when the Incoterm-clauses FOB or FAS are concerned) or the place of delivery provided for by Article 31(b) CISG.

20 The European Economic Area has a wider territorial scope than the European Union, as the former also encompasses states like Iceland, Liechtenstein and Norway. 21 Council Regulation (EC) No 44/2001 of 22 December 2000 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters, available at www.eur-lex.europa.eu. This Regulation has been replaced as of 10 January 2015 by ‘Regulation (EU) No 1215/2012 of the European Parliament and of the Council of 12 December 2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters’ and under this Regulation 1215/2012 Article 7(1)(b) 1 st indent will be applicable. 22 Article 5 of the Lugano Convention (Convention on Jurisdiction and the Recognition and Enforcement of Judgments in Civil and Commercial Matters, done at Lugano on 30 October 2007, [2009] OJ L 147/5) is identical with Article 5 Regulation 44/2001 and Article 7 Regulation 1215/2012 respectively. It is construed and interpreted just like Article 5 Regulation 44/2001 and Article 7 Regulation 1215/2012 respectively. 23 If the place where the delivery took place is not the same as the place of delivery applicable according to the agreed Incoterm-clause or the place of delivery which stems from Article 31 CISG, then the former is decisive, see Kropholler/von Hein, Europäisches Zivilprozessrecht, (10th edn, 2016); Article 5 Council Regulation (EC) No. 44/2001 of 22 December 2000 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters, para. 47. 24 See e.g. Case C-381/08 Car Trim GmbH v KeySafety Systems Srl.[2010] ECR I-1255.

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– –

If the parties agree on a D-clause of the INCOTERMS, the courts at the place of delivery have international jurisdiction. The place of delivery will usually be the buyer’s place of business. If the parties agree on a C-clause of the INCOTERMS, the place of delivery within the meaning of the CISG is at the seller’s place of business. However, the place of performance as regards Article 5(1)(b) 1st indent Regulation 44/2001 is – according to a judgment by the European Court of Justice – at the buyer’s place of business.25

II. UNIDROIT Principles of International Commercial Contracts Article 6.1.6 Place of performance (1) If the place of performance is neither fixed by, nor determinable from, the contract, a party is to perform: (a) a monetary obligation, at the obligee’s place of business; (b) any other obligation, at its own place of business. (2) A party must bear any increase in the expenses incidental to performance which is caused by a change in its place of business subsequent to the conclusion of the contract.

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The UNIDROIT Principles’ scope of application is not restricted solely to sales contracts. Instead, the UNIDROIT Principles have a wider scope of application in generally dealing with commercial contracts. They do not explicitly deal with the question where and how the seller has to deliver. As a result of their wider application and approach, Article 6.1.6. regulates the place of performance. The place of performance for an obligation other than to pay money is – unless it is fixed by or determinable from the contract – the debtor’s place of business, Article 6.1.6(1)(b) UNIDROIT Principles. No provision is made on how the seller has to deliver, that is by placing at disposal or by handing over the goods. According to Article 6.1.11 UNIDROIT Principles, each party has to bear the costs of performance of its obligations.

III. Principles of European Contract Law Article 7:101 Place of Performance (1) If the place of performance of a contractual obligation is not fixed by or determinable from the contract it shall be: (a) in the case of an obligation to pay money, the creditor's place of business at the time of the conclusion of the contract; (b) in the case of an obligation other than to pay money, the obligor's place of business at the time of conclusion of the contract. (2) If a party has more than one place of business, the place of business for the purpose of the preceding paragraph is that which has the closest relationship to the contract, having regard to the circumstances known to or contemplated by the parties at the time of conclusion of the contract. (3) If a party does not have a place of business its habitual residence is to be treated as its place of business.

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Just like the UNIDROIT Principles, the PECL have a wider approach than the CISG and deal with the place of performance rather than specifically with delivery of the goods. If the place of performance of a contractual obligation is not fixed by or determinable from the contract, in the case of an obligation other than to pay money, the 25 See e.g. Car Trim GmbH v KeySafety Systems Srl., ibid. The same will apply to Article 7(1)(b) 1 st indent Regulation 1215/2012 respectively. See also Case C-87/10 Electrostell v Edil Centro in which the court decided that the courts must always assess whether the agreement on an Incoterm-clause was a mere allocation of costs.

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debtor's place of business at the time of conclusion of the contract shall be the place of performance. According to Article 7:112 PECL, each party has to bear the costs of performance of its obligations. Due to the PECL’s wider approach, no provision is made on how the seller has to deliver.

IV. German Bürgerliches Gesetzbuch § 269 (1) Where no place of performance has been specified or is evident from the circumstances, in particular from the nature of the obligation, performance must be made in the place where the obligor had his residence at the time when the obligation arose. (2) If the obligation arose in the commercial undertaking of the obligor, the place of the commercial undertaking takes the place of the residence if the obligor maintained his commercial undertaking at another place. (3) From the circumstance that the obligor has assumed the costs of shipping it may not be concluded that the place to which shipment is to be made is to be the place of performance.

Where no place of performance has been specified or is evident from the circum- 25 stances, in particular from the nature of the obligation, performance must be made in the place where the obligor had his residence at the time when the obligation arose, § 269(1) BGB.26 The seller’s place of residence will thus be the place of delivery as well as the place where the buyer will take delivery. From the mere fact that the debtor has assumed the costs of shipping it may not be concluded that the place to which shipment is to be made is to be the place of performance, § 269(3) BGB. This, in effect, means that even if the seller assumes the cost for shipping, the place of performance will still be at his residence, but the place where the buyer takes delivery will be the place of destination. The BGB does not specifically state how the seller has to deliver. However, according 26 to § 433(1) sentence 1 BGB, the seller is under an obligation to provide the buyer with possession (that means actual control) of the goods.

V. French Code Civil Article 1604 Delivery is the transfer of the thing sold into the power and possession of the buyer. Article 1606 Delivery of movable effects is the outcome: Either of a real delivery; Or of the handing over of the keys of the buildings which contain them; Or even of the sole consent of the parties, where the transfer cannot take place at the time of the sale, or where buyer already had them in his power on another basis. Article 1608 The expenses of delivery shall be charged to the seller, and those of removal to the buyer, unless otherwise agreed.

Article 1609 Code Civil stipulates that delivery shall be made at the place where the 27 thing sold was at the time of the sale, unless otherwise agreed. This means that if the parties do not agree otherwise, the place of delivery will be at the place where the goods are, which will often correspond to the seller’s place of business. ‘Delivery’ is the transfer 26 § 270 BGB, however, specifically deals with the situation that the debtor’s obligation is an obligation to pay money.

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of the sold good into the power and possession of the buyer, Article 1604 Code Civil. This however does not mean that the seller has to hand over the goods to the buyer. Instead, it can be sufficient if the seller places the goods at disposal for the buyer so that the buyer can have it at his disposal.27 Following Article 1606 delivery can however also take place by consent of the parties, where the transfer cannot take place at the time of the sale, or where the buyer already had them in his power.

VI. Spanish Código Civil Article 1461 The seller is bound to perform delivery of and provide warranty over the thing constituting the subject matter of the sale. Article 1463 Outside the cases expressed in the preceding article, delivery of movable property shall take place: by delivery of the keys of the place or location where they are stored or kept; and by mere agreement or conformity between the contracting parties, if the thing sold cannot be moved to the possession of the purchaser at the time of the sale, or if the latter already had it in its power for some other reason.

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Article 1461 Código Civil (in the following ‘CC’) stipulates that the seller has to deliver the sold goods. The goods sold shall be deemed to have been delivered when they are put in the power and possession of the buyer, Article 1461 CC. From this it follows that ‘placing at disposal’ does not suffice.28 Instead the goods have to be handed over to the buyer.29 The CC does not explicitly govern where the seller has to deliver. Primarily, the parties’ agreement governs the place of delivery. If the parties do not agree on the place of delivery, the place of delivery for the sale of specific goods is the place where such goods are situated (Article 1463 CC), and in all other cases at the seller’s place of business.30 This is derived from general provision on the performance of one’s obligations31 as well as the fact that according to Article 1465 CC in the absence of a contrary agreement the costs involved with delivery shall be borne by the seller, while those costs relating to the transport or freight shall be borne by the purchaser. 32

27 Wenner/Schödel, in Graf von Westphalen (ed), Handbuch des Kaufvertragsrechts in den EG-Staaten (1992) p. 417, para. 51. 28 Cf Marti, in Graf von Westphalen (ed), Handbuch des Kaufvertragsrechts in den EG-Staaten (1992) p. 977, para. 48. However, placing at disposal is sufficient if the contract falls within the scope of the Spanish Commercial Code, which can be derived from Articles 337 and 339 Spanish Commercial Code. 29 Article 1462(2) CC as well as Article 1463 provide for special ways to deliver. According to Article 1462(2) CC, where the sale has been made pursuant to a public deed, the execution thereof shall be equivalent to the delivery of the good constituting the subject matter of the contract, unless it should result or it should clearly be deduced otherwise from the public deed. Following Article 1463 CC, delivery can also take place by mere agreement if the buyer is already in possession of the goods or if the goods are immoveable. 30 Marti, in Graf von Westphalen (ed), Handbuch des Kaufvertragsrechts in den EG-Staaten (1992) p. 977, para. 51. 31 Presumably Article 40 CC, which stipulates that for natural persons the performance of civil obligations shall be their place of habitual residence. 32 Marti, in Graf von Westphalen (ed), Handbuch des Kaufvertragsrechts in den EG-Staaten (1992) p. 977, para. 51; the same result is reached in cases falling under the Spanish Codigo de Comercio (Spanish Commercial law, in the following ‘CCo’), see Article 326 CCo.

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VII. United Kingdom Sale of Goods Act 1979 Section 29 (1) Whether it is for the buyer to take possession of the goods or for the seller to send them to the buyer is a question depending in each case on the contract, express or implied, between the parties. (2) Apart from any such contract, express or implied, the place of delivery is the seller's place of business if he has one, and if not, his residence; except that, if the contract is for the sale of specific goods, which to the knowledge of the parties when the contract is made are in some other place, then that place is the place of delivery. (3) Where under the contract of sale the seller is bound to send the goods to the buyer, but no time for sending them is fixed, the seller is bound to send them within a reasonable time. (4) Where the goods at the time of sale are in the possession of a third person, there is no delivery by seller to buyer unless and until the third person acknowledges to the buyer that he holds the goods on his behalf; but nothing in this section affects the operation of the issue or transfer of any document of title to goods. (5) Demand or tender of delivery may be as ineffectual unless made at a reasonable hour; and what is a reasonable hour is a question of fact. (6) Unless otherwise agreed, the expenses of and incidental to putting the goods into a deliverable state must be borne by the seller.

Whether it is for the buyer to take possession of the goods at the seller’s place of 29 business or for the seller to send the goods to the buyer is a question depending in each case on the contract, express or implied, between the parties, s 29(1) Sale of Goods Act (SGA). If no contractual agreement has been made, the place of delivery is the seller’s place of business if he has one, and if not, his residence; except that, if the contract is for the sale of specific goods, which, to the knowledge of the parties when the contract is concluded, are in some other place, then that place is the place of delivery, s 29(2) SGA. These provisions are understood that it is basically the duty of the buyer to collect the goods rather than that of the seller to send them.33 The SGA also defines how the seller has to deliver. s 61 SGA states that ‘delivery’ 30 means voluntary transfer of possession from one person to another. There will be actual delivery where possession of goods is transferred from the seller to the buyer, or to a carrier for the purpose of transmission to a carrier.34 So placing at disposal does not seem to suffice.35 Instead, the seller has to hand over the goods to the buyer or to the carrier.

VIII. American Uniform Commercial Code § 2-308 Absence of Specified Place for Delivery. Unless otherwise agreed (a) the place for delivery of goods is the seller's place of business or if he has none his residence; but (b) in a contract for sale of identified goods which to the knowledge of the parties at the time of contracting are in some other place, that place is the place for their delivery; and (c) documents of title may be delivered through customary banking channels.

If the parties have not agreed otherwise, according to § 2-308(a) UCC, the place for 31 delivery of goods is the seller's place of business or if he has none his residence. However, if identified goods are sold which to the knowledge of the parties at the time of contracting are in some other place, that place is the place for their delivery, § 2-308(b) UCC. Chitty on Contracts, Volume II Specific Contracts (31st edn, 2012) para. 43-277. Chitty on Contracts, Volume II Specific Contracts (31st edn, 2012) para. 43-275. 35 Dissenting Jenkins/Henshall/Holland, in Graf von Westphalen (ed), Handbuch des Kaufvertragsrechts in den EG-Staaten (1992) p. 371, paras 34 et seq. 33

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This place of delivery will then also be the place where the buyer has to take delivery. In such cases, the seller delivers by putting and holding conforming goods at the buyer’s disposition and giving the buyer notification reasonably necessary to enable him to take delivery, § 2-503(1) UCC. So, unlike under the CISG, if the parties have not agreed otherwise, the place of delivery and the place of taking delivery coincide and are at the seller’s place of business. 32 Where a ‘shipment contract’ is concerned, meaning that due to the contractual agreement the seller is required to send the goods to the buyer, the seller is, in the absence of contrary agreements, to this extent required to put the goods in the possession of a carrier, conclude such a contract for their transportation as may be reasonable having regard to the nature of the goods and other circumstances of the case, obtain and promptly deliver or tender in due form any document necessary to enable the buyer to obtain possession of the goods and promptly notify the buyer of the shipment.

IX. Chinese Law Article 603 The seller shall deliver the subject matter at the agreed place. Where there is no agreement between the parties as to a place for delivery, or such agreement is not clear, nor can it be determined according to the provisions of Article 510 of this Code, the following provisions shall be applied: (1) If the subject matter needs carriage, the seller shall deliver the subject matter to the first carrier so as to hand it over to the buyer; (2) If the subject matter does not need carriage, and the seller and the buyer know the place of the subject matter when concluding the contract, the seller shall deliver the subject matter at such place; if the place is unknown, the subject matter shall be delivered at the business place of the seller when concluding the contract.

According to Article 603 of the Civil Code of the Republic of China (‘CCC’), the place of delivery is first of all dependent upon a contractual agreement, which can also be made after conclusion of the contract, Article 510 CCC. If no agreement was made and the place of delivery cannot be determined pursuant to other contract terms or trade custom,36 then Article 603 CCC distinguishes whether the goods require carriage (Article 603(1) CCC) or not (Article 603(2) CCC). If the goods require carriage, the seller shall deliver the subject matter to the first carrier so as to hand it over to the buyer, Article 603(1) CCC. It remains unclear whether the placing at disposal or the handing over to the carrier is decisive, which will be of importance if the goods are damaged during loading of the shipping device. If the goods do not require carriage and at the time of the conclusion of the contract the buyer and the seller knew that the subject matter was at a particular place, the seller shall deliver the goods at that place; and if they did not know that the goods were at a particular place, the subject matter shall be delivered where the seller had his place of business at the time of the conclusion of the contract, Article 603(2) CCC. 34 Again, the question arises when ‘the subject matter needs carriage’. Following Article 11 of the Supreme Court’s ‘Interpretation on Issues Relevant to the Application of the 33

36 Article 510 CCC provides that after a contract enters into effect, the parties may agree to supplement such terms as quality, price or remuneration and place of performance on which there is no agreement or the agreement is unclear; if no supplementary agreement can be reached, the terms shall be determined in accordance with the related terms of the contract or the transaction practices.

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Law in Trials of Disputes over Sales and Purchase Contracts’, this phrase37 refers to the situation where the seller is responsible for arranging shipment of the subject matter and the carrier is a transport operator independent from the parties to the sales and purchase contract. This means that resulting from the contractual agreement the seller is obliged to arrange for shipment. So just like the term ‘contract of sale involving carriage of the goods’ in the CISG, ‘requiring carriage’ cannot be assumed simply because the buyer and the seller are situated at different places or because of the nature of the goods. If the parties do not agree on the place of delivery and do not stipulate that the seller 35 shall arrange for shipment, the place of delivery for goods being at a specific place is that place, and in all other cases the seller’s place of business. In these situations the place of delivery and the place of taking delivery are both at where the seller had his place of business at the time of conclusion of the contract. Again it remains unclear whether placing at disposal or the handing over to the buyer is decisive to deliver. Article 599 CCC stipulates that the seller also has to deliver to the buyer the relevant 36 documents and materials other than the documents for taking delivery of the subject matter. It is not explicitly governed whether non-compliance with this duty leads to a non-delivery or whether the seller has delivered, albeit defective. From a systematic point of view, however, from Article 598 CCC38 it can be derived that in the absence of documents needed to take delivery, a breach to deliver to the buyer the relevant documents does prevent delivery from taking place.

F. Commentary The above sampling of laws shows quite some differences in where and how a debtor 37 has to deliver or perform his obligations. Knowledge of these differences is essential to the transactional lawyer before agreeing on a choice of law clause or before making changes to a contract in the drafting stage. As both PECL and the UNIDROIT Principles of International Commercial Contracts 38 do not provide on how a seller has to deliver, these rules do not provide legal certainty. In this respect, the CISG, BGB, SGA as well as the UCC offer more legal certainty. It must be noted that, according to some laws – depending upon the place of delivery – delivery of documents can be a precondition for the seller to fulfil his duty to deliver. Many laws use the term ‘sale involving carriage of the goods’ or similar formulations, 39 despite the fact that this term is not defined. However, the most convincing approach is to understand this term as involving a sales contract where the place of delivery and the place of taking delivery do not coincide.

G. Illustrations 1. If the seller delivers ‘CPT (place of destination) INCOTERMS 2020’, the time when 40 the goods are handed over to the carrier is decisive for determining whether the seller has delivered on time. It is irrelevant when the goods actually reach the agreed place of destination.

37 This interpretation originally referred to Article 141 of the Contract Law of the People’s Republic of China, but as the wording in Article 603 CCC has hardly changed, it seems reasonable to state that this interpretation shall continue to apply. 38 Article 598 CCC reads as follows: ‘A seller shall perform the obligation to deliver the subject matter or a document for taking delivery of the subject matter and transfer the ownership to the buyer.’

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2. When delivery is made ‘Lieferung frei Haus’ or ‘franco …’ it is unclear where the place of delivery is. It can either be at the seller’s place of business, meaning the risk passes to the buyer when the goods are handed over to the first carrier and this agreement is construed that the seller pays only for the transport to the buyer but does not assume the risk for doing so. Alternatively, it can mean that the seller is willing to deliver at the buyer’s place of business, thereby not only paying for the transport, but also assuming liability for the transport. 3. If the parties to a contract which is subject to the CISG do not specify the time and manner of delivery at all and especially do not make reference to the INCOTERMS, Article 31(a) CISG applies. So, the seller delivers by handing over the goods to the first carrier for transmission.

H. Cross References & Additional Commentary 41

As the parties usually more closely define the place of delivery and how the seller has to fulfil his obligation to deliver by agreeing on INCOTERMS, reference is hereby made to Chapter 10 ‘Trade Terms and INCOTERMS’.

I. Practitioner Tips 42

In international transactions, both the buyer and the seller should thoroughly understand when and how the goods are delivered. As the INCOTERMS issued by the ICC are widely used and ensure legal certainty for almost all aspects relevant in international transactions, the parties are well advised to incorporate the desired Incoterm by making reference to e.g. ‘INCOTERMS 2020’. In doing so, they indicate their intention that the ICC’s rules to interpret the respective Incoterm-clause shall be used as well as the applicable version.39 They thereby also specifically make clear that any national clauses (such as ‘F.O.B.’ or ‘C.I.F’ as provided for by the UCC) shall not apply. Making reference to the INCOTERMS 2020 is not only decisive in the context of Article 7 (1)(b) 1 st indent Regulation 1215/2012. Moreover, when using the INCOTERMS, the respective clauses should only be used for the situations they were designed for, which is why an agreement that the goods shall be delivered ‘FOB airport Frankfurt’40 or ‘FOB seller’s factory’41 is not advisable. Also, when goods are transported in a container and handed over to the carrier before they are on board the vessel, the use of the Incoterm-clause FOB is not recommended,42 but instead the parties should consider using the Incoterm-clause FCA.

39 In the absence of such an indication, the ICC Rules for the Use of Domestic and International Trade Terms, International Chamber of Commerce should nevertheless be decisive, as has been ruled by several courts, see Case C-87/10 Electrosteel Europe SA v Edil Centro SpA [2011] ECR I-4987; BGH 7 November 2012 in (2013) 13 IHR 15 et seq.; see also Magnus/Lüsing, ‘CISG und INCOTERMS, Leistungsverzug und Fixgeschäft’ (2007) 7 IHR 1 (7). 40 For this see e.g. BGH 3 October 1983, II ZR 254/82. In this particular case, however, this inaccuracy did not have any effect. 41 Unless, however, the buyer’s factory is actually situated directly in a port or with direct access to a port. 42 This is due to the fact that the seller usually has to hand over the goods at the terminal, without having any influence of what happens afterwards. In particular, the seller cannot monitor that the container will actually be loaded upon the vessel, although this is the relevant point in time when the seller has delivered. As a reason of this, the ICC recommends not to use the INCOTERMS-clause FOB when goods are handed over to the carrier before they are on board the vessel, which is usually the case with goods in containers.

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From daily practice in drafting, advising on and negotiating contracts, it is important to emphasize that the concept of delivery (and the associated questions of who bears the risks and when the delivery is made on time) is not always thoroughly understood. One regularly encounters contracts which stipulate CPT INCOTERMS 2020 as the applicable Incoterm clause, while it is clear from the rest of the contract that the buyer understands ‘delivery’ as the goods actually reaching the buyer’s place of business. If there is such a wrong appreciation and transportation of the goods takes some weeks, a conflict between the buyer and the seller is almost inevitable. The seller will deliver at the agreed date or within the agreed time period by handing over the goods to the carrier. However, at the date of delivery, the buyer will expect the goods to have reached his place of business. The conflict will be even greater, if the goods get lost, destroyed or damaged during transportation. As the risk of transport will in these cases lie with the buyer, he should consider taking appropriate insurance for these risks. The parties are well advised not to use the legal term ‘delivery’ synonymously with the non-legal term ‘shipment’. Again, daily practice shows that this is done very often. If the parties stipulate in a contract that the buyer shall ‘ship the goods to New York’, it is not clear what is actually meant with this provision. It seems that such a provision is only a confirmation of the fact that the buyer shall arrange for the shipment, which leads to an application of Article 31(a) CISG, however with the peculiarity that it is the seller who has to pay for transportation. It would be too great a burden to interpret this clause in such a way that the place of delivery and the place of taking delivery would both be at the place of destination in New York. When acting for the seller, the provisions on delivery should specifically allow partial or early deliveries. This is in particular true in situations where the seller is under an obligation to deliver e.g. ‘DAP (place of delivery) INCOTERMS 2020’ and where the place of delivery is in a country in which burdensome custom formalities have to be adhered to. In practice, one often encounters drafts of contracts which provide that the seller must strictly adhere to the agreed delivery dates and may not deliver prior to or later than the agreed delivery date. This would lead to the unreasonable situation that the seller would have to send the means of transport with long lead times to avoid delays in customs clearance. But if such customs clearance is performed faster than anticipated, he would not yet be able to deliver the goods but would need to wait until the agreed date of delivery. Moreover, from the seller’s point of view, it is advisable to incorporate a provision limiting the seller’s liability for late or non-existent delivery. This can either be made in the context of provision on delivery or comprehensively when the seller’s liability is concerned. Daily practice also shows that clauses such as ‘franco …’ are still widely used, despite the fact that their exact content is unclear. When constructing these clauses, courts generally try to understand what the parties actually intended to agree on. They therefore look into the merits of the case and have regard to the circumstances of each individual case, which seems to be an appropriate approach, but in practice simply leads to legal uncertainty. From a practitioner’s point of view, it can only be recommended to avoid such unclear terms. If the seller is the owner of trademarks, he should be aware of the fact that the place of delivery can also have an important impact upon the exhaustion of trademarks. According to the applicable European regulation, the proprietor of a trademark is not

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entitled to prohibit the use of his trademark in relation to goods which have been put on the market in the European Union under that trademark by him or with his consent.43

J. Sample Clauses 47 1.

‘Delivery of the goods shall be FCA (seller’s place of business) INCOTERMS 2020.’ With this clause it is made clear that the seller delivers when the goods have been loaded on the means of transportation provided by the buyer. To assess whether or not the seller has delivered timely, one also only needs to consider when the goods have been loaded on the means of transportation provided by the buyer and not when the goods actually reach the buyer’s place of business. It is possible for the seller to contract out of his obligation to load the goods on the means of transportation provided by the buyer and stipulate that delivery is the placing of disposal. If the buyer and the seller are both situated within Europe, in the absence of a jurisdiction clause in the contract which specifies differently, the place of delivery stemming from this delivery term will also often be the place of the competent court.

48 2.

‘Delivery of the goods shall be [insert relevant INCOTERMS-clause as well as the appropriate place] INCOTERMS 2020’ The parties should at all times use the clauses of the INCOTERMS 2020, specifying however the place of delivery, the place/port of destination etc. as applicable depending upon the respective clause.

K. Additional Sources 49 Murray et al., Schmitthoff ’s Export Trade (11th edn, Thomson Reuters 2007); Piltz, ‘Sales involving Carriage of the Goods’ (2012) 9 Nederlands Tijdschrift voor Handelsrecht 86 et seq.

Part 2: Time of Delivery A. Topics Covered Time of delivery

50

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Reasonable time Early delivery

B. Introductory Note 51

Apart from the questions where and how the seller has to deliver, the time of delivery is usually also of utmost importance both for the buyer and the seller. The buyer concludes the sales contract because he is in need of the goods. Late delivery leads to a breach of contract, which is why the seller will want to know when he has to fulfil his 43 See Article 13 Council Regulation (EC) No. 207/2009 of 26 February 2009 on the Community trade mark. See also § 24 German Trademark Act which contains a very similar provision.

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obligation to deliver. This will enable him to plan production capacities or delivery times of his suppliers accordingly.

C. Statement of Issues The issues that will be focused on are: (1) When does the seller have to deliver? 52 (2) Which influences can the use of INCOTERMS-clauses have on the time of delivery? (3) Is the seller allowed to deliver early? (4) What are the consequences if the seller does deliver on time? (5) Which steps should the practicing lawyer do to best protect the interests of his client?

D. International Sales Transaction The time of delivery is important and decisive both in domestic as well as interna- 53 tional sales transactions.

E. Sampling of Laws I. CISG Article 33 The seller must deliver the goods: (a) if a date is fixed by or determinable from the contract, on that date; (b) if a period of time is fixed by or determinable from the contract, at any time within that period unless circumstances indicate that the buyer is to choose a date; or (c) in any other case, within a reasonable time after the conclusion of the contract.

Article 33 CISG deals with the time of delivery. If the parties have fixed a date in the contract or the date of delivery is determinable from the contract, the seller must deliver on that date, Article 33(a) CISG. ‘Fixing’ a date usually means that the exact calendar day is agreed upon. However, it is sufficient that the exact calendar day is determinable from the contract or that the parties make reference to an event of which occurrence is certain and which can be determined objectively. It has to be noted though that if the seller and the buyer agree on an estimated time of departure (ETD) this does not constitute a fixed dated as requested by Article 33(a) CISG.44 If no exact calendar date is fixed or determinable from the contract, but, instead, a time period is agreed upon, the seller can choose a date within this time period, unless the circumstances indicate that the buyer is to choose a date, Article 33(b) CISG. In cases covered neither by Article 33(a) nor (b) CISG, the seller has to deliver within a reasonable time after conclusion of the contract. Assessment of the reasonable time depends upon the circumstances of each individual case. Important factors to take into consideration will be whether the contract relates to goods held in stock, whether the goods need to be manufactured (and how long it usually takes to manufacture the goods), If the seller does not deliver on time, the buyer can require delivery (Article 46 CISG), fix an additional period of time to enable declaring the contract avoided later (Article 49(1)(b) CISG) or immediately declare the contract avoided if late delivery amounts to 44

Rechtbank Limburg 26 July 2018, CISG-Online No. 2838.

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a fundamental breach (Article 49(1)(a) CISG). Finally, the buyer can claim damages, Article 74 CISG. 58 With reference to Article 49(1)(a) CISG, it is important to know that according to some case law, agreeing on the Incoterm-clause ‘CIF’ is interpreted as an agreement on a set delivery date, which entitles the buyer to avoid the contract without first fixing an additional period.45 However, this particular decision has been subject to severe criticism.46

II. UNIDROIT Principles of International Commercial Contracts Article 6.1.1. A party must perform its obligations: (a) if a time is fixed by or determinable from the contract, at that time; (b) if a period of time is fixed by or determinable from the contract, at any time within that period unless circumstances indicate that the other party is to choose a time; (c) in any other case, within a reasonable time after the conclusion of the contract.

The UNIDROIT Principles’ scope of application is not restricted solely to sales contracts. Instead, the UNIDROIT Principles have a wider scope of application in generally dealing with commercial contracts. The wording and content of Article 6.1.1. PICC is almost identical with Article 33 CISG.47 According to Article 6.1.1.(a) PICC, if a time is fixed by or determinable from the contract, party must perform its obligations at that time. In contrast to this, Article 6.1.1.(b) PICC deals with cases where a period of time is fixed or determinable from the contract. In these cases the seller has to perform (that is in cases of sales contracts deliver) at any time within that period unless circumstances indicate that the other party is to choose a time. If neither a time nor a time period is fixed or determinable, the seller has to perform his obligations (that is in case of sales contracts deliver) within a reasonable time after the conclusion of the contract, Article 6.1.1.(c) PICC. 60 Should the buyer and the seller need to perform their obligations simultaneously, then either party may withhold performance until the other tenders its performance, Article 7.1.3.(1) PICC. 59

III. Principles of European Contract Law Article 7:102 A party has to effect its performance: (1) if a time is fixed by or determinable from the contract, at that time; (2) if a period of time is fixed by or determinable from the contract, at any time within that period unless the circumstances of the case indicate that the other party is to choose the time; (3) in any other case, within a reasonable time after the conclusion of the contract.

61

Just like the UNIDROIT Principles, the PECL have a wider approach than the CISG and deal with the time of performance rather than specifically with the time of delivery of the goods. The wording of Article 7:102 PECL is identical to Article 6.1.1. PICC, which is why reference is made to the explanations made with regard to the PICC. Should the buyer and the seller need to perform their obligations simultaneously, then OLG Hamburg 28 February 1997, CISG-Online No. 261. Magnus/Lüsing, ‘CISG und INCOTERMS, Leistungsverzug und Fixgeschäft’ (2007) 7 IHR 1 (7). 47 Piltz, in Kröll, Mistelis, Viscasillas (eds), UN-Convention on the International Sale of Goods (CISG) (2nd edn,2018) Article 33 CISG, para. 37. 45

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each party may withhold performance until the other has tendered performance or has performed, Article 9:201(1) PECL.

IV. German Bürgerliches Gesetzbuch § 271 (1) Where no time for performance has been specified or is evident from the circumstances, the obligee may demand performance immediately, and the obligor may effect it immediately. (2) Where a time has been specified, then in case of doubt it must be assumed that the obligee may not demand performance, but the obligor may effect it prior to that time.

§ 271(1) BGB stipulates that where no time for performance has been specified or is 62 evident from the circumstances, the obligee may demand performance immediately, and the obligor may effect it immediately. Where a time has been specified, then, in case of doubt, it must be assumed that the obligee may not demand performance, but the obligor may effect it prior to that time, § 271(2) BGB. It has to be noted however that unless the parties agree otherwise (e.g. by giving the buyer a time period within which the buyer has to pay the purchase price), § 273 and § 320 BGB stipulate a right of retention, meaning the seller can refuse to deliver until the performance owed to him (payment of the purchase price) is rendered. So each parties’ obligations have to be performed at the same time.

V. French Code Civil Article 1610 If the seller fails to make delivery within the time agreed upon between the parties, the purchaser may, at his choice, demand the rescission of the sale, or that he is put in possession, if the delay results from an act of the seller alone.

Article 1610 of the French Code Civil provides that the seller has to deliver within 63 the agreed time. The French Code Civil does not govern the time of delivery if no agreement has been reached. However, in such cases the seller has to deliver within a reasonable time.48 What is a reasonable time depends upon the circumstances of each individual case. For example, where wholesale trade is concerned, delivery has to be made immediately.

VI. Spanish Código Civil Article 1466 The seller shall not be obliged to deliver the thing sold if the purchaser has not paid the price or the contract has provided no period to pay.

If the contract does not provide for the time of delivery, the seller has to deliver 64 immediately.49 However, the buyer may not demand immediate delivery if he has not paid the purchase price or if the contract does not provide for a period to pay, Article 1466 CC. 48 Wenner/Schödel, in Graf von Westphalen (ed), Handbuch des Kaufvertragsrechts in den EG-Staaten (1992) p. 417, para. 53. 49 Martí, in Graf von Westphalen (ed), Handbuch des Kaufvertragsrechts in den EG-Staaten (1992) p. 977, para. 50.

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VII. United Kingdom Sale of Goods Act 1979 Section 29 (1) Whether it is for the buyer to take possession of the goods or for the seller to send them to the buyer is a question depending in each case on the contract, express or implied, between the parties. (2) Apart from any such contract, express or implied, the place of delivery is the seller's place of business if he has one, and if not, his residence; except that, if the contract is for the sale of specific goods, which to the knowledge of the parties when the contract is made are in some other place, then that place is the place of delivery. (3) Where under the contract of sale the seller is bound to send the goods to the buyer, but no time for sending them is fixed, the seller is bound to send them within a reasonable time. (4) Where the goods at the time of sale are in the possession of a third person, there is no delivery by seller to buyer unless and until the third person acknowledges to the buyer that he holds the goods on his behalf; but nothing in this section affects the operation of the issue or transfer of any document of title to goods. (5) Demand or tender of delivery may be as ineffectual unless made at a reasonable hour; and what IS a reasonable hour is a question of fact. (6) Unless otherwise agreed, the expenses of and incidental to putting the goods into a deliverable state must be borne by the seller.

The United Kingdom Sale of Goods Act provides little guidance on the time of delivery. Only if the seller is bound to send the goods to the buyer, s 29(3) SGA stipulates that where no time for sending them is fixed, the seller is bound to send them within a reasonable time. However, s 29(3) SGA is seen as a general rule that if the contract is silent as to the time of delivery, the seller is bound to deliver the goods within a reasonable time. What is reasonable is a question of fact, but may be affected by the usage of trade.50 66 It has to be noted however that unless the parties agree otherwise (e.g. by giving the buyer a time period within which the buyer has to pay the purchase price), delivery of the goods and payment of the price are concurrent conditions, s 28 SGA. So generally both parties’ obligations have to be performed at the same time or at least the party making the claim must be in a position to perform his side of the contract and he need not tender.51 65

VIII. American Uniform Commercial Code § 2-309 (1) The time for shipment or delivery or any other action under a contract if not provided in this Article or agreed upon shall be a reasonable time. (2) Where the contract provides for successive performances but is indefinite in duration it is valid for a reasonable time but unless otherwise agreed may be terminated at any time by either party. (3) Termination of a contract by one party except on the happening of an agreed event requires that reasonable notification be received by the other party and an agreement dispensing with notification is invalid if its operation would be unconscionable.

67

If the parties have not agreed on the time for delivery, the seller is obliged to deliver within a reasonable time, § 2-309 UCC. What constitutes reasonable time depends upon what constitutes acceptable commercial conduct in view of the nature, purpose and circumstances of the action taken.52

Chitty on Contracts, Volume II Specific Contracts (31st edn, 2012) para. 43-280. Chitty on Contracts, Volume II Specific Contracts (31st edn, 2012) para. 43-271. 52 Baird et al., Commercial and Debtor-Creditor-Law: Selected Statutes (New York 2011) § 2-308. 50

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IX. Chinese Law Article 510 Where, after the contract becomes effective, there is no agreement in the contract between the parties on such contents as quality, price or remuneration, or place of performance etc., or such agreement is ambiguous, the parties may agree upon supplementary terms through consultation; if a supplementary agreement cannot be reached, such terms shall be determined in accordance with the relevant provisions of the contract or transaction practices. Article 511(4) If the time limit for performance is not clear, the creditor may perform, and the debtor may request performance at any time, provided that the other party shall be given the time required for preparation.

Like all other laws explained herein, also the CCC respects the parties’ autonomy. 68 This can be clearly derived from Article 510 CCC and Article 511 CCC but also from Article 596 CCC, which stipulates that a sales contract shall generally include – inter alia – the time limit, place and method for performance. So the creditor (seller) shall deliver the goods sold within the agreed time. If the contract does not specify the time of delivery, Article 510 CCC first upholds this principle of party autonomy and stipulates that the parties may agree upon the time limit for performance by consultation. If no agreement is reached and cannot be determined by looking at the contractual clauses or transaction practices, Article 511(4) CCC provides that the creditor (seller) may perform his obligation to deliver at any time. Likewise, the obligor (buyer) may request performance at any time, though a demand for delivery by the buyer first requires affording the seller with time to make the necessary preparations for delivery.

F. Commentary The above sampling of laws shows many similarities, but also some very important 69 differences. First, one has to note the fact that according to all laws any contractual agreement as to the time of delivery prevails over any statutory default provision. If, however the parties have not agreed on the time or time period of delivery, some laws require the seller to deliver immediately, whiles other grant the seller a reasonable time. Knowledge of such peculiarities can be very important, especially for the seller to avoid being liable for any damages resulting from late delivery.

G. Illustrations 1. Seller is entitled to deliver earlier than the agreed time of delivery. 70 Especially if the storage of the goods can be costly for the seller, he is well advised to agree with the buyer that the seller is entitled to deliver before the agreed time of delivery. To avoid too burdensome situations for the buyer, the parties may restrict such right of an early delivery, e.g. by agreeing that the seller may deliver up to seven calendar days prior to the agreed time of delivery. 2. Seller is entitled to make partial deliveries [unless this is unreasonable burdensome for 71 the buyer]. Depending upon the kind and the amount of goods sold, it might be advisable for the seller to stipulate that he is entitled to partial deliveries. This can be combined with the right to deliver before the agreed time of delivery.

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H. Practitioner Tips 72

73

74

75

76

The parties are well advised to agree on a date or time period within which the seller has to deliver. For the seller, this avoids the situation that he has to deliver within a reasonable time (which is not precise enough) or even immediately, as for example stipulated in § 271 BGB. Should the seller not want to be bound by a specific date or time period, he might consider mitigating the effect of fixing a precise date or time period by inserting the word ‘approximately’, this giving the seller a bit more flexibility. When acting for the seller, the provisions on delivery should specifically allow early deliveries to avoid a rejection by the buyer, Article 52 CISG. Moreover, from the seller’s point of view it is advisable to incorporate a provision limiting the seller’s liability for late or non-existent delivery. This can either be made in the context of provisions on delivery or comprehensively when the seller’s liability is concerned. If the goods are specifically manufactured for the buyer and could not be used elsewhere should the buyer avoid the contract, it is especially decisive for the seller to avoid situations where the buyer could avoid the contract immediately after the agreed date has been fixed. The seller’s interests can be safeguarded in two ways in this respect. First of all, the seller should make sure that the contract does not contain a ‘time is of the essence’-clause, which would make any delay in delivery a fundamental breach. Moreover, a useful provision in the contract could be to make the adherence to any dates or time periods dependent upon the buyer fulfilling all of his obligations in time. This applies to all sales contracts and not only to contracts where the goods are specifically manufactured for the buyer. However, in the latter case the buyer very often has to provide certain information to the seller which the seller needs to perform his services. In daily practice, a corresponding contract clause provides the seller at least with many arguments to avoid late delivery and the potential consequences arising from late delivery, especially avoidance of the contract. The seller should be especially careful when agreeing with the buyer on a C-clause of the INCOTERMS. To avoid the consequences of case law which interprets such a clause as an agreement on a set delivery date which entitles the buyer to avoid the contract without first fixing an additional period,53 the seller should expressly stipulate that time is not of the essence. From the seller’s point of view, such a provision is always advisable to avoid the consequences of Article 49(1)(a) CISG, should non-adherence to agreed time limits be considered as a fundamental breach. Apart from making the right of avoidance conditional upon the fixing of an additional period of time, from the seller’s perspective it is also advisable to limit his liability if he delivers late or not at all.

I. Sample Clauses 77 1.

Delivery times are only approximate and depend upon the buyer making payment of the purchase price and fulfilling all obligations as well as giving necessary information in time. Such a clause is advisable if acting for the seller. Alternatively, one may state that ‘time is not of the essence’. Stating that ‘time is not of the essence’ is especially important when agreeing on a C-clause of the INCOTERMS, to avoid this Incotermclause being construed as an agreement on a set delivery date which entitles the

53 OLG Hamburg 28 February 1997, CISG-Online No. 261. Dissenting with persuasive arguments Magnus/Lüsing, ‘CISG und INCOTERMS, Leistungsverzug und Fixgeschäft’ (2007) 7 IHR 1 (7).

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J. Additional Sources

buyer to avoid the contract without first fixing an additional period, Article 49(1)(a) CISG. 2. All time limits and time periods regarding the delivery are of the essence and failure to 78 comply with these time limits or periods is considered to be fundamental breach which — in addition to all other rights the buyer has according to this Agreement and the applicable law — entitles the buyer to avoid the contract without previously fixing an additional period of time. Such a clause is advisable if acting for the buyer, as usually non-adherence to agreed time limits or periods does not amount to a fundamental breach under the CISG.

J. Additional Sources Baird et al., Commercial and Debtor-Creditor-Law: Selected Statutes (Foundation Press 2011); Murray et al., Schmitthoff ’s Export Trade, (11th edn, Thomson Reuters 2007); von Westphalen, Handbuch des Kaufvertragsrechts in den EG-Staaten (Dr. Otto-Schmidt 1992).

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CHAPTER 13 DELIVERY OF DOCUMENTS Christian Fleischmann and Martin Schmidt-Kessel A. Topics Covered . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B. Introductory Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C. Statement of Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . D. International Sales Transaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Typical Risks in International Sales Transaction and their Diffusion through the Delivery of Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Financial Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Physical Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Legal Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Main Functions of the Delivery of Documents in an International Sales Transaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Types of Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Documents of Title/Documents Representing the Goods . . . . . . . . . . . . . . . . . a) Legal Nature of Documents of Title . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Negotiable Documents of Title . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Non-Negotiable Documents of Title . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Other Documents/Documents Relating to the Goods . . . . . . . . . . . . . . . . . . . . IV. Delivery of Documents in order to Fulfill the Seller’s Obligations under a Contract for the Sale of Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Possible Sources for an Obligation to Deliver Documents . . . . . . . . . . . . . . . . 2. Determining Place and Time of the Document Delivery . . . . . . . . . . . . . . . . . . 3. The Relevance of Trade Terms for the Delivery of Documents . . . . . . . . . . . . V. Delivery of Documents in order to Allow for Payment under a Contract for the Sale of Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Documentary Credit Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Mode of Operation of a Documentary Credit Payment . . . . . . . . . . . . . . . . . . b) Contractual Relationships under a Documentary Credit Transaction . . . c) Applicability of the UCP 600 Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d) Types of Documentary Credits under the UCP 600 Rules . . . . . . . . . . . . . . . e) Special Requirements Regarding the Conformity of Documents Delivered under a Documentary Sales Transaction . . . . . . . . . . . . . . . . . . . . . 2. Documentary Collections Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Mode of Operation of a Documentary Collection Payment . . . . . . . . . . . . . . b) Applicability of the URC 522 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Parties to a Documentary Collection Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . d) Required Content of a Collection Instruction under the URC 522 . . . . . . . e) Necessary Documents for a Successful Documentary Collection Process f) Bills of Exchange . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . g) Conditions for the Release of Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Differences between Documentary Credit and Documentary Collections Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI. Non-Conformity of the Delivered Documents: Documentary Breach . . . . . . . 1. Determining the Non-Conformity of a Delivered Document . . . . . . . . . . . . . a) Non-Conformity Deriving from the Party Agreement . . . . . . . . . . . . . . . . . . . b) Non-Conformity Deriving from Rules of Law or Uniform Texts . . . . . . . . . 2. Examples for Non-Conforming Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Digital Copy of an Airway Bill Instead of the Original Airway Bill . . . . . . b) Obvious Typographical Errors Do Not Constitute a Documentary Breach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Wrong Country of Origin Constitutes a Documentary Breach under a Certificate of Origin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Seller’s Right to Cure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Existence of a Right to Cure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Possible Ways to Cure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. Possible Forms of Documentary Breach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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1 2 3 4 5 6 7 8 9 11 12 12 13 14 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 37 38 39 40 40 41 42 43 44 45 46

A. Topics Covered a) Non-Delivery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 b) Incomplete or Wrong Delivery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 c) Defective Delivery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 5. Effects on a Documentary Breach on the Conformity of the Goods Sold 50 VII. Examples for Documents with Relevance in International Sales Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 1. Documents of Title/Documents Representing the Goods . . . . . . . . . . . . . . . . . 51 a) Negotiable and Non-Negotiable Bill of Lading . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 b) Dock Warrant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 c) Warehouse Keeper’s Certificate/Warehouse Receipt . . . . . . . . . . . . . . . . . . . . . 57 d) The Consignor’s Copy of an Air Waybill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 e) Warrants for the Delivery of Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 2. Other Documents Relating to the Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 a) Sea Waybill/Express B/L . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 b) Dock Receipts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 c) Commercial Invoices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 d) Certificates of Origin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 e) Further Documents Relating to the Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 E. Sampling of Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 I. CISG and CISG Advisory Council Opinions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 II. UNIDROIT Principles of International Commercial Contracts . . . . . . . . . . . . . . 66 III. Principles of European Contract Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 IV. German Bürgerliches Gesetzbuch . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 V. French Code Civil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 VI. Spanish Código Civil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 VII. American Uniform Commercial Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71 VIII. United Kingdom Sale of Goods Act 1979 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 IX. Chinese Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 F. Commentary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 I. CISG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 1. Types of Documents Covered by CISG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76 a) Documents in the Sense of Article 30 CISG and Article 34 CISG . . . . . . . . 77 b) Documents in the Sense of Article 58 CISG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78 2. The Obligation to Deliver Documents under Article 30 CISG and Article 34 CISG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79 3. Specifics of the Seller’s Right to Cure Non-Conforming Documents under the CISG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81 4. Time for Payment in a Documentary Sales Contract under the CISG . . . . 82 5. Seller’s Right of Retention under Article 58 CISG . . . . . . . . . . . . . . . . . . . . . . . . . 83 II. UNIDROIT Principles of International Commercial Contracts . . . . . . . . . . . . . . 84 III. Principles of European Contract Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85 IV. German Bürgerliches Gesetzbuch and Supplementary Laws . . . . . . . . . . . . . . . . . 86 V. French Code Civil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87 VI. Spanish Código Civil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88 VII. United Kingdom Sale of Goods Act 1979 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 VIII. American Uniform Commercial Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90 IX. Chinese Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91 G. Illustrations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95 H. Cross References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97 I. Practitioner Tips & Contract Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98 I. Resolving Issues under Documentary Credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99 II. Electronic Delivery of Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100 J. Additional Sources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110

A. Topics Covered This Chapter will cover the following topics: – –

1

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– – – – –

Requirements for fulfilling the obligation to hand-over documents Relevance of documents for documentary collections Relevance of documents for documentary credit transactions Non-conformity of delivered documents Seller’s cure to cure a documentary breach

B. Introductory Note 2

Under an international business transaction, the delivery of documents is a common phenomenon. In order to ensure the enforcement of the sales of goods contract, documents may have to be transferred. The legal assessment of the delivery of documents is characterized by its nature as an annex to the sales of goods-agreement and the lack of a legal framework specifying the requirements for a conforming delivery of documents. Furthermore, this specific area of International Business Transaction is subject to a wide array of International Business Customs and agreements.

C. Statement of Issues 3

This Chapter will examine the following issues: In which contract types is an obligation of the seller to hand over documents arising? Which types of documents are covered by this obligation? What legal effects are associated with a delivery of documents? When is a document non-conforming and what are the consequences of the non-conformity of a delivered document?

D. International Sales Transaction 4

The delivery of documents is of high importance for the frictionless performance of any international sales transaction due to the risks typically associated with such types of transactions.

I. Typical Risks in International Sales Transaction and their Diffusion through the Delivery of Documents 5

Under a local sales transaction, the goods covered by the sales contract are immediately handed over, buyer and seller are normally able to identify each other and the payment can easily be retained as a security by the buyer. In contrast, under a common international sales transaction the parties do not know each other personally and sources for reputation and trust1 are limited. Moreover, there is usually a large number of several kinds of intermediaries and a long interval of time between the dispatch of goods from the seller and their arrival at the agreed destination. In this period, seller and buyer are exposed to three types of risk.2 1 Cf. for the trust function of documents more generally for the digital age Schmidt-Kessel, ‘Documentary formalism for the digital age – building trust’, in Zaccaria, Schmidt-Kessel, Schulze & Gambino (eds.), EU eIDAS Regulation, Article-by-Article Commentary (Beck/Hart/NomosBeck/Hart/Nomos 2020), Introduction, Part D, no. 2–6. 2 Cf Berman & Kaufman, ‘The Law of International Commercial Transactions (Lex Mercatoria)’ (1978) 19 Harvard International Law Journal 221, 222; Mugasha, The law of letters of credit and bank guarantees (The Federation Press 2003) p. 5.

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1. Financial Risk First, and of the highest importance, is the financial risk, which affects both parties. 6 After the shipment of the goods, the seller wants to obtain the payment as early as possible. He may also want to retain his property on the goods as long as possible in order to hold a security in the case of a non-payment. The buyers’ concerns are just to the contrary: The buyer will not want to pay for goods, which he has not yet received. To reconcile these conflicting interests, it is necessary that the parties obtain sufficient assurance that they will receive the owed performance respectively the owed counterperformance. In international sales transactions, this reconciliation is often achieved by documents of title of goods and the rules relating to the passing of property in goods in transit. Furthermore, the seller may assure, that he will receive the payment by agreeing on a payment by documentary credit. Also, in this constellation, the delivery of the proper documents is crucial, as without the delivery of the documents, the payment of the price will not become due.

2. Physical Risk The second risk typically associated with an international sales transaction is the 7 physical risk of a long transportation. During this transportation period, the goods may be lost or damaged or may deteriorate in transit. An adequate distribution of risk is hereby also achieved by the rules relating to the passing of property in goods in transit.

3. Legal Risk Third, the legal risk of governmental interference with the export or import can be 8 minimized by proper documentation of the import or export process according to the applicable laws. Therefore, the issue of the necessary documents and their delivery can be crucial to a successful performance of an international sales transaction.

II. Main Functions of the Delivery of Documents in an International Sales Transaction Delivering documents has become a common way in international sales transactions 9 to defuse the above-mentioned risks. In order to achieve this task, the delivery of documents tries to serve two crucial functions. First, it allows for the transfer of property on the goods sold under the contract possibly but not necessarily during the transit period. A delivery of documents may be required by the seller in order to fulfil its obligation to transfer property in the goods. Second, it allows for a secure payment in relation to the above-mentioned distribution of risk by payment by means of documentary collections or documentary credit. This is required for the buyer in order to fulfil its payment obligation. These goals are achieved by a modification of the seller’s duty to deliver the purchased goods. A contract resulting in the delivery of documents requires an agreement between the parties that the seller has to perform its obligation not by delivering the goods but documents “regarding” the goods. This results in a two-fold performance-obligation for the seller: He has to deliver the documents to the buyer and make the goods available for transport to the buyer.3

3 Ernst & Lauko, in Honsell (ed), Kommentar zum UN-Kaufrecht (2 nd edn, Springer 2010) Article 34 CISG para. 1.

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The entire legal system of the delivery of documents is also described as documentary sales contracts. The law of documentary sales is a product of the custom of the international community of merchants, ship-owners, marine insurance underwriters, and bankers of many countries.4 It has developed as a part of the lex mercatoria or new law merchant.5 In a documentary sales contract, the delivery of the goods can only be achieved by the delivery of the documents. As there is no international convention for the carriage of goods in general, the provisions presented on the following pages may be modified by the special requirements of every mode of transport. Each mode of transport is specifically regulated by International conventions for international transport by sea, railroad or air.6

III. Types of Documents 11

Two major categories of documents have to be distinguished as the legal consequences of their delivery to the buyer differ heavily. The first category is documents of title; the second is described as ‘other documents’ in academic literature. In order to fulfil the abovementioned obligations to a sales contract, the delivery of either a document of title or another document or the delivery of both types of documents may be required.

1. Documents of Title/Documents Representing the Goods a) Legal Nature of Documents of Title 12

Documents of title facilitate the exchange and transfer of goods and are therefore commonly used in international sales transactions.7 They are, due to their legal nature, also described as documents representing the goods.8 Documents of title are necessary for the performance of the contract of sale, as they are needed by the buyer to acquire the property and possession of the goods.9 A document of title is usually issued by a bailee or keeper of the goods to the bailor or depositor. It describes the goods covered by it in a way that makes them determinable.10 The bailee – under and beyond the classical terminology of the Common Law – is the person, who has custody of the goods of the bailor. In a sales transaction, the bailee is commonly the person, who is ordered to transport the goods from the seller to the buyer. The bailor is commonly the seller. Possession of a document of title is symbolic for the ownership of the goods that are described within it. This means that a person who is in possession of such a document of title may claim the property and possession of the goods covered by this document of title. Therefore, the seller’s failure to deliver these documents will mean that the buyer will not be able to acquire property and possession on the goods.11 In a sales contract, 4 Berman & Ladd, ‘Risk of Loss or Damage in Documentary Transactions under the Convention on the International Sale of Goods (Cornell Symposium)’ (1988) 21 Cornell Int’l LJ 423, 425. 5 Berman, ‘The Law of International Commercial Transactions (Lex Mercatoria)’ (1988) 2 Emory J Int’l Disp Res 234. 6 Grobarčíková & Sosedová, ‘Carrier’s liability under the International Conventions for the Carriage of Goods by Sea’ (2014) 9 Transport Problems 75. 7 Lehman & Phelps, West’s Encyclopedia of American Law Vol III (2nd edn, Thomson Gale 2008) p. 497. 8 v. Bar & Clive, Principles, Definitions and Model Rules of European Private Law, DCFR Commentary Vol II (Sellier 2009) IV.A.–2:201, p. 1256. 9 Piltz, in Kröll, Mistelis & Perales Viscasillas (eds), UN Convention on Contracts for the International Sale of Goods (2th edn, Beck/Hart/NomosBeck/Hart/Nomos 2018) Article 34 CISG para. 10. 10 Cf Lehman & Phelps (n 7) p. 497. 11 v. Bar & Clive (n 8).

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the seller as the bailor can therefore transfer the property on the goods by handing over the document of title to the seller. b) Negotiable Documents of Title Furthermore, the scope of the legal nature of a document of title is determined by a 13 distinction made between negotiable and non-negotiable documents of title is made. In English law, the expression ‘documents of title’ is used in two different senses: a narrow, Common Law sense regards only the negotiable document of title as a document of title. However, the broader statutory approach also covers the non-negotiable bill of document of title.12 A negotiable document of title is given when the document authorizes the bailee to hand over the goods to the order of some named party or the holder of the document.13 This means that the person who is currently in possession of the document of title can request the goods that are covered by the document of title from the bailee. The major advantage of a negotiable document of title is that it allows for the resale of the goods covered by it already during the period of carriage. Considering the long shipping periods especially in a carriage by sea, the buyer will want to make use of the goods before their arrival at the shipping destination. A negotiable document of title can be sold by the buyer and transferred to its business partner. This only requires an agreement by the parties, in Common Law countries called ‘negotiation’ and the delivery of the document to the business partner.14 This ‘negotiability’ or ‘transferability’ is the criteria, which is required for a document to be understood as a document of title in the traditional Common Law sense.15 c) Non-Negotiable Documents of Title The opposite is a non-negotiable document of title, also described as a ‘straight’ 14 document of title.16 Such a document is given when the document orders for a delivery of the goods to a named consignee.17 The ‘straight’ document of title is not covered by the narrow Common Law interpretation of the term document of title, which was mentioned above, because such a document lacks the required ‘transferability’. However, judicial decisions in the recent decade introduced this category of documents of title. 18 The requirements for a non-negotiable document of title are hereafter fulfilled, when 15 it has to be produced to the bailee by the person claiming delivery of the goods from the bailee.19 It therefore allows only for a delivery to the one person named in the document. A complete resale of the goods during the period of carriage including transfer of title is therefore not possible when a non-negotiable document of title has been issued.

12 For more details on this issue of dispute cf Benjamin & Bridge, Benjamin’s sale of goods (10 th edn, Thomson Reuters 2019) paras 18-006 et seq. 13 The concept of a document of title was first established in the decision Lickbarrow v Mason (1787) 2 TR 63. 14 Stockton & Miller, Sales and leases of goods in a nutshell (West Publishing Co. 1992) p. 112. 15 Benjamin & Bridge (n 12) para. 18-007. 16 Stockton & Miller (n 14) p. 111. 17 Stockton & Miller (n 14) p. 111. 18 Cf Parsons Corp v CV Scheepvaartonderneming Happy Ranger (The Happy Ranger) [2002] EWCA Civ 694; JI MacWilliam Co Inc v Mediterranean Shipping Co SA (The Rafaela S) [2003] EWCA Civ 556; Niru Battery Manufacturing Co. v Milestone Trading Ltd [2003] EWCA Civ 1446; Benjamin & Bridge (n 10) para. 18-008. 19 Benjamin & Bridge (n 12) para. 18-008.

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2. Other Documents/Documents Relating to the Goods 16

The second relevant category of documents is the one of the ‘other documents’, also described as documents relating to the goods.20 These are documents, which are not necessarily required for the performance of the sales contract as the buyer could still acquire property on possession on the goods without their delivery. They are nonetheless needed to make claims against third parties or to benefit from tariff advantages, tax privileges or references21 or are required in order to being able to use the goods in a proper manner after they have been taken over by the buyer. Under most jurisdictions, the obligation to deliver documents related to the goods is regarded as a secondary obligation.22

IV. Delivery of Documents in order to Fulfill the Seller’s Obligations under a Contract for the Sale of Goods 17

The first function of the delivery of documents is to enable the seller to satisfy its obligation under an international sales transaction, namely, to deliver goods. In most overseas sales, the seller is under a duty to supply documents to the buyer.23 Commonly the seller hands over goods to a carrier and receives from the carrier a transport document about these goods, which together with other documents, are presented to the buyer in return for the payment for the goods delivered.24 Therefore, the delivery of documents may be required for the proper execution of the sales contract.

1. Possible Sources for an Obligation to Deliver Documents 18

In general, no law or international law relating to the sale of goods imposes an obligation to deliver documents on its own. Those sets of rules define only how an obligation to deliver documents has to be executed. Two regulatory approaches to the delivery of documents exist in the legal orders and uniform texts: The one approach is to cover all possible documents by using the broad term ‘documents’. The other approach is to make the distinction between documents representing the goods and documents relating to the goods and attach different legal consequences to the distinction.25 However, the actual obligation to deliver documents is usually be established between the parties only through a corresponding party agreement. Therefore, party autonomy is of particular importance in view of the obligation to deliver documents. The content of the obligations under the sales contract therefore have to be evaluated by examining the parties’ agreements and any applicable trade usages and practices between the parties in order to determine whether an obligation to deliver documents is existing under the sales contract.26

2. Determining Place and Time of the Document Delivery 19

The place of delivery of the documents also commonly derives from the party agreement, especially from the agreement made concerning the payment method. If the v. Bar & Clive (n 8) IV.A.–2:201, 1257. Piltz (n 9) Article 34 CISG para. 10. 22 See for more details v. Bar & Clive (n 8) IV.A.–2:201, p. 1257. 23 Bridge, The International Sale of Goods (4th edn, OUP 2017) para. 6.53. 24 Berman & Ladd (n 2) p. 424. 25 See above. 26 Piltz (n 9) Article 30 CISG para. 7. 20

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parties have agreed to pay via a documentary payment method,27 the place of delivery is the place of business of the paying agency named in the contractual agreement.28 The chosen payment method may also determine the point of time up to the documents can be delivered. When the payment via documentary credit29 was chosen, the expiration date of the letter of credit indicates the end of a time period within the seller can present the documents at any time without defaulting as otherwise the rights out of the letter of credit will be lost for both parties.30

3. The Relevance of Trade Terms for the Delivery of Documents Because the prevailing legal situation does not regulate the document delivery obliga- 20 tion by statute but refers to party agreement, international trade terms are of even higher importance as they are able to narrow this regulatory gap at least partially. International trade terms like the INCOTERMS 2020 rules including clauses like CIF, FOB and FOB or the newly introduced DPU (Delivered at Place Unloaded) serve the purpose to allocate the risk of loss or damage in international sales transactions.31 The trade terms specify, among other contract details, the way the obligation to deliver documents has to be executed by the seller to comply with the contract. One significant advantage of incorporating an INCOTERMS 2020 clause compared to using an individually negotiated contract term is that the INCOTERMS 2020 clauses are translated in a host of languages as so the language barrier and with it, the danger of misunderstandings is minimized. Moreover, an autonomous interpretation of the INCOTERMS rules exists, in contrast to individual clauses and national or uniform law lacking rules on the topic.32 Nearly all INCOTERMS 2020 clauses include an obligation to hand over certain kinds of documents under the Sales contract. Only when the parties agree on the EXW-clause, the seller is not obliged to hand over any documents.

V. Delivery of Documents in order to Allow for Payment under a Contract for the Sale of Goods The second major category in which documents play an important role is the use 21 of documents as a payment method. As pointed out above, one has to distinguish Documentary Credit Transactions and Documentary Collections Transactions.

1. Documentary Credit Transactions The payment by way of documentary credit is regarded as the most popular mode 22 of payment for lager international trade transactions as it allows for payment made from one place to another distant one while providing securities for both the seller and the buyer.33 The seller is assured by a third party, the bank that the payment will be made after delivery and the buyer is assured that the bank will only pay when the See below for documentary payment methods. Saenger, in Ferrari, Kieninger & Mankowski (eds), Internationales Vertragsrecht (3 rd edn, C.H. Beck 2018) Article 34 CISG para. 4. 29 See below for payment via documentary credit. 30 Piltz (n 9) Article 34 CISG para. 21; Schütze, Das Dokumentenakkreditiv im Internationalen Handelsverkehr (Verlag Recht und Wirtschaft 2008) para. 360. 31 Berman & Ladd (n 2) 423. 32 Cf Piltz (n 9) Article 30 CISG para. 8. 33 Amigo & Acevedo, ‘Costumbres y prácticas uniformes para. los créditos documentarios UCP 600’ (2008) Revista de Derecho de la Pontificia Universidad Católica de Valparaíso 155. 27

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ordered goods were actually delivered.34 Due to its widespread use in international sales transactions, the International Chamber of Commerce (ICC) has developed a set of rules standardizing the payment procedure called the Uniform Customs and Practice for Documentary Credits 600 (hereinafter UCP 600). Documentary credits are a type of letter of credit; however, the terms are often used synonymously although letter of credit is the broader term of the two.35 a) Mode of Operation of a Documentary Credit Payment 23

A documentary credit is used for payment when the parties have agreed upon this particular payment method. In the contractual deed, the parties commonly agree upon this by using the abbreviation ‘L/C’.36 The defining criteria for a documentary credit payment derive from the mode of operation of the payment. A documentary credit payment requires at least three parties to the payment process, at least two contracts, the required documents and the independence of the letter of credit from the underlying sales contract.37 The basis for a documentary credit transaction will commonly be a sales contract with the agreement to pay via documentary credit. Using a simplified explanation herein, the buyer requests its bank, commonly referred to as the issuing bank, to enter into an agreement with the seller to pay the seller the purchase price upon presentation of certain documents set forth in the agreement.38 The agreement is commonly referred to as ‘opening of the letter of credit’. The documents required are typically bill of lading, insurance certificate and other comparable documents.39 The documents assure the buyer that the goods have been actually handed over to the carrier by the seller. After presentation of the documents to the bank, the bank has to verify whether the delivered documents comply with the requirements in the documentary credit. In case the documents do not conform with the letter of credit, the bank notes a ‘documentary discrepancy’ and has to refuse to pay.40 When it finds the presentation complying it has to make the payment according to the documentary credit. The bank thereby does not verify whether the goods were actually delivered or their actual conformity with the contract.41 It rather ignores the underlying sales contract, the sole basis of assessment is the documentary credit.42 b) Contractual Relationships under a Documentary Credit Transaction

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A documentary credit transaction following this mode of operation requires at least two contracts. One contract exists between the buyer and the issuing bank, which contains the order to open a letter of credit in favor of the seller. The second contract is concluded between the issuing bank and the seller and contains the actual promise of performance. This second contract constitutes the actual letter of credit. Jiménez, ICC Guide to Export-Import Basics (ICC Publishing S.A. 1997) para. 6.5.1. Schwenzer, Hachem & Kee (eds), Global Sales and Contract Law (OUP 2012) para. 36.39. 36 Mohs, in Schwenzer & Schlechtriem (eds), Kommentar zum einheitlichen UN-Kaufrecht. Das Übereinkommen der Vereinten Nationen über Verträge über den internationalen Warenkauf (7 th edn, C.H. Beck 2019) Article 53 CISG para. 18. 37 Schütze (n 30) paras 38–43. 38 Schwenzer, Hachem & Kee (n 35) para. 36.40. 39 See below for a detailed description of the documents commonly used in International Sales Transactions. 40 Jiménez (n 32) para. 6.5.1. 41 Schwenzer, Hachem & Kee (n 33) para. 36.42. 42 According to Article 4(a) UCP 600, a credit is by its nature a separate transaction from the sale or other contract on which it may be based. 34

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c) Applicability of the UCP 600 Rules In order to apply the UCP 600 rules of the ICC, the parties in principle have to make 25 an explicit reference to the rule set. However, the rules are so commonly used that they are said by some authors to establish an international trade usage in the sense of Article 9(2) CISG. 43 The UCP 600 rules provide standards and requirements for the documents handed over by the seller and the examination procedure for the bank to which the documents are presented.44 d) Types of Documentary Credits under the UCP 600 Rules As every sales contract may have special requirements concerning the execution of 26 the payment, several different types of documentary credits have developed. A (very broad) distinction is made between revocable and irrevocable credits,45 and confirmed and unconfirmed credits.46 As an irrevocable credit cannot be revoked, it provides for the highest amount of security for the seller. According to Article 3 UCP 600 there is a presumption that the parties have agreed on this type of documentary credit. A confirmed letter of credit is given when a second bank at the seller’s place of business is involved. If this second bank is conforming the letter of credit, it assumes joint liability with the first bank for the payment obligation.47 e) Special Requirements Regarding the Conformity of Documents Delivered under a Documentary Sales Transaction As already stated above, the requirements regarding the compliance of the delivered 27 documents with the specification set out in the letter of credit is especially strict. 48 This level of compliance exceeds the general high standards in business transactions. This derives from fact that the bankers handling the payment are not as well informed as the buyer of the underlying sales contract.49 The standard is described as both exacting and exact.50 Therefore, even the smallest deviation may lead to the assumption that the documents are not in compliance with the letter of credit.

2. Documentary Collections Transactions Documentary collection is a second payment method commonly used in Internation- 28 al Sales Transactions. It is also known as Cash Against Documents abbreviated as ‘D/C’ or ‘CAD’, in case the parties have agreed on this particular payment method. This payment method is particular suitable for transactions in which the parties already have

43 Schwenzer, ‘The Danger of Domestic Pre-Conceived Views with Respect to the Uniform Interpretation of the CISG: the question of Avoidance in case of Non-Conforming Goods and Documents’ (2005) 36 VUWLR 804. Skeptical Schmidt-Kessel, in Schwenzer & Schlechtriem (eds), Commentary on the UN Convention on the international Sale of Goods (CISG) (7th edn, OUP 2016) Article 9 CISG para. 28. 44 Schwenzer, Hachem & Kee (n 35) para. 36.43. 45 See for more details on the irrevocable credit Schütze (n 30) para. 56; Keeren, ‘Le crédit irrévocable’ (1952) Rev. De la Banque 452. 46 Schütze (n 30) paras 37–67. 47 Schütze (n 30) para. 287. 48 See above under D.V.1.a)., → mn. 23. 49 Cf J.H. Rayner & Co. Ltd v Hambro’s Bank Ltd. [1943] 1 KB 37; Midland Bank Ltd v Seymour [1955] 2 Lloyd’s LR 147. 50 Bridge (n 21) para. 6.73; English, Scottish and Australian Bank Ltd (1992) 13 Lloyd’s LR 21; Equitable Trust Co. of New York v Dawson Partners Ltd (1927) 27 Lloyd’s LR 49, 52.

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established a relationship of trust.51 Under an overseas sale contract the Documentary collection is usually governed by the Uniform Rules for Collections, 1995 revision, ICC Publication No. 522 (hereinafter URC 522), published by the International Chamber of Commerce (ICC).52 Therefore, the scope of the following discussion of a typical Collection Process is limited to URC 522. A Documentary collection in the sense of URC 522 is the handling by banks of documents, according to instructions received in order to obtain acceptance or payment or to deliver documents against acceptance or payment or to deliver documents on other terms and conditions (Article 2 URC 522). a) Mode of Operation of a Documentary Collection Payment 29

Payment by documentary collection is possible when the parties have agreed on this mode of payment. In case the parties have agreed on this payment method, the seller has to provide the transport documentation, other commercial documents and the bill of exchange to its bank.53 This bank then forwards the documents to the buyer’s bank. The buyer inspects the documents and pays for possession of the documents. 54 As these documents are documents of title in the abovementioned sense, the buyer than can acquire property and (indirect) possession on the goods sold. b) Applicability of the URC 522

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In order to apply the Uniform Rules to the Documentary Collection process, Article 4 (a) URC 522 requires that the ‘collection instruction’ incorporates the URC 522 rules in the way of an explicit reference. The ‘collection instruction’ is a written document that is separate from the actual contractual deed that the exporter supplies to his bank. It also has to contain complete and precise instructions for the bank on how to perform the Documentary collection process. c) Parties to a Documentary Collection Process

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Article 3 (a) URC 522 defines the parties to the Documentary collection process. The seller is called ‘the principal’. He is the person, who instructs his bank to collect the documents. The principal’s bank is the ‘remitting bank’, any other bank that is involved in the collection process is called the ‘collecting bank’. The ‘drawee’ is the one to whom presentation is to be made according to the collection instruction. d) Required Content of a Collection Instruction under the URC 522

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Beside the abovementioned explicit reference to the governance of the URC 522 rules, the Uniform Rules require that several other pieces of information are included in the Collection instruction. The requirements are detailed in Article 4 (c) URC 522. They range from details of the bank from which the collection was received, details of the principal and drawee, the total amount of the documentary collection to the documents that are enclosed with the collection order and the collection for the release. According to Article 4 (a) (ii) URC 522 banks will not examine the accompanying documents

51 Zahn, Eberding & Ehrlich (eds), Zahlung und Zahlungssicherung im Außenhandel (de Gruyter 1980) para. 3/1. 52 Benjamin & Bridge (n 10) para. 22-034; Schwenzer, Hachem & Kee (n 33) para. 36.37. 53 Zahn, Eberding & Ehrlich (n 51) para. 3/1. 54 Schwenzer, Hachem & Kee (n 35) para. 36.36.

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to the collection instrumentations in order to obtain further instructions. All relevant instructions must therefore be included in the collection instruction.55 e) Necessary Documents for a Successful Documentary Collection Process The Uniform Rules also define which documents are necessary for a successful Docu- 33 mentary collection process. They distinguish in Article 2 (c) URC 522 between Financial documents and Commercial documents. Financial documents are bills of exchange, promissory notes, cheques or other documents used for obtaining the payment of money.56 Commercial documents in the sense of Article 2 (c) URC 522 are commercial invoices, transport documents, documents of title and all further other documents that are not financial documents in the abovementioned sense.57 f) Bills of Exchange The bill of exchange is the most important and most commonly used document 34 that can be used within a Documentary collection. A bill of exchange is a written, unconditional order by one party, the drawer, to another, the drawee, to pay a certain sum for the delivery of goods and/or services received.58 The bill of exchange belongs to the category of negotiable instruments.59 The negotiability of an instrument is only established when it follows one of the forms recognized by law.60 The creation of new types of negotiable instruments by virtue of party autonomy is not possible. Therefore, the content of the bill of exchange is predetermined by several International Conventions and national laws such as the British Bills of Exchange Act 1882 or the United Nations Convention on International Bills of Exchange and International Promissory Notes from 1988. According to the 1930 Convention Providing A Uniform Law For Bills of Exchange and Promissory Notes, a bill of exchange must include the term bill of exchange, an unconditional order to pay a determinate sum of money, the name of the drawee and the drawer, the time and place of payment and the signature of the drawer, as he is the person who issued the bill of exchange. It is also possible to pay by using a negotiable instrument as such, as for example the bill of exchange includes a direction to a bank for payment to be made against presentation of the document. However, the bill of exchange (historically) had been more commonly included in the documentary collection process as the payment by using a negotiable instrument has diminished in modern business transactions.61 g) Conditions for the Release of Documents Finally, Article 7 URC 522 details when the documents are to be released. This 35 mainly depends on the provisions made in the Collection instructions. Herein the seller may state two different terms: ‘Documents against Payment’ or ‘Documents against Acceptance’. Under a Documents Against Payment (D/P) term, the documents may only be released if the buyer makes an immediate payment according to the contractual deed between the exporter and the importer. Under a Documents Against Acceptance Zahn, Eberding & Ehrlich (n 51) para. 3/5. Benjamin & Bridge (n 12) para. 22-032. 57 Benjamin & Bridge (n 12) para. 22-033. 58 Lehman & Phelps Vol II (n 7) p. 29. 59 See for the meaning of negotiablity Benjamin & Bridge (n 12) para. 22-001; other negotiable instruments are promissory notes or cheques. 60 Beale, Chitty on contracts Vol 2 (33rd edn, Sweet & Maxwell 2019) para. 34-006. 61 Mohs (n 36) Article 53 CISG para. 14. 55

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(D/A) term, the documents may only be released if the buyer accepts the accompanying bill of exchange. This constitutes an obligation for the buyer to pay according to the contractual deed at a later point of time.

3. Differences between Documentary Credit and Documentary Collections Transactions 36

The differences between documentary credit and documentary collections transactions affect the actual processing of the transaction as well as the risk distribution between seller and buyer. In general, documentary collections require a significant lower effort than a documentary credit transaction. This already derives from the fact that there are fewer parties involved in the latter transaction type. Furthermore, the actual administrative effort for the involved banks is minimized under a documentary collections transaction as the banks do not control the documents to verify their validity and suitability,62 whilst under a documentary credit transaction the bank has to determine whether the presentation of the documents is complying with the requirements set forth in the letter of credit.63 Regarding the costs associated with both payment types, the costs of a payment by documentary collections is substantially lower than the costs of a payment by documentary credit on average.64 Indeed the payment by documentary credit is regarded as one of the most expensive payment methods in international sales transactions.65 However, the major advantage for the seller under a documentary credit transaction is the distribution of risks. By the means of a letter of credit a trusted third party, the financing bank guarantees for the payment to the seller. The risk of default of the buyer is therefore expunged for the seller under a documentary credit transaction. Under a documentary collections transaction, the seller has to conduct an advance performance and produce or at least ship the ordered goods to the buyer before the actual payment by the buyer has been guaranteed.66 As the documents will only be delivered against payment or acceptance, the documentary collections transactions nonetheless provide for some extent of security as it makes the seller’s performance to a performance subject to counter-performance of the buyer. The seller still carries the risk not to receive any payment nonetheless as a third-party’s guarantee for payment is missing in this case.

VI. Non-Conformity of the Delivered Documents: Documentary Breach 1. Determining the Non-Conformity of a Delivered Document 37

Similar to goods, documents delivered can be defective. This could particularly be the case in a documentary credit transaction, when the documents do not meet the (formal or substantive) requirements of the letter of credit. In order to assess whether a document is in conformity with the seller’s obligations, one has to examine both the party agreement as well as laws and convention governing the particular sales transaction.

See Article 12 URC 522. Mugasha (n 2) p. 3. 64 Mugasha (n 2) p. 7. 65 Cf Ward, Letters of credit and documentary collections (Xlibris Corporation 2009) p. 98. 66 Schwenzer, Hachem & Kee (n 35) para. 36.36. 62

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Non-conformity of the documents is given when they do not adequately establish what they are required to represent.67 a) Non-Conformity Deriving from the Party Agreement As stated above, the obligation to deliver documents arises solely from the party 38 agreement. Therefore, also the question of conformity has to be measured upon the requirements set out by the contract. According to the rule of perfect tender, the documents delivered must strictly conform to the provisions set out by the contract. 68 The requirements regarding the documents can be explicitly stated in the contractual deed but can also be implicitly be set out in the contractual deed. An implicit agreement regarding the requirements can derive from the purpose of the documents or special requirements of the goods. For example, if the documents are needed to facilitate a payment via documentary credit,69 the documents have to be suitable for the execution of the payment via documentary credit. b) Non-Conformity Deriving from Rules of Law or Uniform Texts Additional to the party agreement, the non-conformity of a document can also derive 39 from national laws or international conventions governing the sales transactions. As opposed to the obligation as such to deliver documents, several legal instruments detail the requirements for the properties of the delivered documents, thereby dealing with the case that such an obligation was agreed upon by the parties. For example, for a commercial document to be usable for a documentary payment, the Uniform Customs and Practice for Documentary Credits (UCP) released by the ICC stipulate several criteria, which have to be met by the document. Article 16-28 UCP 600 specify in detail the requirements for the documents demanded under a letter of credit. According to Article 18(c) UPC 600, the description of the goods in the commercial invoice has to be in line with the description of the goods in the letter of credit. In addition, several national laws detail how a document representing or relating to the goods has to be drafted in order to be in compliance. For example, detailed regulation can be found in the US-American Uniform Commercial Code70 regarding documents of title and transactions governed by documentary credit. In Germany the German Commercial Code and other supplementary law details the requirements for transactions with a documentary connection.

2. Examples for Non-Conforming Documents a) Digital Copy of an Airway Bill Instead of the Original Airway Bill One arbitral tribunal held the seller in breach for handing over a digital copy of an 40 airway bill that did not bear the carrier’s seal, rather than the original airway bill or a copy of the original as the digital copy did not adequately establish that the seller had delivered the goods to the air carrier.71

67 CISG-AC Opinion No. 11 Issues Raised by Documents under the CISG Focusing on the Buyer’s Payment Duty, Rapporteuer: Prof. Martin Davies (2012) p. 6. 68 Berman & Ladd (n 2) p. 425. 69 See below for payment via documentary credit or documentary collection. 70 See Articles 2, 7 UCC. 71 CIETAC Arbitration proceeding September 2006 (Spare Parts Case), available at http://cisgw3.law.pa ce.edu/cases/060900c4.html.

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b) Obvious Typographical Errors Do Not Constitute a Documentary Breach 41

Another arbitral tribunal held that the seller had not breached its obligation to deliver documents by handing over a bill of lading dated the year after the carriage because this obvious typographical error would not affect the buyer’s ability to take delivery of the goods.72 c) Wrong Country of Origin Constitutes a Documentary Breach under a Certificate of Origin

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The seller is in breach if it hands over a certificate of origin showing the wrong country.73

3. Seller’s Right to Cure 43

In case of a non-conforming delivery of the documents, the seller may have a right to cure the defect. a) Existence of a Right to Cure

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Whether a right to cure exists has to be determined with regard to the law governing the sales transaction. When a right to cure would exist concerning the goods delivered, then the seller also has a right to cure the defects in regard of the documents. 74 This is also the case for the determination whether a failure to deliver conforming documents amounts to a fundamental breach. This question is to be determined according to the same mechanisms used to determining the severity of a failure to deliver conforming goods. Thereafter a fundamental breach would be given if the non-conformity of documents would hinder the buyer to take control of the delivered goods.75 b) Possible Ways to Cure

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Depending on the form of non-conformity, the seller can deliver the missing documents subsequently, correct mistakes in the already delivered documents or offer the delivery of entirely new documents.76 The cure must nonetheless include the process that is documented in the document in question. For example, if an insurance police is not covering a sufficient amount of money, the seller has to adopt the insurance contract in order to meet the requirements of the sales contract.77

72 CIETAC Arbitration proceeding 4 June 1999 (Industrial raw material case), available at http://cisgw3. law.pace.edu/cases/990604c1.html. 73 BGH 3 April 1996, CISG-Online No. 135. 74 Cf CISG-AC Opinion No. 11 (n 67) p. 6. 75 Cf. CISG-AC Opinion No. 11 (n 67) p. 6; CISG-AC Opinion No. 5 The buyer’s right to avoid the contract in case of non-conforming goods, Rapporteur: Prof. Dr. Ingeborg Schwenzer (2005), Opinion para. 5; Russian Arbitration proceeding No. 2/1995 of 11 May 1997, available at http://cisgw3.law.pace.edu /cases/970511r1.html. 76 Magnus, in J. von Staudingers Kommentar zum Bürgerlichen Gesetzbuch mit Einführungsgesetz und Nebengesetzen (16th edn, Sellier – de Gruyter 2018) Article 34 CISG para. 13; ICC Arbitration Case No. 9117 of March 1998, ICC ICAB 2000, 90; Widmer-Lüchinger, in Schwenzer/Schlechtriem (eds), Kommentar zum einheitlichen UN-Kaufrecht. Das Übereinkommen der Vereinten Nationen über Verträge über den internationalen Warenkauf (7th edn, C.H. Beck 2019) Article 34 CISG para. 10. 77 Widmer-Lüchinger (n 76) Article 34 CISG para. 10; Piltz (n 9) Article 34 CISG para. 26.

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4. Possible Forms of Documentary Breach There are several ways possible how the obligation to deliver documents can be 46 misperformed. a) Non-Delivery First, the documents are not delivered to the buyer at all.78 This may be either 47 because they were never sent to the buyer or because they were lost during the carriage by post or currier. b) Incomplete or Wrong Delivery Secondly, incomplete or wrong documents can be delivered. Documents are wrong 48 when they miss required information, information is not correctly stated or when only an insufficient number of required copies are delivered. c) Defective Delivery A different situation arises when the documents themselves are correct but state that 49 the goods governed by them are defective. Under a bill of lading, such a document is called an ‘unclean’ bill of lading.79 Such an unclean bill of lading is given when the document states that the goods are damaged or insufficiently packaged or were shipped too late.80 In this special case, not the duty to deliver documents but rather the duty to deliver the goods is breached.81 The buyer than can claim its rights arising from the defective delivery of the goods even before he actually took delivery of these goods.

5. Effects on a Documentary Breach on the Conformity of the Goods Sold The documentary breach is separate from the determination whether the seller ful- 50 filled its obligation to deliver the goods.82 Therefore, a buyer can reject non-conforming documents even if he has no right to reject the goods themselves.83 This is also the case in the reversed constellation: If the documents themselves are conforming but reveal defects in the goods to be delivered, the buyer may not reject the documents on this basis.84

VII. Examples for Documents with Relevance in International Sales Transactions 1. Documents of Title/Documents Representing the Goods Under no legal system exists an exhaustive list of possible documents of title. 85 Some 51 regulations nonetheless provide non-exhaustive list of possible documents of title, such 78 Kock, Nebenpflichten im UN-Kaufrecht – dargestellt am Beispiel der Pflichten des Verkäufers (S. Roderer Verlag 1995) p. 62. 79 Kock (n 78) p. 66. 80 Gruber, in Säcker, Rixecker & Oetker (eds), Münchener Kommentar zum Bürgerlichen Gesetzbuch (8 th edn, C.H. Beck 2018) Article 34 CISG para. 7; Magnus (n 76) Article 34 CISG para. 12. 81 Kock (n 78) p. 66. 82 Schwenzer, Hachem & Kee (n 35) para. 47.167. 83 Benjamin/Bridge (n 12) paras 19-147, 20-106. 84 Schwenzer, Hachem & Kee (n 35) para. 47.167. 85 v. Bar & Clive (n 8) IV.A.–2:201, p. 1257.

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as the English Factors Act 1889 s 1(4) or Chapter 2 of the American Uniform Commercial Code or the German Commercial Code. The following examples shall illustrate the most common used forms of documents of title in international sales transactions, which facilitate the exchange and transfer of goods. a) Negotiable and Non-Negotiable Bill of Lading A bill of lading is a document issued by or on behalf of a carrier of goods by sea to the person (usually known as the shipper) with whom he has contracted for the carriage of goods.86 It has three functions: 53 It proves that the carrier has received the goods described.87 It is therefore a receipt of the delivery of the owed goods by the seller to the carrier. Furthermore, it proves or contains a contract between the seller and the carrier about the delivery of the goods to the buyer. However, the regulatory approach to the bill of lading is different in every country or international organization. This is especially the case for the contractual function of a bill of lading. The contractual terms possibly included in a bill of lading, referencing the contract for carriage, must not be different from the rules contained in International Conventions.88 Lastly and of the highest importance it constitutes a document of title. Similar to the distinction between negotiable and non-negotiable documents there is a distinction made between bearer bills, order bills and straight bills of lading. A bearer bill is one that does not name the person to whom the goods are to be delivered.89 An order bill is one, which provides for delivery of the goods to be made to the order of a person named in the bill.90 A straight bill of lading is one, which makes the goods deliverable to a named consignee.91 The goods covered by bearer and order bills can be transferred to a third person by both the shipper and the consignee through endorsement and delivery of the document. Under a straight bill, the consignee cannot transfer the right to the delivery of the goods covered by the bill to a third person by delivering the bill to the third person. Furthermore, the shipper cannot oblige the carrier to deliver the goods to a person other than the named consignee by delivering the bill to a third person. 54 The characteristics of a bill of lading make it a fundamental document for international sales transactions as it allows both for the financing and the secure execution of a sale of goods between parties located at a distance from each other.92 The bill of lading is subject matter of a number of International Conventions concerned with maritime transport. The most recognized instrument is the Convention for Unification of Certain Rules of Law relating to Bills of Lading, also called the Hague Rules from 1924 and a modification of these rules, called the Visby-Rules from 1968, as well as the United Nations Convention on the Carriage of Goods by Sea, also called the Hamburg Rules from 1992.93 At present, the conventions are coexisting respectively and their effectuality depends on whether the seller’s and or buyer’s state have ratified the convention in question. A modern development is the UN Convention on Contracts for 52

Benjamin/Bridge (n 12) para. 18-018. For an overview for the various functions of a bill of lading, see Trafigura Beheer BV v Mediterranean Shipping Co SA (The MSC Amsterdam) [2007] EWHC 944 (Comm). 88 See for the regulatory approaches under the different International Conventions Zekos, ‘The Contractual Role of bills of lading under international conventions and reports’ (1997) 39 Managerial Law 5–19. 89 Benjamin & Bridge (n 12) para. 18-020. 90 Benjamin & Bridge (n 12) para. 18-021. 91 Benjamin & Bridge (n 12) para. 18-024. 92 Zekos (n 88) p. 1. 93 Grobarčíková & Sosedová (n 6) p. 76. 86

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The International Carriage of Goods Wholly or Partly by Sea, also called the Rotterdam Rules.94 The Rotterdam Rules are not in effect yet.95 In contrast to the abovementioned conventions, the Rotterdam Rules require the denouncements of the other conventions in order to become into effect.96 The named conventions regulate the obligations and liabilities under a contract for the carriage of goods by sea. Concerning the bill of lading, a distinct change in the regulatory approach is visible. 55 For example, the United Nations Convention on the carriage of goods by sea (‘the Hamburg Rules’) included a definition of a bill of lading in Article I.97 Nonetheless the modern International Conventions, namely the Rotterdam Rules, do not address the bill of lading specifically but cover transport documents in general.98 This derives from changing practices in International Transport such as containerization, door-to-door transport contracts and electronic transport documents.99 These changes cannot be adequately covered by the traditional bill of lading.100 b) Dock Warrant A dock warrant is a document of title, which is evidence of the title of any person 56 named in the document to the property in any goods lying in a marine or river dock and signed or certified by the person having the custody of the goods.101 A shipping port authority that certifies that a certain shipment is stored in a warehouse lot commonly uses it. c) Warehouse Keeper’s Certificate/Warehouse Receipt A warehouse keeper’s certificate, also called warehouse receipt, is the certificate of a 57 bailee who acts as a warehouseman, who took possession of the goods of the bailor, who as the owner stores the good at the warehouse of the bailee. According to a definition in § 7-102(1)(h) UCC, a warehouseman is ‘a person engaged in the business of storing goods for hire’. The warehouse keeper’s certificate acknowledges, like the bill of lading, the receipt of the goods and provides a detailed description of stored goods. Also like the bill of lading, it depicts the storage contract between the bailee and the bailor. Finally, it is a document of title, which calls for delivery of the goods covered by it to the bearer of the document or the order of a named person or a named person. Therefore, the document of title can either be negotiable or non-negotiable. The bailee under a warehouse receipt is, like the bailee under a bill of lading, obliged to deliver the goods covered by the warehouse receipt to the person authorized by the warehouse keeper’s certificate. It is comparable to a bill of lading with the only difference that the goods are not on transit in the possession of a carrier but rather are static in the possession of a warehouse keeper.102

94 A general overview over the changes and novelties regarding multimodal transports can be found in González, ‘Rotterdam Rules – Prelude or Premonition?’ (2010) 2 Cuadernos de Derecho Transnacional 25–43. 95 The convention will not come into force until a year after twenty countries have ratified it, see Article 94 Rotterdam Rules. 96 See Article 89 Rotterdam-Rules. 97 Zekos (n 88) p. 13. 98 See Article 1 of the Rotterdam Rules. 99 See the General Assembly’s foreword to the Rotterdam Rules. 100 Grobarčíková & Sosedová (n 6) p. 81. 101 Chisholm (ed), Encyclopaedia Britannica Vol 8 (11th edn, CUP 1911) p. 364. 102 CISG-AC Opinion No. 11 (n 67) p. 14.

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d) The Consignor’s Copy of an Air Waybill 58

An air waybill is a non-negotiable transport document for the carriage of goods by air. The consignee, who is named in the waybill, is entitled to demand the delivery of the goods after arrival of the goods at the place designated for delivery.103 e) Warrants for the Delivery of Goods

59

Especially in commodity sales, goods may be carried in an undifferentiated bulk. As the seller will be interested in selling parts of the goods to different buyers, he must be able to split the cargo already during carriage, although he is only in possession of one document of title.104 This is made possible by warrants for the delivery of goods. The seller hands over the bill of lading to the carrier and receives in return several warrants for the delivery that correspond to the amounts to be delivered to each of the buyers.105 These warrants can then be delivered to the individual buyers who can then claim delivery of the respective goods form the carrier.

2. Other Documents Relating to the Goods a) Sea Waybill/Express B/L 60

A seaway bill, sometimes also described as Express B/L, provides for the goods to be delivered simply to a named person.106 It is a mere transport document and constitutes not a right on the goods covered by it. Consequently, a sea waybill has not to be produced before the carrier in order to obtain the goods.107 Nonetheless the carrier is not authorized to deliver the goods to a different person than the one named in the sea waybill.108 b) Dock Receipts

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A sea-carrier or port operator issues dock receipts in order to acknowledge the receipt of the goods at the port for later shipment. The ship carrier will later issue a bill of lading in return for the dock receipt. The information in the bill-of lading are hereby based on the information in the dock receipt. c) Commercial Invoices

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Commercial invoices are documents that serve as customs declaration in cross-borders sale. It has to be provided by the exporting party to the customs authority. It is used among others to calculate due tariffs and to determine the value of the transferred goods for the costs billed for transport. d) Certificates of Origin

63

The certificate of origin is a document that certifies the origin of the goods. It typically serves two functions: It permits the business transaction in cases where a certain good is only allowed in a country under certain restrictions. The certificates than proves CISG-AC Opinion No. 11 (n 67) p. 10. CISG-AC Opinion No. 11 (n 67) p. 14. 105 CISG-AC Opinion No. 11 (n 67) p. 14. 106 Benjamin & Bridge (n 12) para. 18-024. 107 Thume, in Schmidt (ed), Münchener Kommentar zum Handelsgesetzbuch (4 th edn, C.H. Beck 2020) § 407 HGB para. 14. 108 Benjamin & Bridge (n 12) para. 18-024. 103

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that the good are in accordance with the particular restrictions.109 Furthermore, it can be used as evidence that the sale of the good was legal.110 A certificate or origin may therefore be required when an export or import ban has been established for certain countries but also for certain goods. It may also be necessary in order to proof that the goods are not coming from a certain production type. In recent years, this has been the case for example for goods that were respectively were not genetically modified. 111 The World Trade Organization (WTO) has defined the requirements for a certificate of origin.112 e) Further Documents Relating to the Goods Further types of documents relating to the goods are construction and instruction 64 manuals, instructions for use, vehicle registration papers over export licenses, import licenses, customs delivery notes, cargo declarations, goods control certificates, sanitary certificates, weight certificates, supplier’s declarations113 to consular invoices, packaging lists and insurance policies.114

E. Sampling of Laws I. CISG and CISG Advisory Council Opinions 65

Article 30 The seller must deliver the goods, hand over any documents relating to them and transfer the property in the goods, as required by the contract and this Convention. Article 34 If the seller is bound to hand over documents relating to the goods, he must hand them over at the time and place and in the form required by the contract. If the seller has handed over documents before that time, he may, up to that time, cure any lack of conformity in the documents, if the exercise of this right does not cause the buyer unreasonable inconvenience or unreasonable expense. However, the buyer retains any right to claim damages as provided for in this Convention. Article 58 (1) If the buyer is not bound to pay the price at any other specific time, he must pay it when the seller places either the goods or documents controlling their disposition at the buyer’s disposal in accordance with the contract and this Convention. The seller may make such payment a condition for handing over the goods or documents. (2) If the contract involves carriage of the goods, the seller may dispatch the goods in terms whereby the goods, or documents controlling their disposition, will not be handed over to the buyer except against payment of the price. (3) The buyer is not bound to pay the price until he has had an opportunity to examine the goods, unless the procedures for delivery or payment agreed upon by the parties are inconsistent with his having such an opportunity.

Schwenzer, Hachem & Kee (n 35) para. 30.15. Schwenzer, Hachem & Kee (n 35) para. 30.15. 111 Schwenzer, Hachem & Kee (n 35) para. 30.15. 112 For more details see the WTO Agreement on Rules of Origin, last accessed on 22.7.2015, http://www .wto.org/english/docs_e/legal_e/22-roo.pdf. 113 See EC Regulation 1207/2001 of 11 June 2001 and EC Regulation 1617/2006 of 24 October 2006. 114 Enumeration taken in part from Piltz (n 9) Article 34 CISG para. 16. 109 110

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Chapter 13 Delivery of Documents CISG Advisory Council Opinion No. 5 The CISG Advisory Council Opinion No. 5 deals with the buyer’s right to avoid the contract in the case of non-conforming goods or documents.115 It discusses, when a failure to deliver ‘accompanying documents’ or documents in the case of a ‘documentary sales’ can lead to a fundamental breach of contract in the sense of Article 49 CISG. Furthermore, it highlights the special importance of the delivery of documents in commodity trade contracts. CISG Advisory Council Opinion No. 11 Opinion No. 11 of the CISG Advisory Council covers issues raised by Documents under the CISG focusing on the Buyer’s Payment Duty.116 The opinion details, which documents are necessary under Article 30 CISG and Article 34 CISG to fulfil the duty under the sales contract. It also defines the term ‘documents controlling the[disposition of the goods] in Article 58 CISG.

II. UNIDROIT Principles of International Commercial Contracts 66 Article 7.3.1 (1) A party may terminate the contract where the failure of the other party to perform an obligation under the contract amounts to a fundamental non-performance. (2) In determining whether a failure to perform an obligation amounts to a fundamental non-performance regard shall be had, in particular, to whether (a) the non-performance substantially deprives the aggrieved party of what it was entitled to expect under the contract unless the other party did not foresee and could not reasonably have foreseen such result; (b) strict compliance with the obligation which has not been performed is of essence under the contract; (c) the non-performance is intentional or reckless; (d) the non-performance gives the aggrieved party reason to believe that it cannot rely on the other party’s future performance; (e) the non-performing party will suffer disproportionate loss as a result of the preparation or performance if the contract is terminated. (3) In the case of delay the aggrieved party may also terminate the contract if the other party fails to perform before the time allowed it under Article 7.1.5 has expired. Article 9.1.2 This section does not apply to transfers made under the special rules governing the transfers: (a) of instruments such as negotiable instruments, documents of title or financial instruments, or (b) of rights in the course of transferring a business.

III. Principles of European Contract Law 67 Article 11:101 (1) This chapter applies to the assignment by agreement of a right to performance (‘claim’) under an existing or future contract. (2) Except where otherwise stated or the context otherwise requires, this chapter also applies to the assignment by agreement of other transferable claims. (3) This chapter does not apply: (a) to the transfer of a bill of exchange or investment security where, under the law otherwise applicable, such transfer must be by entry in a register maintained by or the issuer; or (b) to the transfer of a bill of exchange or other negotiable instrument or of a negotiable security or a document of title to goods where, under the law otherwise applicable, such transfer must be by delivery (with any necessary indorsement). (4) In this Chapter ‘assignment’ includes an assignment by way of security.

115 116

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The full text of the CISG-AC Opinion No. 5 is available under: http://tinyurl.com/qztdnqf. The full text of the CISG-AC Opinion No. 11 is available under: http://tinyurl.com/pqrpszy.

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E. Sampling of Laws (5) This chapter also applies, with appropriate adaptations, to the granting by agreement of a right in security over a claim otherwise than by assignment.

IV. German Bürgerliches Gesetzbuch 68

§ 324 Termination for breach of a duty under § 241(2) If the obligor, in the case of a reciprocal contract, breaches a duty under § 241(2), the obligee may terminate the contract if he can no longer reasonably be expected to uphold the contract. § 433 Typical contractual duties in a purchase agreement (1) By a purchase agreement, the seller of a thing is obliged to deliver the thing to the buyer and to procure ownership of the thing for the buyer. The seller must procure the thing for the buyer free from material and legal defects. (2) The buyer is obliged to pay the seller the agreed purchase price and to accept delivery of the thing purchased.

V. French Code Civil 69

Article 1604 Delivery is the transfer of the thing sold into the power and possession of the buyer. Article 1606 Delivery of movable effects is the outcome: Either of a real delivery; or of the handing over of the keys of the buildings which contain them; or even of the sole consent of the parties, where the transfer cannot take place at the time of the sale, or where the buyer already had them in his power on another basis.

VI. Spanish Código Civil 70

Article 1097 The obligation to give a specific thing comprises that of delivering all its fittings, even if they have not been mentioned. Article 1445 Pursuant to the contract of sale and purchase, one of the contracting parties undertakes to deliver a specific thing and the other to pay a certain price for it, in money or something, which represents it. Article 1461 The seller is bound to perform delivery of and provide warranty over the thing constituting the subject matter of the sale. Article 1462 The thing sold shall be deemed to have been delivered when it is put in the power and possession of the purchaser. Where the sale has been made pursuant to a public deed, the execution thereof shall be equivalent to the delivery of the thing constituting the subject matter of the contract, unless it should result or it should clearly be deduced otherwise from the public deed. Article 1464 In respect of incorporeal things, the provisions of the second paragraph of article 1462 shall apply. In any other case in which such provision does not apply, delivery shall be deemed to mean the fact of putting the deeds of ownership in the purchaser’s power, or the use of the right by the purchaser with the consent of the seller.

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VII. American Uniform Commercial Code 71 § 2-319 F.O.B. and F.A.S. Terms (1) Unless otherwise agreed the term F.O.B. (which means ‘free on board’) at a named place, even though used only in connection with the stated price, is a delivery term under which (a) when the term is F.O.B. the place of shipment, the seller must at that place ship the goods in the manner provided in this Article (Section 2-504) and bear the expense and risk of putting them into the possession of the carrier; or (b) when the term is F.O.B. the place of destination, the seller must at his own expense and risk transport the goods to that place and there tender delivery of them in the manner provided in this Article (Section 2-503); (c) when under either (a) or (b) the term is also F.O.B. vessel, car or other vehicle, the seller must in addition at his own expense and risk load the goods on board. If the term is F.O.B. vessel the buyer must name the vessel and in an appropriate case the seller must comply with the provisions of this Article on the form of bill of lading (Section 2-323). (2) Unless otherwise agreed the term F.A.S. vessel (which means "free alongside") at a named port, even though used only in connection with the stated price, is a delivery term under which the seller must (a) at his own expense and risk deliver the goods alongside the vessel in the manner usual in that port or on a dock designated and provided by the buyer; and (b) obtain and tender a receipt for the goods in exchange for which the carrier is under a duty to issue a bill of lading. (3) Unless otherwise agreed in any case falling within subsection (1)(a) or (c) or subsection (2) the buyer must seasonably give any needed instructions for making delivery, including when the term is F.A.S. or F.O.B. the loading berth of the vessel and in an appropriate case its name and sailing date. The seller may treat the failure of needed instructions as a failure of cooperation under this Article (Section 2-311). He may also at his option move the goods in any reasonable manner preparatory to delivery or shipment. (4) Under the term F.O.B. vessel or F.A.S. unless otherwise agreed the buyer must make payment against tender of the required documents and the seller may not tender nor the buyer demand delivery of the goods in substitution for the documents. § 2-503 Manner of Seller’s Tender of Delivery (1) Tender of delivery requires that the seller put and hold conforming goods at the buyer’s disposition and give the buyer any notification reasonably necessary to enable him to take delivery. The manner, time and place for tender are determined by the agreement and this Article, and in particular (a) (...) (b) (...) (2) Where the case is within the next section respecting shipment tender requires that the seller comply with its provisions. (3) Where the seller is required to deliver at a particular destination tender requires that he comply with subsection (1) and also in any appropriate case tender documents as described in subsections (4) and (5) of this section. (4) Where goods are in the possession of a bailee and are to be delivered without being moved (a) tender requires that the seller either tender a negotiable document of title covering such goods or procure acknowledgment by the bailee of the buyer's right to possession of the goods; but (b) tender to the buyer of a non-negotiable document of title or of a written direction to the bailee to deliver is sufficient tender unless the buyer seasonably objects, and receipt by the bailee of notification of the buyer's rights fixes those rights as against the bailee and all third persons; but risk of loss of the goods and of any failure by the bailee to honor the non-negotiable document of title or to obey the direction remains on the seller until the buyer has had a reasonable time to present the document or direction, and a refusal by the bailee to honor the document or to obey the direction defeats the tender. (5) Where the contract requires the seller to deliver documents (a) he must tender all such documents in correct form, except as provided in this Article with respect to bills of lading in a set (subsection (2) of Section 2-323); and (b) tender through customary banking channels is sufficient and dishonor of a draft accompanying the documents constitutes non-acceptance or rejection. § 2-504 Shipment by Seller Where the seller is required or authorized to send the goods to the buyer and the contract does not require him to deliver them at a particular destination, then unless otherwise agreed he must

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put the goods in the possession of such a carrier and make such a contract for their transportation as may be reasonable having regard to the nature of the goods and other circumstances of the case; and (b) 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 trade; and (c) promptly notify the buyer of the shipment. Failure to notify the buyer under paragraph (c) or to make a proper contract under paragraph (a) is a ground for rejection only if material delay or loss ensues. § 2-514 When Documents Deliverable on Acceptance; When on Payment

Unless otherwise agreed documents against which a draft is drawn are to be delivered to the drawee on acceptance of the draft if it is payable more than three days after presentment; otherwise, only on payment.

VIII. United Kingdom Sale of Goods Act 1979 72

Section 24 Seller in possession after sale Where a person having sold goods continues or is in possession of the goods, or of the documents of title to the goods, the delivery or transfer by that person, or by a mercantile agent acting for him, of the goods or documents of title under any sale, pledge, or other disposition thereof, to any person receiving the same in good faith and without notice of the previous sale, has the same effect as if the person making the delivery or transfer were expressly authorised by the owner of the goods to make the same. Section 25 Buyer in possession after sale (1) Where a person having bought or agreed to buy goods obtains, with the consent of the seller, possession of the goods or the documents of title to the goods, the delivery or transfer by that person, or by a mercantile agent acting for him, of the goods or documents of title, under any sale, pledge, or other disposition thereof, to any person receiving the same in good faith and without notice of any lien or other right of the original seller in respect of the goods, has the same effect as if the person making the delivery or transfer were a mercantile agent in possession of the goods or documents of title with the consent of the owner. (2) (…) Section 29 Rules about delivery (1) (…) (4) Where the goods at the time of sale are in the possession of a third person, there is no delivery by seller to buyer unless and until the third person acknowledges to the buyer that he holds the goods on his behalf; but nothing in this section affects the operation of the issue or transfer of any document of title to goods.

IX. Chinese Law 73

Article 598 The seller shall perform the obligations of delivering to the buyer the subject matter or handing over the documents for the buyer to take possession of the subject matter and of transferring the ownership thereto. Article 599 In addition to the document for taking delivery of the subject matter, the seller shall deliver to the buyer the relevant documents and materials in accordance with the agreement or transaction practices. Article 609 The failure of the seller to deliver the documents and materials relating to the subject matter as agreed upon shall not affect the passing of the risk of damage to or missing of the subject matter. Article 826 Where carriage of the cargo is subject to such procedures as examination and approval or inspection, the consignor shall submit to the carrier the documents of fulfilment of the relevant procedure.

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Chapter 13 Delivery of Documents Article 840 The multimodal transport operator shall issue a multimodal transport document upon receipt of the goods delivered by the consignor. The multimodal transport document may be either a negotiable document or a non-negotiable document at the request of the shipper.

F. Commentary 74

As the mechanism of document delivery were already extensively covered under Section D. of this Chapter, additional commentary on the particular conventions and national law regimes is limited to highlight deviations from the principles stated above.

I. CISG 75

The relevant articles under the CISG regulating the delivery of documents are Articles 30, 34 and 58 CISG. While Article 30 CISG and Article 34 CISG cover the obligation to deliver documents and its fulfillment, Article 58 CISG regulates the time of payment and the relationship between delivery and payment.117

1. Types of Documents Covered by CISG 76

The CISG uses both regulatory approaches mentioned above concerning the regulation of the delivery of documents. In general, the CISG avoids defining what documents the Articles in the CISG handling documentary sale cover. a) Documents in the Sense of Article 30 CISG and Article 34 CISG

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Under Article 30 CISG and Article 34 CISG, the regulation makes no distinction between documents relating to the goods and documents representing the goods. The articles cover all documents typically needed for the performance of cross-border contracts of sale.118 Included are both documents that are required for the buyer to be able to acquire property, including documents necessary to handle the import and export of the goods, and possession on the goods and documents that are needed by the buyer in order to make claims against third parties.119 It is a common characteristic of the documents covered by Article 34 CISG that the documents are relevant for the relations of the buyer with third parties, may it be private persons or governmental institutions. 120 However, Article 30 CISG and Article 34 CISG do not cover documents that describe the goods sold, such as operating manuals, technical documents or fitting instructions. They are considered as accessory of the thing delivered and therefore a part of the goods delivered.121 The failure to hand over these documents does only affect the conformity of the goods.122 117 Mohs, in Schwenzer & Schlechtriem (eds), Kommentar zum einheitlichen UN-Kaufrecht. Das Übereinkommen der Vereinten Nationen über Verträge über den internationalen Warenkauf (7 th edn, C.H. Beck 2019) Article 58 CISG para. 1; Butler & Harindranath, in Kröll, Mistelis & Perales Viscasillas (eds), UN Convention on Contracts for the International Sale of Goods (2nd edn, C.H. Beck/Hart/NomosBeck/Hart/Nomos 2018) Article 53 CISG para. 1. 118 See Tribunal Supremo 9 December 2008, CISG-Online No. 2100; Mohs (n 36) Article 34 CISG para. 1. 119 Gabriel, in Ferrari, Flechtner & Brand (eds), Draft Digest and Beyond (Sellier 2003) 351; Piltz (n 9) Article 34 CISG para. 11. 120 Piltz (n 9) Article 34 CISG para. 11. 121 Saenger (n 28) Article 34 CISG para. 3; Ernst & Lauko (n 3) Article 34 CISG para. 1. 122 See Schackmar, Die Lieferpflicht des Verkäufers in internationalen Kaufverträgen (Erich Schmidt Verlag 2001) para. 450.

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b) Documents in the Sense of Article 58 CISG Under Article 58 CISG, however a narrower approach was chosen. The convention 78 speaks about ‘documents controlling their [the goods] disposition’. Broadly speaking, only documents representing the goods are covered.123 The wording of the term is somewhat ambiguous as not only traditional documents of title control the disposition of the goods but also other documents commonly used in commercial sales contract can effectuate the delivery of the goods such as a delivery order or a bill of delivery.124 The Chinese125 and Russian126 texts of the Article are consistent with the English wording.127 However, in the Arabic,128 French,129 and Spanish130 translations, the wording is that of ‘documents representing the goods’.131 Under the definition of the CISG Advisory Council, a document only controls the disposition of the goods if it controls the right to possession of them.132 The acquisition of property on the goods by the seller must be to the exclusion of the seller.133 As held by the German Bundesgerichtshof, documents in the sense of Article 58 CISG are documents, which allow the buyer access to the goods excluding the seller such as warehouse warrants.134 Following this view Article 58 CISG does not apply to all documents representing the goods in the sense described above135 as it does not include sea or air waybills and other non-negotiable documents of title.136

2. The Obligation to Deliver Documents under Article 30 CISG and Article 34 CISG Article 34 CISG regulates that if the seller is bound to hand over documents relating 79 to the goods he has to do so in the form required by the contract. Also denoted as an ‘obviousness’137 it therefore sets forth that the obligation to deliver documents depends on the contractual agreement. Article 34 CISG does not constitute an autonomous obligation to deliver documents.138 The obligation to deliver documents under a sales contract covered by the CISG derives from the agreement between the parties. It is therefore within the scope of party autonomy to agree whether documents have to be delivered for a successful execution of the sales agreement. Furthermore, the obligation can derive from the use of INCOTERMS within the contractual deed and any trade usages and established practices between the parties in the sense of Article 6 CISG and Article 9 CISG and applicable domestic law.139 The regulatory approach under the 123 Mankowski, in Ferrari, Kieninger & Mankowski (eds), Internationales Vertragsrecht (3 rd edn, C.H. Beck 2018) Article 58 CISG para. 22. 124 Butler & Harindranath (n 118) Article 58 CISG para. 27. 125 ‘控制货物处置权的单据’. 126 ‘либо товарораспорядительные документы’. 127 CISG-AC Opinion No. 11 (n 67) p. 8. 128 ‘‫’او المستندات التى تمثله‬. 129 ‘Les documents representatives des marchandises’. 130 ‘Los correspondientes documentos representativos’. 131 CISG-AC Opinion No. 11 (n 67) p. 8. 132 CISG-AC Opinion No. 11 (n 67) p. 8. 133 Butler & Harindranath (n 118) Article 58 CISG para. 27. 134 BGH 3 April 1996, CISG-Online No. 135. 135 See above. 136 CISG-AC Opinion No. 11 (n 67) p. 8. 137 Gruber (n 78) Article 34 CISG para. 1. 138 Saenger (n 26) Article 34 CISG para. 1; see also Audiencia Provincial de Barcelona, 12 February 2002, available at http://www.unilex.info/case.cfm?pid=1&do=case&id=881&step=FullText; Piltz (n 7) Article 34 CISG para. 8. 139 CISG-AC Opinion No. 11 (n 67) p. 5; cf. for the possibility of consideration of domestic law Gerechtshof Arnhem 17 June 1997, UNILEX.

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CISG is therefore identical with the general regulatory approach outlined above, that the Convention does only regulate the execution of the obligation and does not as such establish an obligation to deliver documents.140 In case the parties have agreed upon payment by documentary credit, the letter of credit identifies the documents for which an obligation to deliver persists.141 Furthermore, under Article 30 CISG and Article 34 CISG no duty exists that obliges the seller to assist the buyer in procuring the documents.142 80 Regarding the modalities of delivery of the documents, specifically time and place of delivery, these are also determined based on the contractual agreement between the parties. Sometimes, the modalities of the delivery agreement cannot be determined based on the contractual agreement and they also do not derive from applied trade terms or trade usages applicable or established between the parties. In such a case, the seller is obliged to deliver the documents in a timely and duly form that allows the buyer to take possession on the goods when they arrive at their destination and to enable timely customs processing.143 As for the required form of the documents, again the requirements in the contract are decisive. In absence of an agreement regarding the form, the required form has to be determined in accordance with the applicable property and securities law.144 The same applies for the question whether the transfer of ownership of the documents or the mere surrender of them is owed. In absence of an agreement, the obligations of the parties have to be derived by a supplementary interpretation of the contract.145 Regarding the burden of proof, the buyer has to produce the evidence that an obligation to deliver documents was present under the contractual agreement, whilst the seller has to produce the evidence that he has fulfilled this obligation completely. 146

3. Specifics of the Seller’s Right to Cure Non-Conforming Documents under the CISG 81

According to Article 34 CISG second sentence, it is possible for the seller to cure any lack of conformity in the documents if they were handed over ahead of the time agreed upon in the contractual deed.147 When this period has expired, a cure is only allowed when the requirements of Article 48 CISG are met.148 The provision allows the seller to remedy documents that have already been handed over to the buyer.149 However due to the according to Article 6 CISG generally prevailing party autonomy the right to cure can generally be limited or excluded by the parties.150 Under Article 34 CISG, the seller’s right to cure requires that this subsequent performance does not result in unreasonable inconveniences for the buyer. However, as the practical effort in exchanging documents appears to be small, there are only few cases imaginable where this requirement would not be met.151 As a result, the buyer has to proof that a cure would cause unreasonable

See above. CISG-AC Opinion No. 11 (n 67) p. 2. 142 Piltz (n 9) Article 34 CISG para. 8. 143 Saenger (n 28) Article 34 CISG para. 4. 144 Ernst & Lauko (n 3) Article 34 CISG para. 6. 145 Ernst & Lauko (n 3) Article 34 CISG para. 8. 146 Gruber (n 80) Article 34 CISG para. 11; Baumgärtel, Laumen, Prütting, Hepting & Müller, Handbuch der Beweislast im Privatrecht (3rd edn, Carl Heymanns 2008) Article 34 CISG para. 2. 147 Piltz (n 9) Article 34 CISG para. 42. 148 Schlechtriem & Butler UN Law on International Sales (Springer 2009) para. 131. 149 Piltz (n 9) Article 34 CISG para. 25. 150 Mohs (n 36) Article 34 para. 9; Gabriel (n 120) p. 351. 151 Gruber (n 80) Article 34 CISG para. 8; Saenger (n 28) Article 34 CISG para. 6. 140 141

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inconveniences.152 If the seller exercises its right to cure non-conforming documents, the buyer is entitled under Article 34 CISG third sentence to claim damages for any disadvantages caused by the cure. Legal basis for the damages claim is Article 45(1)(b) CISG.153 It is still disputed whether a complaint according to Art. 39 CISG is necessary in case of defective documents. In a decision of 2 April 2015, the Federal Supreme Court of Switzerland demanded such a complaint also with regard to the documentary letter of credit in dispute. Other voices deny the application of Art. 39 CISG in cases of document delivery.154

4. Time for Payment in a Documentary Sales Contract under the CISG The purpose of Article 58 CISG is to define when the payment is due. It also 82 defines the performance-subject-to-counter-performance principle as the principle for the execution of the sales contract.155 The performance-subject-to-counter-performance principle is regarded as a common principle of the CISG in the sense of Article 7(2) CISG.156 According to Article 58(1) first sentence, the payment can only be claimed when the delivery of the goods has occurred. In this respect, Article 58(1) CISG and Article 58(2) CISG equate documents to goods. In the case that the parties have agreed upon a delivery of documents, the time of delivery of the documents controlling the disposition of the goods is decisive for the payment to become due. The point in time when the buyer is actually able to gain possession of the goods is then irrelevant.

5. Seller’s Right of Retention under Article 58 CISG Article 58 (1) second sentence CISG provides a retention right for the seller. He may 83 refuse to hand over the documents until the buyer has paid the agreed payment price. Nonetheless, also in the case that the seller has exercised its retention right, he must still allow the buyer to examine the documents, Article 58 (3) CISG. Article 58 (2) CISG secures the retention right in a sales contract involving the carriage of goods as it allows the seller to ship the goods with the condition that they may not be handed over to the buyer unless he has paid the agreed payment price.

II. UNIDROIT Principles of International Commercial Contracts The UNIDROIT Principles of International Commercial Contracts, which aim, ac- 84 cording to its Preamble to supplement and help with the interpretation of international uniform law and domestic law but which can also be incorporated into the contract by party agreement include regulation concerning among others the formation, performance and consequences of a non-performance of a contract. The assessment whether a delivery of documents is required has to be made, in line with the general principle stated above, by the interpretation of the contractual agreement. The result of the interpretation also affects the legal consequence of a non-performance regarding the Magnus (n 76) Article 34 CISG para. 19; Piltz (n 9) Article 34 CISG para. 27. Piltz (n 9) Article 34 CISG para. 28; Mohs (n 36) Article 34 CISG para. 14. 154 Federal Supreme Court of Switzerland, CISG-online 2592; Piltz, Neue Entwicklungen im UNKaufrecht in (2017) NJW 2449 (2452); Koller, Ist die Pflicht des Verkäufers zur fristgerechten Andienung korrekter Dokumente beim Akkreditivgeschäft eine wesentliche Vertragspflicht gemäß Art. 25 CISG? in (2017) IHR 89-100). 155 Mankowski (n 124) Article 58 CISG para. 24. 156 OGH 8 November 2005 in (2006) IHR 87, 90; Mankowski (n 124) Article 58 CISG para. 24. 152

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document delivery obligation. According to Article 7.3.1.(2)(b) PICC, a party has the right to terminate the contract when the performance of the other party is not in strict compliance with the contract and the compliance with the contract is of essence under the contract. Therefore, the non-conformity of tendered documents may give rise to a termination right. For example, it is assumed that under a documentary credit transaction, the delivered documents must conform exactly to the terms of the credit. 157

III. Principles of European Contract Law 85

The PECL do not contain provisions that regulate the contracts of sale explicitly.158 Even though, due to its common appearance and importance, the explanatory notes and commentaries of PECL reference repeatedly situations, which are found in sales contracts. Nonetheless, it does not include rules regarding the rights and obligations, which specifically arise out a contract of sale.159 Consequently, PECL does not provide any regulations concerning the delivery of documents. Furthermore, as stated in Article 11:101, Chapter 11 of the PECL is not applicable to documents of title, where under the law otherwise applicable, such transfer must be by delivery.

IV. German Bürgerliches Gesetzbuch and Supplementary Laws 86

Under the German civil code (hereinafter BGB) an obligation to deliver documents is not explicitly mentioned. A corresponding provision, the former § 444 BGB (in its original version), was removed during a major reform in 2002. Under the current legal situation, the obligation is designed as a secondary obligation.160 Thereafter the seller is obliged to hand over all documents that relate to contractual relationships in view of the goods sold.161 These may be lease agreements regarding the good sold162 but also commercial invoices, construction documentation or balance sheets.163 The approach under the German Civil Code to the definition of documents is therefore very broad. Whether a contract for the sale of goods requires the delivery of such documents derives from the interpretation of the actual agreement between the parties. However, as the delivery of documents only constitutes a secondary obligation, the legal consequences of a non-delivery will commonly lead to a possible damage claim and not to a termination of the sales contract. 164 According to § 324 BGB, a termination because of non-performance of a secondary obligation in the sense of § 241(2) BGB is only possible when the creditor can no longer reasonably be expected to uphold the contract. Nonetheless, the obligation to deliver document can become the primary obligation under the sales contract. This is the case when the goods sold cannot be used without the document that has to be deliv157 Brödermann, UNIDROIT Principles of International Commercial Contracts (Nomos, 2018), Art. 7.3.1 para. 5; UNIDROIT, UNIDROIT Principles of International Commercial Contracts 2016 (4 th ed), Art. 7.3.1 no. 3 b, p. 255. 158 Piltz (n 9) Article 34 CISG para. 35. 159 Piltz (n 9) Article 30 CISG para. 46. 160 Faust, in Bamberger/Roth (eds), Kommentar zum Bürgerlichen Gesetzbuch (4 th edn, C.H. Beck 2019) § 433 BGB para. 47. 161 Grunewald, in Erman/Westermann/Grunewald/Reimer (eds), Bürgerliches Gesetzbuch (15 th edn, 2017) § 433 BGB para. 35. 162 See BGH 12 November 1991 (1992) NJW 920. 163 Grunewald (n 171) § 433 para. 35. 164 See § 323 BGB: ‘A right to terminate the contract only arises in-case of a non-performance concerning the primary obligation.’.

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ered. According to the German Federal Court, such a constellation is given, when a car is delivered without the vehicle registration document.165 In this situation, the obligation to deliver documents is a main obligation of the sales contract.166 The requirements for documents of title and bills of exchange are set out in supplementary laws. Particulars of the warehouse warrant, the bill of lading and the sea waybills are defined in §§ 475 c, 513 and 526 of the German Commercial Code; § 516(2) German Commercial Code even allows for an electronic bill of lading. Regarding the bill of exchange, a separate Act, the Wechselgesetz transposes the Geneva Convention into German law.

V. French Code Civil The French Code Civil (hereinafter CC) does not provide an explicit regulation 87 concerning the delivery of goods. According to Article 1604 CC, the seller must make them goods available to the buyer in a manner allowing the buyer to take power and possession of the goods. Under the common constellations of international sales transactions, e.g. a long period of carriage, this will commonly include the obligation to deliver documents representing the goods in order to allow the buyer to take possession and power on the goods. It depends on the type of goods delivered whether the seller is also obliged to transfer documents relating to the goods.

VI. Spanish Código Civil Under the Spanish Civil Code (Código civil, hereinafter SCC) the obligation to deliver 88 the goods is, according to Article 1, the seller’s main obligation in a sales contract. Whether documents have to be delivered has to be determined by the agreements made in the contractual deed, Article 1445 SCC. Hereby a delivery of documents representing the goods is required when it is necessary to enable the buyer to take delivery of the goods. Under the SCC, goods are deemed delivered when the seller makes delivery and places the goods in the buyer’s possession.167 However, under the SCC it is unclear when this point of time is reached in a documentary sales contract.168 Under one opinion established by a decision of the Spanish Supreme Court from 1927 and upheld in 1928, delivery occurs when the goods are actually received by the buyer.169 However, this view is not compatible with the requirements of the modern business world as it would create an obstacle for the free flow of documents and hinder the buyer to transfer goods that are still in transit. Under a second opinion that was established by the Spanish Supreme Court in the year 1984 and upheld in 1997, delivery is taken when the goods are handed over to the carrier.170 A third opinion in literature, which is in line with the principles laid down in section D of this Chapter states that delivery occurs when the seller transfers the appropriate documents representing the goods and these documents are

BGH 25 June 1953 (1953) NJW 1347. Saenger, in Schulze et al, Bürgerliches Gesetzbuch (10th edn, Nomos 2019) § 433 BGB para. 11. 167 Albors, in Ziegler (ed), Transfer of ownership in international trade (ICC Publication No. 546 2011) p. 389. 168 Albors (n 177) p. 389. 169 Albors (n 177) p. 390. 170 Albors (n 177) p. 390. 165 166

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duly accepted by the buyer.171 The obligation to deliver documents related to the goods is embellished as an accessory to the main obligation of delivery under the SCC.172

VII. United Kingdom Sale of Goods Act 1979 89

Under the United Kingdom Sale of Goods Act (hereinafter SGA) and the United Kingdom Factors Act only goods can be subject to a delivery. Documents can only be transferred.173 Whether documents have to be transferred depends on the contractual agreement. A transfer of a document of title requires delivery and indorsement. 174 The Factors Act includes a list of documents of title in its s 1 (4). Regarding other delivery obligations not concerned with documents of title, the above mentioned principles apply.

VIII. American Uniform Commercial Code 90

Under the American Uniform Commercial Code (hereinafter UCC) the question whether documents have to be delivered is also determined by the interpretation of the party agreement. § 2-503 UCC details in subsections 4 and 5 the execution of the obligation to deliver documents. § 2-503(4) UCC is concerned with the delivery when the goods are in possession of a bailee and are to be delivered without being moved. The delivery requires in this case that the seller hands over documents to the seller that allow him to take possession of the goods governed by the contract. § 2-503(5) UCC is intended for the case that the interpretation of the contract leads to the conclusion that documents have to be delivered under the contract. In this case, the seller must provide the documents owed in the correct form. Here again the requirements for the type and form of the documents derive in principle from the party agreement. However, the UCC contains a very extensive regulation concerning trade transaction that includes regulation concerning documents of title but also requirements regarding trade terms and documentary credits. Therefore, under a sales transaction under the UCC, one has to also consider the provisions of the UCC in order to determine whether the delivery of documents met the requirements.

IX. Chinese Law 91

Under the newly enacted Civil Code of the People’s Republic of China, the obligation to deliver documents has been given a prominent position within the new regulation. In Article 598, which is the third article governing the Sales Contract, is mentioned for the first time. According to this provision, the obligation for the seller under the Sales Contract is fulfilled by either by handing over the goods or the documents for the buyer to take possession of the goods. In Article 599, an obligation to hand over additional documents is also stipulated. Under this provision, the seller has also to provide “relevant documents” in order to fulfil the obligations under the Sales Contract.

Albors (n 177) p. 390. v. Bar & Clive (n 6) p. 165. 173 Bridge (n 21) para. 5.136; Nicholson v Harper [1895] 2 Ch 415, 418; Michael Gerson (Leasing) Ltd v Wilkinson [2001] QB 514 at [10]. 174 Kitto v Bilbie, Hobson & Co. (1895) 72 LT 266. 171 172

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Whether or which additional documents are to be handed over depends on the indi- 92 vidual agreement between the parties. However, the failure to produce additional relevant documents does not prevent the passing of risks, as expressly provided for in Art. 609. Whether the judicial interpretations released by the PRC Supreme People’s Court concerning sale and purchase contracts (hereinafter ‘Interpretation’) can be applied to interpret the new Civil Code in order to determine what may be “relevant documents”, remains to be seen. According to the Interpretation the documents may include ‘insurance policy, warranty certificate, invoice, VAT invoice, product approval certificate, quality warranty certificate, quality inspection certificate, commercial inspection certificate for import and export, certificate of origin, user manual’ and comparable documents.175 The second section in the new law dealing with the delivery of documents is the Con- 93 tract of Shipment. Under Article 826 of the Civil Code of the People’s Republic of China, the consignor has to submit transport documents to the carrier allowing for or documenting an examination, approval or inspection of the cargo. However, a more important provision is the one in Art. 840. This rule requires the multimodal transport operator to issue a multimodal transport document as soon as it receives the goods by the consignor. This transport document may either be a negotiable document or a non-negotiable document. In summary, it can be said that the arrangement of the delivery of documents under 94 the Civil Code of the People’s Republic of China, like the old regulation, is largely left to the contracting parties. Nevertheless, the new law contains more detailed provisions which will facilitate the application of the law in this area.

G. Illustrations As demonstrated several times in the preceding remarks, the obligation to deliver 95 documents has to be established through a corresponding contractual agreement. Commonly this will be done by using trade terms such as the INCOTERMS 2020. One of the possible INCOTERMS 2020 Clauses that is concerned with the delivery of documents is the ‘CFR’-clause or ‘Cost and Freight’-clause. In section A.8. of the CFR-Clause is stipulated: A.8. Proof of delivery transport document or equivalent electronic message Unless otherwise agreed, at his own expense provide the buyer without delay with the usual transport documents for the agreed port of destination. This document (for example, a negotiable bill of lading, a non-negotiable sea waybill or an inland waterway document) must cover the contract goods, be dated within the period agreed for shipment, enable the buyer to claim the goods from the carrier at destination and, unless otherwise agreed, enable the buyer to sell the goods in transit by the transfer of the document to a subsequent buyer (the negotiable bill of lading) or by notification to the carrier. When such a transport document is issued in several originals, a full set of originals must be presented to the buyer. If the transport document contains a reference to a charter party, the seller must also provide a copy of this latter document. (…).

Herein can be seen that, due to the typical issues with international sales transactions, 96 specifically language issues and different national business practices, the obligation to deliver documents and its modalities, specifically the requirements for the documents to be in compliance with the contractual requirements has to be specific, detailed and precise. On the other hand, due to the lack of an underlying legal framework detailing 175 Squire-Sanders, ‘PRC Supreme Court’s Interpretations concerning sale and purchase contracts’ (2012) 1, available at http://tinyurl.com/o56vmre.

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the obligation to deliver documents, the parties can freely design the contract according to their wishes and needs due to the arising party autonomy.

H. Cross References 97

Regarding the issues of methods of delivery reference is hereby made to Chapter 12, regarding the overall importance of INCOTERMS in international sales transactions, cross-reference is hereby made to Chapter 10.

I. Practitioner Tips & Contract Clauses 98

If no reference is made to INCOTERMS, the sales contract shall include a precise list of the documents the seller has to procure and furthermore shall regulate the modalities of delivery.176

I. Resolving Issues under Documentary Credits 99

Under a sales transaction including a payment via documentary credit, a special way exists to resolve issues regarding the conformity of the documents.177 The International Chamber of Commerce (ICC) created an efficient set of procedural rules to resolve any issues with documentary credits called ‘Rules for Documentary Instruments Dispute Resolution Expertise (DOCDEX)’.178 A proceeding under the DOCDEX-rules leads to an export report, which can be the basis of an enforceable title under a separate proceeding.179 A proceeding under DOCDEX requires that the URC 522-rule set180 was incorporated in the sales contract.

II. Electronic Delivery of Documents A new field of scientific discourse – and already practical application – has emerged in regard to the electronic delivery of documents. In order to increase the speed and cost-effectiveness of a sales transaction, there is a growing interest in using ways of electronic communication to facilitate the delivery of documents. By facilitating an electronic delivery, the costs associated with transporting the documents by courier or else can be significantly reduced, resulting in substantial savings at the macroeconomic level. The risk of fraud associated with the use of paper-based documents in long transport chains can also be significantly reduced through the use of modern security features in electronic documents.181 101 However, the electronic delivery of documents creates several legal challenges. The legal consequences regarding the goods covered by the document flow from the transfer 100

176 Witz, in Witz/Salger/Lorenz (eds), International Einheitliches Kaufrecht (2 nd edn, Deutscher Fachverlag 2016) Article 34 CISG para. 12. 177 Schütze (n 30) para. 31 a. 178 See Vorpeil, ‘ICC Rules for Documentary Instruments Dispute Resolution Expertise (DOCDEX)’ (2003) RIW 370–371. 179 A summary of the decisions made under DOCDEX cf. DOCDEX Decisions 1997–2003, ICC Publication no. 665. 180 See above. 181 Cf. Schmidt-Kessel (n 1) no. 7 et seq.

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of possession of the document. Transfer of possession hereby means the acquisition of possession of the document by the seller and the loss of possession by the seller. This is required in order to transfer the ownership regarding the document and therefore also regarding the goods covered by the document. An electronic transmission however emulates the transfer of possession only incompletely. Even if one would assume that the buyer would acquire some kind of possession of the document, the sender is not deprived of its possession of the document as the document is still stored in its computer system. These issues could be circumvented by using distributed electronic ledger technology (hereinafter “blockchain technology”) to facilitate the exchange, transfer and the delivery of documents. This technology is currently applied for the distribution of cryptocurrencies such as “Bitcoins”. In the context of the delivery of documents, blockchain technology is already being applied by a joint venture of logistic company MAERSK and IT-firm IBM called “TradeLens”. According to the company, it currently processes more than 10 million shipping events per week, which would otherwise have required a traditional delivery of documents.182 By using blockchain technology, a digital register can be created in which the transaction information is stored decentrally and irreversibly in chronological order. In the system derived by TradeLens, all parties to the documentary transaction are incorporated within the blockchain and can access its content. Therefore, the seller, the involved transport providers, the bank, the buyer as well as the relevant port and customs authorities can access the relevant information. As all parties to a blockchain independently verify the information added to the blockchain, the information once stored on the blockchain cannot be modified by a fraudulent actor. The blockchain also enables the transfer of ownership regarding the relevant sales documents as the transfer of ownership is irreversibly stored within the digital register and therefore sufficiently documented. However, the electronic creation and delivery of the relevant documents propels a number of legal problems of its own. Especially for documents of title, the different legal systems stipulate a number of criteria for the form and content of the document to be met in order to represent an effective document of title. Often, the applicable law does not allow or even provide for the existence of documents of title in an electronic form. For example, the Hamburg Rules, which are governing the bills of lading and have entered into force in 1992183, stipulate in Article 14 that the signature on the bill of lading ’may be in handwriting, printed in facsimile, (…) or made by any other mechanical or electronic means, if not inconsistent with the law of the country where the bill of lading is issued.’ It can be derived from this Article that under the Hamburg Rules a physical bill of lading is required and only the required signature may be applied by electronic means. This would change under the Rotterdam Rules, a renewed version of the Hamburg Rules, which, however, has not entered into force.184 Chapter 3 of the Rotterdam Rules explicitly allows for the use of electronic transport documents, including, according to Article 9 of the Rotterdam Rules, negotiable electronic transport records, hence documents of title like the bill of lading. In order to determine the permissibility of electronic documents of title, also the different national legal systems must be taken into account. Under the German Com182

vb.

183 184

Jesper Toft Madsen, ‘A game changer for global trade’ (2019), available at https://tinyurl.com/yyeo6e Cf. above, VII.1, → mn. 105 Cf. above, VII.1, → mn. 105.

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102

103

104

105

106

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mercial Code, the use of electronic transport documents has been allowed for the first time in 2013. For example, Article 516(2) of the German Commercial Code now allows for an electronic bill of lading. Similar provisions can be found in Articles 443(3) and 475c(4) of the German Commercial Code. 108 In conclusion, the use of electronic documents is beneficial in order to reduce costs and fraud risks and to increase the speed of a documentary sales transaction. However, as not all relevant legal systems already provide for or permit the use of electronic documents, special attention should be paid to the choice of law and contractual agreements when an electronic delivery of documents is intended by the parties to the contract. 109 The field of digital document delivery will undergo significant changes in the near future, at least as far as the scope of European Union law is concerned. The transposition of the Directive on certain aspects concerning contracts for the supply of digital contents (Directive 2019/770) into national law though being a Directive for the protection of consumers will not rule out the possibility that digital documents such as documentary credits may also be classified as digital content and thus fall within the scope of the Directive. How the obligations provided for in the Directive, such as the update obligation, can be reconciled with the system of document delivery established to date must currently be assessed as still completely open.

J. Additional Sources 110 Berman/Ladd, ‘Risk of Loss or Damage in Documentary Transactions under the Convention on the

International Sale of Goods (Cornell Symposium)’ (1988) 21 Cornell Int’l LJ 423; Hang Yen Low, ‘UCP 600: the new rules on documentary compliance’ (2010) 52 International Journal of Law and Management 193–210; Hwaidi, ‘The delay in tendering documents in international documentary sales of goods: CISG and Jordanian Sharia’, International Trade Law & Regulation, 2019, 25 (4), 227–247; Jiang & Jing, ‘Bills of lading as documents of title – Chinese Law and policy’, Journal of Business Law 2019, 7, 534–553; Klipatrick Jr, ‘Privity and sub-contracting in multimodal transport: diverging solutions’, Journal of Business Law 2019, 7, 481–503; Mankowski (ed), Commercial Law (Beck/Hart/Nomos 2019); Ozdel, ‘Multimodal transport documents in international sales of goods’, International Company and Commercial Law Review 2012, 23 (7), 238–250; Schackmar, Die Lieferpflicht des Verkäufers in internationalen Verträgen (Erich Schmidt Verlag 2001); Stockton & Miller, Sales and Leases of Goods in a nutshell (West Publishing Co. 1992); Walker, ‘Trade Usages and the CISG: Defending the Appropriateness of Incorporating Custom into International Commercial Contracts’ (2005) 24 J L & Com 263.

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CHAPTER 14 CONFORMITY OF GOODS Bruno Zeller A. Topics Covered . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B. Introductory Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C. Statement of Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . D. International Sales Transaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . E. Sampling of Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. CISG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. UNIDROIT Principles of International Commercial Contracts . . . . . . . . . . . . . . III. Principles of European Contract Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. German Bürgerliches Gesetzbuch . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. French Code Civil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI. Spanish Código Civil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VII. American Uniform Commercial Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VIII. United Kingdom Sale of Goods Act 1979 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IX. American Restatement (Second) of Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . X. Chinese Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F. Commentary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Summary of Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Conformity of Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Express Conformity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Interpretation and Implied Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Implied Conformity of Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Fit for the Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Fit for the Particular Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Conformity to Sample or Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. Packaged in a Manner Required by the Contract. . . . . . . . . . . . . . . . . . . . . . . . . . G. Illustrations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Conformity of Description . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Conformity and Public Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Conformity and the Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . H. Cross References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Practitioner Tips & Contract Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Choice of Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Disclaimer of Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Disclaimer #1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Disclaimer #2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Disclaimer #3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Disclaiming Warranty of Ordinary Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . J. Additional Sources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 2 3 6 7 7 8 9 10 11 12 13 14 15 16 17 17 31 34 35 43 47 52 55 61 63 63 64 65 66 67 67 68 69 70 71 73 74

A. Topics Covered The Chapter focuses on the conformity of goods, namely, the determination of 1 whether the goods delivered conform to the goods contracted for. Conformity or warranties are multi-dimensional and include numerous types of express and implied warranties. Express warranties – depending on the applicable legal system – include oral representations, written statements, descriptions, specifications, samples, and models. Specifications and marking requirements regarding the packaging of the goods are also express warranties. If there are no express terms related to the packaging of the goods, then there is an implicit obligation to package the goods in a way common to the trade (trade usage) or in a reasonable manner to protect the goods. Implied warranties include the conformity of ordinary use (merchantability) and fitness for a particular purpose.

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This Chapter will review these different types of warranties. The terms ‘conformity’ and ‘warranty’ are used interchangeably throughout the Chapter.

B. Introductory Note 2

Conformity of goods is one of the crucial issues and plays a central role in any business dealing and every system of law regulates this area of contracts. Uniformity in this area of law is important specifically as global trade is increasing and common markets take on a more important role. As national legislators adopt their own approach variations between the content of the regulations between legal systems exist but in general, they appear to be very closely linked. However, it is important for contract drafters to keep the variations in mind when determining the applicable law. As an example, the CISG includes packaging as one of the elements of conformity in Article 35 CISG, whereas English law does not do so in its Sale of Goods Act 1979 ss 13 to 15. The difference between the various systems of laws, especially when the Common Law is involved, is how the warranty terms are interpreted. This is an issue with any legal systems and the divergence as noted above increase the risk of using a familiar interpretive regime. The problem of homeward trend persists as some courts have used domestic law, with similar warranty terms, to interpret Article 35 CISG. Australian courts – as an example – have noted that Article 35 CISG is in effect the same as the s 19 of the Australian Sale of Goods Act and other domestic legislation in applying the CISG warranty provisions (Articles 35–40 CISG). Another problem has been courts using domestic procedural law to restrict the types of evidence that can be used to interpret contract terms. In general, the difference is the weight given to the written contract and extrinsic material such as prior dealings, intent of the parties expressed in oral pre-contractual negotiations and trade usage. However, control of the admissibility of extrinsic law by domestic procedural law has been correctly rejected by a majority of courts. The rationale is being that the use of extrinsic evidence in interpreting contracts is a matter of substantive and not procedural law. As such, all relevant extrinsic evidence is admissible under Article 11 CISG.

C. Statement of Issues In general, most legal systems mandate that for an offer to be definite it needs to include the description of the goods, quantity offered, and expressly or by implication determines the price. However, it is left to the parties whether to expressly define conformity of quality. Implied terms of warranty are recognized in most systems in cases where the contract is silent on the issue of conformity. Every system of law contains rules relating to the seller’s obligation to deliver goods, which are conforming to the contract. At the same time law in most instances does not bar contractual parties from excluding the implied terms or drafting express warranty terms suiting their own circumstances. An exception is that some laws provide protections to consumers relating to such exclusions. 4 A pivotal concern in cases where conformity of goods is in dispute is the divergence amongst legal systems as to the type of evidence that can be used in interpreting a warranty clause or disclaimer of warranty. The Common Law countries tend to use the parol evidence rule whereas the CISG and international model laws not only the objective approach but also the subjective approach to finding the intent of the parties is applicable and are therefore open to considering all types of evidence in the interpreta3

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E. Sampling of Laws

tion of contracts. Civil Law courts are less constrained in considering extrinsic evidence, as the underlying philosophy in contract law is to ascertain what the agreement is in fact. Importantly Civil Law countries and international instruments include the mandate of good faith and fair dealing whereas English law does not recognize this principle. In contrast, the American UCC, and by analogy American Common Law, recognize the principle of good faith. It ought to be noted that Chinese Civil Law also uses the principle of good faith in several Articles such as 7, 142, 500 and 509 CCC. As far as implied terms are concerned some systems define what is considered to 5 be non-conformity, such as goods must be fit for an ordinary purpose or must be merchantable. The CISG also includes the obligation that the goods must be packaged in a manner required by the contract. The CCC has included packaging as an obligation in Article 596 CCC. Other Civil Law systems describe the duties of the seller in general terms, such as ‘fit for the use in which it was intended’ or ‘liable for any hidden defects.’ The seller is given a defense if the buyer knew or could not have been unaware of the lack of conformity (Article 35(3) and the UK Sale of Goods Act (SGA) s 14(2)(c)). This Chapter will focus on the following issues: (1) how does each legal system covered in this Chapter define conformity of goods? (2) How are the implied terms of conformity defined? (3) How did courts and tribunals interpret the contract in case of ambiguities? (4) What can the practicing lawyer do to best protect the interests of its client?

D. International Sales Transaction The questions of conformity of goods and to that end the validity of the contract 6 is closely connected. This Chapter will illustrate how the examined domestic laws, the CISG, and model laws indicate what is required to supply conforming goods. A businessperson should also be aware of the effects of non-conformity; the effects vary depending on the applicable law. The CISG distinguishes between non-fundamental and fundamental breaches (only the latter type of breach allows for the termination of the contract). The UCC and SGA distinguish between warranties, which give rise to damages and conditions, which terminate the contract. The Civil Law systems vary between breach of warranty or in the case of the BGB, allowing the buyer to withdraw from the contract. The CCC does not specifically legislate in relation to rescinding the contract. It is a departure from the past Chinese Contract Law. . Most legal systems require that the buyer notify the seller of any defects or non-conformities. Articles 38 and 39 CISG require the buyer to undertake a prompt and reasonable inspection followed by notification to the seller within a reasonable time of the exact nature of the defect. Other systems merely require notification by the buyer. What is considered a reasonable time for inspection and notification, as well as the effects of non-compliance of notification, vary across legal systems.

E. Sampling of Laws I. CISG 7

Article 35 (1) The 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.

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Chapter 14 Conformity of Goods (2) Except where the parties have agreed otherwise, the goods do not conform with the contract unless they: (a) are fit for the purposes for which goods of the same description would ordinarily be used; (b) are fit 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; (c) possess the qualities of goods which the seller has held out to the buyer as a sample or model; (d) are 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. (3) The seller is not liable under subparagraphs (a) to (d) of the preceding paragraph for any lack of conformity of the goods if at the time of the conclusion of the contract the buyer knew or could not have been unaware of such lack of conformity. CISG Advisory Council Opinion No. 2 There is no AC opinion directly on article 35. Opinion 2 investigates only article 38 and 39 the duty to examine the goods and notify the seller of any lack of conformity.

II. UNIDROIT Principles of International Commercial Contracts 8 Article 5.1.6 Determination of quality of performance Where the quality of performance is neither fixed, nor determinable from, the contract a party is bound to render a performance of a quality that is reasonable and not less than average in the circumstances. Article 7.1.1 Non-performance defined Non-performance is a failure by a party to perform any of its obligations under the contract, including defective performance or delayed performance.

III. Principles of European Contract Law 9 Article 6:108 If the contract does not specify the quality, a party must tender performance of at least average quality. Article 8:101 Whenever a party does not perform an obligation under the contract and the non-performance is not excused, the aggrieved party may resort to any of the remedies set out in Chapter 9.

IV. German Bürgerliches Gesetzbuch 10 § 242 Performance in good faith An obligor has a duty to perform according to the requirements of good faith, taking customary practice into consideration. § 323 Withdrawal for nonperformance or for performance not in conformity with the contract 1 (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 withdraw from the contract, if he has specified, without result, an additional period for performance or cure.

1 This 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 ([1999] OJ L171/12).

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E. Sampling of Laws (2) The specification of a period of time can be dispensed with if: 1. the obligor seriously and definitively refuses performance, 2. the obligor does not render performance by a date specified in the contract or within a specific 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 withdrawal. (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. (4) The obligee may withdraw from the contract before performance is due if it is obvious that the requirements for withdrawal will be met. (5) If the obligor has performed in part, the obligee may withdraw from 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 withdraw from the contract if the breach of duty is trivial. (6) Withdrawal is excluded if the obligee is solely or very predominantly responsible for the circumstance that would entitle him to withdraw from 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. § 434 Material defects (1) The thing is free from material defects if, upon the passing of the risk, the thing has the agreed quality. To the extent that the quality has not been agreed, the thing is free of material defects: 1. if it is suitable for the use intended under the contract, 2. if it is suitable for the customary use and its quality is usual in things of the same kind and the buyer may expect this quality in view of the type of the thing. Quality under sentence 2 no. 2 above includes characteristics which the buyer can expect from the public statements on specific characteristics of the thing that are made by the seller, the producer (section 4(1) and (2) of the Product Liability Act [Produkthaftungsgesetz]) or his assistant, including without limitation in advertising or in identification, unless the seller was not aware of the statement and also had no duty to be aware of it, or at the time when the contract was entered into it had been corrected in a manner of equal value, or it did not influence the decision to purchase the thing. (2) It is also a material defect if the agreed assembly by the seller or persons whom he used to perform his obligation has been carried out improperly. In addition, there is a material defect in a thing intended for assembly if the assembly instructions are defective, unless the thing has been assembled without any error. (3) Supply by the seller of a different thing or of a lesser amount of the thing is equivalent to a material defect

V. French Code Civil 11

Article 1641 A seller is bound to a warranty on account of the latent defects of the thing sold which render it unfit for the use for which it was intended, or which so impair that use that the buyer would not have acquired it, or would only have given a lesser price for it, had he known of them. Article 1642 A seller is not liable for defects which are patent and which the buyer could ascertain for himself. Article 1643 He is liable for latent defects, even though he did not know of them, unless he has stipulated that he would not be bound to any warranty in that case. Article 1647 Where the thing, which had defects perishes because of its bad quality, the loss falls upon the seller who is liable to the buyer for restitution of the price and other compensations

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VI. Spanish Código Civil 12

Section 3 of the Spanish Código civil is devoted to warranties. Part 1 deals with warranty against dispossession and part 2 the warranty against hidden defects or encumbrances of the thing sold. Article 1461 The seller is bound to perform delivery of and provide warranty over the thing constituting the subject matter of the sale. Article 1474 Pursuant to the warranty mentioned in article 1461, the seller shall be liable to the purchaser: 1. For the lawful and peaceful possession of the things sold. 2. For any hidden faults or defects Article 1484 The seller shall be obliged to provide a warranty for hidden defects of the things sold, if they render it unsuitable for the use to which it is destined, or if they reduce such use in such a way that, if the purchaser had known them, he would not have acquired it or would have given a lower price for it; but he shall not be liable for manifest defects or those which are in plain sight, nor for those which are not, if the purchaser is an expert who, as a result of his trade or profession, ought easily to have been aware of them.

VII. American Uniform Commercial Code 13 § 2-313 Express warranties by affirmation, promise, description, and sample (1) Express warranties by the seller are created as follows: (a) Any affirmation of fact or promise made by the seller to the buyer, which relates to the goods and becomes part of the basis of the bargain creates an express warranty that the goods shall conform to the affirmation or promise. (b) Any description of the goods, which is made part of the basis of the bargain, creates an express warranty that the goods shall conform to the description. In the case of consumer goods sold by a merchant with respect to such goods, the description affirms that the goods are fit for the ordinary purposes for which such goods are used. (c) Any sample or model, which is made part of the basis of the bargain, creates an express warranty that the goods shall conform to the sample or model. (2) It is not necessary to the creation of an express warranty that the seller use formal words such as "warrant" or "guarantee" or that he have a specific intention to make a warranty, but an affirmation merely of the value of the goods or a statement purporting to be merely the seller's opinion or commendation of the goods does not create a warranty. § 2-314 Implied warranty: merchantability; usage of trade (1) Unless excluded or modified by section 2-316, a warranty that the goods shall be merchantable is implied in a contract for their sale if the seller is a merchant with respect to goods of that kind. Under this section the serving for value of food or drink to be consumed either on the premises or elsewhere is a sale. (2) Goods to be merchantable must at least be such as (a) Pass without objection in the trade under the contract description; and (b) In the case of fungible goods, are of fair average quality within the description; and (c) Are fit for the ordinary purposes for which such goods are used; and (d) Run, within the variations permitted by the agreement, of even kind, quality and quantity within each unit and among all units involved; and (e) Are adequately contained, packaged and labeled as the agreement may require; and (f) Conform to the promises or affirmations of fact made on the container or label if any. (3) Unless excluded or modified by section 2-316, other implied warranties may arise from course of dealing or usage of trade.

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E. Sampling of Laws § 2-315 Implied warranty: fitness for particular purpose Where the seller at the time of contracting has reason to know any particular purpose for which the goods are required and that the buyer is relying on the seller's skill or judgment to select or furnish suitable goods, there is, unless excluded or modified under section 2-316, an implied warranty that the goods shall be fit for such purpose. § 2-316 Exclusion or modification of warranties (1) Words or conduct relevant to the creation of an express warranty and words or conduct tending to negate or limit warranty shall be construed wherever reasonable as consistent with each other; but subject to the provisions of this Article on parol or extrinsic evidence (section 2-202) negation or limitation is inoperative to the extent that such construction is unreasonable. (2) Subject to subsection (3), to exclude or modify the implied warranty of merchantability or any part of it the language must mention merchantability and in case of a writing must be conspicuous, and to exclude or modify any implied warranty of fitness the exclusion must be by a writing and conspicuous. Language to exclude all implied warranties of fitness is sufficient if it states, for example that "There are no warranties which extend beyond the description on the face hereof." (3) Notwithstanding subsection (2) (a) Unless the circumstances indicate otherwise, all implied warranties are excluded by expressions like ‘as is’, ‘with all faults’ or other language which in common understanding calls the buyer's attention to the exclusion of warranties and makes plain that there is no implied warranty; and (b) When the buyer before entering into the contract has examined the goods or the sample or model as fully as he desired or has refused to examine the goods there is no implied warranty with regard to defects which an examination ought in the circumstances to have revealed to him; and (c) An implied warranty can also be excluded or modified by course of dealing or course of performance or usage of trade. (4) Remedies for breach of warranty can be limited in accordance with the provisions of this Article on liquidation or limitation of damages and on contractual modification of remedy (sections 2-718 and 2-719). (5) The provisions of subsections (2), (3) and (4) do not apply to sales of consumer goods or services. Any language, oral or written, used by a seller or manufacturer of consumer goods and services that attempts to exclude or modify any implied warranties of merchantability and fitness for a particular purpose or to exclude or modify the consumer's remedies for breach of those warranties is unenforceable. Any language, oral or written, used by a prior seller or manufacturer of consumer goods and services that attempts to exclude or modify the warranty or reimbursement remedy of a retail seller of consumer goods and services who provides reimbursement or return to a consumer as required to honor an implied warranty of merchantability due to a defect for which that prior seller or manufacturer is liable under section 2-314 or 2-315 is unenforceable. Consumer goods and services are those new or used goods and services, including mobile homes that are used or bought primarily for personal, family or household purposes. (a) A violation of section 2-314, 2-315 or 2-316 arising from the retail sale of consumer goods and services constitutes a violation of Title 5, chapter 10, Unfair Trade Practices Act. (b) A violation of section 2-316 arising from an attempt by a prior seller or manufacturer of consumer goods and services to exclude or modify the warranty or reimbursement remedy of a retail seller of consumer goods and services who provides reimbursement or return to a consumer as required to honor an implied warranty of merchantability due to a defect for which that prior seller or manufacturer is liable under section 2-314 or 2-315 does not constitute a violation of Title 5, chapter 10, Unfair Trade Practices § 2-317 Cumulation and conflict of warranties express or implied Warranties whether express or implied shall be construed as consistent with each other and as cumulative, but if such construction is unreasonable the intention of the parties shall determine which warranty is dominant. In ascertaining that intention the following rules apply: (1) Exact or technical specifications displace an inconsistent sample or model or general language of description. (2) A sample from an existing bulk displaces inconsistent general language of description. (3) Express warranties displace inconsistent implied warranties other than an implied warranty of fitness for a particular purpose.

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VIII. United Kingdom Sale of Goods Act 1979 14 Section 13 Sale by description (1) Where there is a contract for the sale of goods by Sale by description, there is an implied condition that the goods will correspond with the description. (2) If the sale is by sample as well as by description it is not sufficient that the bulk of the goods correspond with the sample if the goods do not also correspond with the description. (3) A sale of goods is not prevented from being a sale by description by reason only that, being exposed for sale or hire, they are selected by the buyer. Section 14 Implied terms about quality or fitness (1) Except as provided by this section and section 15 below and subject to any other enactment, there is no implied condition or warranty about the quality or fitness for any particular purpose of goods supplied under a contract of sale. (2) Where the seller sells goods in the course of a business, there is an implied condition that the goods supplied under the contract are of merchantable quality, except that there is no such condition: (a) as regards defects specifically drawn to the buyer's attention before the contract is made; or (b) if the buyer examines the goods before the contract is made, as regards defects which that examination ought to reveal. (3) Where the seller sells goods in the course of a business and the buyer, expressly or by implication, makes known: (a) to the seller, or (b) where the purchase price or part of it is payable by instalments and the goods were previously sold by a credit-broker to the seller, to that credit-broker, any particular purpose for which the goods are being bought, there is an implied condition that the goods supplied under the contract are reasonably fit for that purpose, whether or not that is a purpose for which such goods are commonly supplied, except where the circumstances show that the buyer does not rely, or that it is unreasonable for him to rely, on the skill or judgment of the seller or credit-broker. (4) An implied condition or warranty about quality or fitness for a particular purpose may be annexed to a contract of sale by usage. (5) The preceding provisions of this section apply to a sale by a person who in the course of a business is an agent for another as they apply to a sale by a principal in the course of a business, except where that other is not selling in the course of a business and either the buyer knows that fact or reasonable steps are taken to bring it to the notice of the buyer before the contract is made. (6) Goods of any kind are of merchantable quality within the meaning of subsection (2) above if they are as fit for the purpose or purposes for which goods of that kind are commonly bought as it is reasonable to expect having regard to any description applied to them, the price (if relevant) and all the other relevant circumstances. Section 15 Sale by sample (1) A contract of sale is a contract for sale by sample Sale by where there is an express or implied term to that effect in the sample. (2) In the case of a. contract for sale by sample there is an implied condition: (a) that the bulk will correspond with the sample in quality; (b) that the buyer will have a reasonable opportunity of comparing the bulk with the sample; (c) that the goods will be free from any defect rendering them unmerchantable, which would not be apparent on reasonable examination of the sample. (3) In subsection (2)(c) above ‘unmerchantable’ is to be construed in accordance with section 14(6) above.

IX. American Restatement (Second) of Contracts 15 § 241 Circumstances significant in determining whether a failure is material In determining whether a failure to render or to offer performance is material, the following circumstances are significant: (a) the extent to which the injured party will be deprived of the benefit which he reasonably expected; (b) The extent to which the injured party can be adequately compensated for the part of the benefit which he will be deprived (c) …

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F. Commentary (d) the likelihood that the party failing to perform or offer to perform will cure his failure, taking account of all the circumstances including any reasonable assurances; (e) the extent to which the behavior of the party failing to perform or offer to perform comports with standards of good faith and fair dealing.

X. Chinese Law 16

Article 511(1) Where certain contents agreed upon by the parties in the contract are ambiguous and cannot be determined in accordance with the provisions in the preceding article, the following provisions shall be applied: (1) If quality requirement is not clear, performance shall be rendered in accordance with the state mandatory standard; absent any state mandatory standard, performance shall be rendered in accordance with the state voluntary standard; absent any state voluntary standard, performance shall be rendered in accordance with the industry voluntary standard; or absent any state or industry standard, performance shall be rendered in accordance with the customary standard or any particular standard consistent with the purpose of the contract. Article 615 The seller shall deliver the subject matter in compliance with the agreed quality requirements. Where the seller gives the quality specifications for the subject matter, the subject matter delivered shall comply with the quality requirements set forth therein. Article 619 The seller shall deliver the subject matter packed in the agreed manner. Where there is no agreement on package manner in the contract or the agreement is not clear, nor can it be determined according to the provisions of Article 510 of this Code, the subject matter shall be packed in a general manner, and if no general manner, a package manner enough to protect the subject matter and favorable to conserving resources and protecting the ecology and environment shall be adopted. Article 636 In a sale by sample, if the buyer is not aware of a latent defect in the sample, the subject matter delivered by the seller shall nevertheless comply with the normal quality standard for a like item, even though the subject matter delivered complies with the sample.

F. Commentary I. Summary of Laws Article 35 CISG establishes the seller’s main obligations in providing conforming 17 goods, with related rules found in Articles 36 to 40 CISG. “The provision has a threefold function: it states the seller’s general obligation to deliver conforming goods, sets the criteria by which the goods are deemed to conform to the contract and, finally, provides for an exception to the seller’s liability [in Article 35(3) CISG].”2 Article 35(1) CISG requires the seller to deliver goods ‘which are of the quantity, 18 quality and description as stated in the contract and which are contained or packaged in the manner required by the contract.’ The three elements of quality, description and packaging, as set out in Article 35(1), are types of express (contractual) warranties replicated in many of the other laws reviewed in this Chapter. Other express warranties (conformities) include warranty based upon a sample or model. Article 35(2)(c) CISG treats warranty by sample or model as non-contractual in nature and may be implied by 2 Villy de Luca, ‘The Conformity of the Goods to the Contract in International Sales’, 27 Pace Int'l L. Rev. 163 (2015), 183.

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20

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law. However, the better view is that they are express warranties. The implied warranties are found in Article 35(2) (a)–(d) CISG, which are used to fill gaps in the contract. The implied warranties listed include: (1) fit for ordinary purpose (merchantable quality) in Article 35(2)(a), (2) CISG fit for a particular purpose in Article 35(2)(b) CISG, and (3) packaged or contained in a customary manner or ‘in a manner adequate to preserve and protect the goods.’ These types of implied warranties are also found in other international and domestic laws. The CISG notes that goods must be fit for the purpose for which goods are ordinarily used as well as fit for any particular purpose impliedly or expressly made known to the seller. The exception is where the buyer did not rely on the skill and judgment of the seller purchasing the goods. Also, if the seller held out a sample or model to the buyer the goods must correspond to the sample. In addition, the goods must be packaged in a usual manner or importantly in a manner adequate to protect the goods. Article 37 CISG gives the seller the opportunity to remedy non-conforming goods if the goods were delivered before the due date and it does not provide the buyer unreasonable inconvenience. Article 36(2) CISG makes reference to conformity of goods by stating that the seller is liable for breach of seller’s obligation to supply conforming goods: ‘including a breach of any guarantee that for a period of time the goods will remain fit for their ordinary purpose or for some particular purpose or will retain specified qualities or characteristics.’ In making the quality determination recourse to the general interpretative principles of Article 8 CISG, which requires the quality guarantee be one intended by the parties or in cases where one party knew or should have known of the other party’s intent as to quality. If subjective intent is not provable, then recourse is to be made to the reasonable person (buyer) standard. Article 9 CISG allows international trade usage to be used in determining the level of quality. The Article 7.1.1 PICC states that ‘non-performance is a failure by a party to perform any of its obligations under the contract, including defective performance or late performance.’ Article 5.1.1 PICC indicates that a contractual obligation may be express or implied. The source of implied obligations is described in Article 5.1.2 PICC, namely the nature and purpose of the contract, practices established between the parties and trade usage, good faith and fair dealing and reasonableness. When performance is not fixed and is to be implied Article 5.1.6 PICC makes reference to a performance that is of ‘a quality that is reasonable and not less than average under the circumstances ‘that is the goods or service must be of a certain quality that is not less than average taking the specific service or goods into consideration. This article is linked to Article 5.1.4 PICC where ‘best efforts’ are required in performing on the contract. Article 6:108 PECL implies a standard of quality of ‘at least average quality.’ Article 1:302 PECL states that ‘in assessing what is reasonable the nature and purpose of the contract, the circumstances of the case, and the usages and practices of the trades or professions involved should be taken into account.’ The § 434 BGB states first that the goods must be suitable for the use intended under the contract. If nothing is noted in the contract the goods must ‘be suitable for the customary use and its quality is usual in things of the same kind and the buyer may expect this quality in view of the type of the thing.’ In effect it follows the mandate of PICC. CESL followed the same rules as found in the BGB as noted in Article 69, that quality is defined as possessing the ‘characteristics, which the buyer can expect from the public statements on specific characteristics of the thing that are made by the seller.’ Furthermore, Article 101 CESL, provides the same rules as the BGB which only applied to consumer contracts, to all contracts unlike in Common Law countries:

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F. Commentary It is also a material defect if the agreed assembly by the seller or persons whom he used to perform his obligation has been carried out improperly. In addition, there is a material defect in a thing intended for assembly if the assembly instructions are defective, unless the thing has been assembled without any error.

§ 323 BGB sets out in general terms the obligations of the seller and allows the buyer to withdraw from the contract for non-performance or for performance not in conformity with the contract. However, the aggrieved party can only do so if ‘he has specified, without result, an additional period for performance or cure’. This section also notes that to withdraw from a contract is not permissible if the breach of the duty is trivial in nature. Article 1641 French Civil Code notes: ‘A seller is bound to a warranty on account of the latent defects of the thing sold, which render it unfit for the use for which it was intended, or which so impair that use that the buyer would not have acquired it, or would have given a lesser price for it, had he known of them.’ The court would judge the hidden defect pursuant to the usual or normal use. However, the buyer is not entitled to warranty protection if she could have discovered the defect through a reasonable inspection (patent or obvious defects) (Article 1642 French Civil Code). Article 1647 French Civil Code provides a broad quality standard: the seller is liable if goods that ‘had defects and perish because of its bad quality’. In addition, if the goods are not conforming with the contractual specification amounts to a breach of Article 1604 French Civil Code. The Spanish Código civil, as is common with all warranty laws, holds the seller liable even he is not aware of hidden defects unless an express clause in the contract stipulates otherwise (Article 1485 French Civil Code). If the seller knew of the hidden defects it is liable for all losses caused by the defected goods. If the seller was unaware of the defects, then its liability is limited to a return of the purchase price. The American Uniform Commercial Code (UCC) distinguishes between express terms in § 2-313 UCC and implied terms in §§ 2-314 UCC (implied warranty of merchantability) and 2-315 UCC (implied warranty for a particular purpose). Express warranties, as described in § 2-313 UCC, are created by affirmative action of the seller that becomes a part of the contract. Furthermore, ‘any sample or model which is made part of the basis of the bargain creates an express warranty that the whole of the goods shall conform to the sample or model.’ Unlike English law, the whole of the goods and not the bulk of the goods must conform to the sample. The UCC also notes that it is not necessary that words such as warranty or guarantee be used to create an express term as described in § 2-313 UCC. However, if implied terms are negated in the contract differences need to be noted between merchantability and fitness of purpose. § 2-316 of the UCC is very specific in relation to merchantability. It notes: “to exclude or modify the implied warranty of merchantability or any part of it the language must mention merchantability.” On the other hand if fitness for purpose needs to be excluded the name of the warranty does not need to be mentioned In sum, § 2-313 UCC recognizes four types of express warranties: (1) affirmation of fact or promise made by the seller, (2) description of the goods, (3) sample, and (4) model or prototype. In the area of implied warranties, the UCC mandates that the goods are firstly merchantable and conform to the usage of the respective trade and secondly, are fit for any particular purpose in the case where the buyer relied upon the skills and knowledge of the seller to provide goods appropriate to serve the buyer’s needs. The English SGA, as with other Common Law countries Acts, cannot be read in isolation of the case law. Court judgments fill the gaps and interpret the law and hence add to the volume of the applicable law. The most important sections dealing with conformity of goods are ss 13 to 15. s 13 SGA notes that sales can be based upon a Bruno Zeller

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description of the goods or by way of a sample. In the SGA a description of the goods is characterized as creating an implied condition while the UCC classifies it as an express warranty. 28 If both a description and sample are the basis of the contract ‘it is not sufficient that the bulk of the goods correspond with the sample if the goods do not also correspond with the description.’ s 15 SGA provides clarification be noting that a sale by sample only requires that the bulk of the goods must correspond with the sample in quality. Thus, despite s 13 SGA, only the bulk needs to correspond with description and sample and not the total supply. What constitutes a ‘bulk’ is a question of fact that is left to the courts to interpret. S 14 SGA also implies terms of quality or fitness into contracts. The general implied warranty or condition that attaches to all goods is the implied warranty of merchantable quality, or in more recent jurisprudence goods of ‘satisfactory quality’. The following standard is provided: the goods are of the ‘standard that a reasonable person would regard as satisfactory, taking account of any description of the goods, the price (if relevant) and all the other relevant circumstances.’ 29 The SGA defines quality based on the state and condition of the goods. The goods must be in a state and condition to satisfy: ‘(a) fitness for all the purposes for which goods of the kind in question are commonly supplied, (b) appearance and finish, (c) freedom from minor defects, (d) safety, and (e) durability.’ However, the above implied conditions do not apply if the lack of quality is specially drawn to the buyers attention before the contract is made or where the buyer examines the goods before the contract is made, and that examination ought to have revealed any defects as to quality, or in the case of a contract for sale by sample, which would have been apparent on a reasonable examination of the sample. Importantly it must be noted that a breach of a condition gives rise to avoid the contract whereas a breach of a warranty gives rise to damages only. 30 Chinese Contact Law contains both civil and Common Law principles. As in the Civil Law, the principle of good faith is an underlying principle found in Article 509 CCC (good faith in the performance and enforcement of contract) and, stating that: ‘The parties shall observe the principle of good faith and perform such duties as giving notice, providing assistance and maintaining confidentiality in accordance with the nature and purpose of the contract as well as the usage of transaction.’ In the area of conformity, Article 511(1) CCC states that ʻ(i)f quality requirement is not clear, performance shall be rendered in accordance with the state mandatory standard; absent any state mandatory standard, performance shall be rendered in accordance with the state voluntary standard; absent any state voluntary standard, performance shall be rendered in accordance with the industry voluntary standard; or absent any state or industry standard, performance shall be rendered in accordance with the customary standard or any particular standard consistent with the purpose of the contract’. More specificity as to what is meant by ‘conformity with the purpose of the contract’ is provided in subsequent articles. The issue of packaging of goods is further regulated under in Article 596 CCC. In cases where there is no agreement or the agreement is unclear as to how the goods must be packaged, then they must be packaged in a customary manner. If there is no customary manner of packaging, then they must be packaged in a manner ‘that is adequate to protect’ the goods.

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II. Conformity of Goods In all legal systems, the starting point for issues of warranties is the contract. In 31 Common Law, the parol evidence rule protects the written contract and hence in theory there is no need to look further. However, in practice, the contextual approach to interpretation is common. The German and French models of interpretation are closer to the CISG as the courts are guided by the question as to what is the agreement in fact and not so much in law The striking difference between the samples of domestic laws is not only how the issue of conformity of goods has been regulated but also on how the rules in this area have been interpreted. The CISG and Common Law countries use detailed provisions to list a variety of types of warranties. The CISG, SGA, and UCC use fitness for ordinary and particular purpose, as well as a mandate that goods conform to samples or models. The Civil Law countries define conformity of goods using broad terms. Article 1641 32 French Civil Code states only that the seller must warrant that the goods are not unfit for the intended use; Article 1484 Spanish Código civil provides, the ‘seller shall be obliged to provide a warranty for hidden defects of the things sold, if they render the goods unsuitable for the use to which they were destined.’ § 434(1) BGB legally defines lack of conformity of goods based upon the subjective notion of ‘agreed quality’. Goods must also conform to the ordinary purpose as well as to the qualities a buyer can expect from the goods. § 434(1) BGB broadly defines express warranty to include ‘public statements’, including advertisements. § 434(2) BGB expands warranty to include ancillary materials: ‘there is a material defect in a thing intended for assembly if the assembly instructions are defective.’3 The PICC follows the Civil Law approach – Article 5.1.6 PICC sets the standard of 33 quality as ‘performance of a quality that is reasonable and not less than average in the circumstances.’ The standard of quality is linked to the subject matter of the contract, and, therefore, context dependent. For example, to define adequate sound isolation in relation to a hotel depends on the hotel’s location. If it is located next to a railway line a more stringent definition is applied than if the location is in a forest.

1. Express Conformity All countries examined have laws that mandate that goods must conform to the 34 requirements of the contract. Quality as a material term or a term essential to contract formation varies across legal systems. Article 14(1) CISG states that an offer only needs to provide a means to affix the price and quantity terms. In contrast, Article 470 of the CCC lists ‘quality’ as one of the eight items that a contract ‘shall, in general, include.’ The CISG encompasses parts of warranty laws found in the civil and Common Law systems. As such it is easier to apply cross border sales. This is so as ‘modern uniform laws are laws which are created with the deliberate aim of establishing shared law between multiple jurisdictions’.

2. Interpretation and Implied Terms As far as the interpretation of legal texts is concerned there are methodological 35 differences between domestic law and international conventions or model laws. The interpretative tools are embedded within the provisions of the various instruments. 3 Matusche-Beckmann, in J. von Staudinger, Kommentar zum Bürgerlichen Gesetzbuch mit Einführungsgesetz und Nebengesetzen, De Gruyter (2014) 257/8.

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Articles 7 and 8 CISG provide a template of interpretation that borrows principles from the civil and Common Laws in order to allow for universal and uniform application. Camilla Andersen provides an historical analogy: In the decision of the House of Lords in Fothergill v. Monarch Airlines—concerning the interpretation of the Warsaw Convention on the Liability of Air Carriers (1929)—the Lords clearly stated that uniform international aviation law is unique and must be treated uniquely. And on the other side of the Atlantic, the U.S. Supreme Court decided in the Air France v. Saks case—a case concerning the meaning of the term 'accident' under the Warsaw Convention—that judicial decisions from other countries interpreting a treaty term are ‘entitled to considerable weight’. 4

Unfortunately, courts have been uneven in referring to foreign case law’s interpretation of the CISG. The better-reasoned decisions, which seems to be the trend, do refer to foreign cases involving the same issue. 37 The inconsistency in the application of the parol evidence rule is given weight when it bars extrinsic evidence, which has been the case in English and Australian law.5 In relationship to the CISG, the issue is whether the admission of extrinsic evidence is a matter of substantive law or inadmissible as a matter of procedural law. Justice Clark of the English High Court of Justice when applying the CISG noted that the ‘Danish law's approach to contractual interpretation is markedly different to that of English law. The evidence of the experts appears to me to support the … propositions [contained in Article 8 CISG].’6 Justice Clark used the evidence of an expert and hence implied that he treated the ‘CISG as fact’ as required when a foreign law is applied which in English law is correct s they did not ratify the CISG. This opinion allowed extrinsic evidence to be considered, but only under an exception to the parol evidence rule. 38 In fact, the interpretative articles of the CISG and recent model laws are not procedural but substantive in nature. Therefore, the parol evidence does not apply. In the seminal case of MCC-Marble Ceramic Center v Ceramica Nuova D'Agostino, a US Federal Court balanced the US parol evidence rule against Article 8 CISG, and stated: 36

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.7

In sum, the parol evidence rule is a rule of substance hence controlled by the governing law in this case the CISG, which rejects any such rule, and not a procedural rule controlled by domestic law. 40 The UCC departs from English Common Law by including good faith as an interpretative tool. To that end the UCC has adopted tools, which normally are found in the Civil Law and international law instruments rather than in the Common Law. In Australia some States such as Victoria and New South Wales have incorporated good faith into their regime, however, the Australian High Court so far has refused to apply the principle of good faith. CCC’s interpretative methodology also relies on the principle good faith as well as the principle of fairness Article 142 CCC. The example provided 39

4 Andersen, Uniform Application of the International Sales Law: Understanding Uniformity, the Global Jurisconsultorium and Examination and Notification Provisions (Wolters Kluwer 2007). 5 Lexcray Pty Ltd v Northern Territory of Australia D1/2001 (3 May 2002), HCA. 6 Kingspan Environmental Limited, Tyrrell Tanks Ltd, Rom Plastics Limited, and Titan Environmental Ltd v Borealis A/S and Borealis UK Ltd [2012] EWHC 1147 (Comm) para. 619. 7 MCC-Marble Ceramic Center v Ceramica Nuova D'Agostino 144 F.3 d 1384 (11 th Cir. 1998).

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by Justice Clark shows that the parol evidence rule is out of step with international developments as it defeats the reasonable expectations of commercial men. 8 In interpreting the warranty provisions of Article 35 CISG, the summary of the 41 sampled laws, discussed above, provides insight as to its meaning. The description of quality and the implied warranties (fit for purpose and fit for particular purpose) is similar to what is found in the Common Law, UCC, and SGA, unlike the Civil Law countries where more generals terms are used, such as ‘fit for the purpose they were intended’9 and a warranty is provided for ‘hidden defects which will render the goods unsuitable for the intended use’.10 It is useful to recognize that despite the similarities of terms between the Common 42 Law and the CISG, there have been some poorly reasoned decisions in Common Law courts in incorrectly applying domestic law in the interpretation of Article 35 CISG. In Castel Electronics Pty. Ltd. v. Toshiba Singapore Pte. Ltd,11 an Australian court conflated the warranties of fitness for purpose and merchantable quality found in s 19(a) and (b) of the Goods Act of 1958 with Article 35 CISG. In referring to the CISG, the court states that: ‘Those provisions have been treated by Australian courts as imposing, effectively, the same obligations as the implied warranties of merchantable quality and fitness for purpose arising under s 19 of the Goods Act.’ However, the English High Court of Justice correctly observed that Article 35(2)(a) and (b) CISG resemble (but do not replicate) the requirements of satisfactory quality and fitness for purpose laid down in s 14 (2) and (3) of the SGA.12

III. Implied Conformity of Goods Each system of law described above use different implied terms and interprets similar 43 terms differently. SGA case law also mixes commercial and consumer transactions. 13 The CISG only applies to commercial sales of goods (B2B), while the UCC warranties apply to all sales of goods. § 2-313 UCC leaves a number of issues unanswered. First, who is a merchant (‘goods 44 sold by a merchant’)? Whether a person is a merchant is fact dependent.14 § 2-104 UCC defines a merchant as a ‘a person who deals in goods of the kind or otherwise by his occupation holds himself out as having knowledge or skill peculiar to the practices or goods involved in the transaction or to whom such knowledge or skill may be attributed by his employment of an agent or broker or other intermediary who by his occupation holds himself out as having such knowledge or skill’. However, this general description of merchant is more limited if the question of merchantability is at issue. It restricts the definition of merchant to a smaller group than everybody else who is engaged in a business. It requires a professional status relating to a particular kind of goods.15

8 Zeller, ‘The Parol Evidence rule and the CISG – a comparative analysis’ (2003) 36 Comparative Law Journal of South Africa 308, p. 314. 9 Article 1641 French Civil Code. 10 Article 1484 Spanish Código civil. 11 Aust Fed Ct 28 September 2010 (Castel Electronics Pty. Ltd. v Toshiba Singapore Pte. Ltd.) [http://cisg w3.law.pace.edu/cases/100928a2.html]. 12 Kingspan Environmental Limited, Tyrrell Tanks Ltd, Rom Plastics Limited, and Titan Environmental Ltd v Borealis A/S and Borealis UK Ltd [2012] EWHC 1147 (Comm) para. 619. 13 Bridge, Benjamin's Sale of Goods (10th edn, Sweet & Maxwell 2017) p. 534. 14 Prenger v Baker 542 N.W 2nd 805 (Iowa 1885). 15 Joyce v Combank Longwood 405 So.2nd 1358, 32, UCC Rep. Serv 1118 (Fla. 5th Dist. 1981).

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The English SGA notes in S 14(2) SGA that the implied term applies to sales of goods made in the course of a business. Case law has interpreted this to mean sales that are an integral part of a business and carried out with a degree of regularity, but also covers sales in a one off transaction as long as it is carried out for profit.16 Hence only purely private sales outside the confines of a business are excluded. The definition of business, like merchant in the UCC, has to be determined as an issue of fact. The only reference in the SGA is that business includes a profession and the activity of any government department or local public authority, which arguably indicates that the sale is not necessarily conducted for profit.17 In Stevenson v Rogers18 a fisherman sold his boat to buy a new one. He had done so once before. It was held that it was a sale falling under the SGA. Simply put, ‘the word business is not an etymological chameleon; it suits its meaning to the context in which it is found. It is not a term of legal art.’19 46 The CISG does not explicitly restrict its jurisdiction to commercial sales, but Article 2 CISG excludes sales of goods bought for personal, family or household use’, unless the seller had no reason to know that the other party was a consumer buying for personal use. The German BGB and French law do not define what is meant by course of business. However, § 434(1) BGB is more restrictive in the description of conformity of goods as in essence the goods must ‘be suitable for the customary use and its quality is usual in things of the same kind and the buyer may expect this quality in view of the type of the thing.’ 45

1. Fit for the Purpose 47

Article 35(2)(a) CISG addresses the obligation that the goods must be fit for the purpose for which goods of the same description are ordinarily used. The German Supreme Court noted: The goods, in order to fulfil these user expectations, do not have to be fit for all theoretically perceivable forms and possibilities of use, but only for such uses, that suggest themselves in light of the material and technical specificities of the goods and reasonable market expectations based thereon. If, however, such a self-suggesting possibility of use is not covered by the uses and purposes for which the goods are suitable, then the goods are not fit for the ordinary purpose under Article 35(2)(a) CISG, unless the seller revealed such limited usability.20

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Another contested issue is whether it is the seller’s obligation to provide goods that conform to the laws and standards of the buyer’s country. The German Supreme Court resolved this issue and noted:21 It is true that a seller is generally not liable for the goods meeting the public law regulations valid in the country of consumption. In this case, however, the product itself caused the issuance of protective regulations under public law, and not only in the ultimate buyer's country (Bosnia-Herzegovina), but also throughout the entire European Union, including the country of origin, Belgium.

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The court rejected the seller’s assertions to the contrary because the situation is different if the regulatory or public law provisions in the seller's and buyer's country are the same, or if the seller is familiar with such provisions of the buyer's country due to particular circumstances as noted in Article 8 CISG.

Davies v Summer [1984] 1 WLR 1301, 1305. Benjamin’s (n 12) p. 552. 18 Stevenson v Rogers [1999] QB 1028, 1033. 19 Town Investment Ltd, v Dept. of Environment [1978] AC 359, 383. 20 BGH 26 September 2012 (Clay case) [http://cisgw3.law.pace.edu/cases/120926g1.html]. 21 BGH 2 March 2005 (Frozen pork case) [http://cisgw3.law.pace.edu/cases/050302g1.html]. 16 17

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Article 151 PICC, as noted above, does not use the term ‘fitness for a purpose’. It 50 instead uses the terms of achieving a specific result and the duty of best efforts. As an example, the commentary of the PICC states that a firm repairing a defective machine is considered to be under a duty of best efforts in regards to the repair work and under a duty to achieve a specific result regarding the replacement of certain defective parts. Arguably, the best effort duty is an alternative means of applying the term fit for a purpose for which goods of the same description would be used. PECL is similar to the PICC in that it does not include fitness for purpose but instead uses the term of ‘average quality.’ § 2-314(2) UCC uses the ‘merchantability’ instead of fit for purpose but follows the 51 criteria used in Article 35(2)(a) CISG. The UCC prescribes a minimum standard of merchantability; UCC jurisprudence suggests that goods must be of fair average quality within the contract description and are fit for the purpose for which goods of that description are ordinarily used. To that end goods must be of fair average quality and are fit for their ordinary purpose. It has also been held that an absence of proper warning or instructions can amount to a breach of an implied warranty.22 The SGA 1979 changed the warranty term from merchantable to ‘satisfactory quality’. Hence, the use of the term merchantable is now confined to the UCC. The BGB, French, and Spanish laws, as noted above, do not include the terms of fitness of purpose but rather use terms, such as ‘conforming to the contract’ or that the seller is liable for ‘hidden defects’.

2. Fit for the Particular Purpose Article 35(2)(b) CISG stipulates that the goods must be fit for any particular purpose, 52 which had been made known to the seller by the buyer except where circumstances show that the buyer either did not or it was unreasonable for him to rely on the seller’s skill and judgment in selecting the goods. For example, the Appellate Court of Graz rejected a claim by a buyer because the seller was not informed of the particular heating oil that was needed. The seller was not aware that the buyer had a particular stove, which could not use the oil sold by the seller.23 The UCC notes that to make a claim for breach of the warranty for a particular 53 purpose the buyer must show that she relied on the skill and judgment of the seller. 24 This implied warranty applies despite the fact the goods are of merchantable quality and do not breach any express warranties, since the goods fail to satisfy the buyer’s particular purpose.25 The warranty of particular purpose is different from the ordinary purpose warranty (merchantable quality) as the buyer’s specific requirements are taken into consideration and the buyer relies on the seller’s skill and judgment. S 14 SGA expressly states that there is no implied term in relation to fitness for 54 any particular purpose. Goods however have to be of ‘satisfactory quality’. 15(2A) SGA defines quality as goods ‘that a reasonable person would regard as satisfactory, taking account of any description of the goods, the price (if relevant) and all the other relevant circumstances.’ In essence, it can be argued that certainly in most cases the same result can be achieved whether the terms particular purpose or satisfactory quality is used because if a buyer has a particular purpose (which has been communicated to the seller) any goods which are unfit for that purpose are not of satisfactory quality.

Madsen v American Home Products Corp. 477 F. Supp 2 d 1025 (E.D. Mo. 2007). OLG Graz 19 June 2013 (Oil case) [http://cisgw3.law.pace.edu/cases/130619a3.html]. 24 § 2-315 UCC. 25 Controltek, Inc v Kwikee Enterprises, Inc. 284 Or. 2 d 585, 670 (1978); 25 UCC Rep Serv 421 (1978). 22

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3. Conformity to Sample or Model 55

Article 35(2)(c) CISG provides that goods must ‘possess the qualities of goods, which the seller has held out to the buyer as a sample or model’. A Belgian Commercial Court questioned the adequacy of a sample to determine if the CISG’s warranty by sample was applicable. The court held that the sample was too small for the ‘buyer to be entitled to derive from it that there would be no difference in colour in the eventual delivery. It cannot be expected of the seller that it would deliver a complete door as a sample.’26 In addition the court also took into consideration that the buyer was the biggest specialist door shop in the Netherlands hence he should have been aware or could not have been unaware that the sample was not decisive in determining the colour of the wood to be supplied. Furthermore, CISG case law indicates that samples have different purposes depending on the goods supplied. As an example, an ICC arbitral tribunal noted that a: buyer could not argue that infected buckwheat delivered from China did not conform to the sample, as in the cereal business samples had a limited aim, being intended to define such type-specific characteristics as the kind of buckwheat and the colour and size of the kernel; they were irrelevant to phytosanitary purposes.27

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Thus, courts have held that merely supplying a sample does not suggest that the bulk must correspond to the sample. The buyer needs to supply further information as to the particular purpose if it expects to benefit by a warranty by sample. The use of Article 8 CISG in determining if there is a warranty by sample is highlighted in a Chinese arbitration case involving a sample of mushrooms: In reviewing all materials submitted by the parties, the Arbitral Tribunal holds that the parties have never denied a sale by sample. On the contrary, the [Seller] stated the delivery would be much better than the samples. Therefore, the samples were the basis of the contract. During the transaction, the [Buyer] always cared about the sizes of the mushrooms and the Seller should have been aware of those concerns. The Arbitral Tribunal holds that the [Seller’s] delivery does not conform to the quality standards agreed between the parties.28

The above cases highlight an important fact namely that in a sale by sample the quality issue of the underlying contract is always taken into consideration and hence the sample and the relevant language in the contract are intrinsically connected. The UCC recognizes that supplying a sample creates an express warranty pursuant to § 2-313 UCC. Unlike the CISG, the UCC further adds that the whole of the goods must correspond with the sample or model. 58 The SGA arguably is the most comprehensive legislation dealing with warranty by sample. The SGA provides that only the bulk must correspond to the sample. This is a lesser threshold than the one contained in the UCC and likely was influenced by commodity trading. Benjamin’s notes that frequently ‘samples are displayed to give no more than some indication of the nature of the goods offered.’29 However, it is clear that the bulk must correspond with the sample in quality. It was held in Steels and Busks Ltd v Bleeker Bik & Co. Ltd30 that ‘the extent to which a sample may be held to speak must depend on the contract and what is contemplated by the parties in regard 57

26 Commercial Court Hasselt 19 April 2006 (Bruges Deuren BVBA v Top Deuren VOF [cisgw3.law.pace.edu/cases/060419b1.html]. 27 ICC Arbitration Case No. 9773 of 1999 (Buckwheat case) [http://cisgw3.law.pace.edu/cases/999773i1. html]. 28 CIETAC 18 September 1996 (Agricultural products case) [http://cisgw3.law.pace.edu/cases/960918c2. html]. 29 Benjamin’s (n 12) p. 577. 30 [1956] 1 Lloyd’s LR 228, 239.

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F. Commentary

to it.’ s 15 SGA must be read in conjunction with s 13(2) SGA, which notes that ‘it is not sufficient that the bulk of the goods corresponds with the sample if the goods do not also correspond with the description in the contract.’ S 13(2) SGA is important in cases where the sample clearly allows the buyer to assess quality, which can vary the description. Hence a certification as to quality might be conclusive as to compliance with the sample.31 This issue also takes into consideration customary practices within the relevant trades. Articles 635 and 636 of the CCC regulate sale by sample. Article 635 of the CCC 59 states: The parties to a sale by sample shall seal the sample and may give a description of the quality of the sample. The subject matter delivered by the seller shall conform with the quality of the sample and its description. Article 636 CCC addresses the issue of latent defects in the sample. In these cases, the subject matter must conform to the ‘usual standard for things of the same kind, notwithstanding the fact that the delivered subject matter conforms with the sample.’ Article 8 CISG, although not explicitly stated as in Chinese Civil Law, leaves open the 60 argument that a sample must conform to the quality and description if all relevant circumstances, under Article 8(3) CISG, informs the court as to the true intent of the parties. The only difference between Chinese law and the SGA is the lack of information as to whether the bulk or all of the goods must conform to the sample. Chinese and American law indicates that all the goods must conform to the sample. The Civil Law countries, as well as the PICC and PECL, in contrast to Common Law countries and China, do not include sale by sample in their warranty regime. As noted above § 434(2) of the BGB does not mention samples at all. However, the commentary notes that only when there is either an implied or express guarantee by the seller, that the bulk will correspond with a sample, can non-conformity lead to a breach of contract.32

4. Packaged in a Manner Required by the Contract. Article 35(2)(d) CISG notes that goods must be packaged in the usual manner for 61 such goods or in a manner adequate to preserve and protect the goods. This article is self-explanatory, and facts will determine whether packaging is conforming. § 2-314 UCC also mandates that goods must be adequately packaged and labeled. CCC follows the approach of the UCC and CISG: The seller shall deliver the subject matter in compliance with the agreed manner of packaging. If there is no agreement on the manner of packaging or if the agreement is unclear, and if the manner of packaging cannot even be determined pursuant to Article 61 of this Law, the customary manner of packaging shall be applied; if there is no such customary manner, the manner of packaging that is adequate to protect the subject matter shall be adopted.

PICC and PECL do not contain rules in relation to packaging since they govern 62 contracts in general and do not have a section devoted to the sale of goods. The BGB, French Civil Code, and the Spanish Código civil also do not address the issue of packaging.

31 32

10.

Benjamin’s (n 12) p. 582. H. P. Westermann in Münchener Kommentar zum BGB, volume 3, 8th edn 2019, BGB § 434 BGB para.

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G. Illustrations I. Conformity of Description 63

A buyer when ordering goods must at least name the goods in order for the seller to understand what he wants. Non-conformity is generally taken as meaning that the goods delivered do not meet the buyer’s reasonable expectation of the goods. The question of conformity is also important when the description of the goods is an issue. The description of the goods must conform in all documents, which form part of the delivery process. This is specially so when bills of lading and letters of credit are involved. Simply put if the description of goods is not uniform in all documents, banks might refuse to honor a letter of credit pursuant to the UCP. See Chapter 13 on the ‘Delivery of Documents’.

II. Conformity and Public Policies 64

Goods must not only conform to the relevant implied conditions they must also conform to government regulations. The point is how much should or ought the seller know in relation to sanitary or phytosanitary regulations of the foreign country of import. If the CISG is the governing law the German Supreme Court held that Article 35(2)(a) and (b) CISG ‘does not place an obligation on the seller to supply goods, which conform to all statutory or other public provisions in force in the import State, unless the same provisions exist in the export State as well, or the buyer informed the seller about such provisions relying on the seller's expert knowledge, or the seller had knowledge of the provisions due to special circumstances.’33

III. Conformity and the Governing Law 65

In determining the issue of whether the goods conform to the contract, the question of interpretation is always of importance. Interpretative tools vary between legal systems. As an example, in Common Law the parol evidence rule is used whereas Civil Law and the CISG prescribe to a wider evidence regime by including subjective considerations as explained above. The type of evidence, which can be used in determining non-conformity, depends on the choice of the governing law. It is obvious that any legal system can resolve a dispute as to non-conformity, but the point is which of the systems delivers the best result. In brief, if the parties to a contract want to be able to sue at the smallest discrepancy then they may favor parol evidence rule found in English law. However, if the contract is the culmination of lengthy negotiations and pre-contractual agreements, as well as customary practices, Civil Law and the CISG are more appropriate as choices of law.

H. Cross References 66

The seller’s main obligations are the delivery of conforming goods and conforming documents. See Chapter 13 on ‘Delivery of Documents’. Chapter 16 on ‘Examination and Notice of Non-Conformity’ reviews the buyer’s obligations to discover non-confor33

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BGH 8 March 1995 [http://cisgw3.law.pace.edu/cases/950308g3.html].

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mities and to provide notice of non-conformity of the goods to the seller. On issues relating to the interpretation of contracts, including warranties, see Chapter 23 on ‘Contract Interpretation.’

I. Practitioner Tips & Contract Clauses I. Choice of Law The above review has shown that the similarities in implied warranty laws can result 67 in various outcomes. The CISG and the model laws discussed above allow for far more evidence to be submitted to the courts. International instruments and Civil Law allow the admissibility of extrinsic evidence since their interpretive goal is to discover the true or subjective intent of the parties. Common Law countries, in various degrees, continue to focus on literal interpretations of the written contract. In practice, many Common Law jurisdictions have moved toward a more contextual approach to contract interpretation. If a party wants to avoid a contextual interpretation, then careful drafting of the warranty term is of vital importance.

II. Disclaimer of Warranties Under the CISG, the seller's obligations to deliver goods of a certain quality resemble 68 the seller's express and implied warranty obligations found in the UCC.34 Most domestic sales agreements include a warranty term expressly warranting specified qualities of the goods sold and disclaiming the implied warranties of merchantability and fitness for a particular purpose. These domestic contract warranty disclaimer terms serve as models for international sales contracts governed by the CISG. They need to be modified to conform to the terminology of the CISG to enhance their enforceability. For example, the CISG does not use the word warranty so the sample clauses provided below should be adjusted to substitute ‘there is no obligation of the seller as to the conformity of the goods’ for ‘warranty’.

Disclaimer #1 Disclaimer of obligation as to conformity of the: The parties agree that the seller 69 undertakes no obligation with respect to the conformity of the goods to the contract except as otherwise provided in this contract document. In particular, the parties agree to exclude all implied warranties, including the implied warranties of merchantability and fitness for a particular purpose.

Disclaimer #2 Exclusions of warranties: The parties agree that the implied warranties of mer- 70 chantability and fitness for a particular purpose and all other warranties, express or implied, are excluded from this transaction and shall not apply to the goods sold.

34 Winship, ‘Changing Contract Practices in the Light of the United Nations Sales Convention: A Guide for Practitioners’ (1995) 29 Int’l L 525.

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Disclaimer #3 Seller expressly disclaims all warranties either expressed or implied, including implied warranties of merchantability or fitness for a particular purpose and any warranties pursuant to Article 35(2) of the CISG. 72 The placement of certain phrases in capital letters responds to the conspicuousness requirement of § 2-316 UCC. However, even though this technique is not expressly required under the CISG and most other laws, it is best practice to make the disclaimer clause ‘conspicuous’ to improve the likelihood of bringing the clause to the attention of the buyer. Another best practice is to place the disclaimer clause in the body of the text and not in the standard terms or general conditions. This strengthens the seller’s argument that the disclaimer was part of the agreement in fact and that the buyer could not have been unaware of its existence. 71

III. Disclaiming Warranty of Ordinary Purpose 73

A Massachusetts Manufacturer sells equipment to a French Buyer. The written contract expressly disclaims any warranty as to quality beyond the specific warranties set out in the contract, but the disclaimer does not use the word ‘merchantability,’ as required by the UCC. Will a Massachusetts court enforce the disclaimer? Article 35 CISG does not require use of any particular language (‘merchantability’) non-conformity obligations. It can be surmised that the disclaimer would be enforceable under the CISG. In the alternative, a warranty disclaimer can be seen as a derogation of the effect of Article 35 CISG. It is conceivable that a Massachusetts court would interpret the use of the word ‘merchantability’ as an issue of validity and therefore not governed by the CISG. A better interpretation would be to conclude that the use of the word is not an issue of validity and, therefore, the disclaimer would be enforceable under the CISG if it reflects the intentions of the parties.

J. Additional Sources 74 Bridge, Benjamin’s Sale of Goods (9th edn, Sweet & Maxwell 2014) Chapter 11: ‘Terms as Description

& Quality Implied by the Sale of Goods Act’; Downie, Contractual Risk Allocation: Using warranties, exclusions, indemnities and insurance provisions to mitigate and manage risk (Inter Alia 2012); Henschel, ‘Conformity of Goods in International Sales Governed by CISG Article 35: Caveat venditor, caveat emptor and contract law as background law and as a competing set of rules’ (2004) Nordic Journal of Commercial Law Issue 1; Hofmann, ‘Interpretation Rules and Good Faith as Obstacles to the UK's Ratification of the CISG and to the Harmonization of Contract Law in Europe’, 22 Pace International Law Review (Pace Int'l L. Rev.) (2010), 145–18; Huber & Mullis, The CISG: A new textbook for students and practitioners (2 nd edn, Sellier 2014); Kröll, ‘The Burden of Proof for the Non-Conformity of Goods under Article 35 CISG’ (2011) 3 Belgrade L Rev 162; Lookofsky, ‘Cator Can't Compete: Caveat Emptor under CISG Article 35(3)?’, in: Lookofsky & Bryde Andersen (eds), The CISG Convention and Domestic Contract Law: Harmony, Cross-Inspiration, or Discord?, Copenhagen: DJØF (2015), 131–146; Neumann, ‘Features of Article 35 in the Vienna Convention; Equivalence, Burden of Proof and Awareness’ (2007) 11 Vindobona J of Int’l Com L & Arb 81; Vincze, ‘Conformity of the Goods under the UN Convention on Contracts for the International Sale of Goods (CISG): Overview of CIETAC's Practice’ in Andersen & Schroeter (eds), Sharing International Commercial Law across National Borders: FS for Albert H. Kritzer (Wildy, Simmonds & Hill 2008) 552.

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CHAPTER 15 SALES AND INTELLECTUAL PROPERTY RIGHTS Wentong Zheng A. Third-Party Rights and Claims Based on Intellectual Property . . . . . . . . . . . . . . I. Topics Covered . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Introductory Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Statement of Issue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. International Sales Transaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. Sampling of Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. CISG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. American Uniform Commercial Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI. Commentary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VII. Illustrations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VIII. Cross References & Additional Commentary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IX. Practitioner Tips & Contract Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B. Warranty of Title . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Topics Covered . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Introductory Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Statement of Issue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Sampling of Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. German Bürgerliches Gesetzbuch . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. United Kingdom Sale of Goods Act 1979 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. French Code Civil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. Commentary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI. Illustrations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VII. Cross References & Additional Commentary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VIII. Practitioner Tips & Contract Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Buyers of Goods or Mixed Sales Checklist . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Warranty of Title . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Warranty of Title . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. Warranty of Title . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C. Territorial Limitations on Seller’s Obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Topics Covered . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Introductory Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Statement of Issue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. International Sale Transaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. Sampling of Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI. Commentary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VII. Illustrations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VIII. Cross References & Additional Commentary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IX. Practitioner Tips & Contract Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . D. Limitations on Seller’s Obligation: Seller’s Knowledge . . . . . . . . . . . . . . . . . . . . . . . . I. Topics Covered . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Introductory Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Statement of Issue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Sampling of Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. Commentary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI. Illustrations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VII. Cross References & Additional Commentary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VIII. Practitioner Tips & Contract Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . E. Limitations on Seller’s Obligation: Buyer’s Knowledge . . . . . . . . . . . . . . . . . . . . . . . I. Topics Covered . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Introductory Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Statement of Issue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Sampling of Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. CISG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. German Bürgerliches Gesetzbuch . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. Commentary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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1 2 3 5 6 7 7 10 15 16 18 20 21 21 22 23 24 24 26 29 32 33 34 35 37 38 39 40 41 41 42 43 44 45 48 49 50 51 52 52 53 54 55 61 62 64 66 67 67 68 69 70 70 74 77

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Chapter 15 Sales and Intellectual Property Rights VI. Illustrations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VII. Cross References & Additional Commentary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VIII. Practitioner Tips & Contract Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F. Additional Sources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

78 79 81 82

A. Third-Party Rights and Claims Based on Intellectual Property 1

This Chapter on sales and Intellectual Property Rights consists of five different parts. The first part deals with the third-party rights and claims based on Intellectual Property, followed by the parts on warranty of title, territorial limitations on seller’s obligation, the limitations on seller’s obligation by the seller’s knowledge and finally by the buyer’s knowledge.

I. Topics Covered Third-party rights and claims based on intellectual property rights

2

– – –

Rights versus claims Frivolous claims versus non-frivolous claims Claims present at the time of delivery versus potential claims

II. Introductory Note A buyer’s right to use or resell an article of goods he or she bought from a seller might be subject to the rights or claims of a third party. Such third-party rights or claims may be based on general property interests, such as ownership rights or liens, or may arise under intellectual property laws. In the event of third-party rights or claims, the buyer may assert a contractual claim against the seller for failure to deliver the goods free from such rights or claims. 4 Third-party rights and claims based on intellectual property involve legal issues distinct from general third-party rights and claims. Due to the non-uniformity of intellectual property laws across jurisdictions, the scope of intellectual property rights that may restrict a buyer’s use or resale of the purchased goods may differ from jurisdiction to jurisdiction. In addition, many jurisdictions have adopted, through either statutes or case law, legal principles under which third-party intellectual property rights may be ‘exhausted’ by an authorized sale, rendering such rights unenforceable against a buyer. However, to the extent that third-party intellectual property rights are recognized in a specific jurisdiction and survive the sale, sellers and buyers need to take into account such rights in drafting the sales contracts. 3

III. Statement of Issue 5

When a buyer faces a potential legal claim from a third party asserting intellectual property rights, the rights of the buyer vis-à-vis the claimant are an issue to be decided under the relevant intellectual property laws. A separate issue under the law of sales, however, is whether the seller will be liable to the buyer for such potential claims. Related to this issue are questions as to when the seller’s obligation to the buyer will be triggered – will the seller be liable as long as a third party holds an intellectual property

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right affecting the goods, or will the seller be liable only when a third party actually asserts a claim?

IV. International Sales Transaction Third-party intellectual property claims are important risk factors for buyers in inter- 6 national sales transactions. Because intellectual property rights are intangible, they are often not discernible from the appearances of the goods. And because of the territorial nature of intellectual property rights, buyers may face intellectual property claims in multiple jurisdictions if the goods in question are used or resold in more than one jurisdiction.

V. Sampling of Laws 1. CISG Article 41 The 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. However, if such right or claim is based on industrial property or other intellectual property, the seller's obligation is governed by article 42. Article 42 (1) The seller must deliver goods which are free from any right or claim of a third party based on industrial property or other intellectual property, of which at the time of the conclusion of the contract the seller knew or could not have been unaware, provided that the right or claim is based on industrial property or other intellectual property: (a) under the law of the State where the goods will be resold or otherwise used, if it was contemplated by the parties at the time of the conclusion of the contract that the goods would be resold or otherwise used in that State; or (b) in any other case, under the law of the State where the buyer has his place of business. (2) The obligation of the seller under the preceding paragraph does not extend to cases where: (a) at the time of the conclusion of the contract the buyer knew or could not have been unaware of the right or claim; or (b) the right or claim results from the seller's compliance with technical drawings, designs, formulae or other such specifications furnished by the buyer.

Under Article 41 of the CISG, the seller has a general obligation to deliver goods free 7 from any right or claim of a third party, unless the buyer agreed to take the goods subject to that right or claim. However, Article 41 of the CISG provides that when the third party’s right or claim is based on ‘industrial property or other intellectual property’,1 the seller’s obligation to the buyer will be governed by Article 42 of the CISG. Under Article 42 of the CISG, the seller must ‘deliver goods which are free from any right or claim of a third party based on industrial property or other intellectual property’, subject to certain limitations that will be discussed in separate sections below. Under Article 42 of the CISG, the seller is liable to the buyer for both ‘rights’ and 8 ‘claims’ based on intellectual property. A seller’s liability under Article 42 of the CISG, 1 The term ‘industrial property’ is defined under the Paris Convention of 1883 to include patents, trademarks and related concepts, but not copyrights. Copyrights were governed by a separate international convention, the Berne Convention for the Protection of Literary and Artistic Work of 1886. The term ‘industrial property or other intellectual property’ was eventually adopted by the CISG at the suggestion of the World Intellectual Property Organization, whose broad definition of intellectual property encompasses essentially all rights ‘resulting from intellectual activity in the industrial, scientific, literary, or artistic fields.’.

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therefore, arises as long as a third party holds a right based on intellectual property, regardless of whether the third party has asserted or will assert that right. 9 As for the seller’s liability for third-party ‘claims’ based on intellectual property, there is a difference of opinion as to whether the seller’s liability extends to all claims or only non-frivolous ones. Joseph Schwerha argues that Article 42 of the CISG should be interpreted to require third-party claims to be made in good faith,2 whereas Christian Rauda and Guillaume Etier argue that such claims include even frivolous ones.3 Given the normal expectation of a buyer that he is not purchasing a lawsuit,4 the latter view appears to be the correct and also the more prudent one. The Austrian Supreme Court upheld this view in the CD Media Case, where it held that under Article 42 of the CISG, the seller is liable even if any intellectual property right is being unrightfully claimed. ‘It is part of the seller's sphere of risk to deal with the third party in such cases’, the court reasoned.5

2. American Uniform Commercial Code § 2-312. Warranty of Title and Against Infringement; Buyer's Obligation Against Infringement. (1) Subject to subsection (2) there is in a contract for sale a warranty by the seller that (a) the title conveyed shall be good, and its transfer rightful; and (b) the goods shall be delivered free from any security interest or other lien or encumbrance of which the buyer at the time of contracting has no knowledge. (2) A warranty under subsection (1) will be excluded or modified only by specific language or by circumstances which give the buyer reason to know that the person selling does not claim title in himself or that he is purporting to sell only such right or title as he or a third person may have. (3) Unless otherwise agreed a seller who is a merchant regularly dealing in goods of the kind warrants that the goods shall be delivered free of the rightful claim of any third person by way of infringement or the like but a buyer who furnishes specifications to the seller must hold the seller harmless against any such claim which arises out of compliance with the specifications.

Article 2 of the Uniform Commercial Code (UCC) has a provision specifically dealing with a seller’s implied warranty against intellectual property infringement. § 2-312(3) of the UCC states that ‘[u]nless otherwise agreed a seller who is a merchant regularly dealing in goods of the kind warrants that the goods shall be delivered free of the rightful claim of any third person by way of infringement or the like ...’ This implied warranty is in addition to the implied warranty of title provided in § 2-312(1) of the UCC. 11 Under § 2-312(3) of the UCC, the seller’s implied warranty against infringement only applies to a merchant regularly dealing in goods of that kind. The official comment to § 2-312 of the UCC explains that ‘[w]hen the goods are part of the seller's normal stock, and are sold in the normal course of business, it is the seller's duty to see that no claim of infringement of a patent or trademark by a third party will impair the buyer's title.’6 According to the official comment, a sale by a person other than a dealer ‘raises no implication in its circumstances of the warranty.’7 12 Another limitation on the UCC’s implied warranty against infringement is that it only applies to a rightful claim by a third party. The use of the word ‘rightful’ in the 10

2 Schwerha, ‘Warranties Against Infringement in the Sale of Goods: A Comparison of U.C.C. § 2-312(3) and Article 42 of the U.N. Convention on Contracts for the International Sale of Goods’ (2000) 16 Mich J Int’l L 441, 457. 3 Rauda & Etier, ‘Warranty for Intellectual Property Rights in the International Sale of Goods’ (2000) 4 Vindobona J of Int’l Comm L & Arb 30, 37. 4 See CISG Secretariat Commentary Article 39, para. 3, O.R. 36, Docy. Hist. 426. 5 Austrian CD Media Case 12 September 2006 (10 Ob 122/05 x) available at http://cisgw3.law.pace.edu/ cases/060912a3.html. 6 Cmt. 3 to UCC § 2-312 [2003]. 7 Id.

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statute creates some ambiguities. It is straightforward that a claim upheld by a court will be considered rightful. It is not clear, however, how far along a claim has to be in the litigation process and how meritorious a claim has to be in order for it to be considered rightful. In one leading case, a California court held that the existence of litigation is neither necessary nor sufficient to establish that a claim is rightful.8 To determine the rightfulness of a claim, the court required an evaluative inquiry into whether the claim is a ‘nonfrivolous claim of infringement that has any significant and adverse effect on the buyer’s ability to make use of the purchased goods.’9 One question in interpreting § 2-312(3) of the UCC is what the phrase ‘delivered free 13 of ’ means. One might be tempted to conclude that a seller is only required to ensure that there are no third-party rights or claims based on intellectual property present at the time of delivery. Under this interpretation, a seller will not be liable for an intellectual property right or claim coming into existence after delivery. Such an interpretation might be mistaken, however. Sometimes, a third party may 14 not have asserted a claim against the buyer by the time of delivery even though it has a valid basis to do so. A judge might interpret the ‘delivered free of ’ language under § 2-312(3) of the UCC to mean that the seller has an obligation to deliver the goods from any potential rightful claims.

VI. Commentary Among the legal regimes that have specific provisions on third-party rights or claims 15 based on intellectual property rights – namely, the CISG and the UCC – statutory language differs as to the exact scope of such rights or claims. Cautions must be exercised in interpreting these statutory texts. One apparent distinction between the CISG on one hand and the UCC on the other hand, for example, is that the CISG appears to impose on the seller an obligation to the buyer even for frivolous claims, while the UCC limits the seller’s obligation to non-frivolous claims only. One caveat, however, is that these interpretations are subject to change under the relevant case laws.

VII. Illustrations A 2006 Austrian Supreme Court case (the CD Media Case) illustrates the scope of 16 the seller’s obligation to the buyer for third-party rights and claims based on intellectual property.10 In this case, a German seller sold blank CDs to an Austrian buyer. The seller had bought the CDs from its Taiwanese parent company, which manufactured and sold the CDs pursuant to a licensing agreement with the licensor. The licensing agreement allowed the parent company to sell the blank CDs in Germany, but was silent about whether the blank CDs could be sold in Austria. After a dispute on the licensing fees, the licensing agreement was terminated and court proceedings were filed between the parent company and the licensor. Upon learning the dispute between the seller’s parent company and the licensor, the buyer withheld payment for CDs sold and delivered after the licensing agreement was terminated. The Austrian Supreme Court held that under the CISG, the buyer had a right of 17 retention if the seller breached its contractual obligation by selling and delivering CDs 8 Pacific Sunwear of California, Inc. v Olaes Enterprises, Inc., 167 Cal. App. 4 th 466, 482 (Cal. Ct. App. 2008). 9 Id. at 470. 10 Austrian CD Media Case (n 5).

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to the buyer after the licensing agreement was terminated. In determining whether the seller breached its contractual obligation, the court focused on the territorial limitations on the seller’s obligation under Article 42 of the CISG, a topic to be discussed in part 3 of this Chapter. Relevant to our purposes here is the court’s implicit holding that the seller’s obligation did not depend on whether the licensor had asserted a claim against the buyer by the time of delivery and whether the claim would have been meritorious. As discussed above, a seller’s obligation under Article 42 of the CISG extends to both rights and claims, and in this case, the existence of a third-party right was sufficient to trigger the seller’s obligation under Article 42 of the CISG.

VIII. Cross References & Additional Commentary Limitations on the Seller’s Obligation:

18

A seller’s obligation to deliver goods free from third-party rights and claims based on intellectual property is subject to several limitations. See, ‘Territorial Limitations on Seller’s Obligation’ (part 3 of this Chapter); ‘Limitations on Seller’s Obligation: Seller’s Knowledge’ (part 4 of this Chapter); ‘Limitations on Seller’s Obligation: Buyer’s Knowledge’ (part 5 of this Chapter). Third Party Rights and Claims in General:

19

A seller’s obligation to deliver goods free of third-party rights and claims based on intellectual property is a special case of a seller’s obligation to deliver goods free of third-party rights and claims in general. For the latter subject, see ‘Warranty of Title’ (part 2 of this Chapter).

IX. Practitioner Tips & Contract Clauses 20

Where a seller has an obligation to deliver goods free from third-party rights and claims based on intellectual property, it may disclaim that obligation to the extent permitted by law. In the case of the CISG, Article 6 of the CISG allows the parties to derogate from or vary the effect of any of the CISG’s provisions except Article 12 of the CISG. Article 42 of the CISG, therefore, can be contracted around if both the seller and the buyer agree. In the case of the UCC, the warranty against infringement under § 2-312(3) of the UCC applies ‘unless otherwise agreed’, meaning that it can be disclaimed by the seller through contract.

B. Warranty of Title I. Topics Covered Seller’s warranty of title

21

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II. Introductory Note In some jurisdictions, a seller’s obligation to deliver goods free from third-party 22 intellectual property rights and claims is governed not by rules specific to intellectual property like those discussed in the above section, but by general rules dealing with a seller’s warranty of title. The scope of a seller’s obligation under a warranty of title may vary from jurisdiction to jurisdiction, creating uncertainty for sellers in international sales transactions.

III. Statement of Issue When the relevant law provides no special rules on a seller’s obligation to deliver 23 goods free from third-party intellectual property rights, an important question will be whether the buyer has recourse under the general rules on a seller’s warranty of title. If the answer is yes, the next question will be what the scope of the warranty is – whether it only covers actual defects of title or it covers both actual defects of title and claims asserting defects of title.

IV. Sampling of Laws 1. German Bürgerliches Gesetzbuch Under § 433(1) BGB, the seller of a thing is bound to hand over the thing to the buyer 24 and to transfer to him ownership of the thing, and the seller must procure the thing for the buyer free from material and legal defects. § 435 BGB further provides that ‘[t]he thing is free of legal defects if third parties, in relation to the thing, can assert either no rights, or only the rights taken over in the purchase agreement, against the buyer.’ The legal defects covered under § 433(1) BGB include third-party intellectual proper- 25 ty rights. The seller’s warranty against legal defects under the BGB, however, only covers actual legal defects, not claims of legal defects. The seller will not be liable to the buyer, therefore, when there is merely a third-party claim of intellectual property rights. The third-party claim has to be reduced to a judgment to trigger the seller’s obligation.

2. United Kingdom Sale of Goods Act 1979 § 12 of the United Kingdom Sale of Goods Act of 1979 provides:

26

(1) In a contract of sale, other than one to which subsection (3) below applies, there is an implied term on the part of the seller that in the case of a sale he has a right to sell the goods, and in the case of an agreement to sell he will have such a right at the time when the property is to pass. (2) In a contract of sale, other than one to which subsection (3) below applies, there is also an implied term that—. (a) the goods are free, and will remain free until the time when the property is to pass, from any charge or encumbrance not disclosed or known to the buyer before the contract is made, and. (b) the buyer will enjoy quiet possession of the goods except so far as it may be disturbed by the owner or other person entitled to the benefit of any charge or encumbrance so disclosed or known. (3) This subsection applies to a contract of sale in the case of which there appears from the contract or is to be inferred from its circumstances an intention that the seller should transfer only such title as he or a third person may have.

Under English case law, a seller’s implied warranty as to title under s 12(1) of the 27 United Kingdom Sale of Goods Act of 1979 only lasts up until the date of sale. By contrast, under s 12(2) of the United Kingdom Sale of Goods Act of 1979, an implied Wentong Zheng

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warranty as to quiet possession is required of the seller as long as the buyer is in possession of the goods. 28 In Microbeads A.G. and Another v Vinhurst Road Markings Ltd.11, a Swiss seller sold three road-marking machines to an English buyer between January and April of 1970. In 1966, an English company applied for a patent for a road-marking machine that would have covered the machines the Swiss seller sold, but the specification for the patent was not published until November 1970 and the patent was not granted until February 1972. The buyer was dissatisfied with the quality of the machines and withheld payment of the purchase price. The Swiss seller filed a legal action for the balance of the purchase price. The buyer raised a defense under the United Kingdom Sale of Goods Act of 1893, which provided for essentially the same implied warranties as the 1979 Act. The buyer alleged that the seller breached both the implied warranty as to title and the implied warranty as to quiet possession. The Court of Appeal held that the seller did not breach the implied warranty as to title because at the date when the machines passed to the buyer, the seller still had a right to sell. The court further held, however, that the seller breached the implied warranty as to quiet possession, because the buyer’s possession and enjoyment of the machines were disturbed by the publication of the patent specification.12

3. French Code Civil The “garantie d’éviction” (guarantee of rightful title) obliges the seller, even in the absence of any warranty stipulated under the agreement, to guarantee the purchaser against partial or complete revocation of the right to use the goods sold or against alleged encumbrances on the goods which were not declared at the time of the sale (formerly Article 1626 of the French Civil Code). 30 According to French case law, the implied warranty against dispossession includes a warranty that the goods sold do not infringe third-party intellectual property rights.13 29

31 Article 866 The licensor under a patent licensing contract shall, in accordance with the contract, license the licensee to exploit the patent, deliver the technical materials related to the exploitation of the patent and provide necessary technical guidance. Article 868 The transferor under a contract for transfer of technical secret and the licensor under a contract for licensing the use of technical secret shall, in accordance with the contract, supply the technical materials, provide technical guidance, and warrant the practical applicability and reliability of the technology, and shall abide by its confidentiality obligations. Article 870 The transferor under a technology transfer contract shall warrant that it is the lawful owner of the technology provided, and shall warrant that the technology provided is complete, free from error, effective, and capable of achieving the prescribed goals.

V. Commentary 32

Among the legal regimes that subsume a seller’s obligation for third-party intellectual property rights or claims under the seller’s general warranty of title – namely, German BGB, United Kingdom Sale of Goods Act, and French Civil Code – the scope of the [1975] 1 WLR 218. Id. at 218–19. 13 Decision of the Cour de cassation of 13 March 2008.

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seller’s obligation in this regard differs significantly. German BGB imposes the least burden on the seller, subjecting the seller only to liability arising from actual legal defects. The United Kingdom Sale of Goods Act and the French Civil Code imposes boarder obligations on the seller by requiring the seller to warrant not only the legal title of the goods at the time of the sale, but also the buyer’s quiet possession and enjoyment of the goods after the sale.

VI. Illustrations A hypothetical case illustrates the differences in the scope of the seller’s obligation 33 for third-party intellectual property rights or claims under the warranty-of-title laws. In this hypothetical case, Seller sold a patented product to Buyer. After the sale was completed, Seller was sued by a third party claiming that the product was covered by a patent owned by it. Buyer prevailed in the suit upon proving that the third-party’s patent was invalid. Buyer sued Seller to recover the cost of the litigation with the third party. Buyer’s suit against Seller would find no support under the German BGB, which would provide for relief to Buyer only if the goods purchased suffered actual defects in legal title. Buyer would prevail against Seller, however, under the United Kingdom Sale of Goods Act and the French Civil Code, both of which provide for an implied warranty of quiet possession.

VII. Cross References & Additional Commentary Warranty against Intellectual Property Infringement: Some jurisdictions have specific 34 rules on warranty against intellectual property infringement. See, ‘Third-Party Rights and Claims Based on Intellectual Property’ (part 1 of the Chapter).

VIII. Practitioner Tips & Contract Clauses Where a seller’s general warranty of title is deemed to include a warranty against 35 intellectual property infringement, the seller may be absolved of its obligation for thirdparty intellectual property rights or claims by disclaiming the warranty of title to the extent permissible under the relevant statutes. The seller should exercise caution, however, when attempting to disclaim the warran- 36 ty of title through agreement with the buyer. In many jurisdictions, special requirements need to be followed for the disclaimer to be legally effective. Under German law, for example, § 444 BGB provides that ‘[t]he seller may not invoke an agreement that excludes or restricts the rights of the buyer with regard to a defect insofar as the seller fraudulently concealed the defect ...’ This principle applies to both defects as to quality and defects as to title. Under French law, the parties can add to or diminish the effect of the implied warranty against dispossession by ‘particular agreements’. They may even agree that the seller may not be subject to any warranty. However, the seller ‘remains liable to that which results from an act which is his own; any agreement to the contrary is void.’

1. Buyers of Goods or Mixed Sales Checklist – – –

What intellectual property rights are there? Are the intellectual property rights owned by the seller? Are the intellectual property rights owned outright or jointly? Wentong Zheng

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–

Is seller using any intellectual property rights under a license granted by a third party? If the seller is using any intellectual property rights under a license, what is the scope of the relevant license? Has the seller granted any licenses in respect of the intellectual property rights to third parties? Were all previous transactions in respect of the intellectual property rights registered with the appropriate registries? Have all renewal fees in respect of registered intellectual property rights been paid? Have any of the intellectual property rights been infringed by a third party?

– – – – –

2. Warranty of Title 38

Furthermore, seller warrants that at the time of signing this agreement seller neither knows, nor has reason to know, of the existence of any outstanding title or claim of title hostile to the rights of seller in the goods.

3. Warranty of Title 39

ABC (Seller) warrants and represents to XYZ that (i) ABC shall provide good and clear title to the product, free and clear of all liens and encumbrances, (ii) all materials and services provided are either owned or properly licensed by ABC or are in the public domain and the use by Buyer or its affiliates, customers, representatives, distributors or dealers will not infringe any proprietary rights of any third party, (iii) ABC has full power to enter into this Agreement, to carry out its obligations under this Agreement and to grant the rights and licenses granted to Buyer in this Agreement and (iv) ABC compliance with the terms and conditions of this Agreement will not violate any Federal, state or local laws, regulations or ordinances or any third party agreements.

4. Warranty of Title 40

Seller warrants that it has good title to the Software and the right to sell the Software to Purchaser free of any proprietary rights of any other party or any other encumbrance whatsoever.

C. Territorial Limitations on Seller’s Obligation I. Topics Covered 41

Territorial limitations on seller’s obligation for third-party intellectual property rights or claims – –

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II. Introductory Note A seller’s obligation to the buyer for third-party rights and claims based on intellectu- 42 al property is potentially very broad. Due to the territorial nature of intellectual property rights, the goods that are delivered to a buyer may be subject to infringement claims in multiple jurisdictions. An important question, therefore, is whether there are territorial limitations on the seller’s potential liability. The CISG provides an affirmative answer to this question.

III. Statement of Issue When a seller contracts to sell goods to a buyer, does the buyer assume an obligation 43 to the buyer for third-party rights and claims based on intellectual property in all jurisdictions where the goods may be used or resold? Or will the seller be obligated for third-party intellectual property rights and claims only in one jurisdiction?

IV. International Sale Transaction Territorial limitations on the seller’s obligation for third-party intellectual property 44 rights and claims are particularly important for sellers in international sales. Without such limitations, a seller in international sales is potentially exposed to third-party intellectual property rights and claims arising in whatever jurisdictions where the goods may be used or resold.

V. Sampling of Laws For CISG, see also: Article 42 of the CISG, Part I, ‘Sampling of Laws’. Under Article 42 of the CISG, the seller is only obligated to the buyer for third-party 45 intellectual property rights or claims that arise under ‚the law of the State where the goods will be resold or otherwise used, if it was contemplated by the parties at the time of the conclusion of the contract that the goods would be resold or otherwise used in that State.’14 In all other instances, the seller is only obligated to the buyer for third-party intellectual property rights or claims that arise under ‘the law of the State where the buyer has his place of business.’15 Under Article 42 of the CISG, the seller is obligated to the buyer for third-party 46 intellectual property rights or claims arising under the law of one jurisdiction only. If, at the time of concluding the sale contract, the seller and the buyer contemplate one jurisdiction in which the goods will be resold or used, then the seller is obligated to ensure that the goods will not violate third-party intellectual property rights arising under the law of that jurisdiction. If, at the time of concluding the sale contract, the seller and the buyer do not contemplate a jurisdiction in which the goods will be resold or used, then the seller only warrants that the goods will not violate third-party intellectual property rights or claims arising under the law of the jurisdiction in which the buyer has his place of business. In either case, the seller is not obligated for third-party intellectual property rights or claims arising under the laws of other jurisdictions in which the goods 14 15

CISG, Article 42(a). CISG, Article 42(b).

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may be resold or used. This territorial limitation is an acknowledgment that intellectual property rights are territorial and it would be an undue burden for the seller to be held accountable for intellectual property violations in all jurisdictions. 47 The CD Media Case discussed in part 1 of this Chapter above provides an example of the territorial limitation on the seller’s obligation under Article 42 of the CISG. 16 In that case, an Austrian buyer bought blank CDs from a German seller, who in turn procured the CDs from its parent company in Taiwan. The blank CDs were covered by a licensor’s European processing patent that had entered into force in Germany. The parent company manufactured the blank CDs pursuant to a licensing agreement with the licensor. The parent company and the licensor had a dispute about the licensing fee, and the licensing agreement was terminated in March 2000. In December 2000, upon learning that lawsuits had been filed between the parent company and the licensor, the buyer withheld payment for several invoices. An appellate court held that the seller’s obligation under Article 42 of the CISG was limited to the jurisdiction in which the seller and the buyer contemplated the goods to be resold or used at the time of concluding the sale contract. The appellate court concluded that although the goods in question were delivered to Austria, the seller was aware that the buyer would resell them in Germany, where the licensor had a valid patent. The Austria Supreme Court reversed the appellate court’s finding that there was enough evidence that the seller and the buyer contemplated the goods to be resold in Germany at the time of concluding the sale contract and remanded the case for further proceedings on that issue. The Austrian Supreme Court, however, upheld the appellant court’s holding about the territorial limitation on the seller’s obligation under Article 42 of the CISG.

VI. Commentary 48

Under the CISG, the seller is obligated to the buyer for third-party intellectual property rights arising only in one jurisdiction. If the seller and the buyer contemplate, at the time of contracting, a jurisdiction in which the goods will be used or resold, then the contemplated jurisdiction will be the jurisdiction for which the seller is obligated. Otherwise, the jurisdiction in which the buyer has its place of business will be the jurisdiction for which the seller is obligated. Under legal regimes that do not provide for such territorial limitations, the seller is potentially subject to liability for third-party intellectual property rights or claims in any jurisdictions in which such rights or claims may arise.

VII. Illustrations 49

Suppose that a seller from Country A and a buyer from Country B enter into a sale contract for certain goods to be delivered to Country B. The circumstances of the transaction, however, make it clear that the seller was aware that the buyer would resell the goods in Country C. Under Article 42 of the CISG, the seller would be obligated to the buyer for third-party intellectual property rights or claims arising under the law of Country C, but not third-party intellectual property rights or claims arising under the law of Country B. Nor would the seller be obligated to the buyer for third-party intellectual property rights or claims in other jurisdictions if the goods were subsequently resold or used in those jurisdictions. If, at the time of concluding the contract, the 16

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buyer and the seller did not contemplate where the goods would be resold or used, the seller would be obligated to the buyer only for third-party intellectual property rights or claims arising under the law of Country B, where the buyer has its place of business.

VIII. Cross References & Additional Commentary Other Limitations on the Seller’s Obligation:

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The seller’s obligation to the buyer for third-party intellectual property rights and claims are subject to limitations based on the seller’s and the buyer’s knowledge of such rights and claims. See, ‘Limitations on Seller’s Obligation: Seller’s Knowledge’ (part 4 of this Chapter); ‘Limitations on Seller’s Obligation: Buyer’s Knowledge’ (part 5 of this Chapter).

IX. Practitioner Tips & Contract Clauses As discussed above, the CISG allows the seller and the buyer to derogate from the 51 default rules concerning third-party intellectual property rights and claims. In international sales transactions, the seller usually welcomes limitations on its potential liability for third-party intellectual property rights and claims, but depending on the negotiating positions of the parties, the buyer may be able to expand its rights from those provided under the default rules. For example, under the CISG, the buyer may be able to have the seller agree to shoulder legal liability for third-party intellectual property rights and claims in a jurisdiction other than the one where the parties contemplated, at the time of the conclusion of the sale contract, the goods to be resold.

D. Limitations on Seller’s Obligation: Seller’s Knowledge I. Topics Covered Limitations on the seller’s obligation for third-party intellectual property rights or 52 claims: the seller’s knowledge – –

The significance of the time at which the seller acquires knowledge of third-party intellectual property rights or claims Actual knowledge versus imputed knowledge

II. Introductory Note Besides territorial limitations, under some legal regimes, there might be limitations 53 on the seller’s obligation to the buyer for third-party intellectual property rights based on the seller’s knowledge of such rights and claims. This limitation, in essence, requires a certain degree of fault on the part of the seller before it could be held liable for third-party intellectual property rights and claims.

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III. Statement of Issue 54

Two issues stand out in deciding whether the seller’s knowledge of third-party intellectual property rights and claims limits its obligation to the buyer for such rights and claims. First, when is the dispositive time? Second, what level of knowledge, actual or imputed, is required of the seller?

IV. Sampling of Laws For CISG, see also: Article 42 of the CISG, Part I, ‘Sampling of Laws’. Article 43 (1) The buyer loses the right to rely on the provisions of article 41 or article 42 if he does not give notice to the seller specifying the nature of the right or claim of the third party within a reasonable time after he has become aware or ought to have become aware of the right or claim. (2) The seller is not entitled to rely on the provisions of the preceding paragraph if he knew of the right or claim of the third party and the nature of it.

Under Article 42 of the CISG, a seller is obligated to a buyer only for third-party intellectual property rights or claims that the seller ‘knew or could not have been unaware of ’ at the time of the conclusion of the contract. 56 Under Article 42 of the CISG, a seller is liable only for third-party intellectual property rights or claims of which he had actual or imputed knowledge at the time of concluding the sale contract. The dispositive moment here is the time of the conclusion of the contract – the seller will not be responsible for third-party intellectual property rights or claims of which he acquired actual or imputed knowledge after that moment. 57 While it is straightforward, at least conceptually, to discern whether the seller has actual knowledge of third-party intellectual property rights or claims at the time of the conclusion of the contract, it is not clear what would constitute the seller’s imputed knowledge of such rights or claims. The Secretariat Commentary on Article 40 of the 1978 Draft of the CISG (the draft counterpart of Article 42 of the CISG) suggests that the seller could not have been unaware of a third-party right or claim if it is based on ‘a patent application or grant which had been published in the country in question.’17 58 Peter Schlechtriem takes a similar view, arguing that the seller ‘must inform himself about the possible industrial or other intellectual property rights of third persons with regard to the goods sold.’18 This interpretation would place on the seller an affirmative obligation to search the official registries of the relevant jurisdiction. By contrast, Huber argues that the seller is liable only for fraudulently maintaining silence about intellectual property rights or claims of which he has actual knowledge.19 Allen Shinn believes that the correct interpretation lies somewhere in between the above two views. Shinn argues that the ‘could not have been unaware’ standard places a duty on the seller to learn of rights through information that is routinely or uniquely in his possession.20 Under this interpretation, the seller is required not to be negligent about information that is 55

17 See A/CONF./97/5, Secretariat's Commentary No. 6 to Article 40 of the 1978 Draft Convention, available at http://www.cisg.law.pace.edu/cisg/text/secomm/secomm-42.html. 18 Schlechtriem, Uniform Sales Law (1986) p. 73. 19 Huber, ‘Der UNCITRAL-Entwurf eines Übereinkommens für internationale Warenkaufverträge’ (1979) 43 RabelsZ 431, 503. 20 Shinn, Jr., ‘Liabilities Under Article 42 of the U.N. Convention on the International Sale of Goods’ (1993) 2 Minn J Global Trade 115, 124.

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reasonably at hand at the time the contract is formed, especially if the buyer is not likely to have the same information.21 Of the above views on the seller’s imputed knowledge, Shinn’s appears to be the most 59 sensible, especially in light of Article 43 of the CISG, which provides that the seller’s obligation does not extend to third-party intellectual property rights or claims of which the buyer knew or could not have been unaware at the time of the conclusion of the contract. If the ‘could not have been unaware’ phrase implies an affirmative obligation to search for all information, then the requirement for the seller would negate the requirement for the buyer, leaving both requirements meaningless. Shinn’s interpretation would only require the seller to learn of information that is 60 routinely or uniquely in his possession. For example, if the seller holds patent rights on the goods, he is reasonably expected to know whether those rights have been licensed to third parties in the relevant jurisdiction. This standard would not place a burden on the seller to learn of all published information but would only impute to the seller knowledge that he is in a best position to learn of.

V. Commentary The CISG limits the seller’s obligation to the buyer for third-party intellectual proper- 61 ty rights or claims to those that the seller had actual or imputed knowledge of at the time of concluding the sale contract. This relieves the seller of liability for third-party intellectual property rights or claims of which it acquired actual or imputed knowledge after the conclusion of the sale contract. In international sales transactions covered by legal regimes that do not allow such a limitation, the seller is potentially exposed to liability arising from changes in circumstances that occur after the sale contract has been concluded.

VI. Illustrations In Maglificio Esse v Wehkamp B.V.,22 a Dutch buyer bought textiles from an Italian 62 seller and sold them to its customers. The buyer was sued by a third party for copyright infringement on the design of the textiles. The buyer lost the lawsuit and was ordered to pay damages to the third party. The buyer commenced an action against the seller based on its standard term providing for the seller’s liability in cases of third-party intellectual property rights and claims and, in the alternative, based on Article 42 of the CISG. The first instance court in the Netherlands decided in favor of the buyer on the 63 basis of its primary claim. On appeal, an appeals court reversed the first instance court and rejected the buyer’s primary claim. The appeals court instead turned to the buyer’s alternative claim. The appeals court held that under Article 42 of the CISG, the buyer had the burden of proving that the seller knew or could not be unaware of the intellectual property rights, and allowed the buyer to produce evidence on its alternative claim.

Id. at pp. 125–26. (1996) NIPR No. 398, available at http://www.unilex.info/case.cfm?pid=1&do=case&id=335&step=A bstract. 21 22

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VII. Cross References & Additional Commentary Limitations on the Seller’s Obligation Based on the Buyer’s Knowledge:

64

The seller’s obligation to the buyer for third-party intellectual property rights and claims is also subject to limitations based on the buyer’s knowledge of such rights and claims. See, ‘Limitations on Seller’s Obligation: Buyer’s Knowledge’ (part 5 of this Chapter). Territorial Limitations on the Seller’s Obligation:

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Some legal regimes impose territorial limitations on the seller’s obligation to the buyer for third-party intellectual property rights and claims. See, ‘Territorial Limitations on Seller’s Obligation’ (part 3 of this Chapter).

VIII. Practitioner Tips & Contract Clauses 66

As in the case of territorial limitations on the seller’s obligation, the extent to which the seller’s obligation for third-party intellectual property rights and claims is limited by the seller’s knowledge of such rights and claims could be negotiated by the seller and the buyer under the CISG. The buyer could, for example, have the seller accept legal obligation for third-party intellectual property rights and claims of which the seller had no actual or imputed knowledge at the time of the conclusion of the sale contract.

E. Limitations on Seller’s Obligation: Buyer’s Knowledge I. Topics Covered 67

Limitations on the seller’s obligation for third-party intellectual property rights or claims: the buyer’s knowledge – –

The significance of the time at which the buyer acquires knowledge of third-party intellectual property rights or claims Actual knowledge versus imputed knowledge

II. Introductory Note 68

The seller’s obligation to the buyer for third-party intellectual property rights and claims is similarly limited by the buyer’s knowledge of such rights and claims. Under some legal regimes, the limitation based on the buyer’s knowledge mirrors the limitation based on the seller’s knowledge. This poses challenges to the interpretation of these limitations.

III. Statement of Issue 69

As in the case of the limitation based on the seller’s knowledge, there are two central issues in deciding on the extent to which the seller’s obligation for third-party intellectual property rights and claims is limited by the buyer’s knowledge of such rights

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and claims: First, when is the dispositive time? Second, what level of knowledge, actual or imputed, is required of the buyer?

IV. Sampling of Laws 1. CISG See: Article 42 of the CISG, Part I, ‘Sampling of Laws’ and CISG Article 43, Part IV, ‘Sampling of Laws’. Article 42(2)(a) of the CISG provides that the obligation of the seller to the buyer does not extend to intellectual property rights of which the buyer knew or could not have been unaware at the time of the conclusion of the contract. In addition, under Article 43(1) of the CISG, the buyer loses the right to rely on Article 42 of the CISG if he does not give notice to the seller specifying the nature of the right or claim of the third party within a reasonable time after he has become aware or ought to have become aware of the right or claim. Article 43(2) of the CISG provides, however, that the seller is not entitled to rely on Article 43(1) of the CISG if he knew of the right or claim of the third party and the nature of it. The limitation on the seller’s obligation based on the buyer’s knowledge under Article 42(2)(a) of the CISG faces the same interpretive issues as the limitation on the seller’s obligation based on the seller’s knowledge under Article 42(1) of the CISG. In particular, the ‘could not have been unaware’ standard appears in both requirements as in interpreting the limitation of the seller’s obligation based on the seller’s knowledge. If the ‘could not have been unaware’ requirement imposes an affirmative obligation to search for all information, then the requirement for the buyer would negate the requirement for the seller, rendering both requirements meaningless. Therefore, Allen Shinn’s argument that the ‘could not have been unaware’ requirement only requires a seller or buyer to learn of information routinely or uniquely in his possession makes more sense and provides a more practical solution to the interpretive problem.

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2. German Bürgerliches Gesetzbuch § 442(1) of the BGB provides that ‘[t]he rights of the buyer due to a defect are exclud- 74 ed if he has knowledge of the defect at the time when the contract is entered into.’ It further provides that ‘[i]f the buyer has no knowledge of a defect due to gross negligence, the buyer may assert rights in relation to this defect only if the seller fraudulently concealed the defect or gave a guarantee of the quality of the thing.’ § 442(1) of the German BGB requires the buyer to have actual knowledge of a defect 75 at the time of the conclusion of the sale contract for the seller to be absolved of legal liability for the defect. The buyer’s lack of knowledge of the defect due to negligence does not relieve the seller of such legal liability. Gross negligence on the part of the buyer, however, does relieve the seller of legal liability as long as the seller has not fraudulently concealed the defect or given a guarantee of the quality of the thing. Under German law, the term ‘gross negligence’ has two elements: (1) an objective 76 element involving a failure to exercise ordinary care in circumstances where the risk of harm was plain for all to see; (2) a subjective element in the form of an absence of anything which renders the act or omission in question excusable from the point of view of the person concerned.23 23 See Tradigrain S.A. v Intertek Testing Services (ITS) Canada Limited [2007] EWCA Civ 154, para. 24, available at http://www.bailii.org/ew/cases/EWCA/Civ/2007/154.html.

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V. Commentary 77

Two legal regimes, namely the CISG and the German BGB, absolve the seller of liability for third-party intellectual property rights or claims if the buyer has actual or imputed knowledge of such rights or claims at the time of concluding the sale contract. This limitation on the seller’s liability implicitly assumes that the buyer purchases the goods at its own risks if it knows or could have known third-party intellectual property rights or claims at the time of concluding the sale contract.

VI. Illustrations 78

In a CISG case decided by a French court,24 two French companies purchased furniture from a Spanish seller. Some of furniture turned out to be counterfeited. The parties entitled to copyright and exclusive manufacture and sale of the furniture brought an action against the two French companies, which brought the Spanish seller into the lawsuit as guarantor on the basis of Article 42(1) of the CISG. After finding that the CISG was applicable, the court concluded that the French buyers had knowledge of the identity of the author of the original models at the time of the conclusion of the sale contract and, therefore, as professionals in this area they could not have been unaware that the furniture in question was counterfeited. As a result, the court denied the buyers’ claim for intervention of the seller as guarantor under Article 42(1) of the CISG.

VII. Cross References & Additional Commentary 79

Limitations on the Seller’s Obligation Based on the Seller’s Knowledge: The seller’s obligation to the buyer for third-party intellectual property rights and claims is also subject to limitations based on the seller’s knowledge of such rights and claims. See, ‘Limitations on Seller’s Obligation: Seller’s Knowledge’ (part 4 of this Chapter).

80

Territorial Limitations on the Seller’s Obligation: Some legal regimes impose territorial limitations on the seller’s obligation to the buyer for third-party intellectual property rights and claims. See, ‘Territorial Limitations on Seller’s Obligation’ (part 3 of this Chapter).

VIII. Practitioner Tips & Contract Clauses 81

Under the CISG, the limitations on the seller’s obligation for third-party intellectual property rights and claims in relation to the buyer’s knowledge are amenable to derogation through agreement between the seller and the buyer. Under German law, the seller and the buyer could also modify the default rule governing the seller’s obligation for third-party intellectual property rights, subject to the requirement that ‘[t]he seller may not invoke an agreement that excludes or restricts the rights of the buyer with regard to a defect insofar as the seller fraudulently concealed the defect …’ 25 The seller and the 24 See Decision of Tribunal de Grande Instance de Versailles of 23 November 2004, available at http://w ww.unilex.info/case.cfm?pid=1&do=case&id=998&step=Abstract. 25 § 444 of the BGB.

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buyer would be able to either restrict or expand the seller’s obligation for third-party intellectual property rights and claims in relation to the buyer’s knowledge of such rights and claims as long as they stay within the parameters set forth under these requirements.

F. Additional Sources Bridge, The International Sale of Goods: Law and Practice (OUP 2013); DiMatteo, International Contracting: Law and Practice (Wolters Kluwer 2013); Honnold, Uniform Law for International Sales (4 th edn, Kluwer Law International 2009); Ostendorf, International Sales Terms (Beck/Hart/Nomos 2010).

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CHAPTER 16 EXAMINATION AND NOTIFICATION OF NONCONFORMITIES André Janssen A. Topics Covered . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B. Introductory Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C. Statement of Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . D. International Sales Transaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . E. Sampling of Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. CISG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. CISG Advisory Council Opinion No. 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. CISG Advisory Council Opinion No. 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. UNIDROIT Principles of International Commercial Contracts and Principles of European Contract Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. Common European Sales Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI. German Commercial Code (Handelsgesetzbuch) . . . . . . . . . . . . . . . . . . . . . . . . . . . . VII. French Code Civil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VIII. Spanish Commercial Code (Código de Comercio) . . . . . . . . . . . . . . . . . . . . . . . . . . . IX. American Uniform Commercial Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . X. English Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XI. Common Law of Contracts and the American Restatement (Second) Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XII. Chinese Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F. Commentary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Duty to Examine . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Nature and Extent of the Examination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Important Criteria for Defining the Nature and Extent of the Examination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . aa) Type and Quantity of the Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . bb) Position of the Buyer in Business Dealings . . . . . . . . . . . . . . . . . . . . . . . . . 2. Beginning of the Examination Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Distance Sales and Sales on Location . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Distance Sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Redirection and Redispatch . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Calculation of the Examination Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Examination with as Short a Period as is Practicable in the Circumstances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Criteria for Calculating the Examination Period . . . . . . . . . . . . . . . . . . . . . . . . aa) Type and Quantity of the Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . bb) Position of the Buyer in Business Dealings . . . . . . . . . . . . . . . . . . . . . . . . . cc) External Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. Costs of Examination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5. Comparative Remarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Duty to Notify . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Content of Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Form of Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Beginning of the Notification Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Open Defects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Hidden Defects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. Calculation of Notification Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Notification within a Reasonable Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Criteria to Determine the Length of the Notification Period . . . . . . . . . . . . . aa) Type and Quantity of the Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . bb) Position of the Buyer in Business Dealings and the Influence of External Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . cc) Type of Remedy Chosen . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5. Complying with the Notification Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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1 2 6 8 10 10 11 12 13 14 15 16 17 18 19 20 21 25 25 25 25 26 26 30 31 32 33 34 35 35 36 36 40 41 42 43 44 44 46 47 48 50 51 51 53 54 55 56 57

B. Introductory Note a) Dispatch Principle in Accordance with Article 27 CISG . . . . . . . . . . . . . . . . . 57 b) Conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 c) Exceptions to Article 27 CISG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 aa) Statements Made Orally or by Telephone . . . . . . . . . . . . . . . . . . . . . . . . . . 60 bb) Transmission by Messenger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 6. Legal Consequences of the Violation of the Duty to Give Notice . . . . . . . . . 62 a) Forfeiture of Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 b) Buyer’s Duty to Pay . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 7. Comparative Remarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 a) Systems without Duty to Examine and to Notify . . . . . . . . . . . . . . . . . . . . . . . . 65 b) Systems without Duty to Examine, but with Duty to Notify . . . . . . . . . . . . . 66 c) Systems with Explicit Duty to Notify and Implicit Duty to Examine . . . . 67 d) Systems with Explicit Duty to Examine and to Notify . . . . . . . . . . . . . . . . . . . 68 aa) Systems with Fixed Maximum Examination Period Only . . . . . . . . . . 69 bb) Systems with Fixed Maximum Examination and Notification Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 cc) Systems with Flexible Examination and Notification Periods . . . . . . 71 III. Seller’s Actual or Constructive Knowledge of Lack of Conformity under Article 40 CISG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 1. Knowledge or Impossibility of having been Unaware . . . . . . . . . . . . . . . . . . . . . 75 2. Relevant Point in Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76 3. Comparative Remarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77 IV. Reasonable Excuse of the Buyer under Article 44 CISG . . . . . . . . . . . . . . . . . . . . . . 78 1. Scope . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79 2. Reasonable Excuse . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80 3. Comparative Remarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83 V. Cut-off Period under Article 39(2) CISG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84 1. Cut-off Period and Limitation of Actions under the CISG . . . . . . . . . . . . . . . . 84 2. Comparative Remarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87 G. Cross References & Additional Commentary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 H. Practitioner Tips & Contract Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90 I. Modifications of the Duty to Examine . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93 II. Modifications of the Duty to Notify . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96 III. Avoidance of the Reasonable Excuse Problem . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98 IV. Avoiding the Seller’s Statements being Interpreted as Waivers . . . . . . . . . . . . . . . 99 I. Additional Sources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100

A. Topics Covered This Chapter deals with the following subjects: – – – – –

1

Duty of the buyer to examine the delivered goods (as under Article 38 CISG) Duty of the buyer to notify any lack of conformity and the consequences of failure to give notice (as under Article 39(1) CISG) The seller’s actual or constructive knowledge of lack of conformity (as under Article 40 CISG) The buyer’s reasonable excuse (as under Article 44 CISG) Cut-off period (as under Article 39(2) CISG)

B. Introductory Note Articles 38–40 CISG and Article 44 CISG deal with the examination and notice of 2 non-conformity, which are of great importance in International Sales Law. Article 38(1) CISG imposes a duty on the buyer to examine the delivered goods ‘within as short a period as is practicable in the circumstances.’ Failing to examine the goods does not

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lead to an independent sanction against the buyer.1 However, according to Article 39(1) CISG he will forfeit his legal claim if he does not notify the seller of the non-conformity and specify it in detail ‘within a reasonable time after he has discovered it or ought to have discovered it’. The buyer can only avoid forfeiting his claim if the lack of conformity relates to facts of which the seller knew or could not have been unaware and which he did not disclose to the buyer (see Article 40 CISG). Alternatively, the buyer can provide a reasonable excuse pursuant to Article 44 CISG. In addition, Article 39(2) CISG provides a cut-off period of two years from the date on which the goods were actually handed over to the buyer (unless this period is inconsistent with a contractual guarantee period). 3 This set of rules pursues different but complementary aims.2 First of all, the provisions aim to distribute the risk between buyer and seller fairly. They serve to both clarify the transaction (i.e. that it is sound in a legal and factual sense) and accelerate its performance. They also prevent any evidential difficulties that may arise over time as well as speculation at the seller’s expense (e.g. in the case of goods with starkly fluctuating prices). Last but not least, they provide the seller with a defence in case of damages suffered by the buyer, allowing the seller to rule out the risk of loss connected with the buyer’s potential claims. 4 The questions of how the duty to examine and to notify should be formulated and what sanctions should be foreseen for delayed, omitted or unsatisfactory notices were among the most controversial matters when preparing the CISG.3 In his CISG Advisory Council Opinion No. 2: Examination of the Goods and Notice of Non-Conformity Articles 38 and 39 CISG, Eric Bergsten concluded that ‘(t)he proper interpretation of those provisions (Art. 38 et seq. CISG) is in turn one of the most controversial matters in its implementation since it involves both facts and law (…).’4 For that reason, he assumed that ‘(t)he difference of opinion in the drafting of the notice requirement and in its interpretation arise largely out of difference in the domestic law of sales.’ Within the CISG, few questions provoke as much conflict between the various national legal traditions. 5 Depicting all the different national and international models in detail would clearly exceed the scope of this Chapter. Instead, the following remarks will provide a selection of approaches under ‘Samples of Laws’ which is then investigated in the ‘Commentary’ section (under ‘Comparative Remarks’). Generally-speaking, the duty to examine and to notify ranges from very strict rules with extremely short periods (particularly in Germanic law systems) to the complete absence of any such duty. However, considerable differences exist even in systems where such a duty is recognised and well-known. These range from the length of periods to the personal and material scope of application. For example, German law only imposes a duty to examine and to notify on merchants and if a sale of goods is concerned (see § 377 German Commercial Code). The Netherlands, however, goes considerably further by providing that the same duty also applies to sales 1 See also Article 38(1) CISG of the Opinion No. 2 of the CISG-AC, Examination of the Goods and Notice of Non-Conformity Articles 38 and 39 CISG. 2 See with regard to the aims of the duty to examine and to notify under the CISG Janssen, Die Untersuchungs- und Rügepflichten im deutschen, niederländischen und internationalen Kaufrecht: Eine rechtsvergleichende Darstellung der Gemeinsamkeiten und Unterschiede (Nomos 2001) pp. 41 et seq.; Kröll, in Kröll, Mistelis & Perales Viscasillas (eds), UN Convention on Contracts for the International Sale of Goods (CISG): Commentary (2nd edn., C.H. Beck 2018) Article 39 CISG paras 7 et seq.; Schwenzer, in Schlechtriem, Schwenzer & Schroeter (eds), Kommentar zum Einheitlichen UN-Kaufrecht – CISG (7 th edn., C.H. Beck 2019) Article 38 CISG para. 4. 3 Schlechtriem & Butler, UN Law on International Sales (Springer 2009) para. 150. 4 CISG-AC Opinion No. 2: Examination of the Goods and Notice of Non-Conformity Articles 38 and 39 CISG, 7 June 2004. Rapporteur: Prof. Dr. Eric E. Bergsten, Emeritus, Pace University School of Law, New York.

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D. International Sales Transaction

contracts among private persons and even in relation to the sale of immovables5 (Article 7:23 Dutch Civil Code).6 By contrast, the withdrawn draft for a Common European Sales Law (CESL) extended the duty to examine and to notify to digital content and related services (see Article 121(1) CESL).

C. Statement of Issues The ‘Commentary’ section of this Chapter starts with the duty to examine the deliv- 6 ered goods. It focuses on the nature and extent of the examination as well as the beginning and length of the examination period. The ensuing analysis of the duty to notify primarily deals with issues relating to due notification (i.e. when the notification period begins, its duration and legal consequences of failing to give notice). It also examines possible exceptions to the (complete) forfeiture of claims owing to a violation of the duty to notify, namely the seller’s actual or constructive knowledge of the non-conformity and the buyer’s reasonable excuse (for the CISG, see the relevant Articles 40 and 44 CISG). The Commentary section concludes by examining the cut-off period as provided for in Article 39(2) CISG and other codes. Accordingly, this Chapter is primarily devoted to the CISG and its provisions on the 7 duty to examine and to notify mentioned above. The parallel provisions in national law and the corresponding rules of other legal instruments are described and explained by way of legal comparison. This Chapter does not discuss the factors that actually ‘trigger’ the duty to examine and to notify (i.e. the non-conformity of the goods). That task is left to Bruno Zeller in Chapter 14 of this book (Conformity of Goods). The same applies to the question of the duty to examine and to notify in relation to third party rights and other industrial and intellectual property rights (as recognised by Articles 41 and 42 CISG; for the duty to notify in those cases see Article 43 CISG). This subject will be dealt with by Wentong Zheng in Chapter 15 (Sales and Intellectual Property Rights).

D. International Sales Transaction It is almost impossible to overestimate the importance of the duty to examine and to 8 notify in international practice. A remarkably large number of published judgments and arbitral awards on the CISG are devoted to the question of whether the requirements of See more detailed Janssen (n 2) pp. 34 et seq. Article 7:23 Dutch Civil Code: (1) The buyer can no longer claim that the supplied object is not in conformity with the sale agreement if he has not reported the lack of conformity to the seller with convenient speed after he has discovered or reasonably should have discovered it. However, if the object appears to be missing a quality that it should have according to the seller or if the lack of conformity concerns facts which the seller knew or ought to have known, but which he did not mention to the buyer, then the lack of conformity must be reported to the seller with convenient speed after it has been discovered. In the event of a consumer sale agreement, the lack of conformity must be reported by the buyer with convenient speed after it has been discovered, on the understanding that a report within a period of two months after that discovery is considered to be made in time. (2) Rights of action (legal claims) and defences, grounded on facts which would justify the conception that the supplied object is not in conformity with the agreement, become prescribed on the expiry of two years after the report has been made in accordance with the first paragraph. Yet, the buyer preserves, as a defence against a right of action (legal claim) to obtain payment, the right to appeal to a price reduction or a compensation for damages. (3) The prescription period shall not run as long as the buyer cannot exercise his legal rights and legal remedies as a result of a deliberate intent of the seller. 5

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the Articles 38 et seq. CISG were satisfied. Often, the seller readily admits to delivering non-conforming goods only to then claim that the buyer has not satisfied the duty to examine and to notify. This ploy is so successful that the buyer regularly leaves empty-handed, despite the fact that non-conformity was never at issue in the first place. 9 In practice, Articles 38 and 39 CISG have proved a relatively strict but not overly onerous burden on the buyer. The CISG’s duty to examine and to notify will be especially familiar to parties from German-speaking countries but surprising to those from countries whose national legal systems do not provide for such duty or, at most, a duty that is less strict. On the other hand, if an international sales contract is subject to a national law that does not recognise such a duty at all, or only a duty that is less strict, then the seller from a country with a strict duty to examine and to notify may deplore the absence of the related legal certainty. In this situation, he may well see himself exposed to the buyer’s warranty rights for a long time to come. Such diverse points of departure can lead to very different results depending on what law applies. Both buyer and seller must tackle the question of the duty to examine and to notify in respect of each sales contract with a foreign party and thoroughly think the matter through in order to avoid unpleasant surprises.

E. Sampling of Laws I. CISG 10

As stated above, the CISG contains four provisions dealing with the duty to examine and to notify. Article 38 CISG regulates the duty to examine while Article 39(1) CISG addresses the duty to give notice. Paragraph 2 of the latter establishes in addition a two year cut-off-period. Article 40 CISG allows an exception to the forfeiture of all claims under Article 39 CISG if the lack of conformity relates to facts of which the seller knew or could not have been unaware and did not disclose to the buyer. Provided the buyer can give a reasonable excuse for his failure to give notice under Article 44 CISG, he will at least be able to reduce the price or to claim damages (except for loss of profit). The wording of these provisions reads as follows: Article 38 (1) The buyer must examine the goods, or cause them to be examined, within as short a period as is practicable in the circumstances. (2) If the contract involves carriage of the goods, examination may be deferred until after the goods have arrived at their destination. (3) If 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. Article 39 (1) 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 after he has discovered it or ought to have discovered it. (2) In any event, the buyer loses the right to rely on a lack of conformity of the goods if he does not give the seller notice thereof at the latest within a period of 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.

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E. Sampling of Laws Article 40 The seller is not entitled to rely on the provisions of articles 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. Article 44 Notwithstanding the provisions of paragraph (1) of article 39 and paragraph (1) of article 43, the buyer may reduce the price in accordance with article 50 or claim damages, except for loss of profit, if he has a reasonable excuse for his failure to give the required notice.

II. CISG Advisory Council Opinion No. 1 In its first opinion (i.e. ‘Electronic Communications under CISG’ of 2003), the CISG 11 Advisory Council had already dealt with one aspect relating to the subject of this Chapter, namely giving notice under Article 39(1) CISG in the era of e-commerce. In this respect, it held the following: Article 39 The term ‘notice’ includes electronic communications provided that the seller expressly or impliedly has consented to receiving electronic messages of that type, in that format, and to that address. 7

III. CISG Advisory Council Opinion No. 2 Shortly after the first opinion, the Advisory Council again examined the duty to 12 examine and to notify in the CISG, thereby reaffirming its great practical importance. The rapporteur Eric Bergsten clarified the meaning of Article 38 and 39 CISG as follows: Article 38 (1) Although a buyer must examine the goods, or cause them to be examined, within as short a period as is practicable in the circumstances, there is no independent sanction for failure to do so. However, if the buyer fails to do so and there is a lack of conformity of the goods that an examination would have revealed, the notice period in article 39 commences from the time the buyer ‘ought to have discovered it’. (2) Whether and when it is practicable, and not just possible, to examine the goods depends on all the circumstances of the case. It is often commercially practicable to examine the goods immediately upon receipt. This would normally be the case with perishables. In other cases, such as complicated machinery, it may not be commercially practicable to examine the goods except for externally visible damage or other non-conformity until, for example, they can be used in the way intended. If the goods are to be re-sold, the examination will often be conducted by the sub-purchaser. Another example is dealt with in article 38(3). (3) The period for examining for latent defects commences when signs of the lack of conformity become evident. Article 39 (1) The period for giving notice under article 39 commences when the buyer discovered or ‘ought to have’ the lack of conformity. The buyer ‘ought to have discovered’ the lack of conformity upon the expiration of the period for examination of the goods under article 38 or upon delivery where the lack of conformity was evident without examination. (2) Unless the lack of conformity was evident without examination of the goods, the total amount of time available to give notice after delivery of the goods consists of two separate periods, the period for examination of the goods under article 38 and the period for giving notice under article 39. The Convention requires these two periods to be distinguished and kept separate, even when the facts of the case would permit them to be combined into a single period for giving notice.

7 In its comment on this point, the Advisory Council stated the following: ‘39.1. Information to the seller about lack of conformity of the goods can be given in an electronic message. The important factor is that the information be conveyed to the seller, not in what form it is conveyed. 39.2. For the effectiveness of notice to the seller see comments in Articles 15 and 27.’

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Chapter 16 Examination and Notification of Non-Conformities (3) The reasonable time for giving notice after the buyer discovered or ought to have discovered the lack of conformity varies depending on the circumstances. In some cases notice should be given the same day. In other cases a longer period might be appropriate. No fixed period, whether 14 days, one month or otherwise, should be considered as reasonable in the abstract without taking into account the circumstances of the case. Among the circumstances to be taken into account are such matters as the nature of the goods, the nature of the defect, the situation of the parties and relevant trade usages. (4) The notice should include the information available to the buyer. In some cases that may mean that the buyer must identify in detail the lack of conformity. In other cases the buyer may only be able to indicate the lack of conformity. Where that is the case, a notice that describes the symptoms is enough to specify the nature of the lack of conformity.

IV. UNIDROIT Principles of International Commercial Contracts and Principles of European Contract Law 13

Owing to the fact that they reflect general contract law, neither the PICC nor the PECL incorporate a duty to examine and to notify. Accordingly, they will not be considered further in this Chapter.

V. Common European Sales Law 14

The duty to examine and to notify in the CESL has some unique features and will therefore also be discussed in this Chapter. The CESL only provides for a duty to examine and to notify in business to business relationships. In a business to consumer relationship, therefore, the buyer will not be subject to such an obligation. Unlike the CISG, the CESL imposes a duty to examine and notify on the buyer also in relation to digital content contracts and contracts on related services. Thus, it is apparent that the CISG formed the precedent for the two relevant provisions of the CESL (i.e. Articles 121 and 122 CESL), despite some important differences in detail. Whereas Article 121 CESL defines the duty to examine in further detail (thereby providing for a maximum examination period of 14 days), Article 122(1) CESL mainly deals with the duty to notify. As with the CISG, Article 122(2) CESL imposes a two-year cut-off period. It also allows for an exception to the forfeiture of claims owing to delayed, omitted or unsatisfactory notification if the lack of conformity relates to facts of which the seller knew or could be expected to have known and did not disclose to the buyer (Article 122(6) CESL). The wording of the two provisions reads as follows: Article 121 (1) In a contract between traders the buyer is expected to examine the goods, or cause them to be examined, within as short a period as is reasonable not exceeding 14 days from the date of delivery of the goods, supply of digital content or provision of related services. (2) If the contract involves carriage of the goods, examination may be deferred until after the goods have arrived at their destination. (3) If the goods are redirected in transit, or redispatched by the buyer before the buyer has had a reasonable opportunity to examine them, and at the time of the conclusion of the contract the seller knew or could be expected 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. Article 122 (1) In a contract between traders the buyer may not rely on a lack of conformity if the buyer does not give notice to the seller within a reasonable time specifying the nature of the lack of conformity. The time starts to run when the goods are supplied or when the buyer discovers or could be expected to discover the lack of conformity, whichever is later. (2) The buyer loses the right to rely on a lack of conformity if the buyer does not give the seller notice of the lack of conformity within two years from the time at which the goods were actually handed over to the buyer in accordance with the contract.

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E. Sampling of Laws (3) Where the parties have agreed that the goods must remain fit for a particular purpose or for their ordinary purpose during a fixed period of time, the period for giving notice under paragraph 2 does not expire before the end of the agreed period. (4) Paragraph 2 does not apply in respect of the third party claims or rights referred to in Article 102. (5) The buyer does not have to notify the seller that not all the goods have been delivered if the buyer has reason to believe that the remaining goods will be delivered. (6) The seller is not entitled to rely on this Article if the lack of conformity relates to facts of which the seller knew or could be expected to have known and which the seller did not disclose to the buyer.

VI. German Commercial Code (Handelsgesetzbuch) German law does not recognise a general duty to examine and to notify for all types 15 of sales contracts. However, § 377 German Commercial Code establishes a duty to examine and to give notice of a lack of conformity if the sale is a business transaction for both parties. This provision is of paramount importance in practice and it read as follows: § 377 (1) If a sale is a business transaction for both parties, then the buyer must promptly examine the goods after receipt from the seller, to the extent that this represents the ordinary business practice, and if a lack of conformity is discovered, promptly notify the seller thereof. (2) If the buyer omits to notify, the goods are deemed to be accepted unless a lack of conformity existed which was not recognizable by an examination. (3) If such a lack of conformity subsequently becomes apparent, then the notification must take place promptly after the discovery thereof; otherwise the goods will also be deemed accepted in respect of this lack of conformity. (4) For the assertion of rights by the buyer, the timely dispatch of the notification suffices. (5) If the seller fraudulently concealed the lack of conformity, it cannot rely on these provisions. 8

VII. French Code Civil In French law, one looks in vain for a duty to examine and to notify such as the 16 one found in the CISG or other legal systems. French law does not recognise an express duty either to examine or to notify any lack of conformity.9 The only provision regularly mentioned in this context is Article 1648(1) French Civil Code, which requires the buyer to bring a claim for material defects within two years after discovery of the defect. The wording of this provision reads as follows: Article 1648 (1) The action resulting from redhibitory vices must be brought by the buyer ‘within a period of two years following the discovery of the vice’ (Ord. No 2005-136 of 15 February 2005).

8 Translation taken from Schwenzer, Fountoulakis & Dimsey, International Sales Law, A Guide to the CISG (2nd edn., Hart 2012) p. 294. 9 However, it is also worth mentioning Article 1641 French Civil Code which states that ʻ(t)he seller is bound to a warranty against hidden defects in the thing sold that render it unfit for its intended use, or that so impair its use that the buyer would not have bought it, or would only have given a lesser price for it if he had known of the defects.ʼ From that provision one can deduct that the warranty will not apply to apparent defects because in that case the buyer should have refused delivery. Hence, one might argue that it follows from Article 1641 French Civil Code that the buyer has at least an indirect duty to examine the goods if he wants to avail himself of the warranty claim.

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VIII. Spanish Commercial Code (Código de Comercio) 17

The Spanish Civil Code does not provide a general duty to examine and to notify applicable to all types of sales contracts.10 Nevertheless, Articles 336 and 342 Spanish Commercial Code are relevant for this Chapter. They are worded as follows: Article 336 (1) The buyer who examines the content of the goods at the time of receipt shall not be entitled to take action against the seller alleging flaw or defect in the quantity or quality of the merchandise. (2) The buyer shall be entitled to repeat action against the seller due to defect in quantity or quality of the merchandise received in packaging or wrapped, provided he takes that action within four days following receipt and the breakage is not due to a fortuitous event, flaw inherent to the item, or malicious intent. (3) In these cases, the buyer may opt to cancel the contract or to fulfil it according to the terms agreed, but always with compensation of the damages that may have been caused by the defects or flaws. (4) The seller may avoid this claim by demanding, at the act of delivery, for these to be checked, with regard to quantity and quality, to the satisfaction of the buyer. Article 342 The buyer who has not made any complaint whatsoever based on internal flaws of the item sold, within the 30 days following its delivery, shall lose all entitlement to action and right of repetition against the seller for that cause.

IX. American Uniform Commercial Code 18

§ 2-607(3)(a) UCC only provides a duty to notify ‘within a reasonable time’. Unlike the CISG, therefore, this provision does not explicitly impose a duty to examine. That said, pinning the start of the notification period to the moment ‘after he (the buyer) discovers or should have discovered any breach’ makes clear that the buyer is also under an obligation to examine the goods. § 2-607(3)(a) UCC reads as follows: § 2-607(3)(a) (3) Where a tender has been accepted, (a) The buyer must within a reasonable time after he discovers or should have discovered any breach notify the seller of breach or be barred from any remedy; (…).

X. English Law 19

English sales law lacks an obligation comparable to the duty to examine and to notify in Articles 38 and 39 CISG with similar legal consequences in the event of violation. Instead, English law obliges the seller to give the buyer time to examine the delivered goods. Once this – undefined – time period has expired, the buyer is no longer entitled to avoid the contract and is instead limited to damages (unless the buyer is a consumer). The buyer is only required to give notice of a lack of conformity if he wishes to avoid the contract. The relevant provision is s 35 of the English Sale of Goods Act 1979. This provision does not, however, apply to consumer contracts.

10 Also, the Spanish Consumer Law does not recognise a comprehensive duty to examine and to notify. Article 123(5) of the ‘Texto Refundido de la Ley General de Defensa de los Consumidores y Usuarios’ merely provides for a duty to notify within two months after gaining knowledge of the non-conformity (the provision derives from Article 5(2) Consumer Sales Directive 1999/44/EC). This provision does not establish a duty to examine and does also not lead to a forfeiture of claims in the event of violation (for further information see Article 123(5) of the Texto Refundido de la Ley General de Defensa de los Consumidores y Usuarios). This Chapter does not further consider this provision.

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E. Sampling of Laws Section 35 (1) The buyer is deemed to have accepted the goods subject to subsection (2) below— (a) when he intimates to the seller that he has accepted them, or (b) when the goods have been delivered to him and he does any act in relation to them which is inconsistent with the ownership of the seller. (2) Where goods are delivered to the buyer, and he has not previously examined them, he is not deemed to have accepted them under subsection (1) above until he has had a reasonable opportunity of examining them for the purpose— (a) of ascertaining whether they are in conformity with the contract, and (b) in the case of a contract for sale by sample, of comparing the bulk with the sample. (…) (4) The buyer is also deemed to have accepted the goods when after the lapse of a reasonable time he retains the goods without intimating to the seller that he has rejected them. (5) The questions that are material in determining for the purposes of subsection (4) above whether a reasonable time has elapsed include whether the buyer has had a reasonable opportunity of examining the goods for the purpose mentioned in subsection (2) above. (…)

XI. Common Law of Contracts and the American Restatement (Second) Contracts Neither the Common Law of Contracts nor the American Restatement (Second) 20 Contracts are relevant for the examination and notification duties described here. As such, they will not be considered further.

XII. Chinese Law The new Chinese Civil Code (CCC) was enacted on 1st January 2021 and replaced, 21 among other laws, the Chinese Contract Law of 1999. As a certain familiarity with the previous legal situation is necessary in order to understand the renewed law on the duty to examine and to notify both the old and the new legal system will be outlined here. The Chinese Contract Law of 1999 contained two relevant provisions that revealed 22 the influence of Articles 38–40 CISG. Accordingly, Article 157 Chinese Contract Law regulated the duty to examine and Article 158 Chinese Contract Law the duty to notify. In addition, the latter bore a further resemblance to Article 39(2) CISG by including a cut-off period of two years (Article 158(2)(2) Chinese Contract Law). Article 158(3) Chinese Contract Law reflected the contents of Article 40 CISG. The two provisions of the Chinese Contract Law read as follows: Article 157 Chinese Contract Law Upon receipt of the subject matter, the buyer shall inspect it within the prescribed inspection period. Where no inspection period was prescribed, the buyer shall timely inspect the subject matter. Article 158 Chinese Contract Law (1) Where an inspection period was prescribed, the buyer shall notify the seller of any non-compliance in quantity or quality of the subject matter within such inspection period. Where the buyer delayed in notifying the seller, the quantity or quality of the subject matter is deemed to comply with the contract. (2) Where no inspection period was prescribed, the buyer shall notify the seller within a reasonable period, commencing on the date when the buyer discovered or should have discovered the quantity or quality non-compliance. If the buyer fails to notify within a reasonable period or fails to notify within 2 years, commencing on the date when it received the subject matter, the quantity or quality of the subject matter is deemed to comply with the contract, except that if there is a warranty period in respect of the subject matter, the warranty period applies and supersedes such two year period. (3) Where the seller knew or should have known the non-compliance of the subject matter, the buyer is not subject to the time limits for notification prescribed in the previous two paragraphs.

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One peculiarity of Chinese law is that the Chinese Supreme People’s Court hands down mandatory interpretative guidelines. Both provisions just mentioned were to be interpreted in accordance with the Interpretation No. 8 [2012] of the Supreme People’s Court on Issues Concerning the Application of Law for the Trial of Cases of Disputes over Sales Contracts.11 Of particular interest in this context were Articles 15–20 of the Interpretation No. 8 [2012] of the Supreme People’s Court. They read as follows: Article 15 Interpretation No. 8 [2012] of the Supreme People’s Court Where the parties have not agreed upon the inspection period for the subject matter, and the delivery notes and confirmation forms indicating the quantity, model, and specifications of the subject matter have been signed by the buyer, the people's court shall, according to Article 157 of the Contract Law, determine that the buyer has inspected for quantity and external defects, unless such determination can be invalidated by sufficient evidence to the contrary. Article 16 Interpretation No. 8 [2012] of the Supreme People’s Court Where the seller delivers the subject matter to a third party as instructed by the buyer, and the inspection standards agreed upon between the seller and the buyer are inconsistent with those agreed upon between the buyer and the third party, the people's court shall, according to Article 64 of the Contract Law, determine the inspection standards agreed upon between the seller and the buyer to be the inspection standards for the subject matter. Article 17 Interpretation No. 8 [2012] of the Supreme People’s Court (1) When determining the ‘reasonable period’ as prescribed in paragraph 2 of Article 158 of the Contract Law, the people's court shall comprehensively take into account the transaction nature, purpose, methods, and customary business practice between the parties, the category, quantity and nature of the subject matter, the circumstances regarding installation and use, the nature of any defects, the duty of reasonable care to be assumed by the buyer, the inspection methods and their degree of difficulty, the specific environment at the location of the buyer or inspector and their own skills as well as other reasonable factors, and make a judgment based on the principle of good faith. (2) ‘Two years’ as prescribed in paragraph 2 of Article 158 of the Contract Law is the longest reasonable period. This period is a non-variable period and does not apply to provisions on the suspension, interruption or extension of the statute of limitations. Article 18 Interpretation No. 8 [2012] of the Supreme People’s Court (1) Where the inspection period agreed upon is too short, if according to the nature of the subject matter and the customary business practice, the buyer cannot complete full inspection within the inspection period, the people's court shall determine that such an inspection period is the period during which the buyer can raise an objection to external defects and shall, according to the provisions of paragraph 1 of Article 17 of this Interpretation, determine the reasonable period during which the buyer can raise an objection to latent defects. (2) Where the inspection period agreed upon or the quality guarantee period is shorter than that as prescribed in laws and administrative regulations, the people's court shall determine that the inspection period or quality guarantee period is subject to such provisions of laws and administrative regulations. Article 19 Interpretation No. 8 [2012] of the Supreme People’s Court Where the buyer raises an objection within the reasonable period, if the seller claims that the buyer has waived the objection on the grounds that the buyer has made payment, confirmed the amount owed, or used the subject matter, the people's court shall not support such claims, except where the parties have agreed otherwise. Article 20 Interpretation No. 8 [2012] of the Supreme People’s Court (1) After the inspection period, the reasonable period, and the two-year period as prescribed in Article 158 of the Contract Law have passed, where the buyer claims that the quantity or quality of the subject matter does not comply with the contractual agreement, the people's court shall not support such claims.

11 Interpretation No. 8 [2012] of the Supreme People’s Court on Issues Concerning the Application of Law for the Trial of Cases of Disputes over Sales Contracts, adopted at the 1545 th session of the Judicial Committee of the Supreme People’s Court on 31 March 2012.

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E. Sampling of Laws (2) After the seller voluntarily assumes liability for breach of contract, where the seller retracts the assumption of liability on the ground that the time periods mentioned in the preceding paragraph have expired, the people’s court shall not support such a retraction.

The new CCC regulates the duty to examine and to notify in Articles 620-624 which 24 to a large extent reflect the previous legal situation. Articles 620 and 621 CCC are copies of the Articles 157 and 158 Chinese Contract Law and the Articles 622-624 CCC reflect some provisions of the Interpretation No. 8 [2012] of the Supreme People's Court and thus replace them: Article 622 CCC resembles the content of Article 18 Interpretation No. 8 [2012] of the Supreme People's Court, Article 623 CCC adopts the content of Article 15 Interpretation No. 8 [2012] of the Supreme People's Court, and Article 624 CCC assumes the content of Article 16 Interpretation No. 8 [2012] of the Supreme People's Court. However, provisions similar to Articles 17, 19 and 20 Interpretation No. 8 [2012] of the Supreme People's Court are missing within the new CCC. This means that they remain applicable even in the new legal environment until the Chinese Supreme Court publishes new interpretations to replace them. Articles 620-624 CCC read as follows: Article 620 Chinese Civil Code Upon receipt of the subject matter, the buyer shall inspect it within the agreed inspection period. Where no inspection period is agreed, the buyer shall promptly inspect the subject matter. Article 621 Chinese Civil Code (1) Where the parties have agreed upon an inspection period, the buyer shall notify the seller of any non-compliance in quantity or quality of the subject matter within such inspection period. Where the buyer is remiss in notifying the seller, the quantity or quality of the subject matter is deemed to comply with the contract. (2) Where no inspection period is agreed, the buyer shall notify the seller within a reasonable period, commencing on the date when the buyer discovered or should have discovered the quantity or quality non-compliance. If the buyer fails to notify within a reasonable period or fails to notify within 2 years, commencing on the date when it received the subject matter, the quantity or quality of the subject matter is deemed to comply with the contract, except that if there is a warranty period in respect of the subject matter, the warranty period applies and supersedes such two year period. (3) Where the seller knows or should know the non-compliance of the subject matter, the buyer is not subject to the time limits for notification prescribed in the preceding two paragraphs. Article 622 Chinese Civil Code (1) Where the inspection period agreed upon by the parties is so short that, based on the nature of the subject matter and transaction practices, it is difficult for the buyer to complete a comprehensive inspection during the inspection period, the period shall be treated only as a period for the buyer to raise an objection to an apparent defect. (2) If the agreed inspection period or warranty period is shorter than that prescribed by the laws and administrative regulations, the period prescribed by the laws and administrative regulations shall prevail. Article 623 Chinese Civil Code Where the parties fail to agree on an inspection period, and the delivery note, acknowledgment, and the like signed by the buyer state the quantity, model, and specifications of the subject matter, the buyer shall be presumed to have made an inspection in respect of quantity and apparent defects, in the absence of sufficient evidence to the contrary. Article 624 Chinese Civil Code Where a seller delivers the subject matter to a third party on the buyer's instructions, and the inspection standards agreed upon by the seller and the buyer are inconsistent with those agreed upon by the buyer and the third party, the inspection standards agreed upon by the seller and the buyer shall prevail.

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F. Commentary I. Duty to Examine 1. Nature and Extent of the Examination a) General 25

Article 38(1) CISG does not contain any specific indications as to the nature and extent of the examination. It is primarily determined by contractual agreements (Article 6 CISG) and commercial practices or usages (Article 9 CISG). The buyer must undertake a reasonable examination in line with commercial practice: it must be thorough and competent.12 Thereby, the circumstances of the case at hand take on a key role. The examination must be capable of revealing non-conformities. The buyer is only bound to undertake an examination that is reasonable. For example, he does not need to apply any means of examination that are not available to him in his own country, even if they are normally found in other countries.13 b) Important Criteria for Defining the Nature and Extent of the Examination aa) Type and Quantity of the Goods

The type and quantity of the consignment is an important criterion for defining the required means of examination.14 Generally-speaking, a reliable examination requires all goods to be properly examined. However, this is not always possible in the case of bulk consignments. Here, it is sufficient but also necessary for representative samples to be taken from the bulk of the consignment. The range of samples is determined in line with any commercial usages or contractual agreements relating to the type of goods involved. As a general rule, samples will only be accepted as representative if they have been taken from several cans, cartons, layers, consignments or several places within a packed unit (i.e. not only from the top layer of the goods). Under certain circumstances, the buyer will be relieved of the obligation to properly examine the quality of the samples. This can be the case, for instance, if an examination risks considerably devaluing the purchased goods or rendering them unsaleable (e.g. opening large gas canisters, thereby causing the gas to escape).15 In these cases, a superficial examination of the goods suffices. 27 Perishables (especially exotic fruits, vegetables or fresh seafood), in particular, must be quickly examined and non-conformities quickly notified. This rules out time-consuming examination methods and restricts the scope of the examination. Generallyspeaking, it is sufficient to perform a simple examination (with reference to appearance, odour or dissecting individual fruits and tasting). If a simple examination gives rise to suspicion, then a chemical or technical examination (e.g. a cooking test) should be considered. 28 If complicated technical goods are involved, it will be sufficient but necessary to examine the working condition of the goods, which usually requires them to be put 26

12 See Magnus, in Honsell (ed), Kommentar zum UN-Kaufrecht (2nd edn., Springer 2010) Article 38 CISG para. 15; Magnus, in Staudinger Kommentar zum Bürgerlichen Gesetzbuch mit Einführungsgesetz und Nebengesetzen, Wiener UN-Kaufrecht (CISG) (17th edn., Sellier/de Gruyter 2018) Article 38 CISG paras 28, 31. 13 Honsell/Magnus (n 12) Article 38 CISG para. 18; Staudinger/Magnus (n 12) Article 38 CISG para. 32. 14 See with regard to this aspect more detailed Janssen (n 2) pp. 136 et seq. 15 Honnold, Uniform Law for Sales under the 1980 United Nations Convention (4 th edn., Wolters Kluwer 2009) para. 252.

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into operation. In order to examine their working condition, the equipment must be put into operation and observed for a substantial period of time. If the buyer is the final customer he must examine the item extensively, thoroughly and with regard to all its main operational processes. However, it is not necessary to examine all functions in detail. The buyer will be subject to stricter examination requirements if a lack of conformity 29 entails considerable consequential damages. In view of this, it is reasonable to expect the buyer to bear additional, exceptional expenses. It is not sufficient to examine the item’s properties without at least testing its working condition if a lack of conformity (e.g. in the case of vehicles or explosives) could present a risk to life and limb. bb) Position of the Buyer in Business Dealings Besides the type and quantity of the consignment, a further criterion in determining 30 the duty to examine is the buyer’s standing in business dealings16. Accordingly, a certain degree of importance will be attached to his expertise. If an item is sold to an expert he will be subject to more stringent requirements regarding the nature and extent of the expected examination than a lay person.17 Even the size of the company can play a role in this respect. This is because large firms will have greater (personnel) resources to undertake a proper examination. It is assumed that those companies will have greater technical skill at their disposal, thereby justifying the expectation of a particularly thorough examination.18

2. Beginning of the Examination Period The examination period commences once the goods have been delivered, subject to 31 the exceptions in Article 38(2)(3) CISG, contractual agreements, commercial practices or usages to the contrary. In other words, the goods must be placed at the buyer’s disposal, at the place of delivery (as specified in the contract or Article 31 CISG), by the agreed delivery date (see Article 33 CISG). a) Distance Sales and Sales on Location In the case of distance or local sales, the examination period starts as soon as the 32 goods are handed over to the buyer. In the latter case, the place of examination regarding specific and generic stock goods or goods to be manufactured or produced, is the place where the goods are located, if the parties knew the goods were there or would be there when concluding the contract (see Article 31(b) CISG). Concerning all other local sales, the place of examination will be the seller’s place of business (see Article 31(c) CISG). In the case of a distance sale, the examination will be performed at the place of destination agreed in the contract or resulting from business practice. b) Distance Sale Article 38(2) CISG regulates distance sales (the typical form of transaction in inter- 33 national trade), despite the fact that it appears to be an exception to Article 38(1) 16

407.

Similarly Schlechtriem & Schroeter, Internationales UN-Kaufrecht (6 th edn., Mohr Siebeck 2016) para.

17 Landgericht Stuttgart (Germany) 31 August 1989, CISG-online 11; Oberlandesgericht München (Germany) 11 March 1998, CISG-online 310; Heilmann, Mängelgewährleistung im UN-Kaufrecht: Voraussetzungen und Rechtsfolgen im Vergleich zum deutschen internen Kaufrecht und zu den Haager Einheitlichen Kaufgesetzen (Duncker & Humblot 1994); Schwenzer (n 2) Article 38 CISG para. 13. 18 See Oberster Gerichtshof (Austria) 15 October 1998, CISG-online 380; Staudinger/Magnus (n 12) Article 38 CISG para. 45.

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CISG. Paragraph 2 modifies paragraph 1 regarding the examination period and place of examination for distance sales. Accordingly, the period will only commence once the goods have arrived at their destination and are placed at the buyer’s disposal. In the absence of this rule, the buyer in a distance sale would have to examine the goods as soon as they are handed over to the first carrier (Article 38(1) CISG in conjunction with Article 31(a) CISG) because this suffices to satisfy the seller’s obligation to deliver the goods. However, the buyer is often unable to perform the examination at this place and time which is why Article 38(2) CISG defers the duty of examination in a distance sale to a different point in time than the one provided for in Article 38(1) CISG. On the other hand, the examination can still be carried out at the intended destination. Although Article 38(2) CISG serves to benefit the buyer, its scope only extends to contracts that involve the carriage of goods. c) Redirection and Redispatch 34

In the case of redirection or redispatch pursuant to Article 38(3) CISG, the beginning of the examination period will be deferred to the time of arrival at the new destination. The reason for this is the same as in the case of Article 38(2) CISG, namely that it is impossible or unreasonable for the buyer to perform the examination. However, it is questionable whether Article 38(3) CISG will also apply if the buyer’s customer receives the goods directly from the buyer without the need for additional transportation. In such cases, Article 38(3) CISG will apply mutatis mutandis.19 This is the only effective way of avoiding delay or the need to repackage the goods at great expense. The beginning of the examination period will only be deferred pursuant to Article 38(3) CISG if the buyer did not have a reasonable opportunity to examine the goods. The length of time the buyer held on to the goods is an important factor when considering whether this was the case or not.20 Accordingly, he would hardly ever have an opportunity to examine the goods in the case of redirection. Concerning redispatch, an examination will often be omitted if the goods are immediately forwarded. However, the buyer is normally expected to take samples or superficially examine the goods where possible. 21 In addition, it is required that ‘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’. This will be the case if the seller was positively aware or negligently unaware of possible changes to the destination.22 This is to be determined by actual evidence (as opposed to the abstract possibility), from which the average seller could deduce final changes to the destination when concluding the contract.23

3. Calculation of the Examination Period a) Examination with as Short a Period as is Practicable in the Circumstances 35

Article 38(1) CISG does not require an examination within a short period but only ’within as short a period as is practicable in the circumstances’. Bearing in mind 19 Oberlandesgericht Saarbrücken (Germany) 13 January 1993, CISG-online 83; Staudinger/Magnus (n 12) Article 38 CISG para. 59. 20 Obergericht des Kantons Luzern (Switzerland) 8 January 1997, CISG-online 228; Heilmann (n 17) p. 300; Schwenzer (n 2) Article 38 CISG para. 25. 21 Kuhlen, Produkthaftung im internationalen Kaufrecht (Wittmann 1997) p. 88; Staudinger/Magnus (n 12) Article 38 CISG para. 60. 22 Illustrative Internationales Schiedsgericht der Bundeskammer der gewerblichen Wirtschaft in Österreich (Austria) 15 June 1994, CISG-online 120. 23 Honsell/Magnus (n 12) Article 38 CISG para. 32; Staudinger/Magnus (n 12) Article 38 CISG para. 62.

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the diversity in international trade, the creators of the CISG were wise enough not to introduce any periods fixed by days, weeks or months. Article 38(1) CISG grants the necessary flexibility in interpretation to accommodate the circumstances of each individual case and thereby avoid the unfairness that a fixed time period would inevitably cause. Thus, fixed standard periods for the examination cannot be relied on. However, the following outlines the most important factors affecting the length of the examination period. b) Criteria for Calculating the Examination Period aa) Type and Quantity of the Goods The length of the examination period primarily depends on the type and extent of 36 examination which can reasonably be expected with view to the type and quantity of the goods involved. Generally speaking, the more precise and comprehensive the examination needs to be, the more time the buyer must be granted. Whether the examination period should be extended when bulk consignments of similar articles are involved largely depends on the examination to be performed. If the examination is simple, only requiring a few samples to be taken and analysed, the examination period will be shorter than for an examination involving a larger number of samples and incurring greater expenses. In general, it can be assumed that the examination period will be longer when bulk consignments are involved as more samples need to be taken and examined.24 If perishables are concerned the examination period is subject to particularly strict 37 requirements.25 The total period, consisting of the period to examine and the period to notify, can then be reduced to a few days or even hours. Live molluscs need to be examined within two to eight hours after delivery; an examination after one week was considered delayed.26 A total period of seven days was held to be too long in the case of pickled gherkins.27 On the other hand, a notice three days after the delivery of contaminated bacon was met with no objections.28 Cut flowers are to be examined and non-conformities reported no later than one day after receiving the goods;29 for mandarins, the examination period is no longer than one or two days.30 In the case of complicated equipment, a mere visual inspection is insufficient. In- 38 stead, it is necessary to examine the working condition. This usually takes place by putting the equipment into operation. If extensive test runs or even serial productions are required, the examination period must be determined in such a way that the buyer is able to clarify whether any deficiencies in the working condition are due to non-conformities in the equipment or mistakes in operation.31 The examination period can be extended if the buyer has to take appropriate construction measures before he is in a position to set up the equipment.32 It can therefore be stated with certainty See also Heilmann (n 17) p. 296; Staudinger/Magnus (n 12) Article 38 CISG para. 40. Heilmann (n 17) p. 296; Honnold (n 15) para. 257; Kuhlen (n 21) p. 90; Schwenzer (n 2) Article 38 CISG para. 16; Staudinger/Magnus (n 12) Article 38 CISG para. 40. 26 Audienca Provincial de Girona (Spain) 21 January 2016, CISG-online 2729; Staudinger/Magnus (n 12) Article 39 CISG para. 40. 27 Oberlandesgericht Düsseldorf (Germany) 8 January 1993, CISG-online 76. 28 Landgericht Bielefeld (Germany) 18 January 1991, CISG-online 174. 29 Oberlandesgericht Saarbrücken (Germany) 3 June 1998, CISG-online 354. 30 Rechtbank Zeeland-West-Brabant (The Netherlands) 30 September 2015, available at https://uitsprak en.rechtspraak.nl/inziendocument?id=ECLI:NL:RBZWB:2015:8696. 31 Schwenzer (n 2) Article 38 CISG para. 17; Staudinger/Magnus (n 12) Article 38 CISG para. 41. 32 Tannò, Die Berechnung der Rügefrist im schweizerischen, deutschen und UN-Kaufrecht (Dike 1993) pp. 197 et seq. 24

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that, if consignments consist of complicated equipment, the examination period will be extended by several weeks or even months depending on the circumstances.33 39 The requirements imposed on the buyer for the examination tend to increase in accordance with the potential damage that could result from a lack of conformity.34 In order to satisfy these stricter requirements, the buyer must be granted the additional time necessary to do so. On the other hand, the examination of potential damage also has to be performed very efficiently. These two conflicting factors (i.e. of particular thoroughness and the particular speed of the examination), mean that it is difficult to calculate the period allowed for the examination. Depending on the case in question, it may last days, weeks and, if the examination is particularly laborious, even months.35 bb) Position of the Buyer in Business Dealings 40

The position of the buyer in business dealings also plays a role in determining the duration of the examination. However, international sales law recognises that obstacles to examining the goods on time should operate to the detriment of the buyer if he is personally responsible for them.36 Factors such as internal organisational difficulties, days off, a lack of commercial or international experience, sickness or lack of legal knowledge are not to be taken into account.37 At most, these factors can be employed to justify a reasonable excuse under Article 44 CISG. The size of the buyer’s company, however, is a personal circumstance that can be considered.38 cc) External Factors

41

The duration of the examination period can also be affected by factors over which the parties have no control. Such factors particularly include contingencies and force majeure. Examples are protests, strikes (if they are beyond the buyer’s control), acts of nature (such as floods or earthquakes), pandemics and political imprisonment.39 The examination and notification periods will be extended for as long as such obstacles exist. However, the buyer is obliged to give notice of the obstacles to the seller as soon as possible. Neither statutory holidays nor Saturdays or Sundays are to be included in the calculation of the examination period.40

4. Costs of Examination 42

The buyer bears the costs of the examination. The costs include not only the costs of the examination procedure itself, the loss in value that the goods suffer due to the examination, but also the costs of deploying (necessary) experts. However, if the goods 33 Bundesgerichtshof (Germany) 3 November 1999, CISG-online 475; Heilmann (n 17) p. 296; Schwenzer (n 2) Article 38 CISG para. 17; Staudinger/Magnus (n 12) Article 38 CISG paras 41, 43. 34 Oberlandesgericht Köln (Germany) 21 August 1997, CISG-online 290; Landgericht Aschaffenburg (Germany) 20 April 2006, CISG-online 1446; Schwenzer (n 2) Article 38 CISG para. 13. 35 Tannò (n 32) p. 196. 36 Heilmann (n 17) p. 296; Honsell/Magnus (n 12) Article 38 CISG para. 23; Schwenzer (n 2) Article 38 CISG para. 18; Staudinger/Magnus (n 12) Article 38 CISG para. 49. 37 Janssen (n 2) pp. 139 et seq. 38 See more detailed and with further references Janssen (n 2) pp. 139 et seq.; Kröll (n 2), Article 38 CISG para. 95. 39 Honsell/Magnus (n 12) Article 38 CISG para. 22; Schwenzer (n 2) Article 38 CISG para. 18; Staudinger/Magnus (n 12) Article 38 CISG para. 44. 40 Oberlandesgericht Köln (Germany) 22 February 1994, CISG-online 127; Amtsgericht Kehl (Germany) 6 October 1995, CISG-online 162; Honsell/Magnus (n 12) Article 38 CISG para. 22; Staudinger/ Magnus (n 12) Article 38 CISG para. 46, Article 39 CISG para. 46.

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delivered are not in conformity with the contract within the meaning of Article 35 CISG and the buyer gives notice thereof within the period provided in Article 39 CISG, he can seek to recover such costs by claiming damages (see Articles 45(1)(b), 74 CISG).

5. Comparative Remarks For comparative remarks see later → mn. 64 et seq. of this Chapter.

43

II. Duty to Notify 1. Content of Notice One issue that has regularly occupied courts and arbitral tribunals is the obligation 44 in Article 39(1) CISG to specify the nature of the lack of conformity. General objections such as ‘poor workmanship and improper fit’,41 ‘the items display defects that preclude payment’ and they ‘do not conform to the contractual specifications’42 or general expressions of dissatisfaction such as ‘miserable quality’43 or ‘take your rubbish back’44 are insufficient.45 Rather, the notice must identify the relevant items and their non-conformities and describe the extent to which they are affected.46 It is however not necessary to give the reasons for a lack of conformity.47 Giving notice of one issue of non-conformity does not exempt the buyer from having to notify of other non-conformities or ones that appear later. In such cases, notice must be given again.48 In Germany, very strict national standards were sometimes applied to the CISG that 45 operated to the buyer’s disadvantage. In one case, the Higher Regional Court Frankfurt49 held the buyer’s notice (i.e. that ‘the shoes supplied are defective in all styles – both quilted and turnover’) to be inadequately substantiated. The Regional Court Marburg50 also rejected a notice as unsubstantiated because the buyer had not marked the machine in question with its model and delivery date even though he had purchased the machine from the seller in the same year the notice was issued. The Regional Court Regensburg 51 also held a notice that stated ‘the material expanded after washing and did not hang properly’ to be too general. Since then, however, the German Federal Supreme Court has established a less strict criterion, thereby following the international trend not to

41 Landgericht München (Germany) 3 July 1989, CISG-online 4. Cf. DiMatteo, International Contracting: Law and Practice (4th edn., Wolters Kluwer 2016) pp. 314 et seq. 42 Handelsgericht des Kantons Zürich (Switzerland) 30 November 1998, CISG-online 415. 43 Oberlandesgericht Saarbrücken (Germany) 3 June 1998, CISG-online 354. 44 Landgericht Kleve (Germany) 15 November 2017, CISG-online 2968. 45 Heilmann (n 17) p. 126; Schwenzer (n 2) Article 39 CISG para. 7; Staudinger/Magnus (n 12) Article 39 CISG para. 21. 46 Piltz, Internationales Kaufrecht: Das UN-Kaufrecht in praxisorientierter Darstellung (2 nd edn., C.H. Beck 2008) para. 5-92; Kröll (n 2) Article 39 CISG paras 33, 36; Staudinger/Magnus (n 12) Article 39 CISG paras 24 et seq. See also Article 39(4) of the Opinion No. 2 of the CISG-AC. 47 Bundesgerichtshof (Germany) 3 November 1999, CISG-online 475; Schwenzer (n 2) Article 39 CISG para. 8. 48 Honsell/Magnus (n 12) Article 39 CISG para. 12; Piltz (n 46) para. 5-95; Schwenzer (n 2) Article 39 CISG para. 10; Staudinger/Magnus (n 12) Article 39 CISG para. 22. 49 Oberlandesgericht Frankfurt (Germany) 8 January 1994, CISG-online 123. 50 Landgericht Marburg (Germany) 12 December 1995, CISG-online 148. 51 Landgericht Regensburg (Germany) 24 September 1998, available at http://www.unilex.info/cisg/case /507.

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exaggerate the need to specify the non-conformity in order to avoid burdening the buyer unduly.52

2. Form of Notice 46

Subject to contrary agreements, practices or usages, notice can be given in any form (see Article 11 CISG). However, a written notice is preferable on evidential grounds alone. As Opinion No. 1 of the CISG Advisory Council on Electronic Communications under the CISG correctly stated, the term ‘notice’ also includes electronic communications (e.g. emails, SMS). In this respect, the buyer must generally use the language of the contract unless he communicates the notice of non-conformity using a language that the seller can understand without difficulty.53 The buyer does not have to mention the remedies he wishes to rely on when giving notice. However, the form of the notice is restricted to some extent by Article 27 CISG. This provision requires notice to be given using means that are ‘appropriate in the circumstances’. Accordingly, standard post is e.g. inappropriate as a means of communication in cases of delivery of perishables.

3. Beginning of the Notification Period 47

As far as the start of the notification period is concerned, a distinction is to be made between open and hidden defects, depending on how obvious they are. Whether the defect is open or hidden, is to be determined by the type and scope of the examination required. a) Open Defects

First and foremost, open defects cover all apparent non-conformities. These are nonconformities that can be immediately detected by sensory perception alone (e.g. usually under-deliveries).54 Such cases only require notice but no examination. Therefore, the period can be determined by simply considering the time needed for the notification. A total period (i.e. consisting of examination and notification period) does not apply here. The notification period commences as soon as the goods have been delivered. Any non-conformities known to the buyer at the moment of or immediately after delivery (i.e. not when the contract is concluded) will be considered open defects.55 The source of such knowledge is irrelevant: it can stem from a bill of lading accompanying the goods or submitted prior to their arrival or be based on other factors (i.e. origin of the goods from an area since proved to be contaminated). 49 Open defects also include non-conformities which have been detected during a proper examination or which should have been detected but were neither obvious nor known to the buyer.56 In such cases, a total period is granted, consisting of the time needed for examination and notice. The total period commences when the examination period commences (i.e. usually on delivery to the buyer). The notification period itself commences as soon as the buyer detects or should have detected the non-conformity (i.e. directly after the examination period). 48

52 Bundesgerichtshof (Germany) 3 November 1999, CISG-online 475; Bundesgerichtshof (Germany) 25 June 1997, CISG-online 277. Cf. in more detail Schlechtriem & Schroeter (n 16) para. 416. 53 Honsell/Magnus (n 12) Article 39 CISG para. 24; Staudinger/Magnus (n 12) Article 39 CISG para. 51. 54 Heilmann (n 17) p. 313. See also Article 39(4) CISG of the Opinion No. 2 of the CISG-AC. 55 Heilmann (n 17) p. 313; Schwenzer (n 2) Article 39 CISG para. 19. 56 Heilmann (n 17) pp. 314 et seq.; Schwenzer (n 2) Article 39 CISG para. 19; Staudinger/Magnus (n 12) Article 39 CISG para. 30.

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b) Hidden Defects Defects are deemed to be hidden if they cannot be detected by a proper examination 50 and are not known to the buyer (e.g. a defect in a machine that only reveals itself after a longer period of serial production).57 Generally, the period does not consist of a total period because the standard here can simply be constituted by the time needed for giving notice. The beginning of the notification period is usually the moment the buyer actually discovers the hidden defect.58 In this case, there is no general duty to examine.59 However, if a defect is only suspected after a while the buyer is compelled to start examining.60 If he fails to do so or performs too superficial an examination any non-conformity will be deemed to be discovered in accordance with the time required by an appropriate examination.61

4. Calculation of Notification Period a) Notification within a Reasonable Period According to Article 39(1) CISG, the buyer has to give notice of the lack of confor- 51 mity ’within a reasonable time’. How the length of the notification period should be determined is one of the most intractable challenges presented by the CISG. At least there is agreement that the period is not long in duration.62 Some authors63 and courts64 argue that a notice must always be given promptly (as in the case of Article 39(1) ULIS), which requires the buyer to act as quickly as possible. This is contradicted by the fact that the period was changed from ‘promptly’ (Article 39(1) ULIS) to a ‘reasonable time’ (Article 39(1) CISG). This was because the competent working group at UNCITRAL took the view that the notification period of the ULIS was too inflexible and severe.65 Hence, Article 39 CISG is clearly formulated in a way that is more beneficial to the buyer than was the case with the ULIS. A strict interpretation is also opposed by the fact that it ignores the legal traditions of many domestic laws that either do not have any duty to notify or only one that is less strict. A very strict interpretation would therefore run counter to the requirement of uniform application of the CISG under Article 7(1) CISG. For this reason, the compromise duration of one week advocated by some German 52 commentators66 and courts especially from the German law family67 is arguably too restrictive. Rather, a notification period should last around one month in order to 57 Bundesgerichtshof (Germany) 3 November 1999, CISG-online 475; Heilmann (n 17) pp. 323 et seq.; Schwenzer (n 2) Article 39 CISG para. 21; Staudinger/Magnus (n 12) Article 39 CISG para. 31. 58 Schwenzer (n 2) Article 39 CISG para. 21; Tannò (n 32) pp. 277 et seq. 59 Honsell/Magnus (n 12) Article 39 CISG para. 17; Schwenzer (n 2) Article 39 CISG para. 21; Staudinger/Magnus (n 12) Article 39 CISG para. 32. 60 Bundesgerichtshof (Germany) 3 November 1999, CISG-online 475. 61 Bundesgerichtshof (Germany) 3 November 1999, CISG-online 475; Heilmann (n 17) pp. 323 et seq.; Tannò (n 32) pp. 277 et seq. 62 Oberster Gerichtshof (Austria) 15 October 1998, CISG-online 380; Honnold (n 15) para. 257; Staudinger/Magnus (n 12), Article 39 CISG para. 35. 63 Heilmann (n 17) p. 323 (‘almost no differences with regard to the length of the notification period’); Tannò (n 32) pp. 272, 280. 64 E.g. Rechtbank van Koophandel te Hasselt (Belgium) 21 January 1997, CISG-online 360. 65 Honsell/Magnus (n 12) Article 39 CISG para. 19. 66 Honsell/Magnus (n 12) Article 39 CISG para. 21; Piltz (n 46) para. 5–67 (two weeks for examination and notification). 67 See Landgericht Mönchengladbach (Germany) 22 May 1992, CISG-online 56 (one week); Oberlandesgericht Karlsruhe (Germany) 25 June 1997, CISG-online 263 (five–six days for notification). Similar Oberster Gerichtshof (Austria)15 October 1998, CISG-online 380 and Oberster Gerichtshof (Austria) 16 December 2015, CISG-online 2663 (two weeks for examination and notification).

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be deemed reasonable.68 The German Federal Supreme Court has also established (hesitantly at first,69 but now routinely)70 a regular notification period of approximately one month (the so-called ‘noble month’).71 Courts in other European countries have also accepted a notification period of one month.72 One must however always bear in mind that the period stated here provides nothing more than a rough estimate with limited significance since the issue will always centre around the circumstances of the individual case.73 It is also noteworthy that the courts in countries which provide in their domestic laws either generous notification periods or none at all (e.g. Belgium, France or the USA), have also accepted considerably longer notification periods (of up to several months) in relation to the CISG.74 b) Criteria to Determine the Length of the Notification Period 53

The question at hand is whether the criteria concerning the duration of the examination period can also influence the notification period. aa) Type and Quantity of the Goods

54

As shown above, the type and quantity of the consignment can considerably influence the length of the examination period.75 This only applies to the determination of the notification period to a certain extent. Accordingly, bulk shipments or the supply of complicated equipment generally serve to extend the examination period. Such factors do however not make any difference to the length of the notification period. For instance, if non-conformity is only discovered, or at least becomes apparent, after an examination (however time-consuming), there is no reason to grant the buyer more time for the notice. On the other hand, the situation will be different where perishables are concerned. If the non-conformity of such goods is discovered or had to be discovered notice must be given very quickly due to the imminent need to act.76 Here, the period will often be reduced to one day or even a few hours.

68 Similarly Janssen (n 2) pp. 175 et seq.; Kröll (n 2) Article 39 para. 86; Schlechtriem & Schroeter (n 16) para. 413; Schwenzer (n 2) Article 39 CISG para.17. 69 Bundesgerichtshof (Germany) 15 February 1995, CISG-online 149. 70 Bundesgerichtshof (Germany) 3 November 1999, CISG-online 475. 71 See e.g. Baasch-Andersen, ‘Article 39 of the CISG and its “Noble Month” for the Notice-giving: A (gracefully) ageing doctrine?’ (2012) 30 J.L. & Com. 185; Kröll (n 2) Article 39 CISG para. 81; Schwenzer, ‘The Noble Month (Articles 38, 39 CISG) – The Story behind the Scenery’ (2006) 7 European Journal of Law Reform 353. 72 See e.g. Bundesgericht (Switzerland) 13 November 2003, CISG-online 840; Obergericht des Kantons Luzern (Switzerland) 8 January 1997, CISG-online 228; Court of First Instance of Athens (Greece) 1 January 2009, CISG-online 2294; Rechtbank Kortrijk (Belgium) 4 June 2004, CISG-online 945. 73 See also Article 39(3) Opinion No. 2 of the CISG-AC. 74 Sky Cast, Inc v Global Direct Distribution, LLC, US Dist. Ct. (E. D. Ky.) (USA) 18 March 2008, CISGonline 1652 (eleven months held within the time limit); TeeVee Tuns, Inc. & Steve Gottlieb, Inc. v Gerhard Schubert GmbH, US Dist. Ct. (S. D. N. Y.) (USA) 23 August 2006, CISG-online 1272 (approx. two months were deemed reasonable without any detailed justification being given); Cour d'appel d' Aix-en-Provence (France) 1 July 2005, CISG-online 1096 (over two months); Cour d'appel Versailles (France) 29 January 1998, CISG-online 337 (six/eleven months); Hof van Beroep Gent (Belgium) 4 October 2004, CISG-online 985 (nine months). Similar CIETAC (China) 3 June 2003, CISG-online 1451 (nine months). 75 See → mn. 36 et seq. 76 Rechtbank Roermond (The Netherlands) 19 December 1991, CISG-online 29; Rechtbank Rotterdam (The Netherlands) 21 November 1996, CISG-online 541; Rechtbank Zwolle (The Netherlands) 5 March 1997, CISG-online 545; Oberlandesgericht Karlsruhe (Germany) 25 June 1997, CISG-online 263; Oberlandesgericht Saarbrücken (Germany) 3 June 1998, CISG-online 354; Heilmann (n 17) p. 296; Honnold (n 15) para. 257; Kuhlen (n 21) p. 90; Schwenzer (n 2) Article 39 CISG para. 16.

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bb) Position of the Buyer in Business Dealings and the Influence of External Factors The comments made on this point above with view to the length of the examination 55 period also apply to the determination of the notification period.77 Accordingly, purely personal reasons of the buyer that serve to delay or prevent notice will not be taken into account in relation to the notification period. However, the size of the company can also influence the length of the notification period. The effect of external factors such as contingencies, force majeure, Saturdays and Sundays and public holidays is the same as in determining the length of the examination period.78 cc) Type of Remedy Chosen Concerning the CISG, the question arises whether the type of legal remedy chosen 56 influences the duration of the notification period. Some authors favour granting the buyer a more generous notification period if he merely claims damages or price reduction (i.e. ultimately, he wishes to keep the goods).79 This can be supported as the reasonable period for giving notice is clearly flexible enough to take account of such circumstances. In addition, this view is supported by the travaux préparatoires to the reasonable notification period of Article 39(1) CISG.80 Last but not least, Article 44 CISG itself makes a corresponding distinction between damages and price reduction on the one hand and remaining remedies like avoidance on the other.

5. Complying with the Notification Period a) Dispatch Principle in Accordance with Article 27 CISG Article 27 CISG governs the risk of sending notices, requests or other communica- 57 tions. Accordingly, the recipient and not the sender bears the risk of loss or delay. The dispatch principle applies in relation to all communication that falls within the scope of Article 27 CISG which includes the notification of non-conformities under Article 39(1) CISG. As a result, those notices do not require acceptance and the seller bears the risk of a delayed or lost notice.81 The buyer only bears the burden of proof with regard to the fact that the notice was properly dispatched. b) Conditions It is only possible to be released from the risk of transmission if the statement 58 was made ‘by means appropriate in the circumstances’ (Article 27 CISG). A means is deemed to be appropriate if an reasonable sender can assume that his message will thereby reach the addressee with the expected speed and certainty taking into account the circumstances of the case.82 Depending on the circumstances (e.g. if perishables are involved), the sender must use an especially expedient means of transmission or, if all transmission methods are unreliable, several of them at once.83 The standard is always reasonableness.84 Obviously, the question whether the means of transmission is See → mn. 40. See → mn. 41. 79 Schwenzer (n 2) Article 39 CISG para. 16; Staudinger/Magnus (n 12) Article 39 CISG para. 48. 80 United Nations, United Nations Commission on International Trade Law (UNCITRAL), Yearbook III (1972) 87. 81 Heilmann (n 17) p. 326; Honsell/Magnus (n 12) Article 39 CISG para. 23; Staudinger/Magnus (n 12) Article 27 CISG paras 1, 7. 82 Staudinger/Magnus (n 12) Article 27 CISG para. 17. See also Heilmann (n 17) p. 329. 83 Heilmann (n 17) p. 328. 84 Staudinger/Magnus (n 12) Article 27 CISG para. 17. 77 78

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appropriate will depend on the statement being sent to the right addressee at the right address. 59 The relevant point in time for transferring the risk of transmission is the dispatch of the statement despite the fact that the CISG only requires that communication be ‘given or made’. The condition is that the statement must leave the sender’s sphere of control.85 Dispatch therefore requires the statement to be placed in circulation in such a way that it will arrive on time and correctly – assuming the transmission method used is working properly. Although notifications do not have to reach the addressee they must be dispatched in such a way that they can reach him. c) Exceptions to Article 27 CISG aa) Statements Made Orally or by Telephone 60

It is not yet settled whether Article 27 CISG also applies to statements made orally or by telephone.86 In order to address this issue, reference must first be made to the wording. This appears to exclude oral statements insofar as it refers to ‘transmission of the communication’ and ’failure to arrive’. The meaning and purpose of the provision also argue against the inclusion of oral statements. If the person making the statement chooses to communicate orally or by telephone he is able to ensure his statement is clear and audible by asking assuring questions. By contrast, there is little opportunity to check and correct statements when using other forms of communication (e.g. letters, fax). Accordingly, Article 27 CISG does not apply to statements made by telephone, video calls or alike. They must be made to the recipient audibly in order to be received. bb) Transmission by Messenger

61

If a communication is transmitted by the sender’s employee, Article 27 CISG will not apply owing to its ratio legis; otherwise, the person making the statement would not be liable for his own staff.87 In such cases, the risk of transmission will remain with the sender until receipt. Article 27 CISG only applies if the statement has actually left the sender’s sphere of control.

6. Legal Consequences of the Violation of the Duty to Give Notice a) Forfeiture of Claims 62

If the buyer has failed to give notice, sent it off too late or if its contents are incorrect, he will in principle forfeit all legal remedies under Article 39(1) CISG that would otherwise have been available to him owing to the non-conformity. Hence, the goods will be deemed to have been finally accepted. On the other hand, hidden defects discovered later will not be deemed finally accepted and can be notified at a later point in time. Legal remedies due to mistake concerning the conformity of the goods will be excluded, even if normally provided for by applicable national law.88 A violation of the duty to notify also excludes tort claims that, under national law, could be based on the loss of value attributed to the defect. Allowing such claims would effectively enforce the

Janssen (n 2) pp. 179 et seq. For the applicability of Article 27 CISG for electronic communication see Björklund, in Kröll, Mistelis & Perales Viscasillas (eds), UN Convention on Contracts for the International Sale of Goods (CISG): Commentary (2nd edn., Beck, Hart, Nomos 2018) Article 27 CISG paras 21 et seq. 87 Heilmann (n 17) p. 329; Staudinger/Magnus (n 12) Article 27 CISG para. 18. 88 Heilmann (n 17) p. 332; Staudinger/Magnus (n 12) Article 39 CISG paras 58, 62. 85 86

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buyer’s typical contractual interest covered by Article 39 CISG.89 On the other hand, tort claims arising from the damage caused to other legal assets (consequential damages like physical harm caused by the non-conformity) will not be excluded.90 Therefore it must be examined in each case whether national law will admit such claims if the buyer has failed to give notice. b) Buyer’s Duty to Pay If the buyer violates the duty to notify he will be obliged to pay the agreed purchase 63 price (see Article 53 CISG). Accordingly, he must pay the full price in the case of under-deliveries, deliveries of poor quality goods or goods inferior to those agreed.91 On the other hand, if the buyer does not give notice that the quantity is greater than the quantity agreed, he must pay the additional price in accordance with Article 52(2) CISG. This provision will also apply if the goods delivered are of a higher value than the value agreed to in the contract (e.g. where technical improvements are made to a machine). 92

7. Comparative Remarks As already seen from the legislative samples in this Chapter,93 the situation concern- 64 ing the duty to examine and to notify differs greatly throughout the world and, bearing this in mind, the following can only be understood as a broad overview. To put it simple, there are four diverging approaches, each of which will be examined in the following. a) Systems without Duty to Examine and to Notify In some legal systems the duty to examine and to notify is either partly or wholly 65 unknown. Owing to the focus on general contract law this obligation is absent from e.g. the PECL, the PICC, and is also not recognised in the Common Law of Contracts or in the Restatement of Contracts (Second). English law only requires notice in cases where the buyer wishes to avoid the contract. According to French law, the buyer is not under a general duty to examine and to notify either. In accordance with Article 1648(1) French Civil Code, he must simply assert his rights ‘within a period of two years following the discovery of the vice’. Similar rules can be found in several other laws of the French legal tradition (e.g. under Belgian law), which refer to a ‘bref délai’ or ‘korte termijn’.94 b) Systems without Duty to Examine, but with Duty to Notify Concerning business to consumer transactions, Article 5(2) of the Consumer Sales 66 Directive 1999/44/EC (and from 1 January 2022 Article 12 of the Directive (EU) 2019/771 on certain aspects concerning contracts for the sale of goods) 95 allows EUmember states to require the consumer to inform the seller of any lack of conformity within a period of two months from the date on which he discovered non-conformity. Janssen (n 2) pp. 184 et seq. Heilmann (n 17) p. 334; Staudinger/Magnus (n 12) Article 39 CISG para. 62. 91 Oberlandesgericht Düsseldorf (Germany) 8 January 1993, CISG-online 76; Honsell/Magnus (n 12) Article 39 CISG para. 27; Schwenzer (n 2) Article 39 CISG para. 30; Staudinger/Magnus (n 12) Article 39 CISG para. 61. 92 Honsell/Magnus (n 12) Article 39 CISG para. 27; Schwenzer (n 2) Article 39 CISG para. 30; Staudinger/Magnus (n 12) Article 39 CISG para. 60. 93 See → mn. 10 et seq. 94 See e.g. Article 1648 Belgian Civil Code. 95 The Directive (EU) 2019/771 on certain aspects concerning contracts for the sale of goods will repeal the Consumer Sales Directive 1999/44/EC with effect of 1 January 2022. 89 90

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In the field of consumer sales, therefore, the Consumer Sales Directive 1999/44/EC (and then the Directive (EU) 2019/771 on certain aspects concerning contracts for the sale of goods) provide the possibility to introduce or maintain a two-month notification period.96 However, the notification period only commences once the buyer has actually discovered the lack of conformity and does thus not establish an examination duty comparable to that of the CISG. The Italian Civil Code also only provides for a duty to notify in Article 1495(1) Italian Civil Code. This provision requires the buyer to give notice of the lack of conformity within eight days after discovery. Thus, Italian law does not oblige him to examine the delivered goods. c) Systems with Explicit Duty to Notify and Implicit Duty to Examine 67

At first glance, some regulatory models provide only for a duty to notify but not a duty to examine. For instance, § 2-607(3)(a) of the UCC only expressly provides for a duty to notify ‘within a reasonable time’. However, it does not regulate the duty to examine in detail nor does it specify the conditions for notice itself. Nevertheless, by pinning the start of the notification period to the moment the buyer ‘discovers or should have discovered any breach’ the provision shows that an obligation to examine the goods does in fact exist. The situation under Dutch law is similar. Here too, Article 7:23(1)1 of the Dutch Civil Code only expressly provides for a duty to give notice (i.e. ‘with convenient speed’). The examination duty materialises indirectly when determining the commencement of the notification period: it commences as soon as the buyer ‘has discovered or reasonably should have discovered’ the lack of conformity. Dutch law only expressly excludes an examination duty in business to consumer relationships (see Article 7:23(1)3 of the Dutch Civil Code). d) Systems with Explicit Duty to Examine and to Notify

68

Most legal systems that provide for a duty to examine and to notify expressly regulate both obligations. Apart from those relating to the personal and material scope of application described in the Introductory Note, differences mainly concern the way the length of the examination and notification periods are determined. aa) Systems with Fixed Maximum Examination Period Only

69

The CESL takes an unusual and, evidently, a unique approach in this respect. Although Article 122(1) CESL provides for notification ‘within a reasonable time’ as per Article 39(1) CISG), the length of the examination period departs from the CISG. The point of departure in Article 121(1) CESL is comparable to Article 38(1) CISG insofar as the buyer is expected ‘to examine the goods (…) within as short a period as is reasonable (…).’ However, Article 121(1) CESL also stipulates that the examination period may not exceed 14 days. This must be deemed unsatisfactory because, as the comments on the examination period for the CISG have shown,97 such a period is not always sufficient in practice. There are situations such as the purchase of particular technical equipment where more time is needed to examine the delivered goods adequately. Here, the maximum period stipulated by the CESL can force the buyer into implementing a rushed and therefore inadequate examination.98 Some of the EU-member states have made use of this option (see e.g. Spain or the Netherlands). See → mn. 35 et seq. 98 Wiese, ‘Prüfungs- und Mitteilungspflichten’ in Schmidt-Kessel (ed), Ein einheitliches europäisches Kaufrecht? (Sellier 2012) pp. 401 et seq. 96

97

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bb) Systems with Fixed Maximum Examination and Notification Period Other legal systems take a different approach to that of the CESL. They impose 70 both a duty to examine and a duty to notify but, unlike the CESL, establish a fixed maximum total period consisting of the time for examination and notification. For example, in accordance with Article 336(2) Spanish Commercial Code, Spanish law stipulates a period of four days for open defects and thirty days for hidden defects (see Article 342 Spanish Commercial Code) after delivery.99 Thereby, the period for both open and hidden defects commences immediately after delivery. Mexican law is similarly strict: Article 383 Mexican Commercial Code provides for a period of five days for open defects and, like the Spanish law, thirty days for hidden defects. Here too, failing to provide notice will cause the buyer to lose his claim which may prove especially problematic in relation to hidden defects. cc) Systems with Flexible Examination and Notification Periods Several legal systems provide for flexible examination and notification periods, i.e. 71 neither period is fixed but rather determined in accordance with the circumstances. Despite comparable legislative techniques, the requirements concerning the speed with which the goods must be examined and non-conformity notified differ greatly. Legal systems from the Germanic law family prove very strict in this respect. For example, § 377(1) German Commercial Code provides that ‘the buyer must promptly examine the goods’ and also ‘promptly notify the seller’ of any non-conformities.100 In practice, this means that the buyer will only have a few days to meet this obligation (even in the case of non-perishables) if he is not to lose all rights resulting from the defect. 101 The legal situation is similar in Switzerland (Article 201B no. 4(a) Swiss Code of Obligations: ‘promptly’). In particular, systems that have modelled their duty to examine and to notify on the 72 CISG and largely adopted its standard text are less strict. This applies to IV. A.–4:301 Draft Common Frame of Reference (DCFR), for example, which describes the periods in the same way as the CISG does. The CESL establishes the periods similarly ̶ however with the exception of the fixed 14-day maximum examination period. Obviously, the courts did not have the chance to further define the length of the examination and notification periods in the DCFR and the CESL. Chinese law closely follows the CISG regarding the length of the examination and notification periods (see Article 620 sentence 2 and Article 621(2)1 CCC). Courts in the Netherlands have generally shown themselves more generous when determining the periods for examination and notification pursuant to Article 7:23 Dutch Civil Code than the courts of the Germanic legal tradition. Accordingly, total periods of several weeks or, depending on the circumstances, even several months are regularly granted for non-perishables.102 As far as the length of the examination and notification periods is concerned, § 2-607(3)(a) UCC is notably more generous. There, even notices given after a few years can still be considered ‘on time’ depending on the circumstances of the individual case.103 99 However, it is necessary to point out that the sphere of application of both provisions and the provisions themselves are highly controversial. 100 The similar §§ 377, 378 Austrian Commercial Code moved 2007 from ‘prompt notice’ to ‘notice within a reasonable time’. 101 Janssen (n 2) pp. 170 et seq. 102 See more detailed Janssen (n 2) p. 176. 103 Cf. in more detail Corey; ‘Contract Warranties and Remedies: A Comprehensive Survey of the Creation, Modification and Exclusion of Contract Warranties and Remedies for Attorneys and Contracting Professionals’ (1992) 14 Campbell Law Review 323, 341 vet seq.; Henning, ‘A Unified Rationale for Section

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As far as the examination and notification duties are concerned, therefore, the CISG occupies the middle ground between the very strict requirements of the legal systems from the Germanic law family and the more generous or completely absent regulation of such duties (e.g. in the UCC or in French Law). This compromise and the absence of fixed periods contribute invaluable flexibility to international trade and prevent Articles 38 and 39 CISG from favouring or disadvantaging one party. This, in turn, increases the international acceptance of these eminently important provisions.

III. Seller’s Actual or Constructive Knowledge of Lack of Conformity under Article 40 CISG 74

As discussed, a buyer in breach of the duty to notify will in principle forfeit all his rights arising from the lack of conformity. Exceptions are nevertheless possible. According to Article 40 CISG, a claim will not be forfeited if the lack of conformity relates to facts of which the seller knew or could not have been unaware and which he did not disclose to the buyer. This provision imposes a duty of disclosure on the seller that reflects the principle of good faith or fair dealing.104 As an exception, Article 40 CISG is to be interpreted restrictively, although it is possible to take the seller as well as his personnel or agents into account.105

1. Knowledge or Impossibility of having been Unaware 75

Knowledge can always be imputed if the seller has actively contributed to the lack of conformity (e.g. watered-down wine).106 However, the CISG only requires pure knowledge thereof, which is not always the case at national level. Accordingly, the seller does not have to act in bad faith or deliberately deceive the buyer about the lack of conformity.107 The criterion ‘could not have been unaware’ will be met if the non-conformity is one that is immediately obvious; the seller’s negligent lack of knowledge will not be sufficient. The circumstances of which the seller could not be unaware largely depend on his position in business dealings, the type of goods and the non-conformity involved.108 Accordingly, the criterion can only be regarded as satisfied if the seller has overlooked obvious and serious non-conformities of his goods that would have been apparent had he exercised the smallest degree of care (e.g. noticeably tight waistband on women’s pullovers or shoes which the seller had not checked and where the holes turned out to be too small).109 Even in the case of general variations in quantity and deliveries obviously different to those ordered, it will normally be possible to tell if the seller ‘could not have been unaware’.110 It is not necessary to establish a causal link between ‘knowledge’ or the requirement ‘could not have been unaware’ and a violation of the duty to notify. The

2-607(3)(a) Notification’ (2009) 46 San Diego Law Review 573; Prince, ‘Overprotecing the Consumer? Section 2-607(3)(a) Notice of Breach in Nonprivity Contexts’ (1987) 66 North Carolina Law Review 107, 125 et seq. 104 Heilmann (n 17) p. 340. Different Schwenzer (n 2) Article 40 CISG para. 7; Staudinger/Magnus (n 12) Article 40 CISG para. 10. See also Arbitration Institute of the Stockholm Chamber of Commerce (Sweden) 5 June 1998, CISG-online 379. 105 Schwenzer (n 2) Article 40 CISG para. 6. 106 Kröll (n 2) Article 40 CISG para. 10. 107 Kröll (n 2) Article 40 CISG para. 11. 108 Schwenzer (n 2) Article 40 CISG para. 5. 109 Cf. with further references Janssen (n 2) pp. 190 et seq. 110 Schwenzer (n 2) Article 40 CISG para. 5; Staudinger/Magnus (n 12) Article 40 CISG para. 6.

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buyer bears the burden of proving that the seller knew or had to have known the facts on which non-conformity was based.111

2. Relevant Point in Time It is unclear when exactly actual or constructive knowledge must manifest itself. 76 One view is to resort to the moment the notification period expires.112 However, the preferable view takes the delivery as the relevant point in time at the latest. 113 This is supported by the fact that also for Article 38 CISG, the time of the delivery of the goods is decisive. In addition, it is not acceptable for such important questions to be determined by reference to the end of the notification period, which is by nature flexible and imprecise.

3. Comparative Remarks Many regulatory models reflect the concept of Article 40 CISG in relation to the duty 77 to examine and to notify. This is not surprising considering that it stems from the principle of good faith or fair dealing. Nevertheless, there are some differences that entail a different allocation of risk. Whereas Article 621(3) CCC and Article 122(6) CESL do not depart from the CISG (i.e. the seller’s actual and constructive knowledge are sufficient), domestic German law reveals itself to be more beneficial for the seller. According to § 377(5) German Commercial Code, the buyer will not forfeit his claim only if the seller ‘fraudulently concealed the lack of conformity’. Spanish law similarly requires the seller to have ‘malicious intent’ (see Article 336(2) Spanish Commercial Code). The seller will thus not suffer any negative effects if he merely knew or had to have known of the nonconformity. The CESL provides another exception from the requirement to give notice that works to the buyer’s advantage. According to Article 122(5) CESL, the buyer does not have to notify the seller that the delivery is incomplete if he has reason to believe that the outstanding items will still be delivered. The main purpose of this is to prevent the buyer from forfeiting his claim if he is still awaiting an under-delivery to be corrected. The DCFR provides a similar provision in IV. A.–4.303 DCFR.

IV. Reasonable Excuse of the Buyer under Article 44 CISG As far as can be seen, Article 44 CISG is without precedent. It was not to be found 78 in the ULIS and was adopted only very late in the negotiations on the CISG, as a compromise between the different interests of the parties.114 That way, it was possible to adhere to the general duty to examine and to notify in Articles 38 and 39 CISG. Article 44 CISG allows the buyer to retain the right to price reduction under Article 50 CISG and damages under Article 45(1)(b) CISG (except for loss of profits), provided he has a reasonable excuse for failing to give sufficient notice.

111 Bundesgerichtshof (Germany) 30 June 2004, CISG-online 847; Rechtbank Roermond (The Netherlands) 19 December 1991, CISG-online 29; Schwenzer (n 2) Article 40 CISG para. 12. 112 Kuhlen (n 21) p. 97; Schwenzer (n 2) Article 40 CISG para. 8. 113 Heilmann (n 17) pp. 339 et seq.; Janssen (n 2) pp. 191 et seq. 114 Cf. Kröll (n 2) Article 44 paras 2 et seq.; Schwenzer (n 2) Article 44 CISG para. 2 (both with further references).

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1. Scope 79

According to its wording, the provision excuses the failure to notify if the buyer has not given notice of non-conformity within a reasonable period of time under Article 39 CISG. It also applies if the buyer has failed to perform an examination on time under Article 38 CISG and therefore delays the notification. In addition, the provision applies to cases where the buyer does send the notification but fails to substantiate it sufficiently or transmits it by means inappropriate in the circumstances.115 Once the two-year cut-off period provided by Article 39(2) CISG has expired, the buyer is no longer able to invoke Article 44 CISG as the provision does not refer to Article 39(2) CISG and the wording states that the buyer will forfeit the right to claim for non-conformity ‘in any event’.

2. Reasonable Excuse The term ‘reasonable excuse’ has proved difficult to deal with. To date, Article 44 CISG has played a subordinate role in judicial proceedings even if its lack of definition has been a source of controversy.116 However, the blurring of Articles 38 and 39 CISG, which was feared by some, has not materialised. This might be a positive signal that courts and arbitral tribunals are not ‘abusing’ Article 44 CISG in order to achieve a certain result in favour of the buyer. However, it could also be interpreted as a sign that the compromise originally intended by the inclusion of the provision ultimately failed in practice and has become nothing more than a ‘paper tiger’. 81 If and when a reasonable excuse can be accepted is a question of fairness; fault in a legal sense is not required.117 The failure to notify will be excused if this is due to conduct that (whilst not compliant) nevertheless deserves a certain understanding and leniency in view of the individual circumstances.118 Acceptable grounds for not giving sufficient notice relate mainly to subjective circumstances that are not taken into account in Articles 38 and 39 CISG. These include sickness, difficulties in company organisation, transmission of notice to the seller’s representative who is no longer responsible, lack of technical ability to implement the examination, lack of experience or even ignorance of the law (e.g. where the duty to notify is completely unknown in the country concerned as well as in the buyer’s circles).119 82 Over and above, one might wish to see all objective obstacles pursuant to Article 79(1) CISG (‘impediment beyond his control’) included in Article 44 CISG, such as strikes, pandemics or a breakdown in all means of communication. However, this is unconvincing: on the one hand, a reasonable excuse requires that the failure to notify is based on non-compliant conduct. Objective obstacles cannot satisfy this requirement. On the other hand, the grounds mentioned can be taken into account in determining the length of the examination and notification period without the buyer being limited to price reduction or damages according to Article 44 CISG. If the grounds for excuse do not apply any longer, the buyer must notify within a reasonable period as provided for in Article 39 CISG. It is the buyer who bears the burden of proving that the actual requirements for applying Article 44 CISG have been met. 80

115

335.

Kuhlen (n 21) p. 93; Staudinger/Magnus (n 12) Article 44 CISG para. 6. Different Heilmann (n 17)

116 Cf. Kröll (n 2) Article 44 CISG para. 6 (‘buyers were in the past rarely successful in their efforts to rely on Article 44 in practice’). 117 Oberlandesgericht Saarbrücken (Germany) 17 January 2007, CISG-online 1642; Kuhlen (n 21) 92; Schwenzer (n 2) Article 44 CISG paras 4 et seq.; Tannò (n 32) p. 285. 118 Schwenzer (n 2), Article 44 CISG para. 5; Staudinger/Magnus (n 12) Article 44 CISG para. 10. 119 See with further references Janssen (n 2) pp. 200 et seq.

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3. Comparative Remarks As stated above, Article 44 CISG is without precedent in other legal systems. Even 83 regulatory models that are normally closely related to the CISG such as the Chinese Law, Dutch Law, CESL or DCFR, deliberately depart from the CISG in this respect and choose not to adopt a corresponding provision. This appears justified considering the fact that Article 44 CISG is of little practical use. The decision not to introduce a provision comparable to Article 44 CISG in the systems under investigation here therefore strengthens the position of the seller in a legal sense. However, since the provision is only seldomly applied in practice the difference between the various legal systems and the CISG is minimal.

V. Cut-off Period under Article 39(2) CISG 1. Cut-off Period and Limitation of Actions under the CISG The CISG does not govern the limitation of actions (see Article 4 CISG). This is to 84 be regulated according to the applicable national law by way of the conflict of laws or on the basis of the UN Convention on the Limitation Period in the International Sale of Goods of 14 June 1974.120 That said, Article 39(2) CISG provides a cut-off period that is to be distinguished from the limitation of actions. Accordingly, the buyer will forfeit the right to claim for a lack of conformity in any event if he does not give the seller notice thereof within a period of two years at the latest. The only situation where this will not apply is if this period conflicts with a contractual period of guarantee. The purpose of the provision is to give the seller security that after a certain time no further claims will arise and he can consider the transaction closed. Therefore, Article 39(2) CISG is at least a partial substitute for the limitation of action lacking in the CISG. However, unlike the limitation period, the cut-off period in Article 39(2) CISG cannot be interrupted or restricted.121 The exclusionary effect (which must be observed ex officio), can only be avoided by giving notice on time; the seller’s attempt to remedy the non-conformity is insufficient.122 Once the cut-off period has passed, no further claims (including those under Article 44 CISG) are permitted. The cut-off period commences with actual physical delivery (‘actually handed over 85 to the buyer’) to the buyer or a third person he has appointed at the contractual place of destination or, if acceptance of the goods is refused, once they have been made available.123 The transfer of risk, the transfer of goods to the independent first carrier or the transfer of documents do not influence the commencement of the period. If the parties have agreed a guarantee for a period of more than two years, the 86 possibility of timely notice will only expire once the guarantee has ended. Accordingly, even if a guarantee period lasts longer than two years, the buyer must give notice of a subsequent lack of conformity within a reasonable period of time and in a reasonable 120 For possible frictions between Article 39(2) CISG and limitation of actions see Schlechtriem & Schroeter (n 16) paras 427 et seq.; Schwenzer (n 2) Article 39 CISG paras 28 et seq. 121 Cour de Cassation (France) 8 April 2009, CISG-online 1977; Heilmann (n 17) p. 364; Honsell/Magnus (n 12) Article 39 CISG para. 29; Piltz (n 46) para. 5–86; Schlechtriem & Schroeter (n 16) para. 424; Schwenzer ( n 2) Article 39 CISG para.23; Staudinger/Magnus (n 12) Article 39 CISG para. 63; Tannò (n 32) p. 286. 122 Heilmann (n 17) pp. 364 et seq.; Honsell/Magnus (n 12) Article 39 CISG paras 29, 32; Staudinger/ Magnus (n 12) Article 39 CISG para. 63. 123 Heilmann (n 17) p. 365; Honnold (n 15) para. 258; Honsell/Magnus (n 12) Article 39 CISG para. 30; Schwenzer (n 2) Article 39 CISG para. 24; Staudinger/Magnus (n 12) Article 39 CISG para. 64.

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form in accordance with Article 39(1) CISG.124 If a shorter guarantee period has been agreed, the question arises whether it should apply in parallel to the lack of conformity of the goods or not. This must be determined by interpreting the agreement between the parties.125 If the contractual guarantee period is to complement the lack of conformity of the goods by granting the buyer additional claims, then the period in Article 39(2) CISG will be unaffected. On the other hand, if it intends to replace the terms of the CISG, the maximum period under Article 39(2) CISG will be reduced in accordance with the contractual guarantee.126

2. Comparative Remarks Article 621(2)2 CCC is similar to Article 39(2) CISG in that it also introduces a two-year cut-off period. That it represents a genuine cut-off-period and not a limitation period is evidenced by Article 17(2) of the Interpretation No. 8 [2012] of the Supreme People’s Court. This states that the provisions on the suspension, interruption or extension of the statute of limitations do not apply to Article 158(2)2 Chinese Contract Law (now Article 621(2)2 CCC). Article 20(1) of Interpretation No. 8 [2012] of the Supreme People’s Court again rules out claims arising from the non-conformity of deliveries after this cut-off period. Article 122(2) CESL also regulates a two-year cut-off period but, unlike Article 39(2) CISG and Chinese law, it chooses not to resolve a potential conflict with a contractual period of guarantee. 88 By contrast, most national legal systems choose not to adopt cut-off periods, which can be onerous for the buyer. Instead, they only regulate limitation periods and are therefore generally more favourable to the buyer than the CISG in this respect (this of course also depends on the length of the limitation period). Following the implementation of the Consumer Sales Directive 1999/44/EC, many European legal systems provide a two-year limitation period for warranty claims relating to the sale of goods in business to consumer relationships, but often also in business to business relationships. Occasionally, the commencement of the limitation period differs. In some legal systems, it only commences with the ‘discovery of the vice’ (see Article 1648 French Civil Code). In others, it only starts with proper notice of non-conformity (see Article 7:23(2) Dutch Civil Code). Other European legal systems initiate the limitation period at the earliest time possible, namely actual delivery of the goods (see § 438(1) no. 3, (2) German Civil Code). 87

G. Cross References & Additional Commentary 89

See, in particular, Chapter 14 (Conformity of Goods) by Bruno Zeller, and Chapter 15 (Sales and Intellectual Property Rights) by Wentong Zheng. See also Chapter 26 (Defenses) by Francesco Paolo Patti and Willibald Posch on limitations.

H. Practitioner Tips & Contract Clauses 90

If a contract is subject to the CISG it is possible to contractually define terms relating to the duty to examine and to notify in greater detail. Alternatively, the duty to examine Janssen (n 2) p. 215; Schlechtriem & Schroeter (16) para. 426; Tannò (n 32) p. 286. Schwenzer (n 2) Article 39 CISG para. 26; Tannò (n 32) p. 286. 126 Schwenzer (n 2) Article 39 CISG para. 26; Staudinger/Magnus (n 12) Article 39 CISG para. 69; Tannò (n 32) pp. 286 et seq. 124

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and to notify can in principle be wholly dispensed (see Article 6 CISG). Whether such modifications are effective is to be decided by the national law invoked under private international law pursuant to Article 4 sentence 2 (a) CISG. Thereby, the question is whether the Articles 38 et seq. CISG can be modified or even excluded. This must be examined according to the applicable national law because it usually imposes limits on the freedom of contract. The effectiveness of contractually-agreed modifications or even the complete exclusion of Articles 38 et seq. CISG agreed on an individual basis does not encounter any objections, generally-speaking. Greater care must be taken when standard contract terms are used. If therein changes 91 are made to the duty to examine and to notify and if e.g. domestic German law were to apply, the parties’ contractual freedom would be restricted since § 307(2) no. 1 German Civil Code127 does not permit changes that are incompatible with essential principles of the statutory provision from which it deviates. Hence, if German standards were to apply, it is not tenable to significantly extend or reduce the examination and notification duties under § 377 German Civil Code to the detriment of the other party, or even exclude the entire provision, using standard contract terms.128 The pivotal question is whether this also remains to be true if Articles 38 and 39 CISG and not § 377 German Civil Code were to apply to the contract. As the CISG is less strict with regard to the duty to examine and to notify than domestic German law and the contractual freedom is a central pillar of the Convention (see Article 6 CISG) it is argued that parties can derogate from or even exclude completely Articles 38 and 39 CISG in standard contract terms.129 So even a complete exclusion of both mentioned provisions would still be ‘compatible with (the) essential principles of the statutory provision from which it deviates’ under § 307(2) no. 1 German Civil Code. However, and almost needless to say, this result might differ if other national laws on standard contract terms were to apply in an international sales law scenario. Therefore, if standard contract terms are used to modify or exclude Articles 38 and 39 CISG they must always be examined individually on the basis of the applicable domestic law. If one intends to use the contractual freedom granted by the CISG to define the duty 92 to examine and to notify, at least four different aspects must be considered when formulating individual contractual clauses or standard contract terms: the duty to examine, the duty to notify, the reasonable excuse problem and the risk that a dispute will arise as to whether statements by the seller serve to waive the requirement of due notification.

127 § 307 German Civil Code: (1) Provisions in standard business terms are ineffective if, contrary to the requirement of good faith, they unreasonably disadvantage the other party to the contract with the user. An unreasonable disadvantage may also arise from the provision not being clear and comprehensible. (2) An unreasonable disadvantage is, in case of doubt, to be assumed to exist if a provision 1. is not compatible with essential principles of the statutory provision from which it deviates, or 2. limits essential rights or duties inherent in the nature of the contract to such an extent that attainment of the purpose of the contract is jeopardised. (3) Subsections (1) and (2) above, and sections 308 and 309 apply only to provisions in standard business terms on the basis of which arrangements derogating from legal provisions, or arrangements supplementing those legal provisions, are agreed. Other provisions may be ineffective under subsection (1) sentence 2 above, in conjunction with subsection (1) sentence 1 above. 128 Bundesgerichtshof 22 May 1985, (1985) Zeitschrift für Wirtschaftsrecht (ZIP) 1204, 1206 et seq.; Benicke, in MüKoHGB, Volume 5 (4th edn., C.H. Beck 2018) Preliminary Remarks to Articles 38, 39 CISG para. 6; Schwenzer (n 2) Article 38 CISG para. 29. 129 Janssen (n 2) p. 209; Schwenzer (n 2) Article 38 CISG para. 29.

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I. Modifications of the Duty to Examine 93

As far as the duty to examine is concerned, the following clause will be sufficient for regular sale contracts: The Buyer must examine the Contract Products as required by law and in so doing check every delivery in every respect for any lack of conformity with the contract.130

94

There is normally no real need to regulate the examination period in detail since the crucial factor is whether non-conformity is notified on time as per Article 39(1) CISG.131 If the examination period does have to be formulated in greater detail, then one way of doing so is as follows: The Buyer must examine the Contract Products within X working days after the delivery of the goods and in so doing check every delivery in every respect for any lack of conformity with the contract.

95

Depending on the goods sold, it may be recommendable to define the type and manner of examination in detail. Examples include deciding on the type of examination in the sale of technical equipment or chemicals (e.g. which examination procedure to apply) or specifying a minimum quantity to be examined (e.g. details of the quantity of samples to be taken) when selling bulk goods.

II. Modifications of the Duty to Notify 96

If statutory rules on the duty to give notice are to be modified, the first thing to consider is specifying the length of the notification period. This is recommendable in relation to purchasing and sale conditions (especially if the products concerned are homogenous),132 in the interests of legal certainty. For example, the following clause could be inserted in the contract: Notwithstanding Article 39(1) CISG, the parties agree that 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 X working days after he has discovered it or ought to have discovered it.133

97

Generally-speaking, the buyer is advised to give notice of any lack of conformity promptly and describe it precisely, regardless of any fixed notification periods. Furthermore, it is in the mutual interest of the parties to clarify the methods of notification. Written form is recommendable, if only for evidential reasons.134 The parties should also identify the person or the division of the seller’s company to whom notification should be made. Here, the interests of the buyer and seller may diverge: the conditions of purchase should enable the buyer to give notice of any non-conformity to a person established in his country such as the seller’s commercial agent (especially if the buyer is not experienced in international trade). On the other hand, the conditions of sale should ensure that the potential recipients are as few in number as possible. The language of the notification may also deserve regulation. The following formulation drafted by Burghard Piltz offers a ‘basic framework’ for the duty to notify, which can be elaborated or modified as need be: Piltz, in Münchener Vertragshandbuch, Volume 4 (8th edn., C.H. Beck 2018) p. 426. See also Piltz (n 46) para. 5-115. 132 See also Piltz (n 46) para. 5-151. 133 See Winship, ‘Changing Contract Practices in the Light of the United Nations Sales Convention: A Guide for Practitioners’, available at http://cisgw3.law.pace.edu/cisg/biblio/winship.html. 134 Illustrative Oberlandesgericht Hamm (Germany) 19 May 2015, CISG-online 2615. 130

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I. Additional Sources The Buyer shall give notice of any lack of conformity with this Contract of Sale to the Seller as required by law, and in any event directly and in writing and by the quickest possible means by which transmission is guaranteed (e.g. by e-mail or telefax).135

III. Avoidance of the Reasonable Excuse Problem Article 44 CISG presents a challenge in practice and causes problems during legal 98 disputes. The main reason for this is that the interpretation of the term ‘reasonable excuse’ is problematic and leads to legal uncertainty. In order to avoid these difficulties one should exclude Article 44 CISG in the conditions of sale (e.g. ‘Article 44 CISG is excluded.’) - at least from the seller’s perspective. If parties do not want to exclude the provision the grounds for a reasonable excuse should be defined in detail. It should be noted that simply contractually agreeing on a certain notification period does not automatically imply that Article 44 CISG is excluded.136

IV. Avoiding the Seller’s Statements being Interpreted as Waivers The seller runs the risk that his statements on the buyer’s failure to give correct 99 notification could be taken as waiving the requirement of due notification.137 This could lead to legal uncertainty and irrevocably damage the relationship of the parties.138 In order to avoid this situation, a clause should be incorporated in the conditions of sale that render such an interpretation impossible. This could be achieved as follows: ‘All statements of the seller pertaining to any lack of conformity only serve to clarify material facts. They do not under any circumstances represent a waiver of the requirement of due notification.’

I. Additional Sources Baasch-Andersen, ‘Reasonable Time in Article 39(1) of the CISG’ (1999) Pace Review of the Convention on Contracts for the International Sale of Goods 63 et seq.; Baasch-Andersen, ‘The Duty to Examine Goods under the Uniform International Sales Law – An Analysis of Article 38 CISG’ (2007) 18 European Business Law Review 797 et seq.; Baasch-Andersen, ‘Article 39 of the CISG and its “Noble Month” for the Notice-giving: A (gracefully) ageing doctrine?’ (2012) 30 J.L. & Com. 185 et seq.; CISG-AC Opinion No. 1, Electronic Communications under CISG, 15 August 2003. Rapporteur: Prof. Dr. Christina Ramberg, Gothenburg, Sweden; CISG-AC Opinion No. 2, Examination of the Goods and Notice of Non-Conformity Articles 38 and 39 CISG, 7 June 2004. Rapporteur: Prof. Dr. Eric E. Bergsten, Emeritus, Pace University School of Law, New York; Gerny, Untersuchungs- und Rügepflichten beim Kauf nach schweizerischem, französischem und US-amerikanischem Recht sowie nach CISG (Helbing & Lichtenhahn 1999); Girsberger, ‘The Time Limits of Article 39 CISG’ (2005/2006) 25 J L & Com 241 et seq.; Heilmann, Mängelgewährleistung im UN-Kaufrecht: Voraussetzungen und Rechtsfolgen im Vergleich zum deutschen internen Kaufrecht und zu den Haager Einheitlichen Kaufgesetzen (Duncker & Humblot 1994); Janssen, Die Untersuchungsund Rügepflichten im deutschen, niederländischen und internationalen Kaufrecht: Eine rechtsvergleichende Darstellung der Gemeinsamkeiten und Unterschiede (Nomos 2001); Janssen & Schimansky, ‘De eenvormige interpretatie van de keurings- en kennisgevingstermijn in het kader van het Weens Koopverdrag (CISG) door de nationale gerechten – Een illusie?’ (2003) Nederlands Tijdschrift voor Burgerlijk Recht 442 et seq.; Kröll in Kröll, Mistelis & Perales Viscasillas (eds), UN Convention on Contracts for the International Sale of Goods (CISG) – Commentary (2nd edn., Beck, Hart, Nomos 2018) Article 38 CISG et seq.; Linnerz, Die Untersuchungs- und Rügeplicht im CISG und im HGB (Peter Lang 2015); Mangal, Untersuchungs- und Piltz (n 130) p. 426. Schwenzer (n 2) Article 44 CISG para. 18. 137 Concerning the problem of the implied waiver of an objection to irregular notification see Benicke (n ) Preliminary Remarks to Articles 38, 39 CISG paras 8 et seq. 138 Illustrative Oberlandesgericht Hamm (Germany) 19 May 2015, CISG-online 2615. 135

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Chapter 16 Examination and Notification of Non-Conformities Rügeobliegenheiten im UN-Kaufrecht (Peter Lang 2015); Piltz, Internationales Kaufrecht: Das UN-Kaufrecht in praxisorientierter Darstellung (2nd edn., C.H.Beck 2008) paras 5-55 et seq.; Schlechtriem & Schroeter, Internationales UN-Kaufrecht (6th edn., Mohr Siebeck 2016) paras 402 et seq.; Schwenzer in Schwenzer, Schlechtriem & Schroeter (eds), Kommentar zum Einheitlichen UN-Kaufrecht – CISG (7 th edn., C.H. Beck 2018) Article 38 CISG et seq.; Schwenzer, Fountoulakis & Dimsey, International Sales Law, A Guide to the CISG (2nd edn., Hart 2012) 292 et seq.; Schwenzer, ‘The Noble Month (Articles 38, 39 CISG) – The Story behind the Scenery’ (2006) 7 European Journal of Law Reform 353 et seq.; Tannò, Die Berechnung der Rügefrist im schweizerischen, deutschen und UN-Kaufrecht (Dike 1993).

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CHAPTER 17 PERFORMANCE AND BREACH OF CONTRACT Ulrich Magnus A. Topics Covered and Introductory Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B. Sampling of Laws and Commentary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. CISG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) The Principle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) The Main Duties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . aa) In General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . bb) Seller’s Duties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . cc) Buyer’s Duties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Breach of Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Breach in General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Fundamental Breach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . aa) Definition of Fundamental Breach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . bb) Types of Cases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Anticipatory Breach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d) Cure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. UNIDROIT Principles of International Commercial Contracts . . . . . . . . . . . . . . 1. Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) The Principle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) The Main Duties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Breach of Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Breach in General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Fundamental Breach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Anticipatory Breach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d) Cure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Principles of European Contract Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) The Principle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) The Main Duties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Breach of Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Breach in General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Fundamental Breach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Anticipatory Breach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d) Cure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. (Withdrawn) Draft Common European Sales Law . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) The Principle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) The Main Duties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . aa) In General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . bb) Seller’s Duties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . cc) Buyer’s Duties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Breach of Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Breach in General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Fundamental Breach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Anticipatory Breach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d) Cure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. German Bürgerliches Gesetzbuch . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) The Principle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) The Main Duties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . aa) In General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . bb) The Parties’ Further Duties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Breach of Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Breach in General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Fundamental Breach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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1 3 3 3 3 4 4 5 6 7 7 8 8 10 14 15 16 16 16 17 21 21 23 25 26 27 27 27 29 31 31 33 35 36 37 37 37 40 40 41 42 43 43 44 45 46 47 47 47 48 48 49 50 50 51

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Chapter 17 Performance and Breach of Contract c) Anticipatory Breach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d) Cure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI. American Uniform Commercial Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) The Principle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) The Main Duties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . aa) In General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . bb) The Parties’ Further Duties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Breach of Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Breach in General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Fundamental Breach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Anticipatory Breach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d) Cure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VII. English Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) The Principle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) The Main Duties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Breach of Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Breach in General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Fundamental Breach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Anticipatory Breach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d) Cure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VIII. French Code Civil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) The Principle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) The Main Duties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Breach of Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Breach in General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Fundamental Breach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Anticipatory Breach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d) Cure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IX. Spanish Código Civil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) The Principle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) The Main Duties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Breach of Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Breach in General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Fundamental Breach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Anticipatory Breach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d) Cure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . X. Chinese Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) The Principle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) The Main Duties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Breach of Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Breach in General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Fundamental Breach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Anticipatory Breach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d) Cure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XI. Comparative Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) The Principle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) The Main Duties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Breach of Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Breach in General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Fundamental Breach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Anticipatory Breach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d) Cure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C. Cross References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . D. Practitioner Tips . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . E. Additional Sources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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53 54 55 55 55 56 56 57 58 58 59 60 61 62 62 62 63 64 64 65 67 68 69 69 69 70 72 72 74 76 77 78 78 78 79 81 81 83 84 85 86 86 86 87 89 89 91 92 93 94 94 94 95 98 98 99 100 101 102 103 105

B. Sampling of Laws and Commentary

A. Topics Covered and Introductory Note The essence of contract law is the fact that certain obligations on which the parties 1 have agreed are given the force of law. Their non-performance is sanctioned by specific remedies. Therefore, the skeleton of each contract law and in particular of each sales law is the definition of specific obligations which the contract partners must perform and of the remedies if they do not perform. In principle, the parties are entitled to define their obligations themselves; the law regularly provides mere default rules in case the parties omit a regulation of when, where and how the contractual duties should be performed. The law set by legislators or judges further controls the fairness of the obligations the parties agreed upon, particularly for consumer sales. But in principle the parties’ autonomy is the overarching maxim. This Chapter deals with the question whether, and if so, when a party to a sales 2 contract can require the other party to perform the contractual obligations in kind (right to specific performance). Which principal duties parties to sales contracts are obliged to perform is treated in Chapters 12 -16 and here for present purposes only shortly summarized. This Chapter further deals with what is regarded to be a breach of a contractual obligation. The topic of anticipatory breach is covered in Chapter 18. The remedies for breach of contract are dealt with in Chapters 19 and 20.

B. Sampling of Laws and Commentary I. CISG Article 4 This Convention governs only the formation of the contract of sale and the rights and obligations of the seller and the buyer arising from such a contract. In particular, except as otherwise expressly provided in this Convention, it is not concerned with: (a) the validity of the contract or of any of its provisions or of any usage; Article 7 (1) In the interpretation of this Convention, regard is to be had to its international character and to the need to promote uniformity in its application and the observance of good faith in international trade. Article 28 If, in accordance with the provisions of this Convention, one party is entitled to require performance of any obligation by the other party, a court is not bound to enter a judgement for specific performance unless the court would do so under its own law in respect of similar contracts of sale not governed by this Convention. Article 30 The seller must deliver the goods, hand over any documents relating to them and transfer the property in the goods, as required by the contract and this Convention. Article 53 The buyer must pay the price for the goods and take delivery of them as required by the contract and this Convention. Article 71 (1) A party may suspend the performance of his obligations if, after the conclusion of the contract, it becomes apparent that the other party will not perform a substantial part of his obligations as a result of: (a) a serious deficiency in his ability to perform or in his creditworthiness; or (b) his conduct in preparing to perform or in performing the contract.

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Chapter 17 Performance and Breach of Contract (2) If the seller has already dispatched the goods before the grounds described in the preceding paragraph become evident, he may prevent the handing over of the goods to the buyer even though the buyer holds a document which entitles him to obtain them. The present paragraph relates only to the rights in the goods as between the buyer and the seller. (3) A party suspending performance, whether before or after dispatch of the goods, must immediately give notice of the suspension to the other party and must continue with performance if the other party provides adequate assurance of his performance. Article 72 (1) If prior to the date for performance of the contract it is clear that one of the parties will commit a fundamental breach of contract, the other party may declare the contract avoided.

1. Performance a) The Principle 3

The CISG acknowledges a primary right to claim performance: The contract obliges each party to perform the agreed duties or – in the absence of an explicit agreement – those duties which the Convention provides for an international sale.1 The CISG offers, however, a split solution as far as the possibility of a secondary performance claim is concerned: If a party has not performed its duty the other party can in principle request performance in kind as a remedy.2 But the court seized will grant this remedy only if it would be available also under the court’s domestic law. If the domestic law does not recognize a right of specific performance in like circumstances the court seized ‘is not bound to enter a judgment for specific performance’ (Article 28). It therefore depends on national law whether an aggrieved party can claim performance. If the domestic law is reluctant towards specific performance – as the Common Law jurisdictions which allow for specific performance only in exceptional situations – only other remedies are available if a party does not perform. b) The Main Duties aa) In General

4

The CISG grants the parties’ autonomy greatest possible weight.3 The parties can agree on any obligation they wish provided that the applicable national law does not invalidate it (Article 4(a) CISG). The concrete stipulations of the parties thus always supersede the default rules of the CISG. bb) Seller’s Duties

5

The seller’s minimum obligations under the CISG which ensue with the conclusion of an international sales contract are the following: The seller is obliged to deliver the goods and to transfer the property in them as well as to hand over eventual documents relating to the goods (Article 30 CISG). In principle this duty is to be fulfilled at the seller’s place of business4 and within a reasonable time after the conclusion of the contract.5 Concerning the how of delivery the goods must be free from defects which

See Articles 30–44 and Articles 53–59 CISG. See Articles 46 and 62 CISG. 3 See the direct or indirect reference to the parties’ contract in Articles 30–36 CISG and in Articles 53–59 CISG and generally in Article 6 CISG. 4 See Article 31(c) CISG. 5 Article 33(c) CISG. 1

2

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hinder their ordinary use6 and they must be free from third party rights.7 In addition, always the principle of good faith in Article 7(1) CISG must be observed. cc) Buyer’s Duties The buyer is obliged to pay the price and to take over the delivered goods (Article 53 6 CISG). The price must be paid at the seller’s place of business8 and at the time when the goods are placed at the buyer’s disposal.9 The buyer is further obliged to take eventually necessary steps to enable payment10 and must also observe the good faith principle in performing its obligations.

2. Breach of Contract a) Breach in General A party which does not fully perform its obligations breaches the contract and faces 7 one or more remedies unless the breach is excused.11 The objective non-performance is the only prerequisite for the sanction; fault is not required12 and lack of fault alone does not excuse.13 Any kind of breach triggers a remedy how light the breach may ever be. Only good faith may constitute a border where the breach is of such insignificance that a fair and reasonable party would neglect it. However, for all other kinds of breaches their gravity influences which remedy the aggrieved party is entitled to. b) Fundamental Breach aa) Definition of Fundamental Breach The CISG expressly defines the notion of fundamental breach in its Article 25 CISG. 8 The fundamental breach is the precondition for a termination of the contract14 and for a right to request a substitute for non-conforming goods.15 Article 25 CISG runs as follows: A breach of contract committed by one of the parties 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 the party in breach did not foresee and a reasonable person of the same kind in the same circumstances would not have foreseen such a result.

This provision focuses on the cause of the breach and its impact on the interest of 9 the other contract party. It requires an almost full deprivation or severe depreciation of the contractual expectation. Because the provision operates with terms such as ‘fundamental’, ‘substantial’, ‘reasonable’ it allows for a large degree of flexibility though also uncertainty. Generally, the circumstances of the individual case decide whether a breach is of such weight that a reasonable person would have lost the interest in the contract and would have terminated the contractual relationship. This is an essentially objective Article 35(2)(a) CISG. Article 41 CISGwith the specific regulation for immaterial property rights in Article 42 CISG. 8 Article 57(1)(a) CISG. 9 Article 58(1) CISG. 10 Article 54 CISG. 11 See Article 79 CISG. 12 See Articles 45 and 61 CISG. 13 Article 79 CISG requires an unavoidable and insurmountable ‘impediment’ that hinders performance. This means more than the pure absence of fault; see Atamer, in Kröll/Mistelis/Perales Viscasillas Art. 79 para. 44; Mankowski, in MüKoHGB Article 79 CISG para. 18. 14 See Articles 49(1)(a), 51(2), 64(1)(a), 72(1), 73(1) and (2) CISG. 15 Article 46(2) CISG. 6 7

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standard that must however take account of the specific agreement and its stipulations. Meanwhile the case law under the CISG has developed types of cases in which it is rather clear whether or not a breach is fundamental. bb) Types of Cases It is common ground under the CISG that the final non-performance (non-delivery or non-payment) as well as the final refusal to perform always constitutes a fundamental breach.16 11 On the contrary, delayed performance as such is generally no fundamental breach unless the parties17 or the circumstances18 make time of the essence. However, in case of delay the aggrieved party can set an additional (reasonable) period of time for performance. The unsuccessful lapse of this so-called ‘Nachfrist’ turns a non-fundamental breach then into a fundamental one.19 This procedure is only open in case of entire non-performance during the delay.20 12 Difficulties can encounter in case of delivery of defective goods. If the buyer has still use for the defective goods—can use them for the own production, can resell them with a rebate etc.—the courts generally deny a fundamental breach.21 This is even the case where only repair (by the seller or by the buyer itself) makes the goods useable. 22 On the other hand is it a fundamental breach where the goods are neither repairable nor useable.23 Also the delivery of goods for human consumption fundamentally breaches the contract if the goods are dangerous for health or where a serious suspicion in this direction exists (e.g. dioxin in pork meat).24 13 Where the seller cannot provide the property title to the goods (for instance because the sold goods were stolen goods) this has been also qualified as fundamental breach.25 10

c) Anticipatory Breach 14

The CISG specifically regulates the case of anticipatory breach.26 The regulation differentiates according to the kind of breach: if the non-performance of a substantial part of the obligations threatens, the other party can suspend the own obligations (Article 71 CISG). Where a fundamental breach threatens, the aggrieved party can terminate the contract (Article 72(1) CISG).

16 See, e.g., Tribunal of International Commercial Arbitration at the Russian Federation Chamber of Commerce and Industry 5 October 1998, CLOUT No. 468; OLG Celle 24 May 1995, CLOUT No. 136; Pretura circondariale di Parma 24 November 1989, CLOUT No. 90. 17 See, e.g., AG Ludwigsburg 21 December 1990, CISG-Online No. 17: it was agreed for the delivery of seasonal (summer) clothes: ‘Livraison : 1–15/07/89 FIXE. O.N.’; delay was fundamental breach. 18 ICC International Court of Arbitration Award No. 8786 in (2000) Arbitration Bulletin 70 (seasonal goods); Corte di Appello di Milano, 20 March 1998, UNILEX; Magnus, in Staudinger Article 25 para. 22; Schroeter, in Schlechtriem/Schwenzer/Schroeter Article 25 para. 18. 19 See Article 49(1)(b) and 64(1)(b) CISG. 20 See the express wording of Article 49(1)(b) and 64(1)(b) CISG. 21 BGH 24 September 2014 in (2015) NJW 867; BG, 28 October 1998, CLOUT No. 248; BGH 3 April 1996, CLOUT No. 171. 22 See in particular BGH 24 September 2014 in (2015) NJW 867 (the buyer itself repaired the goods and used them in its business = no fundamental breach and thus no right to terminate the contract). 23 See, e.g., OLG Cologne in (2003) IHR 15 (ladies’ clothes were entirely misdesigned and could not be worn). 24 See BGH 2 March 2005, CISG-Online No. 999. 25 LG Freiburg in (2003) IHR 22. 26 See Article 71–73 CISG; see further → Chapter 18.

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d) Cure Even where the seller is in breach of its duties the CISG provides the possibility that 15 the seller may cure the breach if this can be done without unreasonable inconvenience and unreasonable expenses for the buyer.27 Under these conditions the seller can repair any deficiency of a performance which he executed before the time for performance lapsed.28 However, where that date has already lapsed, the right to cure further requires that the deficiency is remedied without unreasonable delay.29 The right to cure is excluded if the buyer has validly declared the avoidance of the contract.

II. UNIDROIT Principles of International Commercial Contracts Article 7.2.1 Performance of monetary obligation Where a party who is obliged to pay money does not do so, the other party may require payment. Article 7.2.2 Performance of non-monetary obligation Where a party who owes an obligation other than one to pay money does not perform, the other party may require performance, unless (a) performance is impossible in law or in fact; (b) performance or, where relevant, enforcement is unreasonably burdensome or expensive; (c) the party entitled to performance may reasonably obtain performance from another source; (d) performance is of an exclusively personal character; or (e) the party entitled to performance does not require performance within a reason able time after it has, or ought to have, become aware of the non-performance. Article 7.3.1 Right to terminate the contract (1) A party may terminate the contract where the failure of the other party to perform an obligation under the contract amounts to a fundamental non-performance. (2) In determining whether a failure to perform an obligation amounts to a fundamental non-performance regard shall be had, in particular, to whether (a) the non-performance substantially deprives the aggrieved party of what it was entitled to expect under the contract unless the other party did not foresee and could not reasonably have foreseen such result; (b) strict compliance with the obligation which has not been performed is of essence under the contract; (c) the non-performance is intentional or reckless; (d) the non-Performance gives the aggrieved party reason to believe that it cannot rely on the other party’s future performance; (e) the non-performing party will suffer disproportionate loss as a result of the preparation or performance if the contract is terminated

1. Performance a) The Principle The UNIDROIT Principles (2016) establish a principal right to request performance 16 in kind even as secondary remedy if the debtor does not perform.30 However, the PICC distinguish between monetary and non-monetary duties.31 The right to performance is entirely unrestricted in case of an obligation to pay money which the debtor does See Articles 34, 37, 48, 50 sent. 2 CISG. See Article 34 CISG (handing over of non-conforming documents) and Article 37 CISG (delivery of non-conforming goods). 29 Article 48(1) sent. 1 CISG. 30 Schelhaas, in Vogenauer/Kleinheisterkamp (eds), Commentary on the UNIDROIT Principles of International Commercial Contracts (PICC) (2009) Intro to sect. 7.2 para. 1. 31 Article 7.2.1 PICC (monetary obligations) and Article 7.2.2 PICC (non-monetary obligations). 27 28

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not perform.32 The performance claim in respect of non-monetary duties, on the other hand, is subject to a number of restrictions which Article 7.2.2 PICC enumerates. Nonmonetary duties are all obligations which do not require the payment of a sum. The reasons which exclude their ‘specific performance’ are that performance is impossible, too burdensome or expensive, easily available from other sources, of an exclusively personal character or has been requested unreasonably late.33 In contrast to the CISG the performance claim does not depend on the question whether the court’s domestic law would allow for specific performance. Under the PICC performance must be granted if none of the listed exceptions applies.34 b) The Main Duties The PICC do not contain specific provisions for sellers and buyers; they regulate the main duties in general for all (international) commercial contracts and specify where, when and how obligations must be performed if the contract or the circumstances do not provide otherwise. Like the CISG the PICC formulate default rules. In substance the PICC follow closely the CISG. 18 The rule on the place of performance distinguishes again between monetary and non-monetary obligations. The monetary obligation to pay a sum (not only the price but also interest or damages) must be performed at the place of the creditor of that obligation.35 The default rule for all other contractual duties designates the debtor’s place of business as the place of performance.36 19 If neither the contract nor the circumstances indicate a specific time for performance the PICC require performance within a reasonable time after the conclusion of the contract.37 The length of this period naturally depends on the circumstances of the case. 20 In the absence of any more specific stipulation in the contract, practices between the parties or trade usages38 determining how the parties have to perform their duties, the parties are always obliged to ‘act in accordance with good faith and fair dealing in international trade.’39 The PICC further explicitly require each party to co-operate with the other party ‘when such co-operation may reasonably be expected for the performance of that party’s obligation.’40 17

2. Breach of Contract a) Breach in General 21

The PICC do not define the notion of breach of contract but the notion of ‘non-performance’ which may be regarded as the broader term because it also includes any excused non-performance41 which may not qualify as a breach of contract. The non-performance is any failure to fulfil a contractual duty and covers also defective performance as well as late performance.42 The non-performing party is liable to remedies unless Schelhaas (n 30) Article 7.2.1 para. 2 PICC. See Article 7.2.2(a)–(e) PICC. 34 See UNIDROIT Comment to Article 7.2.2 PICC para. 2, for further exceptions Brödermann, in Mankowski (ed), Commercial Law (2019) Article 7.2.2 PICC para. 8. 35 Article 6.1.6(1)(a) PICC. 36 Article 6.1.6(1)(b) PICC. 37 Article 6.1.1(c) PICC. 38 See Article 1.9 PICC. 39 Article 1.7(1) PICC. 40 Article 5.1.3 PICC. 41 See UNIDROIT Comment to Article 7.1.1 PICC. 42 See Article 7.1.1 PICC. 32 33

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the non-performance is excused.43 Like the CISG the PICC do not require fault as condition for liability nor does the absence of fault alone excuse any non-performance.44 The PICC’s prerequisites for the exemption from liability correspond verbally to the respective CISG provision, namely that an unavoidable impediment beyond control must have hindered the performance.45 Such impediment exempts from damages but leaves a right to termination unaffected.46 The minimum remedy for any kind of the non-excused non-performance of a con- 22 tractual obligation are damages;47 where the breach is of a serious nature (fundamental) the aggrieved party can also claim termination of the contract.48 b) Fundamental Breach Unlike the CISG the PICC do not separately define the term ‘fundamental breach’ but 23 combine it with the right to terminate the contract (Article 7.3.1(1) and (2) PICC). Termination is only available if the non-performance is fundamental.49 The circumscription of fundamental breach in the PICC uses much of the formulation of Article 25 CISG 50 but adds further more specific and precise considerations which have to be taken into account whether the non-performance amounts to a fundamental breach: namely, not only whether the non-performance substantially deprived the other party of what could be expected under the contract but also if strict compliance was of the essence under the contract, whether the breach was intentional or reckless, whether the trust in the non-performing party’s ability for future performances was destroyed or whether the termination would cause the non-performing party disproportionate loss.51 The PICC provide also for a Nachfrist procedure.52 Where the performance is delayed 24 and where this delay does not yet constitute a fundamental breach the aggrieved party may fix an additional period of time (of reasonable length) for performance; after the unsuccessful lapse of this period of time the aggrieved party may terminate the contract. This Nachfrist procedure operates not only in case of delayed performance, but also, unlike the CISG, in case of defective performance.53 Furthermore, the right of termination through Nachfrist arises only if the breach did not merely concern ‘a minor part of the contractual obligation of the non-performing party.’54 c) Anticipatory Breach Where, before the date of performance lapses, a fundamental non-performance 25 threatens the aggrieved party is entitled to terminate the contract. 55 It must be merely Article 7.1.7(1) PICC. See Schelhaas (n 30) Article 7.1.1 paras 2 et seq.; Brödermann, in Mankowski (n 34) Article 7.1.1 PICC para. 2. 45 See Article 7.1.7(1) PICC in comparison to Article 79(1) CISG. 46 Article 7.1.7(4) PICC. 47 Article 7.4.1 PICC. 48 Article 7.3.1(1) PICC. 49 UNIDROIT Comment on Article 7.3.1 PICC para. 2. 50 Article 7.3.1(2)(a) PICC borrows verbally from Article 25 CISG. 51 Article 7.3.1(2)(a)–(e) PICC. 52 See Article 7.1.5 PICC. 53 See also Schelhaas (n 30) Article 7.1.5 PICC para. 3; Brödermann, in Mankowski (n 34) Article 7.1.5 PICC para. 1. The argument is that Artice 7.1.5 uses the term ‘non-performance’ which Article 7.1.1 PICC defines as the ‘failure by a party to perform any of its obligations under the contract, including defective performance or late performance.’. 54 Article 7.1.5(4) PICC. 55 Article 7.3.3 PICC. 43

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‘clear’ that the threatened breach will be of a fundamental character. Insofar a very high standard of probability must be met.56 d) Cure 26

Like the CISG the PICC acknowledge a right to cure. 57 The following conditions must be fulfilled: the party in breach must, without undue delay, inform the other party of the intended cure; the cure must be appropriate in the circumstances, must be effected promptly and the aggrieved party must have no legitimate interest in refusing cure.58 Contrary to the CISG the rightful termination does not preclude the right to cure. 59

III. Principles of European Contract Law Article 1:202 Duty to Co-operate Each party owes to the other a duty to co-operate in order to give full effect to the contract. Article 8:104 Cure by Non-Performing Party A party whose tender of performance is not accepted by the other party because it does not conform to the contract may make a new and conforming tender where the time for performance has not yet arrived or the delay would not be such as to constitute a fundamental non-performance. Article 9:101 Monetary Obligations (1) The creditor is entitled to recover money which is due. (2) Where the creditor has not yet performed its obligation and it is clear that the debtor will be unwilling to receive performance, the creditor may nonetheless proceed with its performance and may recover any sum due under the contract unless: (a) it could have made a reasonable substitute transaction without significant effort or expense; or (b) performance would be unreasonable in the circumstances. Article 9:102 Non-monetary Obligations (1) The aggrieved party is entitled to specific performance of an obligation other than one to pay money, including the remedying of a defective performance. (2) Specific performance cannot, however, be obtained where: (a) performance would be unlawful or impossible; or (b) performance would cause the debtor unreasonable effort or expense; or (c) the performance consists in the provision of services or work of a personal character or depends upon a personal relationship; or (d) the aggrieved party may reasonably obtain performance from another source. (3) The aggrieved party will lose the right to specific performance if it fails to seek it within reasonable time after it has or ought to have become aware of the non-performance. Article 9:301 Right to Terminate the Contract (1) A party may terminate the contract if the other party's non-performance is fundamental.

1. Performance a) The Principle 27

Like the UNIDROIT Principles the Principles of European Contract (PECL) acknowledge a primary obligation to perform the contract and a respective entitlement of the aggrieved party to request performance. In respect of the secondary obligation to 56 See Huber, in Vogenauer/Kleinheisterkamp (n 30) Article 7.3.3 PICC 5; Brödermann, in Mankowski (n 34) Article 7.3.3 PICC para. 1. 57 Article 7.1.4 PICC. 58 See Article 7.1.4(1)(a)–(d) PICC. 59 Article 7.1.4(2) PICC.

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specifically perform after a non-performance the PECL are slightly more restrictive than the PICC. If a party does not perform, the other party can request performance in kind only under certain conditions. With regard to monetary obligations that are due specific performance is always available as remedy.60 The PECL further regulate the specific case that the creditor has not yet performed and the money debtor is unwilling to accept the performance; then specific performance of the monetary obligation is still available unless a cover transaction is easily possible or performance would be ‘unreasonable in the circumstances.’61 The latter situation may arise where the seller still starts production of the ordered goods although the buyer has already announced not to accept them because it is no longer interested in the delivery.62 In principle, the aggrieved party is also entitled to specific performance of non-mon- 28 etary obligations but the PECL – much in line with the PICC – provide for the following restrictions: specific performance must not be unlawful or impossible nor ‘cause the obligor unreasonable effort or expense’; it must not require services or work of a personal character nor must the aggrieved party have the opportunity to ‘reasonably obtain performance from another source.’63 Moreover, the aggrieved party must request specific performance within a reasonable time after actual or constructive knowledge of the non-performance.64 b) The Main Duties Like UNIDROIT’s PICC the PECL regulate general contract law and do not deal with 29 special contract types. The general rules where, when and how performance has to be effected correspond to those in the PICC and essentially also to those in the CISG. In the absence of any stipulation by the parties or other indication to determine the 30 place of performance the PECL fix the place for the performance of payment obligations at the creditor’s place of business, for all other obligations at the obligor’s place of business.65 The default rule for the time of performance is ‘a reasonable time after the conclusion of the contract.’66 Further, the parties are obliged to perform the contract ‘in accordance with good faith and fair dealing’;67 they are also under a general duty to cooperate ‘in order to give full effect to the contract.’68 A party must thus not hinder the performance and prevent the other party from earning the fruits of the contract. 69

2. Breach of Contract a) Breach in General PECL’s provisions on breach of contract resemble very much those of the PICC and 31 thus those of the CISG. A breach is the non-performance of any kind of obligation that follows from the contract or from legal rules.70 Where the non-performance is excused

Article 9:101(1) PECL. Article 9:101(2) PECL. 62 See also the example in Lando/Beale (eds), Principles of European Contract Law (Parts I and II) (2000) p. 392–393. 63 See Article 9:102(2)(a)–(d) PECL. 64 Article 9:102(3) PECL. 65 Article 7:101(1) PECL. 66 Article 7:102(3) PECL. 67 Article 1:201 PECL. 68 Article 1:202 PECL. 69 See the examples in Lando/Beale (n 62) pp. 119 et seq. 70 Article 8:101(1) and (2) PECL. 60

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the remedies differ from the remedies in non-excused cases: only termination and price reduction, depending on the circumstances of the case, may be available.71 32 Like PICC and CISG the PECL do not require fault for sanctions for non-performance but provide for an exemption possibility. The respective PECL provision (Article 8:108 PECL) follows widely the wording of the comparable provisions in the CISG (Article 79 CISG) and the PICC (Article 7.1.7 PICC). The non-performance is excused if a party cannot perform because of ‘an impediment beyond its control’ which could not have been reasonably taken into account. b) Fundamental Breach Like the CISG and unlike the PICC the PECL define the fundamental breach in abstracto. A non-performance is fundamental ‘if strict compliance with the obligation is of the essence of the contract’72 or deprives the other party of what it reasonably and foreseeably could expect from the contract73 or if the breach was intentional and ‘gives the aggrieved party reason to believe that it cannot rely on the other party’s future performance.’74 34 A fundamental breach entitles the aggrieved party to terminate the contract unilaterally.75 In accordance with the CISG and the PICC the PECL allow the termination of the contract also if the non-performing party does not perform during a further – reasonable – period for performance which the aggrieved party sets.76 33

c) Anticipatory Breach 35

It is no surprise that the PECL provide for a right of termination ‘(w)here prior to the time of performance by a party it is clear that there will be a fundamental non-performance.’77 This is almost entirely identical with Article 7.3.3 PICC and Article 72(1) CISG which also deal with the situation of an anticipatory breach. d) Cure

36

Finally, like the CISG and the PICC the PECL know of a right to cure by which the party who has tendered a non-conforming performance is entitled to remedy the non-conformity and thus to avoid an eventual termination.78 After the lapse of the time for performance the only precondition is that ‘the delay would not be such as to constitute a fundamental non-performance.’79

IV. (Withdrawn) Draft Common European Sales Law Article 87 Non-performance and fundamental non-performance 1. Non-performance of an obligation is any failure to perform that obligation, whether or not the failure is excused, and includes:

See Article 8:101(2) PECL. Article 8:103(a) PECL. 73 Article 8:103(b) PECL. 74 Article 8:103(c) PECL. 75 Article 9:301(1) PECL. 76 Article 8:106 in connection with Article 9:301(2) PECL. 77 Article 9:304 PECL. 78 See Article 8:104 PECL. 79 Article 8:104 PECL. 71

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B. Sampling of Laws and Commentary (a) non-delivery or delayed delivery of the goods; (b) non-supply or delayed supply of the digital content; (c) delivery of goods which are not in conformity with the contract; (d) supply of digital content which is not in conformity with the contract; (e) non-payment or late payment of the price; and (f) any other purported performance which is not in conformity with the contract. 2. Non-performance of an obligation by one party is fundamental if: (a) it substantially deprives the other party of what that party was entitled to expect under the contract, unless at the time of conclusion of the contract the non-performing party did not foresee and could not be expected to have foreseen that result; or (b) it is of such a nature as to make it clear that the non-performing party’s future performance cannot be relied on. Article 106(1)(a) Overview of buyer’s remedies (1) In the case of non-performance of an obligation by the seller, the buyer may do any of the following: (a) require performance, which includes specific performance, repair or replacement of the goods or digital content, under Section 3 of this Chapter; Article 109 Cure by the seller 1. A seller who has tendered performance early and who has been notified that the performance is not in conformity with the contract may make a new and conforming tender if that can be done within the time allowed for performance. 2. In cases not covered by paragraph 1 a seller who has tendered a performance which is not in conformity with the contract may, without undue delay on being notified of the lack of conformity, offer to cure it at its own expense. 3. An offer to cure is not precluded by notice of termination. 4. The buyer may refuse an offer to cure only if: (a) cure cannot be effected promptly and without significant inconvenience to the buyer; (b) the buyer has reason to believe that the seller’s future performance cannot be relied on; or (c) delay in performance would amount to a fundamental non-performance. 5. The seller has a reasonable period of time to effect cure. 6. The buyer may withhold performance pending cure, but the rights of the buyer which are inconsistent with allowing the seller a period of time to effect cure are suspended until that period has expired. 7. Notwithstanding cure, the buyer retains the right to claim damages for delay as well as for any harm caused or not prevented by the cure. Article 110 Requiring performance of seller’s obligations (1) The buyer is entitled to require performance of the seller’s obligations. (2) The performance which may be required includes the remedying free of charge of a performance which is not in conformity with the contract. (3) Performance cannot be required where: (a) performance would be impossible or has become unlawful; or (b) the burden or expense of performance would be disproportionate to the benefit that the buyer would obtain. Article 114 Termination for non-performance Monetary Obligations (1) A buyer may terminate the contract within the meaning of Article 8 if the seller’s non-performance under the contract is fundamental within the meaning of Article 87(2). (2) In a consumer sales contract and a contract for the supply of digital content between a trader and a consumer, where there is a non-performance because the goods do not conform to the contract, the consumer may terminate the contract unless the lack of conformity is insignificant.

1. Performance a) The Principle Although the European Commission withdrew the Draft of a Common European 37 Sales Law (CESL) and abandoned the whole project the Draft is nonetheless an important document for the development of European private law. It is an instrument that exclusively dealt with sales, however both between commercial parties and between

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professional sellers (traders) and consumers. The Draft further regulated the sale of traditional movable goods and of digital content (like e-books etc.). 38 According to the Draft, if the seller violates an obligation the buyer may almost always request performance, ‘including specific performance, repair or replacement of the goods or digital content’.80 However, this principal right to performance, even as secondary claim, is excluded if performance would be impossible or illegal or if ‘the burden or expense of performance would be disproportionate to the benefit that the buyer would obtain.’81 For consumer sales (where the seller is a trader and the buyer a consumer) Article 111 CESL contained the same solution, though further specifying the considerations for the assessment of the disproportionality and ordering that the buyer’s performance request stops other remedies for 30 days.82 Also the seller may request performance if the buyer violates a contractual duty, for instance does not take the goods.83 39 The performance claim is further excluded – as well as a damages claim – if the non-performance is excused.84 The respective provision (Article 88(1) CESL) excused the non-performance of a party if this was ‘due to an impediment beyond that party’s control and if that party could not be expected to have taken the impediment into account at the time of the conclusion of the contract, or to have avoided or overcome the impediment or its consequences.’ The core of this provision was identical with that of the corresponding provisions in the CISG, PICC and PECL. b) The Main Duties aa) In General 40

Concerning the how of performance the CESL has borrowed from the PICC and the PECL – and indirectly from the CISG – the express obligation that ‘(e)ach party has a duty to act in accordance with good faith and fair dealing’85 as well as the duty to co-operate.86 The latter duty of the parties reached as far as such co-operation ‘can be expected for the performance of their contractual obligations.’ This left ample room for discretion and was rather vague. The formulation of Article 1:202 PECL to co-operate ‘in order to give full effect to the contract’ is certainly preferable. bb) Seller’s Duties

41

The CESL listed the seller’s obligations in Article 91 CESL: the duty to deliver conforming goods or supply conforming digital content and to transfer the ownership and the right to use. The place of delivery was the consumer’s place of residence in consumer sales and in professional sales generally the place of business of the seller or where the seller handed over the goods to the first carrier (depending on whether the sale involved a carriage of the goods).87 The time of delivery also differed between consumer and professional sales: unless otherwise agreed, the consumer must receive the goods not Article 106(a) CESL. Article 110(3)(b) CESL. 82 Article 111(2) CESL. This specific rule may arouse the wrong impression that in commercial sales the buyer’s performance request does not exclude other remedies for a period reasonable for further performance. 83 Article 131(1)(a) CESL and Article 132 CESL. 84 See Article 106(4) CESL and Article 131(2) CESL. 85 Article 2(1) CESL. 86 Article 3 CESL. 87 See Article 93(1)(a) and(b) CESL. 80 81

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later than 30 days after the contract was concluded; the trader could request delivery ‘without undue delay after the conclusion of the contract.’88 cc) Buyer’s Duties Unsurprisingly, CESL obliged the buyer to pay the price and to take delivery of the 42 goods or of the digital content.89 In the absence of other stipulations or indications the place of payment was the seller’s place of business.90 The default rule for the time of payment was that the price is due at the moment of delivery.91

2. Breach of Contract a) Breach in General The CESL followed the general CISG, PICC and PECL pattern that any kind of 43 non-performance (including delivery of non-conforming goods) entitles the other party to one or more remedies even if the non-performance is excused.92 Fault did not play a role as requirement for contractual liability. Where the breach was excused, the remedies of performance and damages were excluded but termination and price reduction might be still available.93 b) Fundamental Breach Also CESL operated with the concept of fundamental breach as used in the CISG, 44 PICC and PECL. According to Article 87(2)(a) CESL any non-performance—in a broad sense which included the delivery of non-conforming goods94—was fundamental ‘if it substantially deprives the other party of what that party was entitled to expect under the contract unless at the time of conclusion of contract the non-performing party did not foresee and could not be expected to have foreseen that result.’ In substance this corresponded entirely with the respective provisions in the CISG, PICC and PECL. c) Anticipatory Breach CESL dealt with the anticipatory breach of any of the parties in its Article 87(2)(b) 45 CESL. Such breach constituted a fundamental breach as well—and entitled to termination—’if it is of such a nature as to make it clear that the non-performing party’s future performance cannot be relied on.’ d) Cure CESL provided for a rather far-reaching right in sales between traders to cure if 46 delivered goods or digital content did not conform to the contract. It was merely necessary that the seller offered cure ‘without undue delay’.95 The buyer then could refuse this offer only on three grounds: ‘cure cannot be effected promptly and without significant inconvenience to the buyer’; ‘the buyer has reason to believe that the seller’s future performance cannot be relied on’; or ‘delay would amount to a fundamental Article 95 CESL. Article 123 CESL. 90 Article 125(1) CESL. 91 Article 126(1) CESL. 92 See Article 106 CESL for the buyer’s remedies and Article 131 CESL for the seller’s remedies. 93 See Article 106(4) CESL and Article 131(2) CESL. 94 See the definition in Article 87(1)(c) and (d) CESL. 95 Article 109(2) CESL. 88

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non-performance.’ The first and third grounds overlapped to a certain, doubtful degree whereas the second ground required further specification. In contrast to the CISG, CESL reduced considerably the buyer’s possibility to terminate a contract in case of a fundamental breach. Even if a breach was fundamental CESL regularly required the buyer to wait for the seller’s second try of performance if the seller this offered. The reasons for a refusal of the offer were rather restrictive and must be proved by the buyer. Much would depend on the interpretation of these grounds, in particular on the scope of the reason that the buyer had lost the trust in the seller’s future performance. In consumer sales the seller had no right to cure.96

V. German Bürgerliches Gesetzbuch § 242 Performance in good faith An obligor has a duty to perform according to the requirements of good faith, taking customary practice into consideration. § 323 Withdrawal for nonperformance or for performance not in conformity with the contract (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 withdraw from the contract, if he has specified, without result, an additional period for performance or cure. (2) The specification of a period of time can be dispensed with if 1. the obligee seriously and definitely refuses performance, 2. the obligee does not render performance by a date specified in the contract or within a period specified in the contract, in spite the fact that, according to a notice given by the obligee to the obligor prior to the conclusion of the contract or based on other circumstances attending at the time of its conclusion, the performance as per the date specified or within the period specified is essential to the obligee, or 3. in the case of work not having been carried out in accordance with the contract, special circumstances exist which, when the interests of both parties are weighed, justify immediate revocation. (5) If the obligor has not performed in conformity with the contract, the obligee may not withdraw from the contract if the breach of duty is trivial. § 433 Typical contractual duties in a purchase agreement (1) By a purchase agreement, the seller of a thing is obliged to deliver the thing to the buyer and to procure ownership of the thing for the buyer. The seller must procure the thing for the buyer free from material and legal defects. (2) The buyer is obliged to pay the seller the agreed purchase price and to accept delivery of the thing purchased. § 437 Rights of buyer in the case of defects If the thing is defective, the buyer may, provided the requirements of the following provisions are met and unless otherwise specified, 1. under section 439, demand cure, … § 439(1) Cure (1) As cure the buyer may, at his choice, demand that the defect is remedied or a thing free of defects is supplied.

1. Performance a) The Principle 47

German sales law has been deeply influenced by the EU Directive on Consumer Sales of 199997 which led to a modernization of the whole law of obligations of the German 96 97

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Civil Code in 2002 with a particular focus on sales law. Even before this reform the German Civil Code rested on the general principle that a party can claim specific performance.98 In accordance with the EU Directive the Civil Code now explicitly provides for a specific performance claim (Nacherfüllung) where the goods are non-conforming. The specific form of performance is either repair or replacement. 99 The buyer can choose between them but the seller can refuse either if they are impossible or would cause him disproportionate costs.100 b) The Main Duties aa) In General The BGB contains general default provisions on where, when and how contractual 48 parties including sellers and buyers must perform their duties. The place of performance is generally the seat of the debtor.101 Thus, the seller must deliver at his place; however, the buyer must send the payment to the seller102 and has performed its obligation only if the money reaches the seller in the agreed time.103 The time for performance starts immediately with the conclusion of the contract.104 In the absence of other stipulations or indications the performance is then immediately due. Finally, with respect to the mode of performance, the parties must act in accordance with the principle of good faith.105 This means in particular that a party must not endanger the aim of the contract. bb) The Parties’ Further Duties The Civil Code prescribes the usual duties: According to § 433(1) and (2) BGB the 49 seller is obliged to deliver conforming goods and transfer their property title free of any encumbrances, whereas the buyer has to take the goods and to pay for them.

2. Breach of Contract a) Breach in General The 2002 reform of the Code’s law of obligation introduced the unitary concept of 50 breach of contract that in principle treats all kinds of breaches alike and underlies the CISG and its derivatives PICC and PECL. However, the reform still upheld the fault principle as general rule for damages claims although fault is generally presumed.106 This concept applies to sales contracts without restrictions. On the contrary, the remedies of termination and price reduction do not require fault and are available even if the performance has become impossible.107

98 See indirectly § 241(1) BGB according to which a contract (or other obligation) entitles the creditor to claim the – promised – performance. 99 § 439 BGB. 100 § 439(3) BGB. 101 § 269(1) BGB. 102 § 270(1) BGB. 103 See Grüneberg, in Palandt § 271 BGB para. 1. 104 § 271 BGB. 105 § 242 BGB. 106 § 280(1) sent. 2 BGB. 107 See §§ 437, 440, 441 BGB.

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b) Fundamental Breach The German BGB has not adopted the concept of fundamental breach. Nonetheless are its solutions often similar to the outcome of that concept. In principle, the aggrieved party must give the party in breach a second chance for performance before it can terminate the contract how grave the breach ever was.108 If the performance did in any respect not conform to the contract, the aggrieved party – traders and consumers alike – must first fix a reasonable period of time for the performance (‘Nachfrist’); only after the unsuccessful lapse of that period the aggrieved party can declare the contract terminated, again irrespective of the gravity of the breach. Only if the breach was insignificant, termination is excluded.109 Insignificance has been accepted where the breach impaired 5% or less of the value of the good.110 52 In certain instances the Nachfrist procedure is unnecessary, generally if it is unacceptable for a reasonable party to wait with the termination,111 namely because the other party has seriously and finally announced that it will not fulfil its duties,112 because the time of performance was of the essence113 or, where special circumstances justify the immediate termination.114 In sales contracts the buyer can terminate the contract without Nachfrist also if the seller refuses repair and replacement or if the remedying has not succeeded twice.115 51

c) Anticipatory Breach 53

The general German law of obligations deals with the situation that is termed an anticipatory breach in two provisions. The primary provision is § 323(4) BGB which determines: ‘The obligee may revoke the contract before performance is due if it is obvious that the requirements for revocation will be met.’ Under this provision it must be apparent that the debtor will commit a breach that would entitle the other party to terminate the contract. But also § 321(1) sent. 1 BGB can be relevant according to which: ‘(a) person who is obliged to perform in advance under a reciprocal contract may refuse to render his performance if, after the contract is entered into, it becomes apparent that his entitlement to consideration is jeopardized by the inability to perform of the other party.’ The other party’s inability to perform thus entitles the aggrieved party to withhold the own performance and after an unsuccessful Nachfrist also to terminate the contract. 116 d) Cure

54

The German Civil Code does not contain a special provision on cure. However, the general Nachfrist procedure serves the same aim – the creditor must fix a period for remedying any shortcoming of the tendered performance and this period must have lapsed without success before termination or price reduction and even damages for the full performance are available.117 This provides the debtor with an indirect ‘right’ to remedy any insufficiency of the performance during the Nachfrist. See §§ 323(1), 440 BGB. § 323(5) sent. 2 BGB. 110 See BGH in (2014) BB 1999. 111 See §§ 323(2), 440 BGB. 112 See § 323(2) No. 1 BGB. 113 § 323(2) No. 2 BGB. 114 § 323(2) No. 3 BGB. 115 § 440 BGB. 116 § 321(2) BGB. 117 See §§ 281, 323, 440 BGB. 108 109

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VI. American Uniform Commercial Code § 2-301 General Obligations of Parties The obligation of the seller is to transfer and deliver and that of the buyer is to accept and pay in accordance with the contract. § 2-311 Options and Cooperation Respecting Performance. (1) An agreement for sale which is otherwise sufficiently definite (subsection (3) of Section 2–204) to be a contract is not made invalid by the fact that it leaves particulars of performance to be specified by one of the parties. Any such specification must be made in good faith and within limits set by commercial reasonableness. (2) Unless otherwise agreed specifications relating to assortment of the goods are at the buyer's option and except as otherwise provided in subsections (1)(c) and (3) of Section 2–319 specifications or arrangements relating to shipment are at the seller's option. (3) Where such specification would materially affect the other party's performance but is not seasonably made or where one party's cooperation is necessary to the agreed performance of the other but is not seasonably forthcoming, the other party in addition to all other remedies (a) is excused for any resulting delay in his own performance; and (b) may also either proceed to perform in any reasonable manner or after the time for a material part of his own performance treat the failure to specify or to cooperate as a breach by failure to deliver or accept the goods. § 2-508 Cure by Seller of Improper Tender or Delivery; Replacement. (1) Where any tender or delivery by the seller is rejected because non-conforming and the time for performance has not yet expired, the seller may seasonably notify the buyer of his intention to cure and may then within the contract time make a conforming delivery. (2) Where the buyer rejects a non-conforming tender which the seller had reasonable grounds to believe would be acceptable with or without money allowance the seller may if he seasonably notifies the buyer have a further reasonable time to substitute a conforming tender. § 2-601 Buyer's Rights on Improper Delivery. Subject to the provisions of this Article on breach in installment contracts (Section 2–612) and unless otherwise agreed under the sections on contractual limitations of remedy (Sections 2–718 and 2–719), if the goods or the tender of delivery fail in any respect to conform to the contract, the buyer may: (a) reject the whole; or (b) accept the whole; or (c) accept any commercial unit or units and reject the rest.

1. Performance a) The Principle In principle the UCC Sales Chapter follows the Common Law standpoint that perfor- 55 mance as secondary claim is the exception. § 2-716(1) UCC provides for specific performance (for the buyer) as a discretionary remedy ‘where the goods are unique or in other proper circumstances.’118 Although this formulation slightly extends the traditional Common Law position on specific performance, in general also under the UCC, an aggrieved party can merely request damages for any kind of non-conforming performance. Only where the buyer heavily depends on the specific delivery of the agreed goods the court may allow a specific performance claim. Moreover, the seller has an action to claim the price if the buyer does not pay when payment is due119 which can be regarded as a kind of specific performance.

118 § 2-716(3) UCC grants the buyer a right to replevin (specific performance) of the goods under rather specific circumstances only. 119 § 2-709 UCC.

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b) The Main Duties aa) In General 56

The Sales Chapter of the UCC contains general provisions on where, when and how the parties must perform their duties. The place for the delivery of the goods is regularly the seat of the seller, unless otherwise agreed.120 The place for payment is in principle the place ‘at which the buyer is to receive the goods even though the place of shipment is the place of delivery.’121 The default rule for the time for delivery of the goods provides a reasonable time122 which evidently starts with the conclusion of the contract. Payment is due also at the time at which the buyer should receive them.123 As to the mode of the performance of the contract in specific situations the parties are under a duty to co-operate and to observe the principle of good faith, for instance with respect to specifications left to one party.124 bb) The Parties’ Further Duties

57

§ 2-301 UCC defines the traditional duties of seller and buyer: the seller is obliged ‘to transfer and deliver’ the goods; the buyer must accept them and pay.

2. Breach of Contract a) Breach in General 58

The UCC has adopted the unitary concept of breach of contract that is typical for the Common Law. Any breach of contract, irrespective of the ground for the breach, entitles the aggrieved party at least to damages.125 Fault is not required for any remedy for the breach, but the UCC provides for certain excuses where risks outside the party’s sphere have materialized.126 b) Fundamental Breach

59

In the case of delivered goods which are defective the buyer can cancel the contract.127 The UCC seems to require no specific fundamentality of the breach. However, ‘(w)here the buyer rejects a non-conforming tender which the seller had reasonable grounds to believe would be acceptable with or without money allowance the seller may if he seasonably notifies the buyer have a further reasonable time to substitute a conforming tender.’128 This means in cases where the seller could have expected the acceptance of the delivery the seller can avoid the cancellation by prompt cure. Only if the non-conformity of the tender is such that its acceptance could not be expected – and that comes close to a fundamental non-performance – can the buyer immediately terminate the contract.

§ 2-308(a) UCC with certain specifications in (b) and (c). § 2-310(a) UCC. 122 § 2-309(1) UCC. 123 § 2-310(a) UCC. 124 See § 2-311 UCC. 125 See § 2-703(d) and (e), § 2-711(1)(a) and (b) UCC. 126 See § 2-613 and § 2-615 UCC. 127 § 2-711(1) UCC. 128 § 2-508(2) UCC. 120

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c) Anticipatory Breach The UCC regulates the anticipatory breach in § 2-609 UCC: ‘When reasonable 60 grounds for insecurity arise with respect to the performance’ the aggrieved party may ‘in writing demand adequate assurance of due performance’. No positive assurance within at most 30 days brings the contract automatically to an end. d) Cure The UCC contains a special rule on cure: § 2-508 UCC. Before the expiry of the time 61 for performance the seller may always cure any non-conforming performance. 129 Only a respective seasonal notification is necessary. ‘Where the buyer rejects a non-conforming tender which the seller had reasonable grounds to believe would be acceptable with or without money allowance the seller may if he seasonably notifies the buyer have a further reasonable time to substitute a conforming tender.’ 130 That means in cases where the seller could have expected the acceptance of the delivery the seller can avoid the cancellation by prompt cure. Only if the non-conformity of the tender is such that its acceptance could not be expected – and that comes close to a fundamental non-performance – can the buyer immediately terminate the contract.

VII. English Law Sale of Goods Act 1979 Section 11 When condition to be treated as warranty (3) Whether a stipulation in a contract of sale is a condition, the breach of which may give rise to a right to treat the contract as repudiated, or a warranty, the breach of which may give rise to a claim for damages but not to a right to reject the goods and treat the contract as repudiated, depends in each case on the construction of the contract; and a stipulation may be a condition, though called a warranty in the contract. Section 27 Duties of seller and buyer It is the duty of the seller to deliver the goods, and of the buyer to accept and pay for them, in accordance with the terms of the contract of sale. Section 49(1) Action for price (1) Where, under a contract of sale, the property in the goods has passed to the buyer and he wrongfully neglects or refuses to pay for the goods according to the terms of the contract, the seller may maintain an action against the buyer for the price of the goods. Section 51(1) Damages for non-delivery (1) Where the seller wrongfully neglects or refuses to deliver the goods to the buyer, the buyer may maintain an action against the seller for damages for non-delivery. Section 52(1) Specific performance (1) In an action for breach of contract to deliver specific or ascertained goods the court may, if it thinks fit, on the plaintiff ’s application, by its judgment or decree direct that the contract shall be performed specifically, without giving the defendant the option of retaining the goods on payment of damages.

129 130

§ 2-508(1) UCC. § 2-508(2) UCC.

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Chapter 17 Performance and Breach of Contract Consumer Rights Act 2015 Section 19 Consumer’s rights to enforce terms about goods (3) If the goods do not conform to the contract because of a breach of any of the terms described in sections 9,10, 11, 13 and 14 or if they do not conform to the contract under section 16, the consumer’s rights (and the provisions about them and when they are available) are— (a) the short-term right to reject (sections 20 and 22); (b) the right to repair or replacement (section 23); and (c) the right to a price reduction or the final right to reject (sections 20 and 24).

1. Performance a) The Principle 62

In principle English sales law as well as English general contract law does not provide for a general claim for specific performance. If a contractual obligation is not correctly performed damages is the normal remedy, and only under specific circumstances is a claim for specific performance available, namely where damages are no adequate remedy for the non-conforming performance.131 However, already the original Sale of Goods Act of 1893 provided for specific performance of the delivery of specific or ascertained goods according to the discretion of the court,132 and for an action for the price if the buyer did not pay133 which also is a form of specific performance. Moreover, in consumer sales the claim for repair or replacement was originally introduced into the Sale of Goods Act 1979 as s 48B. Due to recent legislation, however, the legislative provisions on remedies in consumer contracts for goods are now to be found in the Consumer Rights Act 2015. A consumer therefore has the principal right to request specific performance in case of delivery of defective goods.134 b) The Main Duties

63

The Sale of Goods Act circumscribes the main duties of the seller and the buyer in a laconic form: ‘It is the duty of the seller to deliver the goods, and of the buyer to accept and pay for them, in accordance with the terms of the contract of sale.’ 135 The Act also determines where and when the parties have to perform their duties if the contract insofar is silent. The place of delivery of the goods is generally the seller’s seat (the place of business or, without such place, its residence).136 There lies also the place of payment.137 The time for delivery is a reasonable time,138 which apparently starts with the conclusion of the contract. The default rule for the time for payment is that the payment must be made concurrently with the tender of the delivery.139

See Co-operative Insurance Society Inc. v Argyll Stores [1998] AC 1. s 52 SGA 1893. 133 s 49 SGA 1893. 134 See s 19(3) in connection with s 23 Consumer Rights Act 2015. 135 s 27 SGA 1979. 136 s 29(2) SGA 1979; but for consumer sales the buyer’s place unless otherwise stipulated: s 28(2) Consumer Rights Act 2015. 137 See Benjamin’s Sale of Goods (9th edn., 2014, Suppl 2018) para. 9-047. 138 s 29(3) SGA 1979; for consumer sales: “without undue delay” and “in any event, not more than 30 days after the day on which the contract is entered into” (s 28(3) Consumer Rights Act 2015). 139 Benjamin’s Sale of Goods (n 137) para. 9-057. 131

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2. Breach of Contract a) Breach in General English sales law follows the general concept of the Common Law that any non-con- 64 forming performance is a breach of contract – and entitles at least to damages.140 The breach does not presuppose fault. The non-conforming performance can however be excused ‘by reason of impossibility or otherwise.’141 b) Fundamental Breach The buyer can terminate the contract if the other party has breached a condition 65 of the contract, and can only claim damages if the breach concerned a warranty.142 Whether an explicit or implied term of the contract is a condition or a warranty ‘depends in each case on the construction of the contract, and a stipulation may be a condition, though called a warranty.’143 The Sale of Goods Act 1979 implies certain terms, in particular on the required quality144 and unencumbered property title,145 which the Act stamps as conditions.146 But even if the breach is a breach of an implied condition the buyer (being no consumer) cannot terminate the contract if ‘the breach is so slight that it would be unreasonable for him to reject’ the goods.147 The breach thus must reach a certain degree of gravity that allows termination. With respect to consumer sales the consumer buyer is generally obliged first to 66 request repair or replacement (and thus give the seller a second chance). He can only turn to the remedy of termination (rescission) if any remedying was impossible, disproportionate or unsuccessful.148 c) Anticipatory Breach English law knows of the notion of anticipatory breach. If a final renunciation of 67 the obligation to perform or the self-created impossibility to perform occurs before the time for performance has lapsed, the aggrieved party is entitled either to terminate the contract or to claim damages but also to wait with these remedies until the time for performance has lapsed.149 d) Cure Although the Sale of Goods Act 1979 does not contain an express statutory provision 68 on cure, there is a series of cases in which judicial support is given for a ‘right to re-tender.’150 It is to be noted, however, that in a sense the specific provisions on consumer goods contracts provide for a right to cure since the consumer who requests repair or See ss 50, 51 and 53 SGA 1979; also Johnson v Agnew [1980] AC 367. s 11(6) SGA 1979. 142 See s 11(3) SGA 1979. 143 s 11(3) SGA 1979. 144 s 14 SGA 1979. 145 s 12 SGA 1979. 146 See s 12(5A) and s 14(6) SGA 1979. Also the implied term that in a sale by description the goods will correspond with the description (s 13(1) Sale of Goods Act 1979) is a condition (s 13(1A) SGA 1979). The same applies to a sale by sample; the implied term that the goods will correspond with the sample is also a condition (s 15(2) and (3) SGA 1979). 147 s 15A(1) SGA 1979. 148 See s 48C(1) and (2) SGA 1979. 149 See Benjamin’s Sale of Goods (n 137) para. 12-021. 150 For a discussion of these cases see McKendrick, Goode on Commercial Law (5 th edn., Penguin 2016) p. 368 et seq. 140

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replacement must give the trader a reasonable time to replace or repair them. 151 The possibility to cure a defective delivery is not expressed as a formal right of the seller but rather an obligation of the buyer. Nonetheless, it serves the same function.

VIII. French Code Civil Article 1217 A party towards whom an undertaking has not been performed or has been performed imperfectly, may: – refuse to perform or suspend performance of his own obligations; – seek enforced performance in kind of the undertaking; – request a reduction in price; – provoke the termination of the contract; – claim reparation of the consequences of non-performance. Sanctions which are not incompatible may be combined; damages may always be added to any of the others. Article 1218(1) In contractual matters, there is force majeure where an event beyond the control of the debtor, which could not reasonably have been foreseen at the time of the conclusion of the contract and whose effects could not be avoided by appropriate measures, prevents performance of his obligation by the debtor. Article 1221 A creditor of an obligation may, having given notice to perform, seek performance in kind unless performance is impossible or if there is a manifest disproportion between its costs to the debtor and its interest for the creditor. Article 1224 Termination results either from the application of a termination clause, or, where the non-performance is sufficiently serious, from notice by the creditor to the debtor or from a judicial decision. Article 1582 Sale is a contract whereby a person obligates himself to deliver a thing and the other to pay the price. It may be made by authentic act or by act under private signature.

1. Performance a) The Principle 69

French sales law as well as French contract law in general provides for a general primary and secondary obligation to perform. If an obligation under a synallagmatic contract like the sales contract is not fulfilled the aggrieved party is entitled – according to its choice – either to performance in natura (if still possible) or to termination and damages.152 However, for termination the non-conformity of the performance must be sufficiently grave.153 According to Article 1351 amended Code civil the debtor is however exonerated from liability if the non-conforming performance is due to force majeure (which Article 1218(1) new Code civil defines very much the same way as Article 79 CISG).

See s 23(6) and (7) Consumer Rights Act 2015. Articles 1217, 1221 Code civil. 153 Now Article 1224 Code civil; prior in the same sense the courts: see Soc., 21 October 1954, Bull Civ. 1954. IV, No. 613. 151

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b) The Main Duties According to Article 1582 Code civil a sale is a contract by which one party is obliged 70 to deliver a thing and the other to pay for it. Since the sales agreement immediately transfers the property in the sold good154 the Code contains no special obligation to transfer the property although this is an inherent obligation of the seller. Unless otherwise agreed or indicated by the circumstances, the place of delivery of 71 ascertained goods is the place where the goods were at the time of the conclusion of the contract,155 for generic goods at the seller’s seat.156 In case of doubt the price has to be paid at the place of delivery.157 The amended Code provides that generally a sum of money must be paid at the domicile of the creditor.158 The default rules for the time of delivery and payment are that both are due immediately after the conclusion of the contract.159 As to the mode of performance the parties are obliged to execute their contract in accordance with good faith (‘bonne foi’).160

2. Breach of Contract a) Breach in General French sales law distinguishes between different cases of non-conforming perfor- 72 mance: for title defects specific provisions apply, in particular to the case that a third party claims the ‘eviction’ of the good.161 Where the delivered goods suffer from hidden defects (‘vices cachés’), the buyer is entitled to either terminate the contract (by returning the goods and reclaiming the price) or to request a price reduction (Article 1644 Code civil). The Code provides also for damages caused by the delivery of defective goods, according to the text of Article 1645 Code civil however only if the seller knew the defects. The courts have held since long that the professional seller must know the defects of his goods and is therefore always liable in damages.162 The professional seller’s knowledge is even imputed towards a professional buyer.163 Thus, in most cases the liability of sellers in damages is strict and independent of subjective elements as fault or knowledge. For consumer sales the implementation of the EU Directive on Consumer Sales 73 of 1999 modified the traditional choice the buyer had between termination and price reduction and introduced the primary remedy of remedied performance by way of repair or replacement.164 Only if this is not possible or has not been successful then the traditional remedies of termination and price reduction become available.165 However, Article L. 211-13 Code de la consommation expressly reserves the traditional remedies under Articles 1641–1649 Code civil. The consumer thus can choose between them and the remedies under the Code de la consommation. In certain cases the right to immediately terminate the contract in case of hidden defects is more favourable to the consumer than the right first to request repair or replacement. Since the EU Directive Article 1583 Code civil. Article 1609 Code civil. 156 See Com., 4 June 1991, Bull Civ 1991. IV. No. 204. 157 Article 1651 Code civil. 158 Article 1343-4 amended Code civil. 159 See Article 1651 Code civil for the payment of the price. 160 Article 1104 amended Code civil. 161 See Article 1626–1640 Code civil. 162 See for instance Civ. 1re 19 January 1965, D. 1965.389. 163 Com., 7 November 1991, Bull. Civ. 1991.IV. No. 367. 164 See Article L. 211-9 Code de la consommation. 165 Article L. 211-10 Code de la consommation. 154

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intends a mere minimum protection of consumers,166 the French solution is in line with the Directive. b) Fundamental Breach The French Code civil did not adopt the concept of fundamental breach. According to the text of Article 1644 Code civil the buyer’s remedies do not depend on a specific gravity of the defect of the goods.167 However, the courts have adopted the power to ‘souverainement’ decide whether the non-conformity justifies the termination of the contract or only damages or a price reduction.168 Instead the court can grant a further period for performance.169 75 Moreover, in consumer sales the termination of the contract is entirely excluded if the non-conformity is minor.170 74

c) Anticipatory Breach 76

The amended Code civil contains a provision on anticipatory breach (Article 1220 Code civil): A party may suspend its own performance where it is manifest that the other party will not perform and where the consequences of that non-performance will be sufficiently grave (‘suffisament graves’) for the aggrieved party. This follows similar provisions in the UCC, CISG, PICC and PECL. d) Cure

77

The Code civil does not contain a provision on cure. But since the court has discretion to grant a further period for performance during which the debtor can perform this offers a possibility of cure although no formal right for the party in breach.171

IX. Spanish Código Civil Article 7 1. Rights must be exercised in accordance with the requirements of good faith. 2. The law does not support abuse of rights or antisocial exercise thereof. Any act or omission which, as a result of the author’s intention, its purpose or the circumstances in which it is performed manifestly exceeds the normal limits to exercise a right, with damage to a third party, shall give rise to the corresponding compensation and the adoption of judicial or administrative measures preventing persistence in such abuse. Article 1124(1) and (2) (1) The power to terminate obligations is deemed to be implied in reciprocal obligations, where one of the obligors should not perform his obligation. (2) The aggrieved party may choose between demanding performance or termination of the obligation, with compensation of damages and payment of interest in both cases. He may also request termination, even after having chosen specific performance, where the latter should be impossible.

See Article 8(2) of the Directive. Under general contract law, termination now requires a sufficiently grave non-performance (Article 1224 amended Cc). 168 Com., 6 March 1990, Bull Civ 1990. IV. No. 75. 169 Article 1228 amended Code civil. 170 Article L-211-10(3) Code de la consommation. 171 See generally Article 1228 amended Code civil; specifically for the obligation to pay see Article 1343-5(1) amended Code civil (‘delai de grâce’ for a period no longer than two years). 166

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B. Sampling of Laws and Commentary Article 1445 Pursuant to the contract of sale and purchase, one of the contracting parties undertakes to deliver a specific thing and the other to pay a certain price for it, in money or something that represents it. Article 1451(1) A promise to sell or purchase, if there is agreement as to the thing and the price, shall entitle the contracting parties to reciprocally claim the performance of the contract. Article 1486(1) In the cases of the two preceding articles , the purchaser may choose between withdrawing from the contract, being paid any expenses he has paid or a reduction of the price in a proportional amount, pursuant to expert opinion.

1. Performance a) The Principle The Spanish Código civil is still strongly influenced by the French Code civil and 78 follows many of its concepts. In principle a party can request specific performance of the contractual obligations.172 In synallagmatic contracts like the sales contract a party can either claim performance or terminate the contract if the other party does not fulfil its contractual obligation.173 In case of hidden defects the seller is, at the choice of the buyer, further liable for a proportional reduction of the price.174 b) The Main Duties It is unsurprising that the Spanish Código civil defines the sale in the same way as the 79 French Code civil as the obligation of the seller to deliver the goods and the obligation of the buyer to pay the price.175 The place of delivery of an ascertained good is in the absence of any other indication 80 the place where the good is at the time of the conclusion of the contract;176 the place of delivery of generic goods is the seat of the seller. 177 Payment must be effected at the place of delivery,178 which means in case of doubt the seller’s seat. If the time for delivery of the goods is not otherwise fixed delivery is immediately due after the conclusion of the contract,179 and payment is due at the time when the goods are delivered.180

2. Breach of Contract a) Breach in General Like France Spain has not adopted a unitary concept of breach of contract. Different 81 specific rules apply to the different kinds of non-conforming performance: in case of non-performance of the sales contract (non-delivery or non-payment) the aggrieved party can either terminate the contract or request performance; in both cases also dam-

See Article 1451(1) Código civil for sales and Article 1124(2) Código civil for obligations in general. See Article 1124 Código civil. 174 Article 1486(1) Código civil. 175 Article 1445 Código civil. 176 Article 1171(2) Código civil. 177 Article 1171(3) Código civil. 178 Article 1500(2) Código civil. 179 Article 1113 Código civil. 180 Article 1500 Código civil. 172

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ages can be claimed.181 In the case of pure delay a damages claim is possible.182 Where the delivered goods are defective in title, Article 1478 Código civil establishes specific rights of the aggrieved party. In the common case of hidden non-conformities of the goods the buyer again can either terminate the contract or request a price reduction; 183 in case the seller knows the defects, also damages can be claimed.184 82 The implementation of the EU Directive on Consumer Sales in the Ley de Garantías en la Venta de Bienes de Consumo No. 23/2003 of 10 July 2003 gives the buying consumer the right to request performance through repair or replacement and only if they are impossible, disproportionate or unsuccessful the buyer may terminate the contract or request a reduction of the price. b) Fundamental Breach 83

Like in France there do not exist specific Code rules which relate the remedy of termination to the gravity of the breach except that Article 7 Sent. 2 Ley de Garantías en la Venta de Bienes de Consumo in line with the EU Consumer Sales Directive provides that termination is not available in case of a minor non-conformity of the goods. Nonetheless the courts, like in France, require under general contract law a grave breach in order to entitle the aggrieved party to termination.185 The special warranty regime for delivery of defective goods however allows termination irrespective of a specific gravity of the defect. The buyer can choose between the general rule and the special regime. 186 c) Anticipatory Breach

84

There is no specific provision in the Código civil which regulates the anticipatory breach as a general legal institute. However, under Article 1467(1) Código civil the seller may withhold delivery if the buyer has become insolvent after the conclusion of the sale. And under Article 1502 Código civil the buyer may suspend the payment of the price if the buyer’s right to possession or ownership is interfered with or where there is reasonable ground to fear such interference.187 d) Cure

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The Código civil does not contain a special provision on cure. However, where the aggrieved party requests termination because the other party has breached the (synallagmatic) contract, the court has discretion to grant an additional period for performance according to the circumstances. This second chance for correct performance serves a similar function as cure, namely to allow the party in breach, generally the seller, to heal a defective performance and to rescue the contract.

Article 1124(1) and (2) Código civil. Article 1101 Código civil. 183 Article 1486(1) Código civil. 184 Article 1486(2) Código civil. 185 See Tribunal Supremo 21 March 1994, RJ 1994/2560; Paz García Rubio, in Blanpain (ed), International Encyclopedia of Laws. Contracts vol. 8 Spain (2018) para. 296. 186 See Paz García Rubio (n 185) para. 297. 187 See for further discussion → Chapter 18 by Qiao Liu. 181

182

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B. Sampling of Laws and Commentary

X. Chinese Law Article 509 Each party shall fully perform its own obligations as agreed. The parties shall abide by the principle of good faith, and perform obligations of notification, assistance, and confidentiality, etc. in accordance with the nature and purpose of the contract and the transaction practice. When performing a contract, the parties shall avoid wasting resources, polluting the environment, and destroying the ecology. Article 511 Where certain contents agreed upon by the parties in the contract are ambiguous and cannot be determined in accordance with the provisions in the preceding article, the following provisions shall be applied: (1) If quality requirement is not clear, performance shall be rendered in accordance with the state mandatory standard; absent any state mandatory standard, performance shall be rendered in accordance with the state voluntary standard; absent any state voluntary standard, performance shall be rendered in accordance with the industry voluntary standard; or absent any state or industry standard, performance shall be rendered in accordance with the customary standard or any particular standard consistent with the purpose of the contract. (2) If price or remuneration is not clear, performance shall be in accordance with the prevailing market price at the place of performance at the time the contract was concluded, and if adoption of a price commissioned by the government or based on government issued pricing guidelines is required by law, such requirement applies. (3) When the place of performance is not clear, if the obligation is payment of money, performance shall be at the place where the payee is located; if the obligation is delivery of an immovable, performance shall be at the place where the immovable is located; for any other subject matter, performance shall be effected at the place where the party performing the obligations is located. (4) If the time limit for performance is not clear, the creditor may perform, and the debtor may request performance at any time, provided that the other party shall be given the time required for preparation. (5) If the method of performance is not clear, performance shall be rendered in a manner which is conducive to realizing the purpose of the contract. (6) If the apportionment of the expenses of performance is not clear, the party performing the obligations shall bear the expenses; and any additional expenses of performance incurred by the creditor shall be borne by the creditor. Article 563 The parties to a contract may terminate the contract under any of the following circumstances: (1) It is rendered impossible to achieve the purpose of contract due to an event of force majeure; (2) Prior to the expiration of the period of performance, the other party expressly states, or indicates through its conduct, that it will not perform its main obligation. (3) The other party delays performance of its main obligation after such performance has been demanded, and fails to perform within a reasonable period. (4) The other party delays performance of its obligations, or breaches the contract in some other manner, rendering it impossible to achieve the purpose of the contract. (5) Other circumstance as provided by law. A contract without a term requiring the successive performance of the obligation may be terminated by a party any time, provided that the other party is notified within a reasonable time. Article 579 If a party fails to pay the price, remuneration, rent, or interest, or fails to perform any other monetary obligation, the other party may request it to make the payment. Article 580 Where a party fails to perform the non-monetary obligations, or fails to perform the nonmonetary obligations as agreed, the other party may request it to perform except under any of the following circumstances: (1) It is unable to be performed in law or in fact. (2) The subject matter of the obligation is unfit for compulsory performance or the performance expenses are excessively high;

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Chapter 17 Performance and Breach of Contract (3) The creditor does not request performance within a reasonable time limit. If any of the foregoing circumstances defeats the purpose of contract, the people's court or arbitration institution may terminate the relation of contractual obligations and rights at the request of either party, without affecting the assumption of the liability for breach. Article 581 Where one party fails to perform the obligation, or fails to perform the obligation as agreed, and the nature of the obligation precludes the enforcement of performance, the other party may request it to bear the costs of substitute performance by the third party. Article 582 Where performance fails to satisfy the agreement, the liability for breach of contract shall be borne as agreed upon by the parties. Where there is no agreement in the contract on the liability for breach of contract or such agreement is not clear, nor can it be determined in accordance with the provisions of Article 510 of this Code, the aggrieved party may, in light of the nature of the subject matter and the degree of loss, reasonably choose to request the other party to bear the liability for breach of contract such as repairing, remaking, replacing, returning the goods, or reducing the price or remuneration.

1. Performance a) The Principle 86

The CCC of 2020 follows the idea that the parties are generally entitled to specific performance.188 On the one hand the CCC provides generally that ‘(e)ach party shall fully perform its own obligations as agreed;’189 on the other hand in a breach situation the aggrieved party can claim unlimited specific performance only in case of an unfulfilled monetary obligation.190 Specific performance of non-monetary obligations is in principle admitted unless it is impossible, unsuitable or too expensive or not claimed within reasonable time.191 b) The Main Duties

The CCC defines the ‘sales contract’ as ‘a contract whereby the seller transfers the ownership of a subject matter to the buyer, and the buyer pays the price for it.’192 But as Article 598 CCC shows the seller is also obliged to hand over the goods (transfer possession of the goods), and Article 608 CCC indirectly indicates that the buyer has the duty to take the goods. 88 In default of any other stipulation or indication the general place of performance is the debtor’s seat, however for payment (other than for real estate) the seat of the creditor. 193 Where the goods need to be transported, the place of performance is where the seller hands over the goods to the first carrier.194 If no transport is needed but the parties know where the goods are located that location is the place of performance.195 The de87

188 Also the Chinese Contract Law of 1999 and the General Rules on the Civil Law of the People’s Republic of China of 2017 had prescribed that principle; to the principle of specific performance see Chen, ‘Damages and Specific Performance in Chinese Contract Law’, in DiMatteo/Chen (eds), Chinese Contract Law. Civil and Common Law Perspectives (2018) 377, 397 et seq. 189 Article 509 Chinese Civil Code. 190 Article 579 Chinese Civil Code. 191 Article 580 Chinese Civil Code. 192 Article 595 Chinese Civil Code. 193 Article 511(3) Chinese Civil Code; also (still to the antecedent Chinese Contract Law) DiMatteo/Wang, ‘CCL and CISG: A Comparative Analysis of Formation, Performance and Breach’, in DiMatteo/Chen (eds), Chinese Contract Law. Civil and Common Law Perspectives (2018) 466, 482 et seq., 487 et seq. 194 Article 603(1) Chinese Civil Code. 195 Article 603(2) Chinese Civil Code.

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fault rule for the time of performance is that the creditor may request performance ‘at any time’ unless the debtor needs time for preparations; and the debtor may also perform ‘at any time’.196 In essence this means that in case of doubt performance regularly becomes due immediately after the conclusion of the contract. As to the mode of performance the Contract Law prescribes that ‘performance shall be rendered in a manner which is conducive to realizing the purpose of the contract’.197 Moreover, Article 7 CCC provides generally: ‘The parties to civil legal relations shall conduct civil activities under the principle of good faith, adhere to honesty, and fulfil their promises.’ The principle that good faith must be observed is also more specifically repeated in Article 509(2) CCC with respect to notification, assistance and confidentiality.

2. Breach of Contract a) Breach in General The CCC appears to have adopted a unitary concept of breach of contract. Generally 89 the aggrieved party can request the fulfillment of the breached obligation,198 and where the breach caused a loss, the aggrieved party is at least entitled to damages.199 Where the breach concerns the quality of the performance the aggrieved party has a variety of remedies: Article 582 CCC lists the following: ‘repairing, remaking, replacing, returning the goods, or reducing the price or remuneration.’ The sales part of the Chinese Contract Law explicitly refers to this Article where the quality of the delivered goods does not meet the required standard (Article 617 CCC). In addition, the aggrieved party can terminate the contract under the conditions listed in Articles 563 and 610 CCC. Events of force majeure however exempt from liability for breach of contract unless 90 they occur during delayed performance.200 Under the Chinese Contract Law force majeure had been defined as ‘objective situations which cannot be foreseen, avoided or overcome.’201 b) Fundamental Breach Like the Chinese Contract Law the new Civil Code does not contain an express 91 provision on fundamental breach. However, Article 563 CCC lists situations (and their requirements) under which a party can declare the contract terminated (dissolved). These situations comprise the case that a party does not perform its principal obligations within reasonable time even after being given notice,202 and the case that the non-performance makes the realization of the aim of the contract impossible. 203 Both situations presuppose a rather grave breach of contract: non-performance or improper performance either despite a reasonable ‘Nachfrist’ or with the consequence that the aim of the contract is frustrated.204 More specifically Article 610 CCC provides that the 196 Article 511(4) Chinese Civil Code; see also Article 601 and Article 602 Chinese Civil Code; further DiMatteo/Wang, ‘CCL and CISG: A Comparative Analysis of Formation, Performance and Breach’, in DiMatteo/Chen (eds), Chinese Contract Law. Civil and Common Law Perspectives (2018) 466, 483 et seq., 487 et seq. 197 Article 511(5) Chinese Civil Code. 198 Articles 509, 579, 580 Chinese Civil Code with the above mentioned exceptions (see supra para. 86). 199 Articles 583 and 584 Chinese Civil Code. 200 Article 590 Chinese Civil Code. 201 Article 117(2) Chinese Contract Law. 202 Article 563(3) Chinese Civil Code. 203 Article 563(4) Chinese Civil Code. 204 This had been confirmed for the former law by Article 25 of the Interpretation of the Supreme People’s Court on Issues Concerning the Application of Law for the Trial of Cases of Disputes over Sales

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buyer may dissolve (terminate) the contract ‘(w)here the quality of the subject matter does not conform to the quality requirements, making it impossible to achieve the purpose of the contract.’ This comes rather close to a fundamental breach which goes to the root of the contract and essentially frustrates the aim of the contract. 205 c) Anticipatory Breach 92

The Chinese Contract Law allows a party who has to perform in advance the suspension of its performance if it has ‘conclusive evidence’ that the other party will be unable to perform its obligations,206 and the first party may terminate the contract if the other party does not regain its ability to perform nor offers a guarantee within reasonable time.207 d) Cure

93

The Chinese Contract Law does not contain a specific provision on cure, but before a party can terminate the contract because of a breach the aggrieved party must urge the other party to perform within a reasonable period of time.208 This gives the party in breach the opportunity to remedy failures of performance though it is no formal right to cure.

XI. Comparative Conclusions 1. Performance a) The Principle 94

There is still a principal difference between the Civil Law countries and the Common Law countries on the question whether a party can request specific performance of the contractual obligations by the other party. In Civil Law countries a claim for specific performance even as secondary claim is the rule if performance is still possible and not too disproportionate whereas the Common Law countries principally regard specific performance as an exception where damages would not fully restitute the aggrieved party’s infringed interest. While the CISG left the decision on this issue to the seized court, PICC, PECL, Draft CESL and the Chinese Contract Law provide for a general claim for specific performance, but under certain restrictions for non-monetary claims: their performance must be possible and must also take account of the justified interests of the party in breach.209 This may constitute a solution which appears globally acceptable.

Contracts of 10 May 2012 which said that the court shall support a claim of the buyer for termination of the contract under Article 94(2) Contract Law if the seller failed to perform or improperly performed its obligations and the buyer’s purpose of the contract had been frustrated. 205 For a discussion see DiMatteo/Wang, ‘CCL and CISG: A Comparative Analysis of Formation, Performance and Breach’, in DiMatteo/Chen (eds), Chinese Contract Law. Civil and Common Law Perspectives (2018) 466,490 et seq. 206 Article 527 Chinese Civil Code. 207 Article 528 Chinese Civil Code. 208 See Article 563(3) Chinese Civil Code. 209 For a comparison of CISG and soft law regulations see Kleinschmidt, ‘Right to Performance‘, in Jansen/Zimmermann (eds), Commentaries on European Contract Laws (OUP 2018) 1185 et seq.

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b) The Main Duties The general duties of sellers and buyers are regulated rather uniformly. Although 95 sometimes differently formulated the basic obligations of seller and buyer are clear and accepted everywhere: the seller must deliver the goods, namely transfer their possession and in principle transfer the unencumbered property title; the buyer must pay for the goods and take them. Due to the overarching maxim of party autonomy the parties may always modify single aspects of these basic obligations. Unless otherwise agreed or indicated the place of delivery is generally the seller’s 96 seat at which in case of doubt also the payment must be effected. Where no time for performance has been determined delivery and payment regularly become due within a reasonable time or immediately after the conclusion of the contract. Since they are concurrent obligations the one need not to be performed without the other. Several of the compared laws and in particular the CISG, PICC, PECL and Draft CESL provide that in performing the contract the parties must observe the requirements of good faith and fair dealing. To a large extent the CISG already represents this far-reaching consensus on the basic 97 obligations of the parties of a sales contract. To a remarkable extent the sales contract is regarded as a contract of cooperation.

2. Breach of Contract a) Breach in General Mainly between the Civil Law countries and the Common Law countries a conceptu- 98 al difference exists concerning the approach to breach of contract. The Civil Law countries generally adopted a differentiated concept which distinguished between the reasons for a breach (non-performance, delayed performance and defective performance) and differentiated the consequences. Moreover, they allow damages only if the party in breach was at fault. The Common Law countries regularly followed and follow a unitary approach: each breach is a violation of the contractual promise and leads – irrespective of fault – at least to the basic remedy of damages. The CISG, PICC, PECL and CESL clearly follow the Common Law approach, and also the German law and the Chinese law has adapted to this approach which is evidently practical and avoids complications which the distinction between different kinds of breaches, their reasons and consequences raises. Moreover, the unitary approach does not exclude a certain differentiation between severe and simple breaches and their respective remedies. b) Fundamental Breach In a sense, all compared systems draw a line between breaches which allow termi- 99 nating the contract and breaches which do not.210 The Common Law jurisdictions generally provide that termination requires a severe violation of the contract. The breach must violate a condition which a reasonable party would regard as a fundament of the contract. Under the Civil Law in particular any defect of the delivered goods entitled the buyer to termination; however, the implementation of the EU Consumer Sales Directive excludes this remedy ‘if the lack of conformity is minor’.211 The CISG, PICC, PECL, the Draft CESL and the amended French general law of obligations follow the approach that termination requires a breach of considerable fundamentality in order to avoid the waste 210 For a comparison see also Rüfner, Art. 8:103: ‘Fundamental Non-performance’, in Jansen/Zimmermann (eds), Commentaries on European Contract Laws (OUP 2018) 1110 et seq. 211 Article 3(6) Consumer Sales Directive.

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of transport and other costs which a termination of the contract often causes and which is particularly burdensome in international sales. This solution seems to be preferable in comparison to an unrestricted right of termination. c) Anticipatory Breach 100

Where already in advance it is clear that a party will not perform its contractual obligations it seems reasonable that the other party should not be obliged to perform the own obligations and if there are no prospects of future performance a right to terminate the contract should be available. In essence this is the solution that can be found in all compared systems although the respective conditions vary in detail. In particular must it be clear that there is hard and fast evidence of the party’s inability to perform. Mere doubts, let alone rumors etc., cannot suffice. The modern sets of rules (CISG, PICC, PECL, and Draft CESL) appear to express this best. d) Cure

101

Some of the compared laws grant the seller a right to cure (UCC, CISG, PICC, PECL, and Draft CESL). Others offer the seller a mere factual opportunity to cure any non-conformity. In any event the cure must not burden the buyer with costs or unreasonable inconvenience, in particular long delay. In consumer sales cure in the form of repair or replacement is the buyer’s primary remedy which principally excludes other remedies. The idea that deficiencies of the performance should be healed if possible and not too burdensome for both parties underlines the maxim of pacta sunt servanda and also corresponds with the concept of fundamental breach. This concept, too, aims at the maintenance and execution of the contract instead of its rush termination which it allows in severe cases only.

C. Cross References 102

For remedies and damages see Michael Bridge, → Chapter 19 and for avoidance Harry Flechtner, → Chapter 20.

D. Practitioner Tips The default rules in international and national law on where, when and how to perform may not always fit the parties’ needs or wishes. They are also sometimes vague (e.g., reasonable time for performance). It is thus recommendable to give due consideration to the place of performance and agree on this place. Further the time for performance should be precisely fixed in the contract. 104 With respect to breach of contract it is often advisable to clearly specify which kinds of non-performance shall constitute a fundamental breach that entitles to terminate the contract. In particular for the case of delay it might be useful to specify when time should be of the essence or from which delay on this shall be the case. 103

E. Additional Sources 105 Adame Martínez, Specific performance as the preferred remedy in comparative law and CISG (Cizur Menor,

Thomson Reuters Aranzadi, 2013); Babiak, ‘Defining Fundamental Breach under the United Nations Convention on Contracts for the International Sale of Goods’ (1992) 6 Temp Int’l & Comp LJ 113;

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E. Additional Sources Devenney/Howells, ‘Common Law Perspectives on Performance and Breach’ in DiMatteo/Chen (eds), Chinese Contract Law (CUP 2018) 351; DiMatteo/Wang, ‘CCL and CISG: A Comparative Analysis of Formation, Performance and Breach’ in DiMatteo/Chen (eds), Chinese Contract Law (CUP 2018) 466; Ding, ‘Perspectives on Chinese Contract Law: Performance and Breach’ in DiMatteo/Chen (eds), Chinese Contract Law (CUP 2018) 301; Goerg, Exécution en nature et specific performance, (Helbing Lichtenhahn, 2017); Jansen/Zimmermann (eds), Commentaries on European Contract Laws (OUP 2018); Kleinschmidt, ‘Specific performance’, in Basedow/Hopt/Zimmermann/Stier (eds), The Max Planck Encyclopedia of European Private Law vol 2 (OUP 2012) 1581; Koch, ‘The Concept of Fundamental Breach of Contract under the United Nations Convention on Contracts for the International Sale of Goods (CISG)’ available at http://cisgw3.law.pace.edu/cisg/biblio/koch.html; Mankowski (ed), Commercial Law (Beck, Hart, Nomos 2020); Schwenzer, ‘Avoidance of the Contract in Case of Non-Conforming Goods (Article 49(1)(A) CISG)’ (2005–06) 25 J L & Com 437; Spaic, ‘Interpreting Fundamental Breach’ in DiMatteo (ed), International Sales Law. A Global Challenge (CUP 2014).

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CHAPTER 18 ANTICIPATORY BREACH Qiao Liu Part 1:

Anticipatory Breach Warranting Suspension of Performance . . . . . .

1

A. Topics Covered . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B. Introductory Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C. Statement of Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . D. International Sales Transaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . E. Sampling of Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. CISG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. UNIDROIT Principles of International Commercial Contracts . . . . . . . . . . . . . . III. Principles of European Contract Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. German Bürgerliches Gesetzbuch . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. French Code Civil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI. Spanish Código Civil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VII. American Uniform Commercial Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VIII. Chinese Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F. Commentary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. The Test of Anticipatory Breach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. ‘It Becomes Apparent’ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. ‘A Substantial Part of his Obligations’ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Two Specified Grounds for Anticipating a Prospective Breach . . . . . . . . . . . . II. Stoppage in Transit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Suspension, Notice and Adequate Assurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . G. Illustrations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Defective Delivery to Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Successive Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . H. Cross References & Additional Commentary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Cross References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Practitioner Tips and Contract Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Additional Sources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2 5 7 8 9 9 10 11 12 13 14 15 16 17 17 17 19 22 23 24 29 29 31 33 33 34 36

Part 2:

534

Anticipatory Breach Warranting Avoidance of Contract . . . . . . . . . . .

37

A. Topics Covered . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B. Introductory Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C. Statement of Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . D. International Sales Transaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . E. Sampling of Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. CISG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. UNIDROIT Principles of International Commercial Contracts . . . . . . . . . . . . . . III. Principles of European Sales Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. German Bürgerliches Gesetzbuch . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. French Code Civil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI. Spanish Código Civil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VII. American Uniform Commercial Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VIII. Chinese Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F. Commentary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. The Test of Anticipatory Breach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. ‘It is Clear’ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Fundamental Breach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Duty to Give Notice and Adequate Assurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. ‘Reasonable Notice’ and ‘If Time Allows’ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Consequences of Non-compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Remedies following Avoidance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Accelerated Action for Damages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Mitigation of Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . G. Illustrations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Time of the Essence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

37 38 43 44 45 45 46 47 48 49 50 51 52 53 53 53 60 62 62 63 65 65 66 67 67

Qiao Liu

A. Topics Covered II. Delayed Loading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Cover and Damages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . H. Cross References & Additional Commentary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Practitioner Tips & Contract Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . J. Additional Sources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

69 71 73 74 76

Part 1: Anticipatory Breach Warranting Suspension of Performance This Chapter carries forward the analysis on anticipatory breach given in Chapter 1 17 and provides a more nuanced review of this important topic with a focus on the gaps and interpretive ambiguities of CISG Articles 71, 72, and 73. The first part of the Chapter deals with anticipatory breach leading to suspension while part two discusses anticipatory breach leading to avoidance.

A. Topics Covered This Chapter addresses the issue of anticipatory breach in international sales of 2 goods. An anticipatory breach is a present breach of one or more future contractual obligations, for which immediate remedies are made available.1 The term ‘anticipatory breach’ is of a Common Law origin. But even within Common Law jurisdictions, the appropriateness of the term is not without dispute. For example, in the United States (US) ‘anticipatory repudiation’ is preferred to ‘anticipatory breach’. As Farnsworth noted, the English term ‘anticipatory breach’ is ‘elliptical’ and, if rewritten in full, should read ‘breach by anticipatory repudiation’.2 Questions can be posed as to the precise meaning of ‘repudiation’ and the appropriateness of it as an exclusive test whether a contractual wrong may have been committed ‘anticipatorily’. For this reason the American term ‘anticipatory repudiation’ has been criticized as unduly restrictive.3 In an international setting, its inappropriateness is even more evident as the Common Law orthodoxy that an anticipatory breach must reside in repudiation has not found favor in international instruments such as the CISG. The anticipatory breach regime under the CISG does, however, adopt one distinctive and innovative aspect of the US system in preference to the English doctrine of anticipatory breach, in that some types of anticipatory breach are allowed to give rise to a right to suspend performance, but not a right to ‘avoid’ the contract. Therefore, a broad view of ‘anticipatory breach’ will be adopted in this Chapter, 3 in line with the different provisions made under the CISG for what is essentially a future breach or non-performance. There are, accordingly, two categories of anticipatory breach. CISG Article 71 provides for an anticipatory breach that entitles the aggrieved party to suspend its performance under the contract. CISG Article 72 provides for an anticipatory breach that entitles the aggrieved party to immediately ‘avoid’ the contract. These two provisions are to be treated separately, although in appropriate cases they are interrelated, for example, where a failure to provide adequate assurance under CISG Article 71 leads to the accrual of a right to avoid the contract under CISG Article 72 1 See a conceptualization of anticipatory breach in the more restricted English Common Law context: Liu, Anticipatory Breach (Hart 2011) pp. 30–39. 2 Farnsworth, Farnsworth on Contracts vol. II (3rd edn Aspen 2004) ch 8 E (‘Prospective Nonperformance’) p. 550 n 2. 3 Liu, Anticipatory Breach pp. 40–43.

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(see discussion under the heading ‘the Notice Requirement and Adequate Assurance’ in Section A below). CISG Article 73(2) deals with the scenario involving avoidance of an installment contract in reliance upon an anticipatory breach. It is a type of anticipatory breach very similar to that found under CISG Article 72 and will be discussed together with it.4 4 Apart from the above provisions of the CISG, anticipatory breach is also a subject of other international as well as domestic legal regimes. At the international level, the PICC and PECL contain provisions on anticipatory breach. These will be discussed in conjunction with the CISG Articles. Reference will also be made to domestic laws relating to the matter, particularly those of England & Wales, US, Germany, and China.

B. Introductory Note Although the notion of anticipatory breach is historically of English origin, the English law does not countenance remedies such as suspension of performance or a demand for assurance of performance for anticipatory breach of contract.5 UCC § 2-609 makes a significant departure from English law by recognizing a right to demand adequate assurance and to suspend performance in anticipation of the other party’s future breach of the contract. This approach, often termed ‘insecurity of performance’, has proved to be a positive development and is well accepted in international instruments and many national legal systems. CISG Article 71 endorses the American scheme, but has certain omissions, which render its application uncertain. 6 The more general provisions under CISG Article 71(1) and (3) largely resemble UCC § 2-609 and find parallels in PICC Article 7.3.4 and PECL Article 8:105. BGB § 321 also embraces a general suspension right. In most European countries, however, this general scheme has not been adopted, although more specific provisions, such as those involving suspension and the right to demand assurance arising from bankruptcy or insolvency.6 One exception is French Code Civil, which during the 2016 amendment introduced art 1220 to allow for a suspension of performance where it becomes evident that the opposite party will commit a sufficiently serious non-performance at the time for performance. In addition, art 1613 entitles an unpaid seller to suspend delivery of goods where the buyer becomes bankrupt or insolvent, unless the buyer gives security for the payment of price. The extension to the withholding of goods already dispatched under CISG Article 71(2) has its equivalent in the English SGA ss 44–46 and UCC § 2-705. 5

C. Statement of Issues 7

The following discussions are structured around the key issues arising under CISG Article 71: (1) what constitutes an anticipatory breach justifying a right to suspend performance? (2) How significant is the aggrieved party’s right to prevent goods in transit from being handed over to the party in breach? (3) What remedies are available to the party in breach if the aggrieved party fails to give notice about its suspension 4 Under Rule 6.20(6) of the English Civil Procedure Rules, a claim may be served outside UK jurisdiction where a contract to be performed outside England is repudiated within. See, Fawcett, Harris and Bridge, International Sale of Goods in the Conflict of Laws (OUP 2005) [4.51] et seq. 5 Carter, ‘Suspending Contract Performance for Breach’ in Beatson and Friedmann (eds), Good Faith and Fault in Contract Law (Clarendon 1995) p. 485; ‘Adequate Assurance of Due Performance’ (1996) 10 JCL 1. 6 Lando and Beale (eds), Principles of European Contract Law (Parts I and II) (Kluwer 2000) p. 372.

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of performance? (4) What follows when the party in breach fails to provide adequate assurance within a reasonable time after receiving the notice?

D. International Sales Transaction Suspension of performance, along with a request for adequate assurance, encourages 8 the parties in international trade to find solutions together through negotiations and cooperation. It provides a temporary and intermediary remedial measure, which may lead to either the removal of impediments to contract performance or early release from potentially wasteful performance.

E. Sampling of Laws I. CISG 9

Article 71 (1) A party may suspend the performance of his obligations if, after the conclusion of the contract, it becomes apparent that the other party will not perform a substantial part of his obligations as a result of: (a) a serious deficiency in his ability to perform or in his credit-worthiness; or (b) his conduct in preparing to perform or in performing the contract. (2) If the seller has already dispatched the goods before the grounds described in the preceding paragraph become evident, he may prevent the handing over of the goods to the buyer even though the buyer holds a document, which entitles him to obtain them. The present paragraph relates only to the rights in the goods as between the buyer and the seller. (3) A party suspending performance, whether before or after dispatch of the goods, must immediately give notice of the suspension to the other party and must continue with performance if the other party provides adequate assurance of his performance.

II. UNIDROIT Principles of International Commercial Contracts 10

Article 7.3.4 Adequate assurance of due performance A party who reasonably believes that there will be a fundamental non-performance by the other party may demand adequate assurance of due performance and may meanwhile withhold its own performance. Where this assurance is not provided within a reasonable time the party demanding it may terminate the contract.

III. Principles of European Contract Law 11

Article 8:105 Assurance of Performance (1) A party who reasonably believes that there will be a fundamental non-performance by the other party may demand adequate assurance of due performance and meanwhile may withhold performance of its own obligations so long as such reasonable belief continues. (2) Where this assurance is not provided within a reasonable time, the party demanding it may terminate the contract if it still reasonably believes that there will be a fundamental non-performance by the other party and gives notice of termination without delay.

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IV. German Bürgerliches Gesetzbuch 12 § 321 Defence of uncertainty (1) A person who is obliged to perform in advance under a reciprocal contract may refuse to render his performance if, after the contract is entered into, it becomes apparent that his entitlement to consideration is jeopardised by the inability to perform of the other party. The right to refuse performance is not applicable if consideration is rendered or security is given for it. (2) The person required to perform in advance may specify a reasonable period in which the other party must, at his choice, render consideration or provide security reciprocally and simultaneously against performance. If the period ends without result, the person required to perform in advance may withdraw from the contract. § 323 applies with the necessary modifications.

V. French Code Civil 13 Article 1220 A party may suspend the performance of his obligation as soon as it becomes evident that his contracting partner will not perform his obligation when it becomes due and that the consequences of this non-performance are sufficiently serious for him. Notice of this suspension must be given as quickly as possible. Article 1613 Nor is [the seller] obliged to deliver, even if he has allowed time for the payment, where, since the sale, the buyer [is under a judicial arrangement] or insolvent, so that the seller is in imminent danger of losing the price; unless the buyer gives him security to pay at the time limit.

VI. Spanish Código Civil 14 Article 1467 The seller shall also not be obliged to deliver the thing sold if a forward period or term for the payment has been agreed if, after the sale, it is discovered that the purchaser is insolvent, so that the seller runs an imminent risk of losing the price. The case where the purchaser should secure all his payment in the period provided shall be excepted from this rule. Article 1502 If the purchaser should be disturbed in the possession or ownership of the thing acquired, or should have a reasonable ground to fear being disturbed by an action of ejectment or a mortgage foreclosure, may suspend payment of the price until the seller has made the disturbance or the danger cease, unless the latter should secure the return of the price, as the case may be, or unless it should have been set forth that, notwithstanding any contingency, the purchaser shall be obliged to pay.

VII. American Uniform Commercial Code 15 § 2-609. Right to Adequate Assurance of Performance. (1) A contract for sale imposes an obligation on each party that the other's expectation of receiving due performance will not be impaired. When reasonable grounds for insecurity arise with respect to the performance of either party the other may in writing demand adequate assurance of due performance and until he receives such assurance may if commercially reasonable suspend any performance for which he has not already received the agreed return. (2) Between merchants the reasonableness of grounds for insecurity and the adequacy of any assurance offered shall be determined according to commercial standards. (3) Acceptance of any improper delivery or payment does not prejudice the aggrieved party's right to demand adequate assurance of future performance. (4) After receipt of a justified demand failure to provide within a reasonable time not exceeding thirty days such assurance of due performance as is adequate under the circumstances of the particular case is a repudiation of the contract.

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F. Commentary § 2-705. Seller's Stoppage of Delivery in Transit or Otherwise. (1) The seller may stop delivery of goods in the possession of a carrier or other bailee when he discovers the buyer to be insolvent (Section 2-702) and may stop delivery of carload, truckload, planeload or larger shipments of express or freight when the buyer repudiates or fails to make a payment due before delivery or if for any other reason the seller has a right to withhold or reclaim the goods. (2) As against such buyer the seller may stop delivery until (a) receipt of the goods by the buyer; or (b) acknowledgment to the buyer by any bailee of the goods except a carrier that the bailee holds the goods for the buyer; or (c) such acknowledgment to the buyer by a carrier by reshipment or as warehouseman; or (d) negotiation to the buyer of any negotiable document of title covering the goods. (3)(a) To stop delivery the seller must so notify as to enable the bailee by reasonable diligence to prevent delivery of the goods. (b) After such notification the bailee must hold and deliver the goods according to the directions of the seller but the seller is liable to the bailee for any ensuing charges or damages. (c) If a negotiable document of title has been issued for goods the bailee is not obliged to obey a notification to stop until surrender of the document. (d) A carrier who has issued a non-negotiable bill of lading is not obliged to obey a notification to stop received from a person other than the consignor.

VIII. Chinese Law7 16

Article 527 The party who is to perform the obligation first may suspend his performance if he has definite evidence to prove that the other party has one of the following circumstances: (1) his business operation has significantly deteriorated; (2) he has removed assets or surreptitiously withdrawn funds in order to evade his obligations; (3) he has lost his commercial goodwill; (4) other circumstances indicate that he has lost or may lose the ability to perform his obligation. If a party suspends his performance without the definite evidence, he shall be liable for breach of contract. Article 528 If a party suspends his performance in accordance with the provisions of the preceding Article, he shall give notice to the other party in a timely manner. Performance shall be resumed if the other party provides appropriate assurance. After the suspension of performance, the other party is deemed to have repudiated the main obligations by his conduct if he fails to recover his ability to perform and fails to provide appropriate assurance within a reasonable time, and the party who has suspended his performance may terminate the contract and demand the other party to bear liability for breach of contract.

F. Commentary I. The Test of Anticipatory Breach 1. ‘It Becomes Apparent’ The expression ‘it becomes apparent’ introduces a requirement as to the likelihood 17 that the anticipated breach described in the section will occur. This section adopts an objective test, just as CISG Article 72(1) does for the requirement that ‘it is clear’ (see below). The threshold of proof required under CISG Article 71(1) is incapable of precise definition, but it is useful to understand it from four comparisons. First, it is generally agreed that, although the degree of probability required under CISG Article 71(1) is a 7 The English translation of the Chinese text is adopted from Ling, ‘The New Contract Law in the Chinese Civil Code’, (2020) 8(3) The Chinese Journal of Comparative Law (forthcoming).

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high one, it falls short of that required under CISG Article 72.8 Secondly, the outcome of a comparison with the degree of probability imparted by ‘good grounds’ under CISG Article 73(2) (see below) is far from clear. Despite the two provisions sharing a linguistic uniformity in the legislative history of the CISG,9 that fact is inconclusive as to whether they should be uniformly interpreted in their current versions. For example, CISG Article 73(2) provides a right to avoid the contract, but adopts a lower threshold of probability with the more subjective wording of ‘good grounds,’ as compared to the requirement of ‘it becomes apparent’ found in CISG Article 71(1).10 Thirdly, it is fair to say that the test under CISG Article 71(1) is similar to that of ‘reasonably believe’ found in the PICC and PECL.11 Finally, it has been suggested that ‘it becomes apparent’ imposes a higher standard than ‘reasonable grounds for insecurity’ under UCC § 609(1).12 18 As an objective test, ‘it becomes apparent’ must be judged from the perspective of a reasonable person. However it is not clear whether the reasonable person should be put into the shoes of the suspending party or an impartial bystander. CISG Article 8(2) endorses a test of ‘creditor objectivity’ and hence requires the knowledge or understanding of the suspending party to be imputed into the reasonable person.13 As will be seen, a future breach may become apparent under CISG Article 71(1) not only from ‘statements made by and other conduct of ’ the party, but also from general circumstances surrounding that party (see subsection 3 below). There appears to be no reason for treating these two cases differently. A future breach must become apparent after the conclusion of the contract, irrespective of whether or not the grounds for anticipating that breach existed at the time of contract.14 The underlying idea is that a party is not allowed to rely upon a future breach if that party has assumed the risk of the breach when entering into the contract.

2. ‘A Substantial Part of his Obligations’ 19

Under CISG Article 71(1) it must be anticipated that a party will not perform ‘a substantial part of his obligations’. It is suggested that the word ‘substantial’ be interpreted broadly as simply denoting ‘not insignificant’.15 The obligations of which a substantial part will not be performed refer to the outstanding obligations of the party in breach. Therefore the anticipated breach does not have to be a non-performance of a substantial part of the entire contract, or all of one of the party’s executed and executory obligations.16 Equally, the performance to be suspended by the aggrieved party refers to its future performance only. By ‘a substantial part of his obligations’ CISG Article 71(1) also excludes from its ambit cases where only minor breaches (such as ‘mere delay’ in

8 Flechtner and Honnold (eds), Uniform Law for International Sales under the 1980 United Nations Convention (4th edn, Wolters Kluwer 2009) pp. 551–2. The two different wordings were deliberately chosen: Bennett, in Bianca and Bonell (eds), Commentary on the International Sales Law: the 1980 Vienna Sales Convention (Giuffre Milan 1987) Article 71 at [3.2]. 9 Bennett, Article 71 at [1.8], Article 73 at [1.5]. 10 Cf Schlechtriem & Schwenzer, p. 1013 [30]. Also, Kröll et al, pp. 922–23 [15]. 11 Kröll et al, p. 948 at [62]. See also, Vogenauer & Kleinheisterkamp, p. 850 [4]. 12 Flechtner & Honnold on CISG, 555 (criticizing that this stringent interpretation of Article 71(1) may lead to wasted costs). See also the comparison between UCC and PICC: Vogenauer & Kleinheisterkamp, p. 850 [4]. For a provision similar to UCC § 609(1), see Restatement (Second) Contracts § 251. 13 Schlechtriem & Schwenzer, p. 1012 [28]; Kröll et al, pp. 923 [15]. 14 Schlechtriem & Schwenzer, pp. 1011 [25]; Kröll et al, pp. 923–4 [16]–[17]; Farnsworth, p. 575 (similar rule is applied under UCC). 15 See also, Bennett, Article 71 at [3.1]. 16 Cf Schlechtriem & Schwenzer, p. 1009 [19].

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payment of price) can be found and anticipated,17 even though the anticipated breach is not required to be a ‘fundamental breach’.18 Unlike BGB § 321(1) and CCC Article 527, the suspending party does not have to be 20 a party ‘obliged to perform in advance under a reciprocal contract’. Therefore, it may suspend not only the performance required by the contract prior to the time for the other party’s performance, but also for the preparation for performance to be rendered after the other party’s performance under the contract. CISG Article 71(1) is also applicable whether or not the contract is a synallagmatic contract or the parties’ performances are reciprocally related to each other (and hence it covers the situation governed by BGB § 273). However there is a general presumption to construe a contract as requiring interdependent, or concurrent, rather than independent performances.19 This raises the issue of whether the performance being suspended is confined to the performance reciprocally related to the other party’s future non-performance. An affirmative answer seems to be given by Common European Sales Law (CESL) Articles 113(3) and 133(3), which provide that ‘[t]he performance which may be withheld under this Article is the whole or part of the performance to the extent justified by the non-performance’. This provision differs from UCC § 2-609(1), where a party is allowed only to suspend performance for which it has not received the agreed return. Although the word ‘justified’ introduces some uncertainty in interpretation, it does not necessarily require a reciprocal relationship, and is wide enough to cover a situation where the suspended performance is one for which the agreed return has been received but nevertheless justified by the non-performance. Meanwhile, it is doubtful that the word supports a general proportionality requirement. Rather, the general approach enshrined under the CESL Articles, and one preferred here, is that the necessary justifiability is to be determined on a case by case basis, which requires that the extent of the anticipated non-performance be ascertained ‘with a reasonable degree of precision’.20 PICC Article 7.3.4 adopts a contrary approach by allowing the aggrieved party to 21 suspend all outstanding performances whenever it ‘reasonably believes’ that there will be a ‘fundamental non-performance’.21 This approach finds justification in the fact that the anticipated non-performance under the PICC is required to be ‘fundamental’. If an avoidance of the contract is a result from a clear anticipation of a future fundamental breach, then it is logical to allow suspension of outstanding performances on the ground of a reasonably belief of a future fundamental breach. PICC Article 7.3.4 and PECL Article 8:105 require the anticipated non-performance to be a ‘fundamental non-performance’.22 It follows that a non-performance of ‘a substantial part’ of a party’s obligations under the CISG is a less material breach than a ‘fundamental non-performance’ under the PICC and PECL.23 Suspension of performance is available under the CISG even where the anticipated breach would not give rise to a right to avoid the contract.

17 Canada Teda Enterprises Inc v Shanxi Weite Food Co Ltd, (2006) Jin Gao Min Si Zhong Zi No 148 Civil Judgment, High People’s Court of Tianjin Municipality, People’s Republic of China, 23 March 2007. Contra, G.W. (German seller) v. M. C. (Polish buyer), Court of Appeal in Warsaw, 30 August 2017, CLOUT Case No. 1811 (price regularly unpaid and paid only when suspension of delivery in sight). 18 UNCITRAL Digest of Case Law (2016 edn), p. 320 [5]. 19 E.g. Markesinis et al, pp. 351–355. 20 Cf Saidov, ‘Anticipatory Non-Performance and Underlying Values of the UNIDROIT Principles’ (2006) Unif L Rev 795, 820. Also, Kröll et al, pp. 930–33 [28]–[34]. 21 Vogenauer & Kleinheisterkamp, p. 852 [13]. 22 Similarly, PECL Article 8:103, see Lando & Beale, p. 367. 23 However, see Flechtner & Honnold on CISG, 553 [388.1], referring to doubts raised by the official French text of CISG Article 71; Kröll et al, pp. 918–20 [4].

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3. Two Specified Grounds for Anticipating a Prospective Breach 22

CISG Article 71(1)(a) and (b) specify two grounds in which the anticipated breach becomes apparent. These two subsections deal respectively with general circumstances of the other party and that party’s conduct in relation to the performance of the contract in question. General circumstances under subsection (a) extend well beyond ‘a serious deterioration of the other party’s financial position’,24 to cases of factual or legal impediments to the party’s ability to perform and a serious deficiency in creditworthiness. In relation to the latter, it is primarily concerned with a seller’s loss of creditworthiness, needed to obtain necessary supplies.25 Such general circumstances could also be inferred from breach (such as delivery of non-conforming goods) under separate yet comparable contracts between the same parties.26 Subsection (b) covers a party’s conduct in either the preparation for future performance or in the contract performance itself. The two subsections cover almost all situations in which a future breach may arise. However, they are said not to extend to a declaration of unwillingness to perform.27 Whether this is indeed the case depends on how the word ‘conduct’ under subsection (b) is interpreted. Arguably, it encompasses ‘statements’ as noted in CISG Article 8(2) (‘statements … and other conduct’). Under Article 527, which contains a general provision similar to subsection (a), but not one like subsection (b), such a declaration is not covered.

II. Stoppage in Transit 23

CISG Article 71(2) extends the general right of suspension of performance under CISG Article 71(1) to goods in transit. A seller acquires a right to prevent already dispatched goods from being handed over to the buyer. However, under this section, the right can be asserted against the buyer only. The CISG does not cover the issue of the seller’s right against the carrier or a third party. For example, UCC § 2-705(3) governs the legal relationship between the seller and a bailee (such as the carrier). CISG Article 71(2) imposes a correlative duty on the buyer not to take possession of the goods, irrespective of whether risk of loss or property to the goods has passed to buyer. Consequently, the buyer will be in breach of that duty by demanding delivery of the goods even in circumstances where he produces all necessary documents. The challenge for the seller is to obtain an interim injunction from a court or arbitral tribunal at the location of the goods.28

III. Suspension, Notice and Adequate Assurance 24

Under CISG Article 71, the aggrieved party is entitled to suspend its performance but this right is accompanied by a duty to immediately give notice of the suspension to the party in breach. If the suspending party does not provide such note, then it loses the right to demand adequate assurance. The reluctance to recognize a right to demand adequate assurance reflects the concern expressed by some Common Lawyers that it undu24 BGB § 321(1) provides that ‘it becomes apparent that his entitlement to consideration is jeopardised by the inability to perform of the other party’. See also, Chinese Civil Code Article 527 which contains a list of events covering much of subsection (a) circumstances. 25 Schlechtriem & Schwenzer, p. 1010 [22]; Kröll et al, p. 921 [10]. 26 Balance Industry Co Ltd v Cixi Chenyang Package Co Ltd, (2011) Zhe Shang Wai Zhong Zi No 11 Civil Judgment, High People’s Court of Zhejiang Province, People’s Republic of China, 18 April 2011. 27 Flechtner & Honnold on CISG, p. 555. 28 Schlechtriem & Schwenzer, p. 1018 [46].

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ly extends the liability of the party in breach. This concern may be dismissed by the fact that a right of suspension rests upon objective grounds foreshadowing a future substantial breach. In contrast, UCC § 2-609(1), PICC Article 7.3.4, and PECL Article 8:105 adopt a different scheme in which the aggrieved party is granted a right to demand adequate assurance and may exercise that right independently of any suspension of performance. However, a literal interpretation of these provisions reveals that the aggrieved party’s right to suspend performance is premised on the making of a demand for adequate assurance and will not arise without it. This explains the absence of a requirement that the aggrieved party give notice to the party in breach under these provisions. A broader interpretation allowing suspension even in the absence of such a demand is preferable. This would prove useful where the aggrieved party may not yet be prepared to resort to the more aggressive remedy of demanding adequate assurance and may be content with relying on the more defensive remedy of suspending performance to exert pressure on the party in breach. If an independent right to suspend performance is recognized, it is appropriate to 25 require, as CISG Article 71(3) does, the suspending party to give notice to the party in breach. Where the suspending party fails to give notice ‘immediately’, or at least within a reasonable time, following the act of suspension, does this make the act of suspension improper or does it merely constitute a breach of the duty to give notice? The reported decisions and the academic literature differ on this point. While a majority of courts or arbitral tribunals hold that the service of the notice is a necessary precondition for a right of suspension to arise,29 the dominating view of the commentators is that the aggrieved party’s conduct amounts to no more than a breach of the duty to give notice and sounds in damages only.30 The latter view appears to be more consistent with the word ‘immediately’ used in CISG Article 71(3). In addition, although it cannot be said to be either onerous or unreasonable to require the aggrieved party to give prior notice to the party in breach before suspending its performance, it may be too harsh to hold a party liable for the consequences of a wrongful suspension of performance simply because of its omission to give prior notice. As explained above, CISG Article 71(3) does not give the suspending party a right 26 to demand adequate assurance of due performance. However, the party in breach may opt to provide adequate assurance in order to remove the aggrieved party’s right to suspend performance. In such a case the aggrieved party’s resumption of its performance may, if necessary, require a reasonable extension of the agreed time allowed for the performance.31 ‘Assurance’ provided by the party in breach does not have to be a ‘security’ in a proprietary sense. An ‘adequate assurance’ may be any effective means of removing the grounds under CISG Article 71(1) for the anticipation of the future breach. Therefore an assurance may be adequate even if it does not show that there will be perfect performance32 or performance of all remaining obligations under the contract33. Depending on the circumstances, an adequate assurance may be a promise, an oral declaration of willingness, or some form of security or guarantee.34 29 E.g. CLOUT Case No. 1709, 5 January 2016, International Court of Arbitration at the Belarusian Chamber of Commerce and Industry; AG Frankfurt a.M. 31 January 1991, CLOUT Case No. 51. See, UNCITRAL Digest, p. 321 at [11]; Kröll et al, p. 935 [38]. 30 Schlechtriem & Schwenzer, p. 1015 [37]; DCFR Article III.–3:401(3). Contrast, Kröll et al, pp. 935–6 [39]. 31 Flechtner & Honnold on CISG, p. 559 [393]; Bennett, Article 71 at [3.6]. 32 Schlechtriem & Schwenzer, pp. 1020–21 [52]; Kröll et al, 942–3 [52]. 33 Cf Schlechtriem & Schwenzer, ibid. 34 Official Comments 1 and 2 to Article 7.3.4, at 226; Kröll et al, pp. 943–4 [53]. See also, Vogenauer & Kleinheisterkamp, pp. 850–51 [7]; Lando & Beale, p. 371; Farnsworth, pp. 576–77.

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Since under CISG Article 71(3) the aggrieved party has no right to demand an assurance, it follows that the aggrieved party is not automatically entitled to avoid the contract. The aggrieved party may avoid the contract only when the failure to provide adequate assurance makes it clear that the other party will commit a fundamental breach.35 In contrast, under legal regimes that recognize a right to demand adequate assurance,36 the aggrieved party is allowed to immediately avoid the contract when a reasonable time has passed and adequate assurance has not been provided.37 The approach under CISG Article 71(3) has been criticized for creating uncertainty and the higher costs it causes.38 Schlechtriem and Schwenzer argue that a failure to provide adequate assurance within a reasonable time should be treated as a declaration of non-performance under CISG Article 72(3), which automatically triggers a right of avoidance under CISG Article 72(1) whether any notice is given to the party in breach. 39 However, in many cases the party in breach cannot be said to have refused to perform the contract by merely failing to provide adequate assurance within a reasonable time. The CISG should be interpreted to allow a more flexible approach, which leaves the weight of the failure in satisfying the test under Article CISG 72(1) to be decided in light of surrounding circumstances. 28 For an anticipatory breach giving rise to a right to suspend performance under CISG Article 71 (or a right to demand adequate assurance under other regimes), there is no right of action for damages for that breach unless it materializes into an actual non-performance of contract or the contract is avoided on the ground of that breach before the time for performance arrives. 27

G. Illustrations I. Defective Delivery to Others Suppose B enters into a contract for the purchase of some machine parts from A. B intends to use these parts immediately upon delivery. Before the date of delivery arrives, B discovers that A has made defective deliveries to buyers with similar needs. The defects in the parts delivered are such that they are not usable until repaired by A. Upon further investigation B finds out that the reason for the defective deliveries is that A has been using raw material from a particular source. During the negotiation of the contract A tells B that he plans to use material from that source for the contract in question.40 30 Analysis: The fact that A is going to use the problematic source of supply is crucial to B’s rights in this scenario. The mere fact that A has made defective deliveries to buyers with similar needs does not necessarily lead to the conclusion that there has been a serious deficiency in A’s ability to deliver machine parts of contractual quality. The defective deliveries may well be made for reasons irrelevant to the performance of the contract 29

35 Flechtner & Honnold on CISG, p. 560 [394], p. 563 [396]; Kröll et al, pp. 944–5 at [55]; Bennett, Art. 71 at [3.7]. 36 PICC Article 7.3.4; PECL Article 8:105(2); UCC § 2-609(4); BGB § 321(2); Chinese Civil Code Article 528; Dutch Civil Code Article 6:80(1)(c). See also, Vogenauer & Kleinheisterkamp, p. 853 [15]; Eiselen, p. 210 [j]. 37 UCC § 2-609(4) (provides that the reasonable time does not exceed thirty days.). 38 Schlechtriem & Schwenzer, p. 1019 [49]. 39 Schlechtriem & Schwenzer, pp. 1021-22 [56]. 40 Adapted from Bennett, Article 71 at [2.6] the third example.

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with B. Therefore they do not constitute either the general circumstance under (a) or the specific conduct under (b) of CISG Article 71(1). For the same reason, B should not be entitled to suspend his performance of the contract or to demand adequate assurance if the applicable law is PICC, PECL, BGB, CCC or (arguably) the UCC. However, the use of the defective raw material connects A’s breach in other contracts with his performance of the contract with B. This extra fact makes it apparent that A will not perform ‘a substantial part of his obligations’ as a result of ‘a serious deficiency in his ability to perform’. It gives rise to a right to suspend performance under the BGB § 321(1), CCC Article 527(4) and UCC § 2-609(1). However, since the future defective delivery is rectifiable, it may not amount to a ‘fundamental breach’ and consequently provide no right to suspend performance under PICC Article 7.3.4 or PECL Article 8:105.

II. Successive Contracts B enters into three successive contracts for the purchase of goods from A. Under each 31 of these contracts B is required to pay the full contract price a week before the time for delivery. The goods are of such a nature that A usually needs three weeks to prepare for delivery. B fails to pay the price in advance of delivery under each of the first two contracts, but A still delivers the goods in the hope that B will pay later. Subsequently A gives notice to B that he will cease to make preparations for the delivery of the goods under the third contract until B provides adequate assurance of his payment. B reassures A that he will pay the price in full a week before the scheduled delivery but refuses to provide other forms of assurance. A then notifies B of its election to avoid the contract. 41 Analysis: B’s failure to make payment in the two separate contracts entitle A to sus- 32 pend preparations for performance under the third contract pursuant to CISG Article 71 as it points to a serious deficiency in B’s ability to perform or in its creditworthiness. That failure may well entitle A to avoid the third contract under CISG Article 72. But A is free to adopt the safer option under the former provision. A is entitled on the given facts to demand adequate assurance and to cease to make preparations for the delivery until such assurance is provided under PICC Article 7.3.4, PECL Article 8:105 and UCC § 2-609(1). However, neither BGB § 321(1) nor CCC Article 527(4) will be applicable as A is not required by the contract to deliver goods until one week after B’s payment. B’s oral assurance is unlikely to be adequate under any of the above provisions. A more secure form of assurance such as a bank guarantee of the price under the third contract may be required.42 B’s refusal to provide other forms of assurance entitles A to immediately avoid the contract. Under the CISG, Article 72(3) should be applied by analogy given that B’s failure to pay on the first two contracts has made it clear that he will not pay under the third contract. Under the PICC, PECL and UCC, A should not be compelled to wait for a reasonable time to elapse in the light of B’s refusal to provide adequate assurance.

41 42

Adapted from PECL Article 8:105 Illustration 3. Lando & Beale, p. 371.

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H. Cross References & Additional Commentary I. Cross References 33

CISG Article 71 operates in relationship with Article 72 (see discussion below). The general circumstances referred to under Article 71(1)(a) must be distinguished from exempted performance under CISG Article 79 (see Chapter 22 on ‘Excuse’). For an overview of performance and breach of contract, see Chapter 17.

II. Practitioner Tips and Contract Clauses A client who has a well-grounded doubt over the opposite contracting party’s future performance is advised to adopt a prudent approach. He should be advised to make preliminary inquiries to the other party, couch his communications in the language of a ‘request’ rather than ‘demand’ and specify grounds for suspension of performance, types of assurance expected, time limit for providing the assurances, consequences of non-compliance and so on.43 35 CISG Article 6 allows contracting parties to contract out of CISG Article 71. However, it is not advisable to do so unless the parties include more detailed or tailor-made provisions, which will supersede or supplement CISG Article 71. The contract provisions may specify the circumstances that justify a suspension of performance and the forms of assurance expected. For example: 34

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Seller is not required to commence or continue its performance unless and until any required Payment or Security is received, and all applicable Progress Payments have been received. For each day of delay in receiving any such payments or security, Seller shall be entitled to a matching extension of the schedule. If at any time Seller reasonably determines that Buyer's financial condition or payment history does not justify continuation of Seller's performance, Seller shall be entitled to require full or partial payment in advance or otherwise restructure payments, request additional forms of Payment or Security, suspend its performance or terminate the Contract. 44 Seller may suspend or terminate the Contract (or any affected portion thereof) immediately for cause if Buyer (i) becomes Insolvent or Bankrupt, or (ii) materially breaches the Contract, including, but not limited to, failure or delay in Buyer providing Payment or Security, making any payment when due, or not fulfilling any payment conditions. … Buyer shall pay all reasonable expenses incurred by Seller in connection with a suspension, including, but not limited to, expenses for repossession, fee collection, demobilization or remobilization, and costs of storage during suspension. The schedule for Seller's obligations shall be extended for a period of time reasonably necessary to overcome the effects of any suspension. 45

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I. Additional Sources 36 Fountoulakis, ‘Article 71’ in Schwenzer (ed), Schlechtriem & Schwenzer Commentary on the UN Conven-

tion on the International Sale of Goods (CISG) (4th edn, OUP 2016) (‘Schlechtriem & Schwenzer’); Saidov,

Farnsworth, pp. 579–80. GE Terms and Conditions for Sale of Products and Services Form ES 104 (Rev. 4) Clause 2.3, see http://www.gerightcontrols.com/tnc/en/terms.htm. 45 Id., Clauses 11.3 and 11.6. 43

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B. Introductory Note ‘Article 71’ in Kröll, Mistelis & Perales Viscasillas (eds), UN Convention on Contracts for the International Sale of Goods (CISG) (2nd edn, Beck, Hart, Nomos 2018); Seliazniova, ‘Prospective Non-Performance or Anticipatory Breach of Contract (Comparison of the Belarusian Approach to CISG Application and Foreign Experience)’ (2004) 24 J L & Com 111.

Part 2: Anticipatory Breach Warranting Avoidance of Contract A. Topics Covered This part of the Chapter covers the legal test for the second category of anticipatory 37 breach, which entitles the aggrieved party immediately to avoid the contract, its extension to installment contracts, the duty to give notice for the purpose of allowing the provision of adequate assurance and the remedial consequences following avoidance. For convenience, this second category of anticipatory breach will be called ‘anticipatory fundamental breach’, although, as will be seen, the fundamentality of a future breach is not invariably recognized as a prerequisite to a right to avoid the contract in all legal systems.

B. Introductory Note CISG Articles 72 and 73(2) deals with the more severe situation where a right to 38 ‘avoid’ the contract arises directly from an anticipatory breach before the time has arrived for the party in breach to perform the contract. Here ‘avoidance’ carries the meaning given to it under CISG Article 81(1) (discussed in Chapter 20 below). In effect, it resembles a termination or discharge of contract at Common Law which brings the contract to a prospective (but not retrospective) end. CISG Article 72 differs from CISG Article 71 in a number of respects. First, ‘it is 39 clear’ should be contrasted with ‘it becomes apparent’ and has been said to require a higher degree of probability than the latter. Secondly, the anticipated future breach must be a fundamental breach, whereas under CISG Article 71 the anticipated breach is a non-performance of a substantial part of one’s obligations caused by specified reasons. Thirdly, an avoidance of contract under CISG Article 72 requires a prior ‘reasonable notice’ to be given only ‘if time allows’ and this notice requirement is exempted where the anticipatory breach takes the form of a declaration of non-performance (section (3)). In contrast, such notice is required under CISG Article 71 immediately following the suspension of performance without exception.46 Similar provisions can be found in major international instruments, including PICC 40 Article 7.3.3 and PECL Article 9:304. Avoidance for anticipatory breach is a distinctly Common Law rule. English law (and other Common Law systems adopting largely identical rules, such as Australia) still confines the notion of anticipatory breach to cases where a right to ‘terminate’ the contract arises from the breach; therefore an anticipatory breach sounding in damages only is not countenanced.47 In contrast, the majority of Civil Law systems do not accept the rule.48 French law, for example, does not recognize the notion of ‘anticipatory breach’ in that, according to French Civil Code Article UNCITRAL Digest, p. 324 [2]. Liu, Anticipatory Breach, pp. 79–80. 48 Schwenzer, Hachem and Kee, Global Sales and Contract Law (OUP 2012) [47.139].

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1305-2, a contract cannot be terminated (or ground a claim for damages) by the time it is due to be performed.49 Consequently, no remedy (except for a suspension of performance, discussed above) is available before the time for performance (although remedies may be sought after that time), and this reflects French law’s preference for encouraging contract performance instead of its determination.50 Some Civil Law legal systems have, however, endorsed a similar rule. Germany is a prime example. BGB § 323(4) provides that ‘the obligee may withdraw from the contract before performance is due if it is obvious that the requirements for withdrawal will be met’. 41 CISG Article 73(2) lays down a special rule for the avoidance of an installment contract for an anticipatory breach embodied in an actual non-performance in respect of an earlier installment. It states: If one party’s failure to perform any of his obligations in respect of any instalment gives the other party good grounds to conclude that a fundamental breach of contract will occur with respect to future instalments, he may declare the contract avoided for the future, provided that he does so within a reasonable time.

42

This special rule is less stringent than the more general rule under CISG Article 72 because it makes it easier for a party to establish an anticipatory breach in respect of future installments and to avoid the contract on that ground, provided he acts timeously. A party to an installment contract may, however, choose to rely on the more onerous ground under CISG Article 72 to avoid the contract.51

C. Statement of Issues 43

Key issues arising under CISG Articles 72 and 73(2) include: What does ‘it is clear’ entail? When is notice required, and what amounts to ‘reasonable notice’? What are the consequences if such notice is not given? How does the test for an anticipatory breach in installment contracts under CISG Article 73(2) differ from the more general test under CISG Article 72, and are the differences justifiable? What remedies are available after a contract is avoided for anticipatory breach under CISG Articles 72 and 73(2)?

D. International Sales Transaction 44

In international trade, there are circumstances where a party is justified, by virtue of a foreshadowed breach on the part of the other party, in pulling out of the contract and committing its resources elsewhere, without having to wait or engage in further communication with the other party.

Rowan, ‘The New French Law of Contract’ (2017) 66 Int’l & Comp LQ 805, 830. Whittaker, ‘How Does French Law Deal with Anticipatory Breaches of Contract?’ (1996) 45 Int’l & Comp LQ 662. Cf Strub, pp. 485–86. 51 UNCITRAL Digest, p. 324 [3] fn 4. 49 50

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E. Sampling of Laws I. CISG 45

Article 72 (1) If prior to the date for performance of the contract it is clear that one of the parties will commit a fundamental breach of contract, the other party may declare the contract avoided. (2) If time allows, the party intending to declare the contract avoided must give reasonable notice to the other party in order to permit him to provide adequate assurance of his performance. (3) The requirements of the preceding paragraph do not apply if the other party has declared that he will not perform his obligations. Article 69 If a party suspends his performance in accordance with art. 68 of this Law, he shall give notice to the other party in a timely manner. Performance shall be resumed if the other party provides appropriate security. After the suspension of performance, the party who has suspended his performance may terminate the contract if the other party fails to recover the ability to perform the contract and to provide appropriate security within a reasonable time.

II. UNIDROIT Principles of International Commercial Contracts 46

Article 7.3.3: Anticipatory non-performance Where prior to the date for performance by one of the parties it is clear that there will be a fundamental non-performance by that party, the other party may terminate the contract.

III. Principles of European Sales Law 47

Article 9:304: Anticipatory Non-Performance Where prior to the time for performance by a party it is clear that there will be a fundamental non-performance by it the other party may terminate the contract.

IV. German Bürgerliches Gesetzbuch 48

§ 323: Withdrawal for nonperformance or for performance not in conformity with the contract (4) The obligee may withdraw from the contract before performance is due if it is obvious that the requirements for withdrawal will be met.

V. French Code Civil 49

Article 1305-2 Whatever is due only after a delay may not be demanded until the time so fixed has passed; but whatever has been paid in advance may not be recovered.

VI. Spanish Código Civil 50

Article 1503 If the seller should have reasonable grounds to fear the loss of the immovable property and the price, he may immediately terminate the sale. In the absence of such grounds, the provisions of article 1124 shall be observed.

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VII. American Uniform Commercial Code 51 § 2-610 Anticipatory Repudiation. When either party repudiates the contract with respect to a performance not yet due the loss of which will substantially impair the value of the contract to the other, the aggrieved party may (a) for a commercially reasonable time await performance by the repudiating party; or (b) resort to any remedy for breach (Section 2-703 or Section 2-711), even though he has notified the repudiating party that he would await the latter's performance and has urged retraction; and (c) in either case suspend his own performance or proceed in accordance with the provisions of this Article on the seller's right to identify goods to the contract notwithstanding breach or to salvage unfinished goods (Section 2-704). § 2-611 Retraction of Anticipatory Repudiation (1) Until the repudiating party's next performance is due he can retract his repudiation unless the aggrieved party has since the repudiation cancelled or materially changed his position or otherwise indicated that he considers the repudiation final. (2) Retraction may be by any method which clearly indicates to the aggrieved party that the repudiating party intends to perform, but must include any assurance justifiably demanded under the provisions of this Article (Section 2-609). (3) Retraction reinstates the repudiating party's rights under the contract with due excuse and allowance to the aggrieved party for any delay occasioned by the repudiation. § 2-612 “Installment Contract”; Breach (1) An “installment contract” is one which requires or authorizes the delivery of goods in separate lots to be separately accepted, even though the contract contains a clause "each delivery is a separate contract" or its equivalent. (2) The buyer may reject any installment which is non-conforming if the non-conformity substantially impairs the value of that installment and cannot be cured or if the non-conformity is a defect in the required documents; but if the non-conformity does not fall within subsection (3) and the seller gives adequate assurance of its cure the buyer must accept that installment. (3) Whenever non-conformity or default with respect to one or more installments substantially impairs the value of the whole contract there is a breach of the whole. But the aggrieved party reinstates the contract if he accepts a non-conforming installment without seasonably notifying of cancellation or if he brings an action with respect only to past installments or demands performance as to future installments.

VIII. Chinese Law 52 Article 563 A party may terminate the contract in one of the following situations: (2) before the expiration of the time of performance, a party declares expressly or indicates through his conduct that he will not perform his main obligation; Article 578 Where a party declares expressly or indicates through his conduct that he will not perform his contractual obligations, the other party may demand him to bear liability for breach of contract before the expiration of the time of performance.

F. Commentary I. The Test of Anticipatory Breach 1. ‘It is Clear’ 53

CISG Article 72 states that an anticipatory breach warranting avoidance of the contract arises when ‘it is clear that [the party in breach] will commit a fundamental breach

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of contract’.52 The principal issue relating to the interpretation of this sentence concerns the meaning of ‘it is clear’. This phrase should be interpreted in the same way as the words are used in PICC Article 7.3.3 and PECL Article 9:304. The prevailing view is to understand the phrase to mean ‘obvious to everyone’, a term found in BGB § 323(4). 53 Again, the issue is the degree of probability needed to anticipate a breach.54 The word ‘will’ denotes that the future nature of the breach, and does not suggest that its occurrence need be a matter of absolute certainty. The test under CISG Article 72 has been agreed to be that ‘although virtue certainty cannot be required, a very high and obvious degree of possibility is necessary’.55 This interpretation accords with that of its counterpart in PICC Article 7.3.3,56 in respect of which the Official Commentary stresses that a suspicion, even a well-founded one, is not enough.57 Accordingly, ‘it is clear’ under CISG Article 71 poses a higher standard of probability not only in comparison to the ‘it becomes apparent’ standard under CISG Article 71, but also in comparison to ‘good grounds’ under CISG Article 73(2).58 The former comparison is explainable by the fact that an avoidance of contract is a more serious remedy and termination of contract is not a preferred outcome in international trade (as influenced by the Civil Law), whereas a suspension of performance (CISG Article 71) is considered a temporary remedy that can encourage performance of the contract.59 Unlike CISG Article 72, CISG Article 73(2) requires a party avoiding the contract 54 to show that the other party’s actual non-performance of ‘his obligations in respect of any installment’ gives ‘good grounds’ to anticipate a future fundamental breach. Spanish Código Civil Article 1503 uses a similar phrase ‘reasonable grounds’, but it limits the right of immediate avoidance to the seller of an immovable property. PECL Article 9:302 also provides for avoidance of a contract in its entirety where ‘the non-performance is fundamental to the contract as a whole’. A present breach ‘in respect of any installment’ does not have to, and is actually sup- 55 posed not to, be fundamental.60 Nevertheless, given that an installment contract is one that provides for delivery of goods in separate lots,61 there is arguably a presumed similarity between installments. An actual non-performance in respect of one installment is more telling for the likelihood of non-performance in respect of future installments. At any rate, the actual non-performance must be such that it alone will sufficiently support an anticipation of a future fundamental breach. Only in such a circumstance will a right to avoid the contract arise under CISG Article 73(2).62 This is said to be a ‘less strict and more subjective’ test than both CISG Article 71 and CISG Article 72. 63 Note however that under either of the latter Articles the anticipation can be partially or wholly grounded on an actual breach, as shown in CISG Article 71(1)(b) phrase: ‘his Like Article 71(1), the future breach must be clear ‘after the conclusion of the contract’. See also, Vogenauer & Kleinheisterkamp, p. 846 [5]. 54 Bridge, ‘Issues Arising Under Articles 64, 72 and 73 of the United Nations Convention on Contracts for the International Sale of Goods’, (2005–06) 25 J L & Com 405, 413–14. 55 LG Berlin 30 September 1992 (90 O 123/92), UNILEX, see http://cisgw3.law.pace.edu/cases/920930g 1.html. See also, Schlechtriem & Schwenzer, p. 1030 [14]; Kröll et al, p. 954 at [7]. 56 Vogenauer & Kleinheisterkamp, p. 845 [1]. 57 Off Cmt to Art. 7.3.3, 225. 58 Schiedsgericht der Börse für Landwirtschaftliche Produkte – Wien 10 December 1997 (Arbitration award No. S2/97), UNILEX, . 59 See similarly, the contrast between PICC Article 7.3.3 and PICC Article 7.3.4 (‘reasonably believes’). 60 Schlechtriem & Schwenzer, p. 1048 [20], contrast the contradictory statement at 994 [31]. 61 Secretariat Commentary on 1978 Draft, art 64 at [1]. See also, UNCITRAL Digest, p. 327 [3]; UCC § 2-612(1). 62 Bennett, Article 73 at [3.3]; Kröll et al, p. 982 at [24]. 63 Flechtner & Honnold on CISG, p. 569 [401]. 52

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conduct…in performing the contract’. PECL Article 8:103(c) also makes an intentional actual non-performance a ‘fundamental non-performance’ if it ‘gives the aggrieved party reason to believe that it cannot rely on the other party’s future performance’. 56 CISG Article 73(2) contains the additional stipulation that the right of avoidance be exercised ‘within a reasonable time.’ However, it is difficult to conceive how CISG Article 72, being interpreted according to the notion of good faith under CISG Article 7(1), might allow the same right to remain exercisable after an unreasonable delay. The ‘good grounds’ requirement under CISG Article 73(2) imports a ‘high standard of probability’, higher than what is demanded under CISG Article 71.64 The degree of probability required by ‘good grounds’ is higher than the balance of probability test (more than fifty percent) applied in some English cases, where the commercial value of an avoidance of contract is more greatly appreciated and where an actual non-performance is not required.65 However, the exercise of the right of avoidance under CISG Article 73(2) is not subject to a notice requirement as found in CISG Article 72(2).66 It can be argued that an argument based on the good faith nature of an incorrect interpretation of contract is more likely to be accepted under CISG Article 73(2) than under CISG Article 72(1).67 57 The novelty of CISG Article 73(2) helps to reveal another important feature of CISG Article 72, which provides that what must be clear is that the other party ‘will commit’ a fundamental breach. A different expression is employed under PICC Article 7.3.3, where it is required to be shown that ‘there will be’ a fundamental breach. Both provisions derogate from the Common Law approach, which requires a present repudiation and is therefore overly restricted to the words and conduct of a party.68 The Common Law approach was duly rejected by the CISG Working Group.69 Further, the Secretariat Commentary states, subject to CISG Article 79, that: The future fundamental breach may be clear either because of the words or actions of the party which constitute a repudiation of the contract or because of an objective fact, such as the destruction of the seller's plant by fire or the imposition of an embargo or monetary controls which will render impossible future performance.70

58

According to this approach, future incapacitation, made clear by the surrounding circumstances, may give rise to a right to have the contract avoided under CISG Article 72. In contrast, under CISG Article 73(2) ‘good grounds’ must be provided by an actual breach in respect of any earlier installment. The Common Law approach insists that that party evinces an intention not to perform the contract by words or conduct, unless it can be inferred from a present act of disablement. CCC Article 563(2) adopts the Common Law approach by providing that a party may terminate the contract if, before the time for performance, the other party expressly states (express repudiation) or through his conduct indicates that he will not perform his main obligations under the contract (implied repudiation). 64 Schlechtriem & Schwenzer, p. 1049 [24]; Kröll et al, p. 979 at [18]. See also, Vanwijck-Alexandre, ‘Anticipatory Breach and Instalment Contracts in the CISG’ (2001) Int’l Bus LJ 353, 373 (citing Heuze). 65 Liu, Anticipatory Breach, pp. 73–79. 66 Schlechtriem & Schwenzer, p. 1051 [27]; Kröll et al, p. 983 at [26]. 67 CISG Article 72(1) could be regarded as similar to the Common Law approach (see Farnsworth, § 8.21 at 561). For PICC Article 7.3.3 on this point, see Saidov, pp. 807–8. 68 E.g. English SGA 1979 s 31(2); Restatement Contracts 2 d § 250(2). See also, the US case of Marr Enters Inc v Lewis Refrig Co 556 F 2 d 951, 959 (9th Cir 1977) (there must be a ‘voluntary affirmative conduct’ and not mere failure to act). 69 Bennett, Article 72 at [1.4], [2.2]. 70 Text of Secretariat Commentary on Article 63 of the 1978 Draft, [2].

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If it is shown to be ‘clear’ at the time when a party avoids the contract that the other 59 party will commit a fundamental breach, can the avoiding party’s entitlement to avoid be challenged when it turns out subsequently that the other party has not committed a fundamental breach when his performance becomes due? The Secretariat Commentary takes the view that the avoidance would be void because in view of the later fact ‘the original expectation may not have been “clear”’. However, the actual wording of CISG Article 72 suggests that ‘it is clear’ is to be judged by reference to the time of avoidance. Under English law, a later transpired fact may not be used to challenge an inference drawn at the time of termination.71 Unless a good faith interpretation compels a different conclusion, an anticipation shown to be ‘clear’ at the time of avoidance should not be defeated by subsequent events.72 Will a party’s right of avoidance under CISG Article 72 be affected by his own lack of willingness or readiness to perform the contract? PICC Article 7.3.373 and English law indicate that such a fact is an influencing factor in the measurement of damages, but does not affect a right of avoidance, which arises once an anticipatory breach is established.74

2. Fundamental Breach The very high standard of probability imposed by the ‘it is clear’ requirement of 60 CISG Article 72 applies to the occurrence of the future breach only. As regards the fundamental character of that breach, the avoiding party needs only to satisfy the normal standard of proof required by the rules of civil procedural. He must prove that the anticipated breach meets the criteria for ‘fundamental breach’ set out in CISG Article 25. The UNCITRAL Secretariat’s Explanatory Note to the CISG (at [29]) states that the breach: ‘must result in such detriment to the other party as substantially to deprive him of what he is entitled to expect under the contract, unless the result was neither foreseen by the party in breach nor foreseeable by a reasonable person of the same kind in the same circumstances’. In recent cases, it has been held that a fundamental breach will not arise where non-conformity in quality does not cause unreasonable difficulty for the buyer to use or resell the goods even with some discounts.75 A peculiar issue arising in the context of CISG Article 72 is whether a party may 61 avoid the contract immediately by anticipating a future breach of an essential term or ‘condition’. The same question may be raised in respect to PICC Article 7.3.3. The Official Comment gives an illustration that relates to an anticipated delay in performance where time is of the essence.76 It appears that the anticipated future breach in that illustration would constitute a fundamental breach. This view is reinforced by PECL Article 8:103(a), which provides that a non-performance of an obligation is ‘fundamental’ if ‘strict compliance with the obligation is of the essence of the contract’, which may be 71 Universal Cargo Carriers Corp v Citati (No 1) [1957] 2 QB 401. See the analysis in Liu, Anticipatory Breach at 88–92. Cf in terms of prospective incapacitation, Treitel, Remedies for Breach of Contract, pp. 405–406; the position under the US law: Restatement 2 d § 251 Illustration 2. 72 Bridge, ‘Issues Arising Under Articles 64, 72 and 73 of the United Nations Convention on Contracts for the International Sale of Goods’, (2005–06) 25 J L & Com 405, 415 et seq. 73 Vogenauer & Kleinheisterkamp, Commentary, p. 847 [7]. 74 See Liu, Anticipatory Breach, ch 5 (‘Anticipated Breach as Defence’). 75 E.g. ThyssenKrupp Metallurgical Products GmbH v Sinochem International (Overseas) Pte Ltd, Supreme People’s Court, 30 June 2014, (2013) Min Si Zhong Zi, No. 35 Civil Judgment. See discussion of the case: Ewan McKendrick, Qiao Liu and Xiang Ren, ‘Remedies in International Instruments‘, in D Campbell & R Halson (eds), Research Handbook on Remedies in Private Law (EE Publishing 2019), Ch 22, p. 402 at 408 et seq. 76 Similarly, Lando & Beale, p. 417. See also, Treitel, Remedies for Breach of Contract: A Comparative Account (Clarendon 1988) p. 380, citing the New Zealand Contractual Remedies Act 1979 ss 7(3), (4)(a).

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derived expressly or by implication from the contract. Greater difficulties arise in cases where the anticipated breach is not fundamental in nature, but by virtue of an express term of the contract, gives rise to a right of avoidance once committed (CISG Article 29(1)). Instead of using the language of ‘fundamental breach’, CESL Articles 116 and 136 provide that immediate avoidance is permissible ‘if the non-performance would be such as to justify termination’. 77 Literally, this provision seems to cover the situation where the right of avoidance arises from the parties’ agreement. The CESL approach is to be contrasted with the approach adopted in England, where Lord Diplock once stated that ‘it is to fundamental breaches alone that the doctrine of anticipatory breach is applicable’.78 Lord Diplock’s statement excludes from the scope of anticipatory breach a breach that triggers a right of termination solely by virtue of an express term of the contract, but should not be read as excluding a breach of a ‘condition’ at the Common Law sense.79 Of these two approaches, it seems that the latter (namely, the anticipated breach must be ‘fundamental’) is more appropriate for CISG Article 72, as well as the equivalent provisions in the PICC and the PECL, not only because of its explicit reference to ‘fundamental breach’, but also because the acceleration of a future right of avoidance without the parties clearly intending so runs counter to the general preference that international contracts should be upheld and performed.

II. Duty to Give Notice and Adequate Assurance 1. ‘Reasonable Notice’ and ‘If Time Allows’ 62

The notice requirement in CISG Article 72 for avoidance of contract is another debated issue. CISG Article 72(2) requires a party to give ‘reasonable notice’ for the purpose of allowing the other party an opportunity to provide adequate assurance of performance before declaring avoidance (‘if time allows’). ‘Reasonable notice’ is principally related to a sufficient amount of time for the other party to provide adequate assurance, and ‘if time allows’ offers the avoiding party a ground to dispute the necessity of such a notice in view of the urgency of the avoidance. But these two requirements should be construed strictly, with the consequence that the duty to give notice is not easily evaded.80 CISG Article 72(3) exempts the notice requirement where the other party makes a declaration of non-performance because in such a case the declaring party is deemed to take notice of his own intention to bring the contract to an end. An implicit declaration will not suffice unless it is tantamount to an express declaration, which attributes knowledge and intention to the declaring party (renunciation in Common Law)81 and the aggrieved party may immediately avoid the contract pursuant to section 1. Section 2 applies to cases where either the conduct of the other party or circumstances other than his words or conduct have made it clear that a fundamental breach will be committed. In such cases it is said that that party deserves a chance to provide facts,

77 See BGB § 323(4). See, Markesinis, Unberath and Johnston, The German Law of Contract: A Comparative Treatise (2nd edn, Hart 2006) pp. 430–31. 78 Afovos Shipping Co SA v Romano Pagnan and Pietro Pagnan (The Afovos) [1983] 1 WLR 195 (HL) 203. See further, Liu, Anticipatory Breach, pp. 80–83. 79 Qiao Liu, ‘Termination of Contract for Fundamental Breach’ in D Campbell & R Halson (eds), Research Handbook on Remedies in Private Law (EE Publishing 2019), Ch. 10, p. 163 at 176–177. See also, Anselmo Reyes, ‘Anticipatory Breach in Charterparties’ (2018) 43 Tul Mar LJ 1, at 10–11. 80 See also, Schlechtriem & Schwenzer, pp. 1033–34 [24]; Kröll et al, pp. 960–61 at [21]–[22]. 81 Cf Kröll et al, pp. 952–53 at [4]–[6] and p. 963 at [27].

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unknown to the avoiding party, that show the party’s intent to perform the contract according to its terms.82

2. Consequences of Non-compliance If the aggrieved (avoiding) party fails to fulfil its duty to give reasonable notice under 63 CISG Article 72(2), does it forfeit its right of avoidance under CISG Article 72(1)? The notice requirement applies only to cases of disablement and future incapacitation, where the aggrieved party is required to give the party in breach an opportunity to provide adequate assurance and, therefore, that party will lose its right of avoidance if it fails to do so.83 The rationale is that the termination of a contract should not be done on a unilateral basis (based upon the perspective of a single party). The notice requirement ensures that a solution to the occurrence of a fundamental breach can be fully explored. Nevertheless, it must be noted that neither PICC Article 7.3.3 nor PECL Article 9:304 has a notice requirement. It has been suggested that CISG Article 72(2) should be interpreted narrowly and that the duty to give notice should be waived where there is doubt that it would have resulted in a different outcome.84 Where the party in breach fails to provide adequate assurance within a reasonable 64 time after receipt of CISG Article 72(2) notice, a right of avoidance arises immediately upon the party giving the notice in accordance with CISG Article 72(1). One way of achieving this is to apply CISG Article 72(3) by analogy, treating the failure as a declaration of unwillingness to perform.85 Alternatively, it can be argued that CISG Article 72(2) ceases to be applicable as the party in breach has forfeited the opportunity to provide adequate assurance.86

III. Remedies following Avoidance 1. Accelerated Action for Damages The CISG is silent on whether a party who has avoided the contract in accordance 65 with CISG Article 72 may immediately bring an action for damages before the time of performance has arrived. The Article expressly only allows an action for damages after the contract is avoided for actual non-performance.87 That an action for damages may be accelerated is one of the striking features of the Anglo-American doctrine of anticipatory breach (repudiation). The argument in favor of the Common Law approach is that it promotes a prompt and efficient resolution of disputes.88 CCC Article 578 allows a lawsuit to be brought before the time for performance arrives. This approach is particularly appropriate in the case of long-term contracts or where the time for performance lies far in the future.

DiMatteo (ed), Global Sales and Contract Law, [47.145]. UNCITRAL Digest, p. 325 [9]: CIETAC 1989 (Thai-made emulsion case), available at http://cisgw3.la w.pace.edu/cases/890000c1.html. 84 Eiselen, p. 210 [k]. It has been argued that waiving the notice requirement may lead to abuse and penalize the party on the receiving end of an avoidance. See Strub, ‘The Convention on the International Sale of Goods: Anticipatory Repudiation Provisions and Developing Countries’ (1989) 38 Int’l & Comp LQ 475, 498–500. 85 Flechtner & Honnold on CISG, p. 565. 86 Schlechtriem & Schwenzer, pp. 1035-36 [32]; Kröll et al, p. 962 at [25]. 87 Contra, Flechtner & Honnold on CISG, p. 564 [397]; Lando & Beale, p. 418. 88 Liu, Anticipatory Breach, pp. 161–64; Farnsworth, § 8.20 at pp. 552–53. 82

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2. Mitigation of Loss 66

CISG Article 77 requires a party relying on a breach of contract to take reasonable measures to mitigate its loss or loss the right to recover the damages that could have been avoided. According to the Secretariat Commentary,89 this provision applies equally to anticipatory breach and may thus require reasonable measures of mitigation to be taken even prior to the contract date of performance: ‘The other party cannot await the contract’s date of performance before he declares the contract avoided and takes measures to reduce the loss arising out of the breach by making a cover purchase, reselling the goods or otherwise’. This deals principally with mitigation measures following an avoidance of contract but it also suggests that the mitigation rule applies to the act of avoidance itself.90 The principle of mitigation may also require a party to exercise its right to avoidance. For example, an aggrieved party should not be allowed to insist on performance where such performance would be excessively wasteful.91

G. Illustrations I. Time of the Essence Suppose A promises to deliver oil to B by M/S Paul at the terminal in country X on 3 February. On 25 January M/S Paul is still 2,000 kilometers from the terminal. At current speed it will not arrive, at the earliest, until 8 February. Since the contract expressly stated that time was of the essence, may B terminate the contract before 3 February? 92 68 Analysis: The key issue arising out of this illustration is whether an anticipated delay in the delivery of goods amounts to a fundamental breach when time is of the essence. This issue can be resolved by reference to PICC Article 7.3.1(2)(b), which provides that ‘in determining whether a failure to perform an obligation amounts to a fundamental non-performance regard shall be had, in particular, to whether strict compliance with the obligation which has not been performed is of essence under the contract’. However, the CISG contains no equivalent provision. Therefore, it is necessary to decide if the anticipated delay amounts to a breach that ‘results in such detriment to the other party as substantially to deprive him of what it was entitled to expect under the contract’ (CISG Article 25). A breach of a time obligation, which is of the essence under the contract, amounts to a fundamental breach as defined under CISG Article 25. However, an issue remains as to whether the selling party is entitled to a Nachfrist extension despite the existence of the time of the essence clause. See Chapter 17 on ‘fundamental breach’ and Chapter 20 on ‘Avoidance.’ 67

II. Delayed Loading 69

On 1 January, A and B enter into a contract for sale of goods, under which B agrees to load its cargo onto a vessel designated by A within seven working days from receiving a notice of readiness to load. B received the notice on 1 July but provides no cargo. On 8 89 Text of Secretariat Commentary on Article 63 of the 1978 Draft, [4], referring to Commentary on Article 73, [4]. 90 Bennett, Article 72 [2.4]; Kröll et al, p. 966 at [34] and 967 at [36]. 91 White & Carter (Councils) Ltd v McGregor [1962] AC 413 (HL Sc). See further, Liu, ‘The White & Carter Principle: A Restatement’ (2011) 74(2) MLR 171. 92 This illustration is taken from the Official Commentary to PICC Article 7.3.3.

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July, when only two working days are left for completing the loading, A provides B with a notice of avoidance and accepts an offer from a third party and orders the vessel to sail away for another port. It subsequently transpires that B would not have supplied the cargo even if A had waited.93 Analysis: This illustration is to be contrasted with illustration 1 in that the due date 70 for completing the loading of cargo is not made of the essence under the contract. It is clear that B will commit a future breach in the form of a delay in loading the cargo. However, there is not enough information for A to conclude that the anticipated breach will meet the criteria of a fundamental breach under CISG Article 25. If A nonetheless avoids the contract, could this avoidance be justified by the fact that B would have caused such a delay as to deprive A of substantially what he was entitled to expect under the contract? If it is unclear at the time of the purported avoidance that the there is an anticipated fundamental breach, then the avoidance was not justified. Under English law the avoidance would have been proper if avoidance of the contract rested upon a valid ground existing at the time of the avoidance.94 However, CISG Article 72 clearly states that the determination of a fundamental breach must have existed at the time of the avoidance. A further issue may be raised whether A has complied with the notice requirement under section 2, but it is doubtful that there was enough time for A to give such notice.

III. Cover and Damages A contract provided that A was to deliver 100 machine tools by 1 December at a 71 total price of $50,000. On 1 July, it wrote to the buyer B and stated that because of the rise in prices, which would certainly continue for the rest of the year, he would not deliver the tools unless B agreed to pay $60,000. B replied that he would insist that A deliver the tools at the contract price of $50,000. On 1 July and for a reasonable time thereafter, the price at which B could have contracted with a different seller for delivery on 1 December was $56,000. On 1 December, B made a cover purchase for $61,000 for delivery on 1 March. Because of the delay in receiving the tools, B suffered additional losses of $3,000.95 Analysis: A’s 1 July letter constitutes a declaration of non-performance under CISG 72 Article 72(3) as it threatened not to deliver goods unless the demand to increase the contract price by $10,000 was accepted. B could have immediately avoided the contract without having to give a prior notice or demand for adequate assurance. However, B did not avoid the contract and waited until 1 July to make a cover purchase. The delay violated the buyer’s duty to mitigate its loss. As explained in the Secretariat Commentary, in this example B is limited to recovering $6,000 in damages, the extent of the losses he would have suffered if he had made the cover purchase on 1 July or a reasonable time thereafter, rather than the $14,000 it suffered by waiting until 1 December to make the cover purchase. This example shows that the mitigation rule of CISG Article 77 applies to the aggrieved party’s exercise of its right of avoidance arising under CISG Article 72.

Adapted from Universal Cargo Carriers Corp v Citati (No 1) [1957] 2 QB 401. Taylor v Oakes Roncoroni & Co [1922] All ER Rep Ext 866 (CA) 869 (Greer J). 95 This illustration is taken from Text of Secretariat Commentary on CISG Article 73 of the 1978 Draft, Example 73A. 93

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H. Cross References & Additional Commentary 73

Apart from the interplay with CISG Article 71 (discussed earlier in the Chapter) and the above discussion of CISG Articles 72 and 73(1)-(3) is closely related to discussions on fundamental breach (see Chapter 17), damages (see Chapter 19), avoidance of contract (see Chapter 20), and instalments contracts (see Chapter 28).

I. Practitioner Tips & Contract Clauses A client is strongly advised to be cautious when attempting to invoke CISG Article 72. It is, if appropriate, always safer to take the temporary measure under CISG Article 71 first and to give detailed written notice requesting the provision of adequate assurance before giving a notice of avoidance. For this purpose he may send a ‘combined’ notice under both CISG Article 71(3) and CISG Article 72(2) to the other party setting out the time during which adequate assurance must be provided and indicating that a failure to do so will entitle the sender to avoid the contract. 75 It is relatively rare that the parties make express provision for an anticipatory breach, which gives rise to a right of avoidance in the contract. Two example clauses are provided below: 74

Either party may avoid the contract if the party acquires reasonably reliable information that it is more likely than not the other party will in the future commit a fundamental breach of contract. If time permits, a party who desires to proceed under this section must request adequate assurance of future performance from the other party, unless the first party has already made such a request with regard to the same potential breach in connection with suspension of the first party’s performance. The parties agree that the following circumstances make it more likely than not that a party will commit a future beach: a) the commission by a party or its affiliate of a current breach under this contract or any other contract between the parties or their affiliates, if a similar breach would be possible in the future under this contract and no circumstances make it clear such a future breach would not occur; b) failure by a party to provide adequate assurances of its future performance to a requesting party within 30 days after receipt of a request for such assurances made under this clause or in connection with suspension of the first party’s performance; c) any other facts or circumstances that make it more likely than not that a party will commit a future breach. Without prejudice to any such right or other remedies provided by the applicable governing law of this Contract, the Seller/Purchaser shall be entitled to declare the Contract avoided without any further preconditions if there is a material deterioration of the Purchaser/Seller’s creditworthiness or insolvency proceedings relating to the assets of the Purchaser/Seller are commenced. 96

J. Additional Sources 76 Farnsworth, Farnsworth on Contracts Vol. II (3 rd edn Aspen 2004) ch 8 (‘Prospective Nonperformance’); Q Liu, Anticipatory Breach (Hart 2012).

96 See GE Sales Terms, above, Clause 11.1; Ostendorf, International Sales Terms (Beck, Hart, Nomos 2010) p. 110 (Clause 9(c)).

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CHAPTER 19 REMEDIES AND DAMAGES Michael Bridge A. Topics Covered . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B. Introductory Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C. Statement of Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . D. International Sales Transaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . E. Sampling of Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. CISG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. UNIDROIT Principles of International Commercial Contracts . . . . . . . . . . . . . . III. Principles of European Contract Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Common European Sales Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. German Bürgerliches Gesetzbuch . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI. French Code Civil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VII. Spanish Código Civil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VIII. United Kingdom Sale of Goods Act 1979 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IX. American Uniform Commercial Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . X. American Restatement (Second) of Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XI. Chinese Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F. Commentary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Damages: Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Primary and Secondary Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Coverage of Damages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Compensation Principle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Interests Protected by a Damages Award . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Expectation Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Reliance Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Indemnity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Foreseeability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Factual Causation and Foreseeability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Full Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Degree of Probability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. Type and Quantum of Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5. Discretionary Limits on Recovery? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6. Costs of Preserving Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. Establishing ‘Loss’ under CISG Article 74 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Certainty and Chance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Intangible Interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Reliance Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Reasons for Reliance Claim . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Loss-Making Contracts and Pre-Contractual Expenditure . . . . . . . . . . . . . . c) Overhead . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. Lost Volume . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5. Discounting Future Losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6. Attorneys’ Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI. Substitute Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Additional Damages Claim . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Reasonable Substitute Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Time of Substitute Transaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. Pre-Emptive Substitution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VII. Current Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Time of Avoidance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Relationship of CISG Articles 75 and 76 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Current Price and Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. Current Price and Mitigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5. Meaning of Current Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6. Substitutes for Current Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7. Sub-Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Chapter 19 Remedies and Damages 8. Time of Taking Over the Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VIII. Penalties and Agreed Damages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Excluding CISG Article 74 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Agreed Damages Clauses and Other Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . IX. Mitigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Mitigation and Agreed Damages Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Contributory Fault . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Mitigation and Non-Damages Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. Justification for the Mitigation Principle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5. Reasonable Mitigation Measures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6. Damages and the Cost of Mitigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7. Burden of Proof . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . X. Currency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XI. Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Interest and Damages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Rate of Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Interest on Damages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. Interest in Restitution Cases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XII. Requiring Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Buyer’s Right to Require Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Seller’s Right to Require Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Other Matters Common to Seller and Buyer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. Quasi-Declaration in CISG Article 28 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XIII. Price Reduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . G. Cross References & Additional Commentary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . H. Additional Sources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

70 71 73 75 76 78 79 80 82 83 85 87 88 90 91 94 95 96 98 100 105 106 108 110 113 114

A. Topics Covered 1

This Chapter deals with primary and secondary remedies available when an obligor1 is in breach of contract, with the exception of avoidance, which is dealt with in Chapter 20. The remedy that has generated the most discussion and case law is the secondary remedy of damages, the subject of CISG Articles 74–76. Hence, this Chapter starts with damages. The discussion below is complemented by the principle of mitigation of loss in CISG Article 77 and also by the right to interest in CISG Articles 78 and 84. This Chapter also deals with the right to require performance in CISG Articles 46 and 62, which is primary in the sense that the obligee obtains the very performance for which it contracted. The buyer’s right to reduce the price in CISG Article 50 may also be seen as a primary remedy, in that the buyer is licensed to modify the contract to the extent of revising its own price obligation.

B. Introductory Note 2

The general areas of remedies may be divided into primary and secondary remedies. The remedy of requiring performance is a primary remedy in that the breaching party is forced to perform, so that the non-breaching party receives what it had expected under the contract. In a less obvious way, the buyer’s right to reduce the price when receiving non-conforming goods is primary in that the buyer receives goods at fair value, as measured with reference to the contract price. The buyer who is permitted to revise the agreed price then makes due performance when paying the reduced sum. 1 When there is no need to differentiate buyer and seller, the language of obligor and obligee is preferred in this Chapter to debtor and creditor, which stems from the Civil Law tradition but is confined to debt relationships in the Common Law tradition.

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D. International Sales Transaction

Damages are secondary remedies in that they represent a default or substitute for a 3 party’s failure to perform. Damages for breach may have been foreseeable at the time of contract formation, but breach and the payment of damages was not how the parties expected their contract to come to an end. They expect instead performance. An obligor does not have an option to pay damages instead of performance, even if the damages are calculated in advance in the form of a penalty or agreed damages clause.

C. Statement of Issues Given space limits, the complexity of the area of remedies and damages, especially 4 in view of the numerous laws reviewed, cannot be analyzed in depth. This Chapter highlights the major issues in this important area of contract law. Some of the issues reviewed in this Chapter include: (1) how does the law recognize compensatory damages? What types of damages are considered compensatory in nature? (2) What interests are damages intended to protect? (3) How do courts determine whether particular damages were foreseeable at the time of the conclusion of the contract? (4) What are considered to be recoverable ‘losses’ under CISG Article 74? (5) In a breach involving a sale of goods, how are losses calculated? (6) How is the market price determined in assessing damage differentials (contract price versus market price)? (7) When is a substituted transaction considered to be reasonable or unreasonable? (8) What types of actions are within scope of the buyer’s duty to mitigate damages? (9) What standards do courts utilize in determining the enforceability of a penalty or ‘agreed sum’ clause? (10) When and how are interest damages assessed against the breaching party? How are interest charges related to losses stemming from the time of breach and post-judgment interest charges treated differently across various legal systems? (11) When is the remedy of requiring performance available to the non-breaching party? (12) In cases of delayed payment, under what situations (and laws) may losses due to currency fluctuations be awarded as damages? (13) When and how is the price reduction remedy applied under the CISG and other laws?

D. International Sales Transaction There is a great deal of commonality among international and national sales laws 5 in that the idea of just compensation underpins the assessment of expectancy or fully compensatory damages. The non-breaching party is to be made whole and placed in the position it would have occupied but for the breach. However, there are numerous types of damages that may or may not be supported under the just compensation principle, and it is here where the rules of different legal systems show some variation. The law applicable to an international sales dispute will determine the total amount of damages collected. Interest, incidental, and consequential types of damages are not fully recognized across legal systems.

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E. Sampling of Laws I. CISG 6 Article 46 (1) The buyer may require performance by the seller of his obligations unless the buyer has resorted to a remedy, which is inconsistent with this requirement. (2) If the goods do not conform with the contract, the buyer may require delivery of substitute goods only if the lack of conformity constitutes a fundamental breach of contract and a request for substitute goods is made either in conjunction with notice given under article 39 or within a reasonable time thereafter. (3) If the goods do not conform with the contract, the buyer may require the seller to remedy the lack of conformity by repair, unless this is unreasonable having regard to all the circumstances. A request for repair must be made either in conjunction with notice given under article 39 or within a reasonable time thereafter. Article 50 If the goods do not conform with the contract and whether or not the price has already been paid, the buyer may reduce the price in the same proportion as the value that the goods actually delivered had at the time of the delivery bears to the value that conforming goods would have had at that time. However, if the seller remedies any failure to perform his obligations in accordance with article 37 or article 48 or if the buyer refuses to accept performance by the seller in accordance with those articles, the buyer may not reduce the price. Article 62 The seller may require the buyer to pay the price, take delivery or perform his other obligations, unless the seller has resorted to a remedy, which is inconsistent with this requirement. Article 74 Damages for breach of contract by one party consist of a sum equal to the loss, including loss of profit, suffered by the other party as a consequence of the breach. Such damages may not exceed the loss which the party in breach foresaw or ought to have foreseen at the time of the conclusion of the contract, in the light of the facts and matters of which he then knew or ought to have known, as a possible consequence of the breach of contract. Article 75 If the contract is avoided and if, in a reasonable manner and within a reasonable time after avoidance, the buyer has bought goods in replacement or the seller has resold the goods, the party claiming damages may recover the difference between the contract price and the price in the substitute transaction as well as any further damages recoverable under article 74. Article 76 (1) If the contract is avoided and there is a current price for the goods, the party claiming damages may, if he has not made a purchase or resale under article 75, recover the difference between the price fixed by the contract and the current price at the time of avoidance as well as any further damages recoverable under article 74. If, however, the party claiming damages has avoided the contract after taking over the goods, the current price at the time of such taking over shall be applied instead of the current price at the time of avoidance. (2) For the purposes of the preceding paragraph, the current price is the price prevailing at the place where delivery of the goods should have been made or, if there is no current price at that place, the price at such other place as serves as a reasonable substitute, making due allowance for differences in the cost of transporting the goods. Article 77 A party who relies on a breach of contract must take such measures as are reasonable in the circumstances to mitigate the loss, including loss of profit, resulting from the breach. If he fails to take such measures, the party in breach may claim a reduction in the damages in the amount by which the loss should have been mitigated.

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E. Sampling of Laws Article 78 If a party fails to pay the price or any other sum that is in arrears, the other party is entitled to interest on it, without prejudice to any claim for damages recoverable under article 74. Article 84 (1) If the seller is bound to refund the price, he must also pay interest on it, from the date on which the price was paid. (2) The buyer must account to the seller for all benefits, which he has derived from the goods or part of them: (a) if he must make restitution of the goods or part of them; or (b) if it is impossible for him to make restitution of all or part of the goods or to make restitution of all or part of the goods substantially in the condition in which he received them, but he has nevertheless declared the contract avoided or required the seller to deliver substitute goods. CISG Advisory Council Opinion No. 6: Calculation of Damages under CISG Article 74 2.1:

Article 74 does not explicitly address to what extent aggrieved parties must prove that they have suffered a loss in order to recover damages under that provision. As a result, there has been controversy over whether this matter is implicitly addressed by the Convention or whether it is a procedural matter to be resolved according to domestic law. Some courts and tribunals have held that the issue is a procedural matter beyond the scope of the Convention. However, relying on such an approach could be counterproductive and lead to differential treatment of similarly situated parties. 2.3: The existence of differing rules concerning the proof of damage could lead to the differential treatment of similarly situated parties. For example, buyers attempting to prove future losses often rely on assumptions about market prices and the amount of future sales. If a seller wrongfully refuses to deliver a new product or a product that the buyer had not previously been in the business of selling, there may be little concrete evidence on which the aggrieved buyer can base its damages claim, which would mainly consist of loss of profit. In such a case, countries requiring a high level of proof with regard to the fact that the aggrieved party suffered a loss would likely not allow the recovery of lost profits under Article 74. However, in countries that have a more relaxed level of proof, the aggrieved party may be able to recover such damages under Article 74. This result would be unfair and undermine the goal of the Convention to provide a uniform law on the sale of goods. In addition, the former approach would be contrary to the principle of full compensation. It also could provide an incentive for a party to breach its contractual obligations. 3.19: Under Article 74, an aggrieved party is entitled to recovery of not only profits lost prior to the judgment, but also for future lost profits, to the extent that such lost profits can be proved with reasonable certainty and subject to the principles of foreseeability and mitigation. While the Convention does not expressly state that future losses are recoverable, its recovery is consistent with the principle of full compensation. 4.1: In some circumstance a breach of contract may cause an aggrieved party to incur additional costs in attempts to avoid further loss. These expenses, which are sometimes referred to as incidental damages, are for loss in addition to the aggrieved party's loss in value from being deprived of performance under the contract. While Article 74 does not explicitly provide for the payment of incidental damages, an aggrieved party is entitled to recover these damages under the Article's principle of full compensation provided, among other things, that they are reasonable. 5.1: Article 74 does not explicitly address the payment of attorneys' fees and costs incurred by an aggrieved party in connection with seeking relief for the breach of contract from a third party, such as a court or arbitration tribunal ("litigation expenses"). Some courts and commentators believe that the recovery of litigation expenses is a procedural matter outside the scope of the Convention's substantive damages provisions. However, other courts and commentators argue that based on Article 7(1), the Convention must be interpreted autonomously that characterizations of domestic law are irrelevant, and that recourse to domestic law should be made only as a last resort. Under this view, it is argued that Article 74 must be broadly interpreted in accordance with the principle of full compensation, which necessarily calls for the conclusion that an aggrieved party should be able to recover expenses associated with vindicating its rights. Otherwise, the aggrieved party would remain less than whole. 5.2: The issue of whether litigation expenses should be considered as damages for purposes of Article 74 cannot be resolved through a substance/procedure distinction. Whether a matter is considered substantive or procedural may vary from jurisdiction to jurisdiction and may depend on the circumstances of a particular case. Relying upon such a distinction in this context is outdated and unproductive. Instead, the analysis should focus on whether the payment of litigation expenses is deliberately excluded from the Convention and, if not, whether the issue may be resolved "in

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5.3:

5.4:

7.3:

conformity with the general principles on which [the Convention] is based or, in the absence of such principles, in conformity with law applicable by virtue of the rules of private international law." While Article 74 does not explicitly provide for the recovery of litigation expenses as damages, it does not prohibit their recovery. In addition, the history that led to the drafting of Article 74 is silent on the issue. Thus, the matter is not one that explicitly falls outside the Convention and it is appropriate to consider whether the issue may be resolved through a liberal interpretation of Article 74 or "an analogical application of specific provisions of the Convention." Although Article 74's principle of full compensation appears to support the view that litigation expenses should be recoverable in order to make the aggrieved party whole, such an interpretation would be contrary to the principle of equality between buyers and sellers as expressed in Articles 45 and 61. If legal expenses were awarded as damages under Article 74, an anomaly would result where only a successful claimant would be able to recover litigation expenses. The ability to recover damages under Article 74 is grounded on a breach of contract; thus, a successful respondent will not be able to recover its legal expenses if the claimant has not committed a breach of contract. Therefore, the purpose of awarding attorneys' fees and costs, to make a prevailing party whole for costs incurred in litigation, will not be realized in those cases where the respondent prevails. Remedies are the core of contract law, and to interpret Article 74 to create unequal recovery of damages between buyers and sellers is contrary to the design of the Convention. However, Article 74 does not preclude a court or arbitral tribunal from awarding a party its attorneys' fees and costs when the contract provides for their payment or when authorized by applicable rules. Goodwill, however, is notoriously difficult to define. Thus, its loss is difficult to measure. Loss of goodwill can simply refer to a loss of future lost profits. Loss of goodwill also has been defined as a decline in business reputation or commercial image, quantified by the retention of customers. Alternatively, loss of goodwill has been defined as the decrease in the value of a business interest. Because there is no uniform definition, some tribunals have required a higher level of proof for damages resulting from a loss of goodwill. However, the fact that goodwill may be difficult to measure should not result in a requirement of a higher level of proof to obtain such damages. Indeed, requiring that damages for loss of goodwill be calculated exactly would, in many cases, place an insurmountable burden on the aggrieved party and would thwart Article 74's principle of full compensation. It is consistent with Article 74 that, like other damages recoverable under the Article, damages for loss of goodwill may be awarded if, among other things, the aggrieved party can prove with reasonable certainty that its reputation has been damaged by the breach.

CISG Advisory Council Opinion No. 8: Calculation of Damages under CISG Articles 75 and 76 4.1.5: Article 76 may also be used, instead of Article 75, to calculate damages where the aggrieved party is "continuously in the market" for the particular good of the type in question. In the case of a true lost volume seller, where the aggrieved party engaged in multiple transactions similar to the avoided one, it may not be possible to identify a specific substitute, and, therefore, impossible to calculate damages concretely under Article 75. The aggrieved party may then pursue damages under the abstract calculation of Article 76 and seek further damages under Article 74. 4.3.1: Abstract calculation of loss under Article 76 is only possible if the contract goods have a current price. The requirement that a current price exists does not mandate that there be an official or unofficial market quotation for the goods in question. A current price is established by the price generally charged for the sale of goods of the same kind and on comparable terms. Thus, establishing a current price within the meaning of Article 76 requires an objective basis for determining the value of the goods and is not possible when the goods are valued based on subjective needs. Furthermore, an adjustment may be necessary to account for any differences in terms between the avoided transaction and the market price. CISG Advisory Council Opinion No. 10: Agreed Sums Payable upon Breach of an Obligation in CISG Contracts 4.3.7: Putting together these developments, the exception made for agreed sums from the general principle that terms freely entered into have to be strictly enforced may see a change in the near future. It follows, that where the CISG provides the backdrop for the general test of reasonableness to be carried out under the genuine pre-estimate of loss test, agreed sums should not fail the genuine pre-estimate of the loss test simply because they seek to induce performance of the obligation owed. Rather, they should fail this test if they are excessive in relation to that goal (where they are disproportionate in the context of the individual contractual relationship). 7.1: Rule 7 deals with the interplay of the general duty to mitigate losses and the agreed sum payable by the breach of the obligor. The CISG clearly distinguishes contribution to breach by the obligee and mitigation of losses incurred. As a starting point – and in contrast to Article 80 – Article 77

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7.3:

does not have any impact on the fact that the agreed sum is triggered in its full amount. Under the CISG the failure to mitigate losses on the side of the obligee does not impact the amount that must be paid by the obligor. Agreed sums are payable upon breach independent of whether an actual loss has occurred. If it is generally irrelevant, whether a loss has occurred it cannot be of relevance, whether that loss is an unmitigated or a mitigated one. Articles 74–77 are rules for calculating damages. Where, however, an agreed sum is stipulated in the contract, the parties have taken care of this necessity in advance. In particular, Article 77 does not contain a reduction mechanism. Furthermore, it appears preferable to leave it to the obligee whether it decides to take mitigation measures. The economic incentive to take mitigating measures is to reduce the actual loss and recover the sum in full. The economic risk of not taking mitigating measures is that the actual loss may exceed the agreed sum and that the obligee then cannot recover the outstanding part.

II. UNIDROIT Principles of International Commercial Contracts 7

Article 7.1.6 Exemption clauses A clause which limits or excludes one party’s liability for non-performance or which permits one party to render performance substantially different from what the other party reasonably expected may not be invoked if it would be grossly unfair to do so, having regard to the purpose of the contract. Article 7.4.2 Full compensation (1) The aggrieved party is entitled to full compensation for harm sustained as a result of the non-performance. Such harm includes both any loss which it suffered and any gain of which it was deprived, taking into account any gain to the aggrieved party resulting from its avoidance of cost or harm. (2) Such harm may be non-pecuniary and includes, for instance, physical suffering or emotional distress. Article 7.4.3 Certainty of harm (1) Compensation is due only for harm, including future harm, that is established with a reasonable degree of certainty. (2) Compensation may be due for the loss of a chance in proportion to the probability of its occurrence. (3) Where the amount of damages cannot be established with a sufficient degree of certainty, the assessment is at the discretion of the court. Article 7.4.4 Foreseeability of harm The non-performing party is liable only for harm which it foresaw or could reasonably have foreseen at the time of the conclusion of the contract as being likely to result from its non-performance. Article 7.4.9 Interest for failure to pay money (1) If a party does not pay a sum of money when it falls due the aggrieved party is entitled to interest upon that sum from the time when payment is due to the time of payment whether or not the non-payment is excused. (2) The rate of interest shall be the average bank short-term lending rate to prime borrowers prevailing for the currency of payment at the place for payment, or where no such rate exists at that place, then the same rate in the State of the currency of payment. In the absence of such a rate at either place the rate of interest shall be the appropriate rate fixed by the law of the State of the currency of payment. (3) The aggrieved party is entitled to additional damages if the non-payment caused it a greater harm. Article 7.4.13 Agreed payment for non-performance (1) Where the contract provides that a party who does not perform is to pay a specified sum to the aggrieved party for such non-performance, the aggrieved party is entitled to that sum irrespective of its actual harm. (2) However, notwithstanding any agreement to the contrary the specified sum may be reduced to a reasonable amount where it is grossly excessive in relation to the harm resulting from the non-performance and to the other circumstances.

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III. Principles of European Contract Law 8 Article 9:501 Right to Damages (1) The aggrieved party is entitled to damages for loss caused by the other party's non-performance which is not excused under Article 8:108. (2) The loss for which damages are recoverable includes: (a) non-pecuniary loss; and (b) future loss which is reasonably likely to occur. Article 8:101 Remedies Available (1) Whenever a party does not perform an obligation under the contract and the non-performance is not excused under Article 8:108, the aggrieved party may resort to any of the remedies set out in Chapter 9. (2) Where a party's non-performance is excused under Article 8:108, the aggrieved party may resort to any of the remedies set out in Chapter 9 except claiming performance and damages. (3) A party may not resort to any of the remedies set out in Chapter 9 to the extent that its own act caused the other party's non-performance. Article 8:102 Cumulation of Remedies Remedies which are not incompatible may be cumulated. In particular, a party is not deprived of its right to damages by exercising its right to any other remedy.

IV. Common European Sales Law 9 Article 159 Right to damages 1. A creditor is entitled to damages for loss caused by the non-performance of an obligation by the debtor, unless the non-performance is excused. 2. The loss for which damages are recoverable includes future loss, which the debtor could expect to occur. Article 160 General measure of damages The general measure of damages for loss caused by non-performance of an obligation is such sum as will put the creditor into the position in which the creditor would have been if the obligation had been duly performed, or, where that is not possible, as nearly as possible into that position. Such damages cover loss, which the creditor has suffered and gain of which the creditor has been deprived. Article 166 Interest on late payments 1. Where payment of a sum of money is delayed, the creditor is entitled, without the need to give notice, to interest on that sum from the time when payment is due to the time of payment at the rate specified in paragraph 2. 2. The interest rate for delayed payment is: (a) where the creditor's habitual residence is in a Member State whose currency is the euro or in a third country, the rate applied by the European Central Bank to its most recent main refinancing operation carried out before the first calendar day of the half-year in question, or the marginal interest rate resulting from variable-rate tender procedures for the most recent main refinancing operations of the European Central Bank, plus two percentage points; (b) where the creditor's habitual residence is in a Member State whose currency is not the euro, the equivalent rate set by the national central bank of that Member State, plus two percentage points.

V. German Bürgerliches Gesetzbuch 10 § 248 (1) Compound interest An agreement reached in advance that interest due should in turn bear interest is void. § 249 (1) Nature and extent of damages A person who is liable in damages must restore the position that would exist if the circumstance obliging him to pay damages had not occurred.

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E. Sampling of Laws § 280 (1) Damages for breach of duty 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. § 284 Reimbursement of futile expenses In place of damages in lieu of performance, the obligee may demand reimbursement of the expenses, which he has made and in all fairness was entitled to make in reliance on receiving performance, unless the purpose of the expenses would not have been achieved, even if the obligor had not breached his duty. § 288 (1) Default interest Any money debt must bear interest during the time of default. The default rate of interest per year is five percentage points above the basic rate of interest. § 311 a (2) Obstacle to performance when contract is entered into The obligee may, at his option, demand damages in lieu of performance or reimbursement of his expenses in the extent specified in section 284. This does not apply if the obligor was not aware of the obstacle to performance when entering into the contract and is also not responsible for his lack of awareness. § 343 (1) Reduction of the penalty 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, every legitimate interest of the obligee, not merely his financial interest, must be taken into account. Once the penalty is paid, reduction is excluded.

VI. French Code Civil 11

Article 1231 Unless non-performance is permanent, damages are due only if the debtor has previously been put on notice to perform his obligation within a reasonable time. Article 1231-1 A debtor is condemned, where appropriate, to the payment of damages either on the ground of the non-performance or a delay in performance of an obligation, unless he justifies this on the ground that performance was prevented by force majeure. Article 1231-2 In general, damages due to the creditor are for the loss that he has incurred or the gain of which he has been deprived, with the following exceptions and qualifications.. Article 1231-3 A debtor is bound only to damages which were either foreseen or which could have been foreseen at the time of conclusion of the contract, except where non-performance was due to a gross or dishonest fault. Article 1231-4 In the situation where non-performance of a contract does indeed result from gross or dishonest fault, damages include only that which is the immediate and direct result of non-performance. Article 1231-5 Where a contract stipulates that the person who fails to perform shall pay a certain sum of money by way of damages, the other party may be awarded neither a higher nor a lower sum. Nevertheless, a court may, even of its own initiative, moderate or increase the penalty so agreed if it is manifestly excessive or derisory. Where an undertaking has been performed in part, the agreed penalty may be reduced by a court, even of its own initiative, in proportion to the advantage which partial performance has procured for the creditor, without prejudice to the application of the preceding paragraph. Any stipulation contrary to the preceding two paragraphs is deemed not written. Except where non-performance is permanent, a penalty is not incurred unless the debtor was put on notice to perform.

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Chapter 19 Remedies and Damages Article 1231-6 Damages due on the ground of delay in satisfaction of a monetary obligation consist of interest at the rate set by legislation, starting from the time of notice to perform. These damages are due without the creditor having to establish any loss. Where a debtor who is late in performing has by his bad faith caused his creditor a loss independent of this delay, the latter may obtain damages distinct from interest arising from the delay. Article 1231-7 In all matters, an award of compensation attracts interest at the rate set by legislation, even in the absence of any claim by a party or specific order of the court. Subject to any legislative provision to the contrary, this interest runs from the giving of judgment unless the court decides otherwise. In the case of a pure and simple affirmation by a court of appeal of a decision awarding compensation as reparation of harm, the latter bears interest by operation of law at the rate set by legislation from the giving of judgment at first instance. In other situations, compensation awarded on appeal bears interest from the appellate decision. A court of appeal may nonetheless derogate from the provisions of this paragraph.

VII. Spanish Código Civil 12 Article 1107 The damages for which the debtor in good faith shall be liable are those which are foreseen or which could have been foreseen at the time of contracting the obligation and which are a necessary consequence of his failure to perform. In the event of wilful misconduct the debtor shall be liable for all damages, which are known to have arisen from the failure to perform the obligation. Article 1108 If the obligation should consist of the payment of an amount of money, and the debtor should incur in default, unless otherwise agreed damages shall consist of paying the agreed interest and, in the absence of an agreement, the legal interest

VIII. United Kingdom Sale of Goods Act 1979 13 Section 49 Seller’s Remedies (1) Where, under a contract of sale, the property in the goods has passed to the buyer and he wrongfully neglects or refuses to pay for the goods according to the terms of the contract, the seller may maintain an action against him for the price of the goods. (2) Where under a contract of sale, the price is payable on a day certain irrespective of delivery and the buyer wrongfully neglects or refuses to pay such price, the seller may maintain an action for the price although the property m the goods has not passed and the goods have not been appropriated to the contract. (3) Nothing in this section prejudices the right of the seller in Scotland to recover interest on the price from the date of tender of the goods, or from the date on which the price was payable, as the case may be. Section 50 Damages for Non-performance (1) Where the buyer wrongfully neglects or refuses to accept and pay for the goods, the seller may maintain an action against him for damages for non-acceptance. (2) The measure of damages is the estimated loss directly and naturally resulting, in the ordinary course of events, from the buyer's breach of contract. (3) Where there is an available market for the goods in question the measure of damages is prima facie to be ascertained by the difference between the contract price and the market or current price at the time or times when the goods ought to have been accepted or (if no time was fixed for acceptance) at the time of the refusal to accept. Section 51 Damages for Non-Delivery (1) Where the seller wrongfully neglects or refuses to deliver the goods to the buyer, the buyer may maintain an action against the seller for damages for non-delivery.

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E. Sampling of Laws (2) The measure of damages is the estimated loss directly and naturally resulting, in the ordinary course of events, from the seller's breach of contract. (3) Where there is an available market for the goods in question the measure of damages is prima facie to be ascertained by the difference between the contract price and the market or current price of the goods at the time or times when they ought to have been delivered or (if no time was fixed) at the time of the refusal to deliver. Section 52 Specific Performance (1) In any action for breach of contract to deliver specific or ascertained goods the court may, if it thinks fit on the plaintiff 's application, by its judgment or decree direct that the contract shall be performed specifically, without giving the defendant the option of retaining the goods on payment of damages. (2) The plaintiff ’s application may be made at any time before judgment or decree. (3) The judgment or decree may be unconditional, or on such terms and conditions as to damages, payment of the price and otherwise as seem just to the court. (4) The provisions of this section shall be deemed to be supplementary to, and not in derogation of, the right of specific implement in Scotland. Section 53 Remedy for Breach of Warranty (1) Where there is a breach of warranty by the seller or where the buyer elects (or is compelled) to treat any breach of a condition on the part of the seller as a breach of warranty, the buyer is not by reason only of such breach of warranty entitled to reject the goods; but he may (a) set up against the seller the breach of warranty in diminution or extinction of the price, or (b) maintain an action against the seller for damages for the breach of warranty. (2) The measure of damages for breach of warranty is the estimated loss directly and naturally resulting, in the ordinary course of events, from the breach of warranty. (3) In the case of breach of warranty of quality such loss is prima facie the difference between the value of the goods at the time of delivery to the buyer and the value they would have had if they had fulfilled the warranty. (4) The fact that the buyer has set up the breach of warranty in diminution or extinction of the price does not prevent him from maintaining an action for the same breach of warranty if he has suffered further damage. (5) This section does not apply to Scotland. Section 54 Interest Nothing in this Act affects the right of the buyer or the seller to recover interest or special damages in any case where by law interest or special damages may be recoverable, or to recover money paid where the consideration for the payment of it has failed.

IX. American Uniform Commercial Code 14

§ 2-708 Seller's damages for non-acceptance or repudiation (1) Subject to subsection (2) and to the provisions of this Article with respect to proof of market price (section 2-723), the measure of damages for non-acceptance or repudiation by the buyer is the difference between the market price at the time and place for tender and the unpaid contract price together with any incidental damages provided in this Article (section 2-710), but less expenses saved in consequence of the buyer's breach. (2) If the measure of damages provided in subsection (1) is inadequate to put the seller in as good a position as performance would have done, then the measure of damages is the profit (including reasonable overhead) which the seller would have made from full performance by the buyer, together with any incidental damages provided in this Article (section 2-710), due allowance for costs reasonably incurred and due credit for payments or proceeds of resale. § 2-710 Seller's incidental damages Incidental damages to an aggrieved seller include any commercially reasonable charges, expenses or commissions incurred in stopping delivery, in the transportation, care and custody of goods after the buyer's breach, in connection with return or resale of the goods or otherwise resulting from the breach.

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X. American Restatement (Second) of Contracts 15 § 351(3) Unforeseeability and related limitations on damages (1) Damages are nor recoverable for loss that the party in breach did not have reason to foresee as a probable result of the breach when the contract was made. (2) Loss may be foreseeable as a probable result of a breach because it follows from the breach: (a) in the ordinary course of events, or (b) as a result of special circumstances, beyond the ordinary course of events, that the party in breach had reason to know. (3) A court may limit damages for foreseeable loss by excluding recovery for loss of profits, by allowing recovery only for loss incurred in reliance, or otherwise if it concludes that in the circumstances justice so requires in order to avoid disproportionate compensation.

XI. Chinese Law 16 Article 584 Where a party fails to perform its obligations under the contract or its performance fails to conform to the agreement and cause losses to the other party, the amount of compensation for losses shall be equal to the losses caused by the breach of contract, including the interests receivable after the performance of the contract, provided not exceeding the probable losses caused by the breach of contract which was foreseen or should have been foreseen when the party in breach concludes the contract. Article 585 The parties may agree that if one party breaches the contract, it shall pay a certain sum of liquidated damages to the other party in light of the circumstances of the breach, and may also agree on a method for the calculation of the amount of compensation for the damages incurred as a result of the breach. Where the amount of liquidated damages agreed upon is lower than the damages incurred, the people's court or an arbitration institution may, at the request of a party, to make an increase; where the amount of liquidated damages agreed upon are significantly higher than the damages incurred, the people's court or an arbitration institution to make an appropriate reduction at the request of a party. Where the parties agree upon liquidated damages in respect to the delay in performance, the party in breach shall perform the obligations after paying the liquidated damages.

F. Commentary I. Damages: Introduction 1. Primary and Secondary Remedies The remedies available for non-performance, in those cases where the non-performing party cannot take shelter within the exemption from liability conferred by CISG Article 79, may be divided into remedies that are of a primary character and remedies that are of a secondary, or substitutive, character. The remedy of requiring performance is a primary remedy in that the obligor is compelled by the court or tribunal to carry out the very contractual duty that it undertook to perform. In a less obvious way, the buyer’s right to reduce the price when receiving non-conforming goods is primary. In effect, the buyer who is permitted to revise the agreed price makes due performance when paying the reduced sum. If the buyer has already paid the price in full, the seller may be said to be under a duty to repay the excess price so that, if not doing so, the buyer may require due performance. 18 Damages is a secondary, or substitutive, remedy in that it stands in for the performance that the obligor failed to render. A buyer recovering damages for non-delivery by the seller is claiming a sum of money that may never be used to purchase the agreed 17

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goods or bring any goods received up to the contractual standard. The award of damages may have been foreseen by both parties to arise if the seller failed to perform, but it was not how the parties expected their contract to progress to fulfilment. The nearest that damages comes to a primary remedy is where the parties settle the amount in advance in the form of a penalty or agreed damages clause. Even in this case, they contemplate that the seller will deliver, or the buyer pay and receive delivery,2 as the case may be. It is a matter of some debate whether it is requiring performance or damages that 19 is the principal remedy available under the CISG. In a sense, the question is devoid of substance in that the obligee, apart from those cases where CISG Article 28 applies, may freely choose either. The principal remedy, therefore, is the one the obligee chooses in a given case and, in the great majority of cases, the remedy sought will be damages. As a result of this choice, the body of law concerning damages is significantly larger than that concerning the requiring of performance. We shall therefore start with damages.

2. Coverage of Damages The award of damages is dealt with in four provisions of the CISG, Articles 74–77. 20 Interest is usually treated as a separate category. When awarded under CISG Article 78, interest is somewhat indeterminate in its classification since it is an unsettled question whether interest is a form of compensation for the late payment of a money sum. Putting CISG Article 78 aside for separate treatment, this damages section covers the provisions of the CISG that lay down the rules of assessment of damages, and not those provisions that establish the entitlement to damages.3 That is to say, the section deals with CISG Article 74, which lays down a general damages rule covering a wide range of cases;4 CISG Article 75, which in the case of non-delivery by the seller and non-acceptance by the buyer, measures damages according to the terms of the substitute transaction that the obligee concludes in replacement of the avoided contract; CISG Article 76, which applies as does CISG Article 75, except that no substitute transaction is concluded and damages are measured according to the current or market price; and CISG Article 77, which reduces damages to the extent that the loss could have been mitigated by action that the obligee could have taken. CISG Articles 75 and 76 cover a significantly narrower range of cases than does CISG Article 74 and may be seen as particular applications of the principles laid down in CISG Article 74 (under which the award of damages is not dependent upon the contract having been avoided).5 The same may be said of CISG Article 77, though its link to CISG Article 74 is less clear-cut.

The CISG does not impose a duty on the seller to receive payment from the buyer. These stem from the duties imposed by contract, notably, under Articles 30 and 53, which lay down a damages entitlement in CISG Articles 45(1)(b) and 61(1)(b). 4 In addition to recovery under CISG Article 74, there are independent heads of recovery dealing with issues that are not directly derived from the primary performance provisions of the CISG in CISG Articles 30 and 53, such as those dealing with the preservation of the goods in CISG Articles 85–88 (see OLG Braunschweig 28 October 1999 (translated at http://cisgw3.law.pace.edu/cases/991028g1.html)) and with the duty to make restitution in CISG Articles 81 and 84 after the contract has been avoided (see OLG Munich 17 November 2006 (translated at http://cisgw3.law.pace.edu/cases/061117g1.html)); Aus Fed Ct 28 April 1995 (available at http://cisgw3.law.pace.edu/cases/950428a2.html) (Roder Zelt-und Hallenkonstruktionen GmbH v Rosedown Park Pty Ltd). 5 LG Munich 6 April 2000 (translated at http://cisgw3.law.pace.edu/cases/000406g1.html) is wrong so far as it states otherwise. 2

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II. Compensation Principle The purpose of a damages award is unequivocally stated by CISG Article 74 to be compensatory in that the obligee is entitled to a sum equal to the loss caused by a breach of contract. Recovery is subject to such loss being foreseeable at the date the contract was concluded.6 Loss is not defined but is expressed to include loss of profit; it thus, implicitly, extends to future losses. The confinement of CISG Article 74 to a claimant’s loss means that courts and tribunals may not award punitive damages.7 It also means that they may not award gain-based (or restitutionary) damages. A distinction may be drawn between monetary awards that compensate for loss and monetary awards that make up for the extent to which performance rendered by the defendant has fallen short. The buyer of non-conforming goods may reduce the price under CISG Article 50 even if suffering no loss.8 On both punitive and gain-based damages, the CISG has spoken by stating in CISG Article 74 that damages perform a compensatory role so that it cannot be said that these issues are gaps in the CISG waiting to be filled, if necessary, by the rules of a national law as the lex causae. If an obligor earns $100,000 by non-performance but causes the obligee a loss of $50,000, then the recoverable damages are $50,000 and not $100,000.9 Owing to its commitment to the binding force of contract, the CISG does not as such adhere to the doctrine of efficient breach of contract, which has failed to achieve an impact outside the United States. In those cases where an obligee has the right to avoid the contract, damages will be awarded under CISG Article 74 despite any assertion that certain future losses would not have accrued but for the avoidance of the contract.10 22 Thus stated, the compensatory principle does not as such state what amounts to a ‘loss’. A trite response is to say that only losses recognized by the CISG qualify as compensable losses under CISG Article 74.11 A particular problem here is the issue of attorneys’ fees or, put in a broader way, the costs incurred in pursuing a claim for breach of contract. This is connected with another issue that is mentioned in CISG Article 74, but taken no further, namely, when can it be said to be ‘caused’ by a breach of contract? But the question of recovering costs is more than just a matter of causation. Another debatable issue under CISG Article 74 concerns non-pecuniary loss. Some forms of non-pecuniary loss, such as injured reputation, are capable of being monetized in the form, for example, of sums recoverable for loss of repeat business or the loss of a chance 21

For a combination of factual causation and foresight, see Chinese Civil Code Article 584. For the view that such damages are traditionally associated with the United States and Canada, see Schwenzer, Hachem and Kee, Global Sales Law (2012) paras 44.13–14. 8 The English damages case of Bence Graphics International Ltd v Fasson UK Ltd [1998] QB 87 gave the buyer of seriously non-conforming goods only nominal damages because it had incurred no losses on contracts with sub-buyers. These had complained about the quality of goods manufactured by the claimant with the defendant’s defective raw materials but had evidently taken their complaints no further. Given CISG Article 50, an award of this type should not be made in these circumstances under the CISG. 9 But for the view that the obligor’s benefits arising from breach may, further to some sort of ‘preventive role’ of damages as well as the performance principle of damages assessment, be taken into account without requiring a disgorgement as such, see Schwenzer, in Schlechtriem & Schwenzer (eds), Commentary on the UN Convention on the International Sale of Goods 1980 (4th edn, 2016) pp. 1059, 1075–76. In contrast, see Djordjević, in Kröll, Mistelis and Perales Viscasillas (eds), UN Convention on Contracts for the International Sale of Goods (CISG) (2nd edn, 2018) p. 978 (rejecting ‘noble attempts to moralize the law of international sales’). 10 This is implicit in CISG Articles 75–76. 11 CISG Article 6 excludes damages for personal injury and death, and would be determined by the applicable law selected according to the forum’s choice of law rules. 6 7

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to expand a business. A further difficult issue concerns the loss of a chance to earn a profit from a contract.

III. Interests Protected by a Damages Award Another way of looking at loss under CISG Article 74 is to consider the interests that 23 are protected by contract law. A seminal paper of the 1930 s identified three interests as served by the award of contract damages: first, the expectation interest (positive interest); secondly, the reliance interest (negative interest);12 and thirdly, the restitution interest.13 The expectation interest concerned the gain that the obligee expected to derive from the performance of the contract. The reliance interest concerned the investment that the obligee put into the contract, expecting to at least recover that amount, any surplus thereafter falling within the range of the expectation interest. The third interest amounted to a refined form of the reliance interest, in that it related to the recovery of an investment paid over to the obligor. So far as this restitution interest merely restates the reliance interest, it need be taken no further in this Chapter.

1. Expectation Interest As for the expectation interest, if the award of damages under CISG Article 74 was 24 ever to protect it in full, the obligee would be economically placed in exactly the same position as if the contract had been fully performed on both sides. This aspiration, which is the primary goal of contract damages,14 is present in the wording of CISG Article 74 as it states the obligee’s entitlement to recover damages ‘equal’ to the loss caused by the breach.15 The expectation measure of recovery is sometimes expressed in terms of placing the obligee in the position it occupied immediately before the breach. 16 This comes to the same thing in that the obligee at that time had a right to future performance by the obligor. As we shall see below, however, the entitlement to such a perfect level of award is compromised from the outset by a rule confining recovery to the bounds of foreseeability.

2. Reliance Interest The so-called reliance interest raises a number of issues dealt with below, not the least 25 of which is its relationship to the expectation interest. Can an obligor recover more by claiming compensation for harm done to the reliance interest instead of asserting its expectation interest? The very label of the interest provokes debate: does it extend to expenditure incurred by the obligee even before the contract was concluded with the obligor?

12 The distinction drawn in Civil Law systems between the positive and negative interests serves various purposes, such as, limiting an obligee to negative damages when the obligee cannot prove the obligor’s fault. See Graziano, Comparative Contract Law (2009) p. 286 (on Swiss law). The absence of fault in the assessment of damages under the CISG is one reason why a formal distinction between positive and negative interests is not formally recognized. 13 See Fuller & Perdue, ‘The Reliance Interest in Contract Damages’ (1936) 46 Yale LJ 52. 14 See CESL Article 160. 15 See para. 29. 16 See Livingstone v Rawyards Coal Co (1880) 5 App Cas 25, 39; BGB § 249(1).

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3. Indemnity 26

Finally, under this heading, there is a type of loss that does not adequately fit within the expectation, reliance and restitution trilogy. Taking a simple example, a seller supplies dangerous machinery to a factory-owning buyer. As a result of the defect in the machinery, the buyer’s factory is destroyed. It cannot plausibly be asserted that the buyer’s reliance interest has been infringed, still less its restitution interest. It is entirely artificial to ascribe the buyer’s claim to its expectation interest. The buyer did not literally expect performance from the seller to leave its factory standing after the installation and use of the machinery as a result of any promise, express or implied, made by the seller. The reality is that the law of contract has assimilated a type of liability that could just easily have been left as a tortious (or delictual) liability ancillary to contract liability. That type of liability might conceivably be strict or fault-based. Under the CISG, liability for this type of loss falls squarely within CISG Article 74 and is strict. See Chapter 24 on ‘Products Liability’. In effect, we are looking here at a separate type of interest being served by contract law, which may accurately be called the indemnity interest.

IV. Foreseeability 27

For damages to be recoverable under CISG Article 74, the obligor must have foreseen, or should have foreseen, at the time of the conclusion of the contract, the loss suffered by the obligee as a result of the breach of contract. The loss may be either an expectation loss or a reliance loss, or the obligee may be seeking indemnification. Foresight is measured according to the facts and matters that the obligor knew or ought to have known at that time. This formula is close to the classic Common Law formulation of recoverable damages,17 itself said to be derived from the French Civil Code.18

1. Factual Causation and Foreseeability 28

Two aspects of this rule may restrict the recoverable amount of damages. First, the obligee must establish that its loss is in fact caused by the breach.19 The CISG gives no guidance as to the application of this factual test and much will depend upon the discretion exercised by a particular tribunal, thus providing an incentive for the parties themselves to dispel uncertainty by setting in advance the amount recoverable in the form of an agreed damages or penalty clause. Secondly, even if an obligee surmounts this factual hurdle, as a matter of law the obligee’s recovery is capped in accordance with the foresight principle. Some legal systems dispose of the issue of recovery under the broad banner of causation, without being too concerned to draw a distinction between these two aspects.20 The presence of the legal aspect (the rule of remoteness of damages) in Common Law systems means that little attention is devoted to the factual aspect in practice. A further reason for this neglect is the existence of a separate rule of mitigation of damages which, had it not been formally recognized in its own terms, would have Hadley v Baxendale (1854) 9 Ex 341. See Parke B (arguendo) (1854) 9 Ex 341, 347. 19 See French Civil Code Article 1231-2 (loss incurred or gain denied); BGB § 280(1) (but damages may depend upon the service of a default notice under BGB § 281). 20 French law subjects the award of damages to a foresight test judged as of the contract date (Article 1231-3) but then goes on to state that for losses to be recoverable they must be immediate and direct (Article 1231-4). Foresight is provided for in the Spanish Civil Code Article 1107 except where the failure to perform is due to wilful misconduct. 17

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been recognized as a factual or legal bar on recovery in accordance with the factual causation or foresight principles.

2. Full Compensation CISG Article 74 seeks to marry the Civil Law and Common Law traditions. In 29 doing so, it brings to the surface a point of tension between the two. There is the principle of full compensation usually associated with the Civil Law, which receives lip service in the obligee’s entitlement to recover an amount ‘equal’ to the loss. This entitlement jars against the limits then introduced by the foresight principle. 21 This conflict in turn highlights what appears to be a greater Civil Law commitment to the principle of pacta sunt servanda, evidenced both by the readier availability of enforced primary performance as a remedy and by the full compensation principle itself. The Common Law, in taxing recoverable damages by means of the foresight principle, and in treating specific performance as an exceptional remedy, gives the appearance of a lesser commitment to the binding force of contract. Too much should not be made of these differences. The foresight principle in Common Law systems tends often to screen out consequential losses of the type given in the earlier indemnity example: these are not central to the enforcement of the basic bargain between the contracting parties. The principle of full compensation is a somewhat hollow one as is demonstrated in the observation that its existence is ’undisputed’ but ‘its precise meaning is yet to be determined’.22

3. Degree of Probability Turning to the degree of ex ante probability that must exist in order for there to 30 be recovery under CISG Article 74, the standard set is that of foresight of possible consequences. What degree of likelihood must be demonstrated in order for recovery to be allowed? The first point to note here is that the words of any formulation such as possible, likely, or probable cannot be translated into a mathematical formula as though there a calculable difference between what is foreseeable and what is probable or likely. 23 Although the existence of personal fault has no formal part to play in the operation of the foreseeability rule, and indeed is not a prerequisite to liability in damages for breach,24 it is a brooding presence that is likely to influence outcomes.25 In an uncertain world, all manner of things are possible. The word ‘possible’ should not be interpreted to mean far-fetched but should be broadly understood to be the kind of eventuality against which a rational person would take available precautions. If CISG Article 74 were applied in a way that is generous to obligees, this would nar- 31 row any compensation gap between the full compensation principle and the detraction 21 The discordance between the two is more marked in the UNIDROIT Principle of International Commercial Contracts (hereinafter PICC) (2016), where the full compensation and foresight principles are expressed in different provisions: PICC Articles 7.4.2(1) and 7.4.4. 22 See Schwenzer, in Schlechtriem and Schwenzer (n 9), p. 1059. 23 See Polimeles Protodikio Athinon, Decision No. 4545 of 2009 (translated at cisgw3.law.pace.edu/cases/094545gr.html) (discussion of foreseeability). 24 See Djordjević, in Kröll, Mistelis and Perales Viscasillas (eds), UN Convention on Contracts for the International Sale of Goods (CISG) (n 9) pp. 961–62; Magnus, ‘Remedies: Damages, Price Reduction, Avoidance, Mitigation, and Preservation’ in DiMatteo, International Sales Law: A Global Perspective (2014), p. 258. Hence a seller may not claim exemption from damages liability under Article 79 merely because of an absence of fault: BGH 24 March 1999 (translated at http://cisgw3.law.pace.edu/cases/990324 g1.html). For a general discussion of fault in relation to damages, see Schwenzer (n 7) paras 44.63 et seq. 25 See Saidov, The Law of Damages in International Sales (2008) pp. 21–23.

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from it by the foresight principle. It is important therefore to have an informed sense of how courts and tribunals might interpret ‘possible’ in CISG Article 74.26 A particular issue is whether any compensation gap is greater under the PICC, where a loss has to be ‘likely’ at the contract date to be compensable in damages. Although the architects of the PICC were perfectly aware of their departure from the approach adopted in the CISG, it does not necessarily follow that they were favouring a difference of principle as opposed to a difference of semantic style. A word such as ‘likely’ is no more capable of precise definition than is ‘possible’. The difference between them cannot be exactly measured on a percentage scale: recovery for certain types of loss is likely to owe more to the instincts of a court than to any calibration of degrees of probability. Moreover, in the absence of a principled discussion of this point in a critical mass of decided cases, which is unlikely,27 the size of the gap is not to be measured by a comparison in gross of cases decided under both instruments. 32 Recovery under CISG Article 74 is a function of both probability and information. The more information possessed by the obligor of the obligee’s economic position, disclosed before or at the date of the contract, the more the foreseeability formula weighs in the obligee’s favour. A loss that might not be sufficiently possible to engage the liability of an uninformed obligor may cross the possibility threshold with the aid of particular information obtained by the obligor, whether or not from the obligee. This information, moreover, may fairly cause the obligor to assess the degree of risk it is undertaking in the contract so as to price its goods or services at the right level or seek instead to limit or exclude liability in the contract. The obligor’s passive response when given this information will be treated as an assumption of responsibility in respect of the loss.28 Hence, the obligee may be in a dilemma when it comes to supplying information. The date of foresight, namely before or at the time of the contract, underlines the point that the obligation to pay damages stems from the contract itself and is not imposed, as tortious (or delictual) liability is, by operation of law. This is significant when we come to the question whether contracting parties are allowed to determine in advance the amount of recoverable damages.

4. Type and Quantum of Loss 33

The foresight rule lends itself to discretionary decision-making and the next point to note is whether there should be drawn in its application a distinction between type and quantum of loss, admittedly a somewhat fluid distinction. In English law, the obligor is not in principle required to foresee the quantum of loss, but in one famous case29 the distinction between quantum and type was manipulated. It concerned the sale of a boiler to a laundry. The boiler, accidentally damaged when being loaded, was delivered late.30 In limiting the buyer’s recovery, the court distinguished between a claim for loss of large profits from dyeing contracts and a claim for more modest profits from laundering contracts. Only the latter were recoverable, though the court would have been prepared to award ‘some general (and perhaps conjectural) sum for loss of business in respect of 26 See Ziegel, ‘The Remedial Provisions in the Vienna Sales Convention: Some Common Law Perspectives’ in Galston & Smit (eds), International Sales: The United Nations Convention on Contracts for the International Sale of Goods (1984) pp. 9–37. 27 See Victoria Laundry (Windsor) Ltd v Newman Industries Ltd [1948] 2 KB 528; Koufos v C. Czarnikow Ltd (The Heron II) [1969] 1 AC 350. 28 HG Zürich 10 February 1999 (translated at http://cisgw3.law.pace.edu/cases/990210s1.html). 29 Victoria Laundry (Windsor) Ltd v Newman Industries Ltd [1948] 2 KB 528. 30 The seller’s carrier was negligent in damaging the boiler, so that it had to be repaired before it could be delivered to the buyer.

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dyeing contracts’ falling short of the large profits claimed. The interesting feature of this consolation prize is that, by the court’s own logic, it is compensating for a loss that was not caused by the breach of contract. There is support for requiring foresight of the quantum under CISG Article 74, 31 34 which would dispense with the type of reasoning adopted in the English case. Support has also been given to the application of the foresight test separately to each type of loss that follows from a breach of contract.32 The question of whether profits from different types of activity should be recoverable is more than just a taxonomic one. Assuming that the seller of a boiler knows that the buyer runs a dyeing business, how precise should the seller’s foresight of quantum have to be, especially if the seller has no knowledge of or expertise in the economics of the buyer’s business? Given the breadth of the foresight rule, the application of CISG Article 74 may in practice turn upon an instinctive feel that some claims go too far. In consequence, its application should be balanced by requiring foresight, not of the precise financial consequences of breach, but rather of the broad extent of the obligee’s loss.33

5. Discretionary Limits on Recovery? This leads on to a related aspect of the foresight issue. Even if loss is sufficiently 35 foreseeable, should a cap be placed on liability, especially where the obligor is not personally at fault, in order to avoid causing ruin to the obligor? One leading author gives the following example in aid of keeping in check the foresight rule: ‘Retail dealer S contracts to sell farmer B a tractor with lights. S knows B needs the lights to harvest at night. Delivery of the lights is delayed and, since no substitute is available, B is unable to use the tractor at night. He then sues S for (substantial) profits lost.’ 34 The author then refers to the notion in American law that, where loss is disproportional to the consideration (or value) received by the obligor from the obligee, there should be a tacit assumption of liability in excess of ordinary damages if the obligor is to be liable.35 The above example is one of consequential loss, an expression often used in the law 36 relating to damages but often in an imprecise way. Like a similar expression, incidental loss, it connotes a type of loss that does not immediately flow from the breach of contract but nevertheless is tied to that breach by a causal connection.36 The recovery 31 For the unexplained assertion that CISG Article 74 is concerned with foreseeability of the quantum of loss, see Knapp, in Bianca and Bonell (eds), Commentary on the International Sales Law: the 1980 Vienna Sales Convention (1987) p. 540. Support for this approach is found in the Secretariat Commentary on the 1978 Draft (Article 70), para. 8, where ‘exceptionally heavy losses’ are apparently regarded as unforeseeable unless they are drawn to the attention of the other party. See also Huber and Mullis, The CISG (2007) pp. 273–74 (‘losses reaching extraordinary dimensions’); Arbitration Institute of the Stockholm Chamber of Commerce 1998, No. 107/97 (available at http://cisgw3.law.pace.edu/cases/980107 s5.html) (buyer’s claim included excessively large freight forwarder’s fees). 32 In support of this, see OGH 14 January 2002 (translated at cisgw3.law.pace.edu/cases/ 020114a3.html). 33 See OGH 14 January 2002 (n 32); CISG-AC Opinion No. 6, para. 2.1. For a review of case law limiting liability for consequential loss where the loss is disproportionate or excessive, see Ferrari, ‘Hadley v Baxendale v Foreseeability under Article 74 CISG’ in Saidov and Cunnington (eds), Contract Damages[:] Domestic and International Perspectives (2008) p. 314. 34 Lookofsky, ‘Consequential Damages in CISG Context’ (2007) 19 Pace Int’l L Rev 62, 67. 35 See § 351(3) of the Restatement Second of Contracts: ‘A court may limit damages for foreseeable loss by excluding recovery for loss of profits, by allowing recovery only for loss incurred in reliance, or otherwise if it concludes that in the circumstances justice so requires in order to avoid disproportionate compensation.’ 36 For a discussion about losses that are recoverable over and above the loss of value in non-conforming performance (dealings with third parties and losses as flowing from actions taken by the obligee arising out of the breach), and that avoids labels such as consequential and incidental loss, see Djordjević, in Kröll

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of damages under both heads is governed by the foreseeability test but the questions presented in particular by consequential loss is whether there should be a further cap on recovery. This is because consequential loss is very often disproportional to the benefit received from the contract by the obligor.37 In addition to the tractor example, a further example concerns the wrong type of seed supplied to a farmer, which leads to the loss of a crop.38 The price of the seed paid to the obligor is dwarfed by the value of the lost crop. The introduction into the CISG of contractual liability in damages without fault39 makes the extent of liability a peculiarly difficult question to address, but there is no role allotted to fault in the foresight rule in CISG Article 7440 (see also PICC Article 7.4.4). The CISG is largely a blank canvas. On a persuasive view, an obligor seeking to avoid extensive liability should be put to the trouble of seeking to exclude or limit it. To return to the example of the tractor and lights, the buyer suffers a serious loss if the seller’s liability is capped. To deny the buyer damages for an inability to bring in the harvest because the lights fail would be to deny the buyer’s expectation interest and would be sharply at variance with the full compensation principle.41 The buyer, denied its claim for consequential loss, would thus not be ‘put in the same economic position he would have been in if the contract had been performed’.42 The drafting history of the CISG shows a firm rejection, on the ground that it would introduce ‘many difficulties’, of a proposal that damages should not be awarded ‘of an extent which would be excessive in relation to the price’.43

6. Costs of Preserving Goods 37

The foresight principle is unlikely to play a major role in cases of direct loss resulting from a breach of contract. It comes into play in particular where consequential losses arise. Certain provisions of the CISG impose a liability sounding in damages that is not filtered through Article 74. One example is the various rules in Articles 85–88 44 dealing with the preservation of the goods. In so far, for example, as reasonable expenses in et al (n 9) pp. 974–75. Also recoverable are expenses incurred in mitigating loss further to Article 77: CISG-AC Opinion No. 6, para. 4.1. 37 On the question of whether such losses are recoverable under CISG Article 74, or under domestic law, or under both, see Schwenzer, in Schlechtriem and Schwenzer (n 9) p. 1072, advocating a nuanced approach, with the CISG alone applicable in the case of damaged objects ‘typically affected by the defective performance, such as materials to be processed or incorporated into the purchased goods’, and with concurrent application of the CISG and domestic tort law where the goods ‘breach general safety expectations’. This is not an easy distinction to apply. 38 Which happened in George Mitchell (Chesterhall) Ltd v Finney Lock Seeds Ltd [1983] 2 AC 803, a case dealing with exclusion clauses. 39 See CISG Articles 49 and 61 (damages are generally available for non-performance). 40 See para. 30. 41 See Schwenzer, in Schlechtriem and Schwenzer (n 9) p. 1072 (‘predictably calculable and achievable future profits’ as being recoverable). 42 Secretariat Commentary on the 1978 Draft (Article 70), para. 3. 43 Report of the Committee of the Whole on the 1977 Sales Draft (A/32/17), paras 474–77. Similarly, a proposed amendment to the text preventing damages from exceeding ‘the reasonable expectation of loss’ (A/CONF.97/C.1/L.235) was rejected by the First Committee at the 1980 Diplomatic Conference: Doc C(5), C.74. In dealing with the full compensation principle, the PICC (2016) make it plain, for reasons of certainty and uniformity, that there is no room for a discretionary reduction of damages: Comment 1 to PICC Article 7.4.2. 44 In some cases, there is an implicit liability arising out of a duty imposed by the CISG, e.g., where expense is incurred in effecting the restitutionary process after avoidance in Articles 81 and 84. The party whose breach brought about the avoidance ought to pay the other’s reasonable expenses, though the provisions in question make no mention of this. It is unlikely that any practical difference would arise out of the choice between applying the reasonable expenses provisions of CISG Articles 85–88 by analogy and applying CISG Article 74.

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preserving or disposing of goods are recoverable, the extent of liability is already limited and there is no need for any further limitation imposed by foresight.

V. Establishing ‘Loss’ under CISG Article 74 A number of issues arising under Article 74 draw out the nature of a loss recognized 38 as meriting recovery under the CISG.

1. Certainty and Chance In some legal systems, the foreseeability rule is supplemented by a further rule that 39 the loss claimed must be estimable with a sufficient degree of certainty. 45 Suppose for example that a seller’s failure over time to supply sufficient goods to an overseas buyer prevents the buyer from acquiring sufficient critical mass to attract business from other suppliers seeking a point of entry into the buyer’s country.46 If the buyer can establish that there is a loss, so as to comply with CISG Article 74, one response is to say that this is a matter of proof for the rules of civil procedure of the forum.47 But the CISG contains a number of provisions relating to proof, dealt with in a number of standard texts.48 A too-ready willingness to allocate the issue to local procedural rules would have a disturbing effect on uniformity.49 Treating the matter as one governed by the CISG, although CISG Article 74 is silent on the subject,50 the opinion of the CISG Advisory Council is that the obligee should have to prove loss to the requisite standard of certainty, but need not prove the loss with ‘mathematical precision’.51 A higher standard would compromise the principle of full compensation.52 It is appropriate to invoke the underlying principle of reasonableness in the CISG in aid of a reasonable assessment by the court or tribunal.53 Since an obligee’s difficulties of proof are so often caused by the defendant’s breach of contract, recoverability on this basis should serve as a disincentive 45 See Farnsworth, Contracts (4th edn, 2004) § 12.6 (US law). Certainty is referred to as the standard of proof in Schwenzer (n 7) paras 44.328 et seq. 46 Another example is the buyer who acquires goods for resale that prove to be defective and dangerous, so that the buyer suffers a loss of trade reputation. It is hard to prove that customers who in future stay away from the buyer do so because of an earlier incident. On the recovery of damages for loss of trade reputation, see Helsinki HO 26 October 2000 (translated at cisgw3.law.pace.edu/cases/001026f5.html); Audiencia Provincial de Barcelona 20 June 1997 (translated at cisgw3.law.pace.edu/cases/970620s4.html). For a discussion of the loss of goodwill and the various meanings of goodwill, see Djordjević, in Kröll et al (n 9) pp. 985–86. 47 This danger is present in assertions that the local law deals with issues relating to the quantification of damages, on which see LG Flensburg 24 March 1999 (translated at http://cisgw3.law.pace.edu/cases/990 324g2.html). 48 For the view that the convention deals with the burden of proof, see Helsinki HO 26 October 2000 (n 42). See also Djordjević, in Kröll et al (n 9) pp. 962–64 and the cases therein cited; Schwenzer, in Schlechtriem and Schwenzer (n 9) pp. 1084–85. For the contrary, surely incorrect, view, see OLG Koblenz 22 April 2010 (CISG-online 2163). 49 See CISG-AC Opinion No. 6, paras 2.1, 2.3. 50 Cf PICC (2016) Article 7.4.4(1), requiring a claimant to establish harm with a reasonable degree of certainty. 51 Opinion No. 6, black letter rule 2. Cf OLG Celle 2 September 1998 (translated at cisgw3.law.pace.edu/cases/980902g1.html). Opinion No. 6 nevertheless asserts in black letter rule 2 the existence of a reasonable certainty principle under Article 74, as does but without supporting argument US Second Circuit, 6 December 1995 (available at cisgw3.law.pace.edu/cases/951206u1.html) (Delchi Carrier SpA v Rotorex Corp). 52 CISG-AC Opinion No. 6, para. 2.3. 53 Id., paras 2.6, 2.9. See also PICC (2016) Article 7.4.3(3), laying down a rule that, if damages cannot be established with a sufficient degree of certainty, the assessment is at the discretion of the court.

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to breaches of contract54 and buttress the binding force of contract already served by the routine availability of the remedy of requiring performance. 40 In some cases, a reasonable estimate of the loss will not be available because the obligee cannot sufficiently prove the fact of loss.55 Here, damages might be allowed for loss of the chance of gain or profit. 56 Damages for loss of a chance are somewhat unlikely to arise in sale of goods conditions,57 but should in a proper case be recoverable under Article 74.58 Awards of this nature, if abused, would become a routine way of reducing the intensity of the obligee’s burden of proof.59 The principle of compensation would be unbalanced if obligees recovered in full when barely satisfying the civil standard of proof, but, when falling short of this standard, routinely were allowed proportional damages measured according to the chance of gain. Speculative claims should therefore be precluded by requiring claims to cross a probability threshold.60

2. Intangible Interests CISG Article 74 does not state that the obligee’s losses, in order to be compensable, have to be financial in character. The question is whether an obligee should be able to recover for a range of losses often referred to as intangible, such as inconvenience, distress, and annoyance. These are notoriously difficult to assess in monetary terms and when, in domestic legal systems, an assessment is made, it tends to be somewhat notional in character, designed above all to recognize that there is a loss even if it cannot adequately be monetized. The confinement of the CISG to commercial transactions, where in the great majority of cases the participants are corporations lacking the capacity for feelings and emotions, ensures that this issue will remain a low profile one.61 In the case of sole traders, the realities of commerce, both national and transnational, should normally encourage them to develop a shell thick enough to resist losses of this kind so that the obligor may not reasonably foresee the possibility of such losses arising from a breach of contract. But even a corporation suffering inconvenience may be put to the expense of dealing with that inconvenience, so that the claim is reshaped as a case of recoverable damages for financial loss. 42 Moreover, there are other types of apparently intangible loss that translate into monetary terms. These include loss of commercial reputation and goodwill. In both these very 41

54 See Eiselen, ‘Unresolved Damages Issues of CISG: A Comparative Analysis’ (2005) 32 Comparative and International Law Journal of Southern Africa 37 (noting the difficulty of a claimant facing the expiry of a limitation period). 55 See PICC Article 7.4.3, distinguishing between certainty of loss and certainty of the amount of loss. 56 This goes beyond the recovery of reliance damages but relates to it, in the sense that the existence of a chance may counter an inference that would otherwise be drawn that the contract is a losing contract: see Security Stove & Manufacturing Co v American Railway Express Co, 51 SW 2 d 572 (1932) (United States). 57 But see Schwenzer, in Schlechtriem and Schwenzer (n 9) p. 1074, asserting that loss of a chance is a recoverable head of economic loss (revising a former view that it is non-economic) under Article 74. 58 For a reference to contrary views and doubts, citing HG Zürich, 10 February 1999 (n 28), see Djordjević, in Kröll et al (n 9) pp. 984–85, which however makes a case for the recovery of such damages since chances have an economic value; Schwenzer and Hachem, ‘The Scope of the CISG Provisions on Damages’, in Saidov and Cunnington (n 33) Ch 3. 59 PICC Article 7.4.3(2)), that ‘compensation may be due for the loss of a chance in proportion to the probability of its occurrence’, emphasizes the danger of this. This measure, however, appears to be the one that best adheres to the rule of compensation in CISG Article 74 in Djordjević, in Kröll et al (n 9) pp. 984–85. 60 See Saidov (n 25) p. 73, citing Mansonville Plastics (BC) Ltd v Kurtz GmbH 2003 BCSC 1298 (available at www.canlii.org). 61 See Schwenzer, in Schlechtriem and Schwenzer (n 9) p. 1074 (‘hardly conceivable’ that damages will be allowed once loss of reputation and loss of a chance are considered to be economic in character).

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similar cases, the obligee suffers a real financial loss. The difficulty lies in quantifying it. A buyer whose commercial reputation is damaged or destroyed as a result of reselling goods received from the seller, whether in their integral state or as components in goods made by the buyer, will experience a loss of sales volume and possibly, too, the chance to expand its business. The same goes for goodwill, essentially the value placed upon the habits of returning customers. This is commonly valued as a separate item when a business is sold in the form of a sale of assets rather than of shares, though in such instances it works as a balancing item, representing the subjective value, over and above the hard cash value of other assets, that a purchaser puts on the value of the business as a whole. In both cases, issues of certainty and damages for loss of a chance arise when a court or tribunal has to decide whether to accept a claim and then to put a monetary value on it. There is no good reason for demanding a higher standard of proof when a claim is made for loss of goodwill,62 but care should be taken not to allow double compensation where a claim is made for loss of future profits and for loss of goodwill.

3. Reliance Claims a) Reasons for Reliance Claim The distinction between expectation and reliance claims, not explicitly recognized in 43 the CISG,63 is commonly seen as a matter of the obligee’s choice. Yet, allowing an obligee to elect in favour of the pre-contractual, reliance position,64 instead of the post-contractual, expectation position, amounts almost to an abandonment of the contract by the obligee in favour of a tortious claim based upon the obligee’s detrimental expenditure in preparing to perform the contract. Since reliance claims are not as such disallowed in the CISG and are widely recognized in legal systems, an obligee should be entitled to assert a reliance claim as long as it does not infringe the rules of recovery laid down in CISG Article 74. When electing between a claim for reliance damages and a claim for expectation 44 damages, an obligee will obviously prefer the measure that gives the higher recovery. A reliance claim will be preferred if the expectation loss cannot be proved either at all or with the requisite degree of certainty.65 Again, a reliance claim will be preferred if the quantum of expectation is less than the amount laid out by the claimant in preparing to perform and in performing the contract. But whether a claim will be allowed in these circumstances is a different matter.66 The requirements of CISG Article 74 against which a reliance claim should be measured are those that require a loss to have been caused by the breach of contract and to have been foreseeable at the contract date. b) Loss-Making Contracts and Pre-Contractual Expenditure Two hypothetical cases bring out the true nature of a reliance claim. In the first, 45 the obligee enters into an imprudent contract, which, if it had been performed by the obligor, would have resulted, not only in the obligee failing to make a profit, but also 62 CISG-AC Opinion No. 6, para. 7.3; cf HG Zürich 10 February 1999 (n 28) (‘substantiated and explained concretely’). 63 But the expectation interest is implicitly recognized: Article 74 states that damages for loss of profit are recoverable. See also OGH 14 January 2002 (n 32). There are numerous references in the cases to the negative or reliance interest and its protection under the CISG: see, e.g., OLG Dresden 21 March 2007 (translated at cisgw3.law.pace.edu/cases/070321g1.html). 64 This is explicitly permitted in German law (BGB § 311a(2)) except where the purpose of the expenses disbursed could not have been achieved (BGB § 284). 65 On certainty, see para. 39. 66 See para. 46.

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in incurring the loss of some or the whole of its investment in the contract. In the second case, the obligee incurs expenses prior to and in anticipation of a binding sale contract.67 In the first case, the obligor might say that his breach did not cause the loss of the obligee’s investment, which would have been lost in any event if the contract had been performed. Indeed, the obligor’s breach might have protected the obligee from incurring further losses. In the second case, the obligor might deny that it caused the investment loss since this would have occurred anyway if no contract had materialized. The obligor’s defence in the second case should be rejected. The reliance claim is not an independent head of recovery in contract law but, in a substitutive way, stands in for the expectation interest in a world of insufficient evidence created by the defendant’s breach of contract.68 Had the obligee not entered into a contract with the obligor, it might have contracted instead with someone else. 46 Taking further the first of the above cases, the obligee’s expectation, under a contract that will bring about a net loss if duly performed, is that it will lose its investment. Hence, it has been asserted that the contractual expectation sets a ceiling above which a reliance claim may not go.69 This accords with the factual causation rule in CISG Article 74: the obligor’s breach of contract did not cause the loss of the obligee’s investment. It may then be fair to require the obligor to prove that the contract was unprofitable or worse for the obligee.70 The breaching obligor created the difficulty of proving what the post-performance world would have looked like and so should carry the burden of proof.71 As for the second case, this expenditure was certainly speculative at the time it was incurred but the speculation paid off once the obligee secured the obligor’s contractual commitment. The obligee then had an expectation that its investment would be protected. The obligor’s breach caused the loss of an investment that should have been recovered from profits generated by the contract. In further making it impossible or difficult for the obligee to prove the lost expectation, the obligor should have to reimburse the obligee for investment losses unless able to prove the contract to be unprofitable. c) Overhead 47

A reliance claim addresses another difficulty that arises when it comes to quantifying a lost expectation. Take the example of a seller’s special expenditure (variable overhead, which might include additional supplies and extra staff and plant) incurred in the hope of securing a valuable, long-term contract and its fixed overhead costs, such as the cost of space and of maintaining the premises and staff in a functional state.72 The seller’s special expenditure may be saved if the contract does not go forward to performance 67 This occurred in Anglia Television Ltd v Reed [1972] 1 QB 60. The recognition of the reliance interest in OGH 14 January 2002 (n 32) is not expressed to include pre-contractual reliance. 68 See Commonwealth of Australia v Amann Aviation Pty Ltd (1991) 66 ALJR 123 (Australia); Omak Maritime Ltd v Mamola Challenger Shipping Co [2010] EWHC 2026 (Comm), [2011] 1 Lloyd’s Rep 47 (England). 69 See, e.g., CCC Films (London) Ltd v Impact Quadrant Films Ltd [1985] QB 16 (England); Bowlay Logging Ltd v Domtar Ltd [1978] 4 WWR 105 (Canada); BGB § 284; Fuller and Perdue, ‘The Reliance Interest in Contract Damages’ (1936) 46 Yale LJ 52. 70 See, e.g., McRae v Commonwealth Disposals Commission (1951) 84 CLR 377 (Australia); Bowlay Logging Ltd v Domtar Ltd [1978] 4 WWR 105 (Canada); Filobake Ltd v Rondo Ltd [2005] EWCA Civ 563 at [62] (England). 71 ‘In commercial trade it is to be assumed that parties calculate in a way that the profit expected will at least cover the expenses made in connection with the contract’: Schwenzer, in Schlechtriem and Schwenzer (n 9) p. 1073. 72 See Western Web Offset Printers Ltd v Independent Media Ltd [1996] CLC 77 (England) (forensic difficulties in dealing with such cases).

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as a result of the buyer’s breach. Fixed overhead presents greater difficulties and also poses problems of certainty of loss and proof.73 A case can be made for its recovery in the form of a reliance claim since, had the contract been performed, it would have been recovered as part of the overall price paid by the buyer. The question, then, is how to calculate the recoverable amount of fixed overhead. Now, a seller loading fixed overhead costs into its pricing structure normally expects that contracts initially concluded in the financial cycle will soak up fixed overhead for that cycle, so that later contracts will give a higher marginal profit. Nevertheless, instead of pinpointing the position of a particular contract in the cycle, a better approach, consonant with the foresight rule in CISG Article 74, would be to allocate fixed overhead rateably across all of a seller’s contractual activity within that cycle. This same approach of rateable apportionment should assist in calculating the amount due to a seller when pursuing an expectation claim for net profit under CISG Article 74.

4. Lost Volume The liability of a buyer for non-acceptance of the goods is measured either according 48 to the price realized by the seller on a substitute transaction or by the current or market price where no such transaction is concluded. By either measure, a seller unable to deliver the goods to an unwilling buyer may at first glance appear to have suffered no loss if the goods set aside for the first buyer are later delivered for the same price to another buyer. This impressionistic judgment ignores the possibility that the seller might have been able to perform both contracts, thus earning a profit on both, in circumstances where the supply of goods available to the seller exceeds the demand for them. The seller’s lost profit is therefore recoverable as damages. 74 A manufacturing seller of widgets may have the resources to increase output to perform both contracts; the seller of a unique vintage car does not. If the latter seller can dispose of the car at the same price on a subsequent occasion, then, apart from any additional storage and transaction costs (see CISG Article 74), it has suffered no loss as a result of the first buyer’s renunciation of the contract.75 The manufacturing seller of widgets, able to satisfy both or more contracts, loses 49 a profit when the first buyer renounces its obligations and should therefore recover damages for that lost profit.76 The calculation of that profit calls for some analysis. The cost of manufacturing the widgets may not be wasted if the seller is able to dispose of those same widgets to another buyer.77 In this case, the seller’s claim will be for damages representing the difference between the sale price agreed for that first transaction and the supply price (or cost to the seller of the goods that were to be supplied to the buyer). 73 See Aust Fed Ct Castel Electronics Pty Ltd v Toshiba Singapore Pte Ltd (available at www.austlii.edu .au/au/cases/cth/FCA/2010/1028.html); Federal District Court (New York) 29 January 2010 (available at cisgw3.law.pace.edu/cases/100129u1.html) (ECEM European Chemical Marketing BV v Purolite Co). For the view that fixed costs should not be deducted from a seller’s claim, see OLG Hamburg 26 November 1999 (translated at cisgw3.law.pace.edu/cases/991126g1.html). 74 Delchi Carrier SpA v Rotorex Corp (available at cisgw3.law.pace.edu/cases/951206u1.html); Magnus, ‘Remedies: Damages, Price Reduction, Avoidance, Mitigation, and Preservation’, in DiMatteo (n 24), pp. 285–86. 75 Lazenby Garages Ltd v Wright [1976] 1 WLR 459 (England) (unique second-hand car resold by the claimant dealer). 76 A lost volume recovery was allowed in OGH 28 April 2000 (translated at cisgw3.law.pace.edu/cases/000428a3.html), the court ruling that neither Article 75 nor Article 76 precluded a claim for such loss based on CISG Article 74. In lost volume cases, the finding of a second buyer is not action taken in mitigation of loss further to CISG Article 77: id. 77 Likewise, in the case of an intermediate seller, the cost of those widgets to that seller.

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If the seller has to discount those goods when performing the second transaction, because of their deteriorating condition or because they have been surpassed by more upto-date models, then the decline in value of the goods may be added to the seller’s lost profit claim against the first buyer. If the goods have no resale value at all, possibly apart from a minor scrap value, then the seller’s damages will amount to the price the buyer should have paid.78 A seller who successfully requires performance from the renouncing buyer under Article 62 will benefit from a release from the difficulties of proving its lost profit. 50 The calculation of that profit may present in some cases a considerable forensic challenge. Taking the example of the manufacturing seller, that seller may incur additional expenditure (variable overhead, such as the cost of materials and overtime payments to employees) in the performance of a contract. If, owing to the buyer’s renunciation, that expenditure is either never incurred or else is recovered from the next contract in line, the defaulting buyer will not be liable for it. That leaves fixed overhead, such as basic employment costs, mortgage or rental payments and basic utility bills, to be considered. In the course of a financial year, a seller should expect to break even at some point when having earned enough to cover fixed overhead for the year, with later contracts yielding a higher marginal net profit than earlier ones. A defaulting buyer, party to a later contract, may therefore be at risk of liability for a substantial lost profit. Nevertheless, that buyer’s position ought to be no worse than that of an earlier buyer. Instead of loading up earlier contracts with its fixed overhead, so as to give the appearance of a highly profitable contract with the defaulting buyer, the better approach would be to apportion overhead pro rata among all of the claimant seller's contracts in the same accounting period. It is the calculation of the seller’s position, rather than the principle of it, that will present the greater difficulties in practice.

5. Discounting Future Losses 51

A general damages issue, discussed below in relation to substitute transactions and the current price rule, is that of the date of assessment. A particular feature of that issue, which may be considered here, concerns continuing losses that may run into the future beyond the time that a tribunal makes the assessment. CISG Article 74 should be interpreted as allowing for the recovery of future losses (damnum emergens), though it does not say so explicitly: this type of award is implicit in the recognition given to claims for lost profits.79 The question is, to what extent should a tribunal discount the amount of damages by taking into consideration negative contingencies that might occur in the future? A related question concerns contingencies that have occurred after the date of avoidance and before the tribunal comes to make its assessment.80 Both questions should be distinguished from the case where a tribunal makes an award based on a continuing stream of future profits that the obligee might have reasonably have expected to make if the obligor had performed in accordance with the contract.81 In this case, the profits should be discounted to present value in recognition of the obligee receiving its rewards in a lump sum by way of damages at an earlier date. Lost profit claims are a particular feature of contracts for the supply of machinery. In a case of this kind, a buyer, instead of claiming lost profits, might instead seek a reduction of the price under CISG On the recovery of damages in excess of lost profits, see Re Vic Mill Ltd [1913] 1 Ch 465 (England). Schwenzer & Hachem, ‘The Scope of the CISG Provisions on Damages’ in Saidov and Cunnington (n 33) p. 97; CISG-AC Opinion No. 6, para. 3.19. 80 See further para. 52. 81 The buyer’s loss might be put in the alternative of the diminished capital value of the goods, since this will reflect its income-earning potential. 78

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Article 50. The capital value of machinery is a function of its profit-making capability. A tribunal should be astute not to allow both a price reduction and a claim for lost profits here, since this would amount to double compensation.82 The above questions concerning contingencies can be developed with the aid of the 52 following example. Suppose that a seller delivers machinery that fails to comply with agreed express or implied performance standards (see CISG Article 35), or fails to deliver the machinery at all. Subject to any requirement of mitigation of loss (see CISG Article 77), whether this takes the form of the obligee disposing of defective machinery in the former case or of acquiring machinery from another source in the second case, a tribunal assessing the obligee’s damages based on an expected income stream is engaged in an inherently speculative process. The applicable principle is, nevertheless, a compensatory one designed to quantify in financial terms the true loss suffered by the obligee. The obligee’s future trading returns might suffer for all sorts of reasons, and might already have done so by the time of the assessment. The machine supplied might have been superseded by a superior model putting the obligee’s competitors in a better trading position. Or there might occur, or have occurred, a diminution in the demand for goods manufactured by the obligee. Damages should be discounted to take account of contingencies that have occurred and of contingencies that have not yet occurred. 83 Prospective contingencies should first, as a matter of principle, have to pass a threshold of substantial likelihood, or else every contract involving future losses would involve the award of damages for loss of a chance.

6. Attorneys’ Fees In some legal systems, costs go with the cause, that is, the successful claimant recovers 53 its costs from the defendant and the successful defendant recovers its costs from the claimant. Costs may be awarded in both directions, as where the claimant succeeds with its claim but the defendant also succeeds on its counterclaim. The award of costs will be taxed in accordance with what are quite strict limits, so that recovery may be denied even for costs that are reasonably incurred. In other legal systems, each litigant, successful or not, bears its own costs, which may, in a substitutive sense, be recovered in some jurisdictions as part of a punitive damages award. The CISG makes no provision for the award of costs and does not sanction the award of punitive damages since such an award is not ‘equal’ to the loss as required by CISG Article 74. The question is whether the broad principle of damages compensation in CISG Article 74 should be applied so as to permit the recovery of costs in the form of a damages award. This will depend upon whether the incurring of costs can be said to be a loss caused by the breach of contract. It will also depend upon whether the award of costs can be said to concern the rights and obligations of buyer and seller under Article 4. The clear balance of authority treats the issue of costs as falling outside the CISG, 54 to be governed by arbitration rules or the procedural rules of the lex fori as the case may be.84 Not the least reason for this stance is the fact that the award of damages

82 There will, however, be cases where a price reduction claim might be linked to a claim for damages under CISG Article 74, such as the commissioning of expert reports to assess the state of non-conforming goods. 83 This has been a matter that has attracted exhaustive litigation in England. See in particular Golden Strait Corp v Nippon Yusen Kubishika Kaisha (The Golden Victory) [2007] UKHL 12, [2007] 2 AC 353; Bunge SA v Nidera BV [2015] UKSC 43, [2015] 2 Lloyd’s Rep 469. 84 See, e.g., USDC 15 April 2009 (available at http://cisgw3.law.pace.edu/cases/090415u1.html) (San Lucio SrL v Import & Storage Services LLC); Schwenzer, in Schlechtriem and Schwenzer (n 9) p. 1069.

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under CISG Article 74 could only ever go in favour of a successful claimant.85 A successful defendant could not recover in the absence of a revolutionary argument that the bringing of an ill-founded action amounts to a compensable breach of contract. Another reason is that litigation costs are a consequence of the litigation or arbitration, and not of the breach of contract,86 but this reasoning amounts to begging the question. For present purposes, costs should include not only lawyers’ and court fees but also expenses incurred internally in preparing for a claim or counterclaim, since otherwise the outcome would be biased in favour of successful claimants against successful defendants.87 A difficult question is presented by non-forensic costs incurred in pressing the other party to perform which would not be recoverable as part of a costs award in legal proceedings. These costs might include, for example, the expense of instructing a collection agency88 and the internal costs incurred in demanding performance. Since the cost of resisting an unwarranted demand for performance may not be recovered, on balance the better approach is to deny an award of these costs under CISG Article 74. 55 There remains, however, a case where costs may indirectly be recovered in the form of damages.89 Suppose that goods are sold by A to B under a contract governed by the CISG, those same goods being sub-sold by B to C, whether under the CISG or under a domestic law. The seller in both contracts is in breach and B ends up having to pay damages to C as well as its own costs and a contribution to C’s costs. When B comes to sue A, B’s loss, putting aside any costs incurred in bringing proceedings against A, will include not just its damages liability to C but also both sets of costs in the B–C proceedings. As losses caused by A’s breach of contract, these are recoverable so long as they satisfy the foresight requirement of CISG Article 74. The reason for the recovery of B’s own costs in the action brought by C is that they were not incurred for the purpose of bringing an action against A but rather to avoid having to bring an action against A. Nor would their recovery from A be the subject of domestic costs rules in jurisdictions where costs go with the cause.

VI. Substitute Transactions 56

CISG Article 75 provides that, in the event of the avoidance of the contract, 90 the resale price of the goods (if it is the seller who avoids), or the repurchase price of the goods (if it is the buyer who avoids), in a substitute transaction is to be compared to the

85 US Seventh Circuit 19 November 2002 (available at http://cisgw3.law.pace.edu/cases/021119u1.ht ml) (Zapata Hermanos Sucesores SA v Hearthside Baking Co Inc); CISG-AC Opinion No. 6, paras 5.1–5.4 (citing a principle of equality between seller and buyer drawn from Articles 45 and 61). But see the case made for the recovery of costs by a successful litigant: Piltz, ‘Litigation Costs as Reimbursable Damages’ in DiMatteo (n 24), pp. 286–294, invoking the principle of full compensation in CISG Article 74 (pp. 290, 293) and citing the alternative possibility of recovering costs as damages to the extent that they are not recoverable under the procedural rules of the forum (p. 290). 86 See Djordjević, in Kröll et al (n 9) p. 988. Cf. Piltz, ‘Litigation Costs as Reimbursable Damages’ in DiMatteo (n 24), p. 293. 87 Schwenzer, in Schlechtriem and Schwenzer (n 9) pp. 1069–70 (citing numerous decisions favouring the recovery as damages of pre-procedural costs). 88 Recovery denied in the particular circumstances in LG Frankfurt 16 September 1991 (translated at http://cisgw3.law.pace.edu/cases/910916g1.html). 89 For an example of this process in English law, see Kasler and Cohen v Slavouski [1928] 1 KB 78. 90 This may occur before or after the goods are delivered and may be based on the delivery of non-conforming goods or late delivery or non-delivery. It must occur after the avoidance of the contract: OGH Düsseldorf 9 July 2010 (CISG-online 2171).

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original contract price for the purpose of calculating damages.91 If it is the seller who is claiming, the resale price will have to be lower if the seller is to make a damages claim under CISG Article 75.92 If it is the buyer making what is called a ‘cover’ purchase, the cover price must be higher for a damages claim to be maintained. According to case law, a declaration of avoidance (see CISG Article 26) is not necessary where it is certain that the obligor will not perform, as for example will be so when the obligor renounces its obligation to perform.93 It is submitted that there is no good reason for this departure from the clear wording of CISG Article 75.94 A declaration of avoidance is not subject to demanding formalities and is easily served. Moreover, as will be demonstrated below, CISG Article 74 may be brought into play where the substitute transaction precedes avoidance.95

1. Additional Damages Claim Where CISG Article 75 does apply, the measure of damages awarded will not preju- 57 dice a separate claim under CISG Article 74 for any additional loss suffered by the claimant. For example, a claimant seller may have incurred further storage and transaction costs before concluding the substitute transaction. A claimant buyer may have incurred further transaction costs as well as, in some cases, losses due to the enforced idleness of its machinery and workforce. In both instances, the substitute transaction must be concluded in a reasonable manner and within a reasonable time after avoidance.

2. Reasonable Substitute Transactions The notion of a reasonable manner draws upon the particular circumstances in 58 which the seller or buyer is placed. The nature and urgency of the buyer’s predicament and the availability of substitute goods will determine how much effort a buyer should be expected to expend in finding substitute goods.96 In those cases where it is the seller who is seeking an alternative buyer, similar considerations apply.97 A buyer may be expected not to purchase substitute goods with heavy insurance and carriage costs when a cheaper alternative is available closer to home, though the commercial reputations of alternative sellers is a relevant consideration in addition to any prices that they may be quoting. A seller should be wary of disposing of the goods in favour of a connected company without taking steps to obtain more than one quotation.98 A buyer in urgent need of the goods, and thus having to pay a high price in a substitute transaction, should be able to claim the difference between the two prices. So far as this action is foreseeable and abates losses that otherwise arise as a result of non-delivery by the seller, this approach to the calculation of damages is also supported by the mitigation rule in 91 See Schlechtriem, ‘Calculation of Damages in the Event of Anticipatory Breach under the CISG’ (2007) (available at http://cigw3.law.pace.edu/cisg/biblio/schlechtriem20.html). 92 If the seller is a lost volume seller, its damages will be assessed under CISG Article 74. A subsequent sale by the seller, whether or not at a higher price, will not be a ‘substitute transaction’ under Article 75. 93 OLG Hamburg 28 February 1997 (translated at ttp://cisgw3.law.pace.edu/cases/970228g1.html); OLG Munich 15 September 2004 (translated at http://cisgw3.law.pace.edu/cases/040915g2.htm). 94 See OLG Bamberg 13 January 1999 (translated at http://cisgw3.law.pace.edu/cases/990113g1.html). 95 Supreme Court of Poland 27 January 2006 (translated at CISG-online 1399); Audiencia de Valencia 31 March 2005 (translated at http://cisgw3.law.pace.edu/cases/050331s4.html). 96 Audiencia de Palencia 26 September 2005 (translated at http://cisgw3.law.pace.edu/cases/050926s4.ht ml) (buyer of printing machine rendered late in performing its printing obligations). 97 See: OLG Graz 29 July 2004 (translated at http://cisgw3.law.pace.edu/cases/040729a3.html) (seller not permitted to resell at a ‘dumping’ price). 98 See OLG Graz 29 July 2004 (n 97) (sale to subsidiary that was an autonomous legal entity, where a number of quotations were obtained).

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CISG Article 77. It may even be seen as a requirement of that rule, especially if there is an available market price under CISG Article 76.99

3. Time of Substitute Transaction 59

The substitute transaction must be entered into a reasonable time after avoidance. 100 Where it is a resale, goods in the seller’s hands may deteriorate and therefore depreciate if rapid action is not taken. This is also an expression of the mitigation principle expressed in CISG Article 77. For goods that have a market value, especially a fluctuating one, the requirement of a reasonable time serves the purpose of not allowing one party to speculate in the market at the expense of the other. For example, a buyer delaying a cover purchase of bulk oil ought not to be permitted to watch the market, deriving a benefit from its fall if it goes below the contract price, while claiming damages for an expensive cover repurchase if the market rises instead. It is here that the position of anticipatory breach poses real problems. Taking again the case of the buyer of oil, suppose that the seller renounces its obligation to deliver some time before the due date of delivery. May the buyer wait until the delivery date falls due before avoiding the contract and making a cover purchase? It is usual to treat this conduct as going to the mitigation principle, thought strictly speaking it does not since markets both rise and fall.101 The objectionable feature of the buyer’s behaviour is that it is attempting to create a one-way speculation at the seller’s expense, not that it is allowing loss to accumulate. On one view, CISG Article 49(1)(b)(i) deals with the problem before the entry of CISG Article 75, because it prevents the buyer from avoiding the contract if it does not do so within a reasonable time after the breach. CISG Article 72 appears to treat the seller’s renunciation as a breach of contract, but the expression ‘anticipatory breach’ appears only in the heading of the section102 and not in CISG Article 72 itself, and it is arguable that the real ‘breach’, for the purpose of CISG Article 49(1)(b)(i), is the non-delivery on the due date. Furthermore, the buyer’s right to require performance and its right to decide whether to avoid the contract have to be judged for their compatibility with the mitigation principle in CISG Article 77. It is far from clear whether a buyer should be allowed to exercise its right to require performance in the face of mounting losses, particularly where there are only slim prospects of securing actual performance by the seller.

4. Pre-Emptive Substitution 60

A final question posed by substitute transactions is whether a buyer may anticipate non-performance by the seller leading to avoidance and enter into a substitute transaction without avoiding the contract. This question is not resolved under CISG Article 75, which applies only where the contract has been avoided. The market may be a volatile one or the buyer may have a pressing need for the goods. Where the seller is late and this lateness does not constitute a fundamental breach, the buyer may serve a time notice but will have to wait for that to expire before avoiding the contract. Similarly, the buyer may have suspended performance of its obligations under CISG Article 71 because it rightly apprehends that the seller will not perform a substantial part of its obligations. Where the goods are defective, the buyer may not know whether and how effectively the seller will cure. Furthermore, the tendency in the case law to treat avoidance for BGer 17 December 2009 (CISG-online 2022). See Hof Ghent 20 October 2004 (translated at http://cisgw3.law.pace.edu/cases/041020b1.html). 101 See Bunge SA v Nidera BV [2015] UKSC 43, [2015] 2 Lloyd’s Rep 469 (Lord Toulson) (England). 102 Chapter V Section I ‘Anticipatory breach and instalment contracts’. 99

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fundamental breach as an ultima ratio103 may put the buyer in the position of having to retain and later dispose of non-conforming goods, whilst acquiring conforming goods from a substitute source. A buyer in the above circumstances should be mindful of its duty to mitigate loss in CISG Article 77. It may therefore make the sensible commercial decision to enter into a cover transaction even if unable, at that time or ever, to avoid the contract in the absence of a fundamental breach, or because a time notice served on the seller has not yet expired. Even if the buyer is later able to avoid, the cover purchase will not come under CISG Article 75, which applies only to such purchases as take place after avoidance. Although CISG Article 75 does not here apply, there remains CISG Article 74, under which a claim based on this transaction might in proper circumstances be maintained.104

VII. Current Price A seller or buyer choosing not to enter into a substitute transaction within the 61 conditions laid down by CISG Article 75 may decide instead to claim damages under CISG Article 76. As the text itself states, the existence of a qualifying substitute transaction debars a claim under CISG Article 76.105 Nevertheless, the evidentiary difficulty facing a seller, in the face of a CISG Article 76 claim, in demonstrating that a cover purchase by the buyer has in fact taken place should not be underestimated. In addition, where a substitute transaction is purportedly made but fails to satisfy the reasonableness requirements of Article 75, resort may also be had by the obligee instead to CISG Article 76.106 It may also be that a post-avoidance claim falls under neither CISG Article 75 nor CISG Article 76, in which case it will be disposed of under CISG Article 74. This will be so where no substitute transaction is concluded and the goods are too specialized or thinly traded for there to be a current price.107 A buyer in this position may frame a claim for lost profits instead as CISG Article 74 explicitly recognizes. CISG Article 76 does not require an obligee to proceed with a current price claim in those cases where it applies. A buyer instead may frame a damages claim under CISG Article 74, but there would seem to be no good practical reason for doing so and indeed good reason to invoke CISG Article 76 where it is applicable since it excuses the obligee from having to prove a loss.

1. Time of Avoidance CISG Article 76 grants the claimant the difference between the contract price and the 62 current price at the time of avoidance108 or, exceptionally, where the contract is avoided after the goods have been taken over, the time of taking over. In the general case, the time of avoidance was preferred to the time of delivery because, in those cases where there is an anticipatory repudiation by the obligor, the obligee would not be able to take advantage of a peak in the market at a date prior to avoidance so as to maximize the See Chap. 20. See CISG-AC Opinion No. 8; Schlechtriem, ‘Damages, Avoidance of the Contract and Performance Interest under the CISG’ (2006) (available at http://cigw3.law.pace.edu/cisg/biblio/schlechtriem21.html). 105 See Schlechtriem, ‘Damages, Avoidance of the Contract and Performance Interest under the CISG’ (2006) (available at http://cigw3.law.pace.edu/cisg/biblio/schlechtriem21.html). 106 Secretariat Commentary on the 1978 Draft (Article 71) para. 6. 107 See Gatoil International Inc v Tradax Petroleum Ltd (The Rio Sun) [1985] 1 Lloyd’s Rep 350 (England). 108 On the question whether a declaration of avoidance is necessary, see above for the discussion of the same issue under Article 75. 103 104

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obligor’s liability.109 An obligee able to avoid the contract prior to the due delivery date but awaiting developments in the market instead would be restricted in such speculative conduct by the mitigation rule in CISG Article 77.

2. Relationship of CISG Articles 75 and 76 63

The rule in CISG Article 76 will be resorted to by a seller on a falling market and by a buyer on a rising market. Where the market moves in the opposite direction in these two cases, the obligee suffers no market loss as a result of avoidance. Like CISG Article 75,110 CISG Article 76 permits a claim for damages also to be made under CISG Article 74, but does not of course sanction double compensation. CISG Article 76 stipulates that it applies if the claimant has not entered into a substitute purchase under CISG Article 75. Accordingly, a claimant who has entered into a substitute transaction may not seek damages under CISG Article 76 where this provides a higher measure. 111 Since the burden of proving a CISG Article 75 transaction for the purpose of making a claim thereunder evidently rests upon the claimant, the practical point to make is that a respondent seeking to assert that a lesser sum should be awarded under CISG Article 75 may be faced with considerable evidentiary difficulties. This will be especially so in the case of claimants who are active in conducting multiple like transactions on active markets, where it may in practical terms be impossible causally to connect the supposed substitute transaction to the avoided transaction.112

3. Current Price and Loss 64

The next point to note about CISG Article 76 is the extent of its departure from the philosophy of the CISG in seeing a contract through to performance. This philosophy is apparent in the provisions on requiring performance as well as in CISG Article 75, where the substitute transaction may be rationalized as the claimant requiring performance through the person of a third party substitute. An assessment of damages by reference to a current price amounts to a re-characterization of the contract of sale of goods as a market differences contract. The successful seller need not dispose of the goods, or acquire them in the first place if they have not yet been bought in. The successful buyer may decide to alter its business model and pursue its business opportunities in a different sector. CISG Article 74 requires there to be a loss before damages may then be awarded under the foresight principle. The current price rule is applied in such a way that the claimant’s loss is never crystallized, so that in a very real sense CISG Article 76 is not constrained by the principle of compensation for loss laid down in CISG Article 74. There is, further, no stated requirement in CISG Article 76 that the existence of a current price be foreseeable, but the reality is that it will in fact be, for otherwise it would be most unlikely that any current price could ever be established.

4. Current Price and Mitigation 65

The abstract character of CISG Article 76 raises an issue of some difficulty, namely, whether a claimant should be entitled to rely upon CISG Article 76 in circumstances See A.CONF.97/C.1/SR.30 (30th First Committee Meeting, 31 March 1980). See discussion above, para. 57. 111 For an English case where this happened and the claimant buyer was not permitted to recover under the market (or current price) rule, see R. Pagnan & Flli v Corbisa Industrial Agropacuaria Lda [1970] 1 WLR 1306. 112 See CISG-AC Opinion No. 8 para. 4.1.5 for the view that CISG Article 76 is available where the claimant is ‘continuously in the market’. 109

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where it could instead have entered into a substitute transaction but did not. On one view, the claimant may be required to do so in order to comply with the mitigation of loss principle in CISG Article 77.113 As will be demonstrated below, the date of assessment of damages under the two provisions is different, the CISG Article 76 date coming into play earlier. If the claimant is required to enter into a substitute transaction, it means that the claimant’s entitlement under CISG Article 76 will crystallize before it is later diminished in furtherance of the mitigation principle. An alternative view is that the claimant should be entitled to sign off the avoided contract in accordance with CISG Article 76, confining the mitigation principle to issues of consequential and incidental loss. This alternative view is consistent with the reality of pricing in changeable market conditions: a claimant taking even a reasonable time to make a substitute purchase instead of waiting upon a CISG Article 76 market claim might, if required to make a substitute purchase, be doing so in a rising market. For reasons of commercial certainty, this latter view is to be preferred.

5. Meaning of Current Price CISG Article 76 does not define what is meant by a current price but, in the case of 66 fixing the price in open price contracts, CISG Article 55 refers to ‘the price generally charged...for such goods sold under comparable circumstances in the trade concerned’. This formula may provide some assistance in CISG Article 76 in ordinary cases, but it does not address the key question of what constitutes a sufficiency of trading activity for there to be a market in which current prices are charged from time to time. Certainly, there should not have to be an organized exchange or index publishing prices at intervals.114 That said, the availability of only one willing, arm’s length contractual counterparty is unlikely to satisfy any court of the existence of a current price. A claimant facing evidentiary difficulties will be driven to prove its loss, whether by entering into a substitute transaction under CISG Article 75 or by proving an actual and foreseeable loss in accordance with CISG Article 74.115

6. Substitutes for Current Price The current price referred to in CISG Article 76 may have to be adjusted to suit the 67 particular circumstances. A specific mention is made of time in CISG Article 76(2), which states the current price at the place of delivery as the normal rule but then, in the absence of a current price at that place, refers instead to the current price in a place serving as a ‘reasonable substitute’. In this case, due allowance will have to be made for the cost of transporting the goods. This provision understates a number of difficulties. It is easier to begin with an example where paragraph (2) would not apply. A Dutch company agrees to buy goods on EXW116 Hamburg terms. The seller defaults and the nearest available source for alternative goods is in Gothenburg, whence the cost of transportation to the Netherlands would be higher. Since the rule in Article 76 is not based on an actual cover purchase, the buyer is not entitled to recover under that provision both the difference in current prices and the difference between transportation costs from Gothenburg and from Hamburg. A claim would have to be made under CISG Schwenzer, in Schlechtriem and Schwenzer (n 9) p. 1098. CISG-AC Opinion No. 8 para. 4.3.1. 115 A non-delivery case where damages were awarded for the expected loss of profit by the buyer on a resale of oil after refining it is Gatoil International Inc v Tradax Petroleum Ltd (The Rio Sun) [1985] 1 Lloyd’s Rep 350 (England). 116 The INCOTERMS 2020 abbreviation for ex works. 113

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Article 74 for additional carriage costs. Suppose, instead, that the contract had been for delivery CPT Rotterdam117 and that the alternative supplier was again in Gothenburg. Since the contract price absorbs the carriage cost, the current Gothenburg price would be expected to be higher than the price charged by a Hamburg supplier. CISG Article 76(2) would appear to sanction an award of the difference between the two CPT prices unless proper account were taken of the qualifying requirement of ‘due allowance for differences in the cost of transporting the goods’ by way of a notional and proportionate reduction of the substitute price. This is preferable to overcompensating a claimant, who has not in fact entered the market, by giving it the full difference between the two CPT prices. 68 There are additional current price difficulties, demonstrating the interplay between time and place, that are not specifically dealt with in CISG Article 76. One example is the sale of soya beans FOB a Brazilian port in a named month. The seller defaults towards the end of the month, by which time trading activity on FOB terms for that month has ceased. Traders turn instead to CIF transactions, which carry on for some time afterwards. The CIF price is higher, since it absorbs freight and insurance costs not taken into account in settling the FOB price. A teleological application of CISG Article 76 should allow a comparison between the FOB contract price and the current CIF price, with the freight and insurance costs stripped out of the latter.118 Another case concerns the sale on CIF an English port terms of wood pulp shipped in a particular month from a Swedish port. By the time the seller defaults, there is no longer any CIF trading for goods shipped in Sweden in that month, but there is a spot market price for wood pulp in England. The price in this market, which absorbs the various costs incurred in transporting the goods from Sweden, should serve as a current price under CISG Article 76.119 If there is no spot market for the goods in England, then compensation based on the buyer’s expected profits should be made under CISG Article 74.

7. Sub-Sales 69

A further point concerning CISG Article 76 concerns the issue of a buyer’s sub-sales. Suppose that goods are sold at US$300 per ton and that the buyer concludes at a later date a sub-sale of the same type and quantity of goods at US$350 per ton. The two transactions can be shown to be causally linked. When the seller fails to deliver and the buyer avoids the price, the current price stands at US$380 per ton. The question is whether the buyer should be allowed to recover the difference between the contract price and the current price (US$80 per ton) when it would have made a lesser profit (US$50 per ton) measured by the difference between the contract and the sub-sale price if the contract had been duly performed by the seller. At first sight, the buyer appears to be over-compensated by the current price rule but this concern fails to take account of the buyer’s own vulnerability to an action by the sub-buyer, which, under the same damages

Carriage paid to Rotterdam (INCOTERMS 2020). This example is based on the English case of Esteve Trading Corp v Agropec International (The Golden Rio) [1990] 2 Lloyd’s Rep 273, where the court, apply a default clause in the contract, arrived at this solution. 119 This example is drawn from the English carriage of goods case of Ströms Bruks Aktie Bolag v Hutchison [1905] AC 515. Since the spot price would also absorb the cost of landing the goods in England as well as any customs duties, which are for the account of the buyer in a CIF transaction, these costs should be stripped out of the spot price before the comparison is made. 117

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rule, would recover the difference between the sub-sale price and the current price. 120 There is much to be said for a simple rule like that in CISG Article 76 that avoids the complexities of multiple transactions having to be taken into account.121 A difficult variation is the case where the buyer is protected from liability under the sub-contract because its duty to deliver is expressed to be dependent upon due performance by the head seller. Here, the buyer would be over-compensated by the current price rule, 122 so that it might be thought appropriate to give a narrow interpretation to CISG Article 76 in accordance with good faith123 and reduce the recoverable amount.

8. Time of Taking Over the Goods A final point concerning CISG Article 76 relates to its provision that, in cases where 70 the buyer avoids the contract after taking over the goods, the current price to be looked at is that prevailing at the time of taking over and not at the time of avoidance. It was not in the 1978 draft though it was proposed but rejected by the First Committee at the 1980 diplomatic conference.124 It was then, later in the day, adopted by the Plenary Conference for unrecorded reasons.125 The discussions about CISG Article 76 that took place in Vienna in 1980 were strongly focused on the avoidance of speculative activity by the buyer.126 Since a buyer avoiding the contract has to do so within a reasonable time,127 which can be calculated by reference to market conditions, it is hard to see the reason for this particular provision. A buyer who does in fact make a cover purchase can avoid any disadvantage otherwise imposed by the provision on a rising market.

VIII. Penalties and Agreed Damages Though the CISG makes no express provision for the right of contracting parties 71 to agree in advance the amount of recoverable damages, CISG Article 81(1) indirectly recognizes such agreements. At one extreme, a clause may comprise an amount that falls below the foreseeable amount of loss so that the clause may be cognate with a clause that excludes liability altogether. At the other end of the range, the clause may amount to a penalty in the sense that it ensures that the obligee will recover an amount in excess of any loss caused by the breach of contract. Both types of clause are herein referred to as agreed damages clauses. In contrast with the CISG, the PICC contain rules preventing a party from invoking a clause limiting liability if it would be ‘grossly unfair’ to do so128 and reducing to a reasonable sum the amount recoverable in those cases where a clause 120 This over-simplifies the position, in that (a) the sub-buyer may not be purchasing under a contract governed by the CISG (the applicable law might base damages on the date of default and not avoidance), and (b) the sub-buyer may not have avoided the sub-sale at the same time as the buyer avoided the sale contract. 121 Commodity sales strings can involve many parties all contracting in respect of the same goods. 122 On one version of the facts, this occurred in the English case of Williams Bros v Agius Ltd [1914] AC 510, where the court applied the current price rule regardless of the buyer’s true position under the sub-sale. 123 Further to CISG Article 7(1). 124 The proposed amendment to the 1978 draft was tabled as A/CONF.97/C.1/L.245. See DOC. C(5), O.R. 83–141 (Text of Proposed Amendments; Action by First Committee). 125 See A/CONF.97/SR.10 (10th Plenary Meeting, 10 April 1980). 126 See A.CONF.97/C.1/SR.30 (30th First Committee Meeting, 31 March 1980) and A/CONF.97/SR.10 (10th Plenary Meeting, 10 April 1980). 127 CISG Article 49(2). 128 PICC Article 7.1.6. French law allows the court to increase the sum if it is manifestly derisory: Civil Code Article 1231-5 para. (2). A general discretion to increase the sum is given by the Chinese Civil Code

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provides for the payment of a specified sum that is ‘grossly excessive’ in relation to the harm resulting from non-performance.129 Even though these PICC provisions are not contained in the Chapter on validity, they similarly function as mandatory provisions. Whereas the PICC embrace issues of validity and mandatory provisions, the CISG does not.130 Both of the above extremes, as well as clauses within the range between them, may for present purposes be styled agreed damages clauses. So far as agreed damages clauses raise issues of validity and fall within the scope of an applicable law selected under choice of law rules,131 they are dealt with elsewhere in this work. 132 The concern here is with the compatibility of such clauses with the provisions of the CISG. 72 Even in international sales, where there is likely to be a fair measure of bargaining equality between the parties, a seller may reasonably seek to limit its liability, so as, for example, to exclude liability for consequential and incidental losses. The buyer in such cases may be a better insurer of the loss. As regards the other type of agreed damages clause, as a practical matter it is efficient for the parties to make prior provision for the amount of recoverable damages in the event of a breach. An agreed damages clause may encourage performance of the contract, a basic value underlying the CISG as a whole, by deterring breaches. In the event of a contractual breakdown, the clause may encourage the parties to settle their differences and avoid the tolling of legal expenses and court costs. The clause will also provide clearer guidance for recovery than is given by the foreseeability rule in CISG Article 74 and will therefore abbreviate trials.

1. Excluding CISG Article 74 73

CISG Article 74 goes beyond a guide to courts and tribunals in calculating damages when, as a result of the contracting parties’ silence on the matter, no provision has been made in the contract. Rather, CISG Article 74 is an integral part of the contractual obligations of the parties. Since CISG Article 74 provides for recovery of an amount equal to the loss, both of the examples given above, at opposite ends of the agreed damages spectrum, involve a departure from CISG Article 74. A clause limiting liability to a sum less than the harm caused by the breach offends this equality principle, as does a clause providing for a sum that transcends the amount of harm. Now, in some rare circumstances, a limitation of liability clause may provide for an amount in excess of the harm caused, just as a penalty clause may in some cases reflect or conceivably fall short of the harm caused. Judged ex ante, at the time of the contract, in the light of the foreseeable consequences of the breach, both types of clause might offend the equality principle, yet fall into line with it in the circumstances of a particular breach. Article 585. Other legal systems, such as English law (Unfair Contract Terms Act 1977 s 3), in stated circumstances prevent the enforcement of a limitation clause of this kind where this would be unreasonable. 129 PICC Article 7.4.13. In some legal systems, reduction is provided for if the amount is disproportionately high (BGB § 343 – penalties are otherwise allowable under § 340) or significantly higher than the loss caused (Chinese Civil Code Article 585) or manifestly excessive (French Civil Code Article 1231-5 para. (2)). The traditional stance of English law is that only a genuine pre-estimate of the loss is permissible, but there is a pronounced movement away from this hostility towards penalty clauses in favour of clauses that are commercially justifiable and do not have a deterrent purpose: see Beale (ed), Chitty on Contracts vol. I (33rd edn, 2018) para. 26-195. 130 There remains the argument that an implied principle of good faith, drawn from the text of the CISG via CISG Article 7(2), might support controls on certain agreed damages clauses. 131 See Hof Arnhem 22 August 1995 (translated at http://cisgw3.law.pace.edu/cases/950822n1.html). See also ICC Arbitration Case No. 7197 of 1992 (UNILEX) (application of lex causae) and OLG Munich 8 February 1995 (translated at http://cisgw3.law.pace.edu/cases/950208g1.html) (availability of ‘contractual fine’ governed by lex causae), where the lex causae does not seem to have been applied as a matter of validity. 132 Chap. 11.

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The PICC provisions noted above are not concerned with the ex ante position but rather with attempts to enforce the clause. In judging the compliance of an agreed damages clause with CISG Article 74, the same temporal point of reference should be adopted, notwithstanding the argument that a clause seeking genuinely to estimate a future loss is compliant with CISG Article 74 even if in fact it awards more than the loss suffered. 133 In the case of a penalty clause, one should also note that it may provide in the event of a particular breach for the recovery of an amount beyond that which would be recoverable in accordance with foreseeability but equal to or even less than the harm in fact caused by the breach. Accepting, then, that in many cases an agreed damages clause clashes with the rule of 74 recovery under CISG Article 74, a justification for the clause has to be sought if it is to be enforced. Under CISG Article 6, the contracting parties, besides being free to exclude the application of the CISG, are also free to ‘derogate from or vary the effect of any of its provisions’.134 Implied derogation was explicitly permitted in the text of ULIS135 but attempts to amend the draft Article 6 by inserting a mention of both implied and express derogation were defeated. A likely reason for the failure of the amendment was the desire not to encourage findings of implied derogation.136 It can hardly be claimed that the failure to make explicit mention of implied derogation in CISG Article 6 is fatal to implied derogation: Article 6 also makes no mention of express derogation for that matter. That leaves the question whether the parties should have understood that they were derogating from Article 6 and intended so to do. This would over-refine any interpretation of CISG Article 6. An agreed damages clause plainly does involve a departure from CISG Article 74 and should be respected.137 On one view, it is an express derogation anyway in that, whilst not mentioning its departure from CISG Article 74 or more generally from the CISG, it is nevertheless in writing. In the case of penalties, there is the further argument that an obligor agreeing to a penalty clause has assumed a contractual obligation to make the payment. It is a conditional obligation like other conditional obligations that might be assumed. The obligee, therefore, should have the right to require performance of the payment obligation.138

2. Agreed Damages Clauses and Other Remedies A final point concerning agreed damages clauses is whether they altogether supplant 75 other remedies of the obligee, such as price reduction, requiring performance and the various damages provisions in the Convention, as well as other provisions, such as the seller’s right to cure.139 This may or may not be so depending upon the interpretation of the contract.140 133 CISG-AC Opinion No. 10, para. 4.3.7, asserting that a clause inducing performance in a non-disproportionate way is compliant with CISG Article 74. 134 See CISG-AC Opinion No. 10. 135 ULIS Article 3. 136 See Working Group Session No. 2 (December 1970), A/CN.9/52 para. 45. 137 According to the Secretariat Commentary on the 1978 Draft (Article 5), para. 1: ‘adopting provisions in [the] contract providing solutions different from those in the Convention’ complies with CISG Article 6. 138 CISG Articles 46(1), 62. See Secretariat Commentary on the 1978 Draft (Article 42), para. 10. A general liability to pay damages under CISG Article 74 may also be seen as a contractual obligation. This becomes a live issue when it comes to the question of pre-trial interest on the damages award, discussed below. 139 Under CISG Articles 37, 48. For example, might a buyer insist on payment in the event of non-conforming goods being supplied where the seller is able to rectify the breach by cure? 140 Chap. 23. Recovery under a penalty clause as well as damages was allowed in ICC Arbitration Case No. 7585 of 1992 (available at http://cisgw3.law.pace.edu/cases/927585i1.html).

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IX. Mitigation As stated in CISG Article 77, a party relying on a breach of contract ‘must take such measures as are reasonable in the circumstances to mitigate the loss, including loss of profit, resulting from the breach’.141 A failure to take these steps will result in a reduction of the damages award ‘by the amount by which the loss should have been mitigated’. Reference is sometimes made to a ‘duty’ to mitigate.142 This language is not used in the CISG and is best avoided, for mitigation operates not as a duty but rather as a bar on the recovery of damages by the obligee beyond a certain point. Mitigation is thus a requirement conditioning the award of damages. 77 Although CISG Article 77 makes no mention of them, there are two further rules linked to this mitigation rule. One rule concerns the recoverability of the costs incurred in mitigating loss. This rule is discussed below. The other rule concerns steps that an obligee might not have been required to take by the mitigation rule, but in fact did take, the effect of these steps being to reduce or eliminate the loss flowing from the breach of contract. This rule is an aspect of the general requirement that an obligee prove a causal link between non-performance and a loss.143 A particular manifestation of it occurs where a claim is made on the basis of the current price under CISG Article 76 when a substitute transaction has in fact been made under CISG Article 75, when the measure of damages will be greater under the former provision than under the latter.144 CISG Article 76 applies only where a substitute transaction has not been made under CISG Article 75.145 76

1. Mitigation and Agreed Damages Clauses 78

The requirement of mitigation of loss is concerned with efforts that should be made by an obligee to reduce or prevent losses flowing from a breach of contract. It does not prevent an obligee from relying upon an agreed damages clause even in so far as the amount recoverable exceeds the losses caused by the breach of contract, 146 but it should prevent an obligee from doing nothing whilst waiting for the sum recoverable under such a clause to mount from day to day.

2. Contributory Fault 79

In that it presupposes a breach, CISG Article 77 does not deal with issues of contributory fault147 on the part of the obligee leading up to the commission of the breach of contract.148 It has nevertheless been argued that the mitigation rule in CISG Article 77 extends to conduct occurring even before the breach in those cases where the risk of breach is serious, as it is in the case of anticipatory repudiation.149 So far as we are A concrete application of the same rule is Article 88 (duty to preserve goods). As in the Secretariat Commentary on the 1978 Draft (Article 73), para. 2. 143 See discussion above. 144 A graphic example of such a case, where the obligee was not allowed to recover according to the current price, is the English case of R. Pagnan & Flli v Corbisa Industrial Agropacuaria Lda [1970] 1 WLR 1306, where the buyer rejected a non-conforming cargo but later purchased it in its non-conforming state at a very large discount when a distress sale was held under a court order. 145 On who bears the burden of proving that Article 76 should not apply in such cases, see below. 146 Hof Arnhem 22 August 1995 (n 131). See also CISG-AC Opinion No. 10, paras 7.1–3. 147 Chap. 26. 148 CISG Article 80 has a role to play here. 149 Schwenzer, in Schlechtriem and Schwenzer (n 9) p. 1104. A difficult case concerns the buyer who has received goods and who could have avoided the destructive consequences of their non-conformity by examining them prior to consumption: OLG Cologne 21 August 1997 (translated at http://cisgw3.law.pa 141

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concerned only with the risk of a serious breach that has not yet occurred, the argument is misconceived. 150 It contradicts the text of CISG Article 77, which speaks of mitigating loss resulting from the breach. Any assertion that an obligee should go further and take precautionary steps that would alleviate the burden of a breach,151 even where there was no reason to expect a breach, would depart even further from the text of CISG Article 77.152 Where there is an anticipatory breach, as where a seller renounces its delivery duty, the duty to deliver has not yet been breached but the seller is in breach of an unstated contractual obligation to remain faithful to the agreed goals of the contract.153 Where the breach has occurred but no loss has yet eventuated, however, CISG Article 77 is in play. Notwithstanding the above, CISG Article 77, through the lens of CISG Article 7(2), could support the inference of a general principle in the CISG that account should be taken of contributory fault in the assessment of damages.154

3. Mitigation and Non-Damages Remedies The requirement of mitigation presents difficulties where the obligee is seeking to 80 exercise a remedy other than damages.155 As stated above, it should preclude passivity on the part of an obligee relying upon a penalty clause incrementally increasing from day to day. The broad acceptance that the requirement applies in the case of anticipatory breach strongly suggests, not merely that an obligee should mitigate after avoidance in such a case, but that an obligee may have to avoid the contract rather than await the due date of performance.156 An obligee who is permitted to watch the market without being subject to a mitigation requirement might thereby speculate unfairly at the expense of the obligor, claiming added damages if the market deteriorates but appropriating the gain if it improves. The right of an obligee to require performance raises more demanding considerations 81 since it pits against the mitigation requirement, widely conceived to be Common Law in origin, a remedy that is significantly more forcefully asserted in the Civil Law than in the Common Law. It is difficult to justify the action of an obligee, able to seek satisfactory performance from a third party, who continues to demand performance from the obligor even as losses due to the delay in performance mount from day to day. To say that the right to require performance trumps the mitigation requirement ce.edu/cases/970821g1.html). This may be regarded as a proper case of mitigation because the breach of contract had already occurred before the buyer might have taken action. 150 It is however supported without reasons by Djordjević in Kröll et al (n 9) p. 1017. Case law opposed to the argument includes OLG Braunschweig 28 October 1999 (n 4); OLG Düsseldorf, 14 January 1994 (translated at http://cisgw3.law.pace.edu/cases/940114g1.html). 151 E.g., by taking out insurance, a step rejected in Schwenzer, in Schlechtriem and Schwenzer (n 9) p.1108. 152 The Secretariat Commentary on the 1978 Draft (Article 73), para. 4 confines mitigation to performance that has fallen due and to anticipatory breach. 153 Although CISG Articles 71 and 72 do not mention anticipatory breach, it is significant that the Secretariat Commentary on the 1978 Draft (Article 73), para. 4 refers to ‘anticipatory breach’. See also Russia Arbitration No. 302/1996 of 27 July 1999 (translated at http://cisgw3.law.pace.edu/cases/990727r1. html). 154 But CISG Article 80 could be applied to the same end: Magnus, ‘Remedies: Damages, Price Reduction, Avoidance, Mitigation, and Preservation’ in DiMatteo (n 24), p. 279. 155 For the view that a mitigation requirement concerns only damages and does not directly affect a claim to avoid the contract or to require its performance, see Schwenzer, in Schlechtriem and Schwenzer (n 9) pp. 1105–06; Magnus, ‘Remedies: Damages, Price Reduction, Avoidance, Mitigation, and Preservation’ in DiMatteo (n 24), p. 280 (damages and not avoidance or price reduction). 156 Secretariat Commentary on the 1978 Draft (Article 73), para. 4; Russia Arbitration No. 105/2005 of 13 April 2006 (translated at http://cisgw3.law.pace.edu/cases/060413r1.html).

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would encourage the obligee to hang on to its claim for performance to the bitter end, running up avoidable legal costs on both sides. In addition, the obligee would know, in those cases where the seller did not deliver or the buyer refused to accept delivery, that damages would be awarded after a belated avoidance according to the current price or a substitute transaction. In a fluctuating market for the goods, this would give the obligee an unfair speculative advantage.157 CISG Article 7(1) requires that the CISG be interpreted in accordance with good faith. This seems appropriate when the right to require performance is subject to abuse on the part of the obligee.

4. Justification for the Mitigation Principle 82

CISG Article 77 has been justified on the ground that an obligee, who could have avoided loss but did not, does not deserve compensation.158 The principle that an obligee is bound by a requirement to mitigate is often linked to good faith,159 a concept that in explaining everything commonly misses the target. If good faith were relevant, its significance would attach not to suffering a loss that could have been avoided but to the bringing of a claim for damages that the obligee ought not to have brought. The abuse of civil process is a matter for the lex fori and not for the CISG. Another way of explaining the mitigation requirement is to say that the loss is not in fact caused by the obligor’s breach or that, even if so caused, the loss was not foreseeable from the point of view of an obligor who could reasonably have expected the obligee to mitigate.160 The former view does not adequately explain the case of an obligor who retained the capacity to perform but did not do so. The latter view, so far as it pertains to causation in fact, gives rise to a difficult burden of proof issue.161

5. Reasonable Mitigation Measures The steps to be taken in mitigation are those that are reasonable in the circumstances. A reasonable response does not demand an immediate response; courts have been generous in allowing a time margin to the obligee.162 An obligee should not be expected to take risky measures or even take measures that impose substantial expenditure over and above the expenditure incurred in performance of the particular contract. In the former case, substantial losses may be difficult to charge to the breaching party; in the latter case, there is no guarantee that the costs incurred in mitigation, even if awarded as damages against the breaching party,163 will in fact be recovered from the obligor. 84 A straightforward case of mitigation arises where the obligee should have entered into a substitute transaction, as in the case of resale by the seller or a cover purchase 83

157 There is of course the opposing argument that an obligor alive to this possibility should perform when requested to do so, but the obligor may believe, wrongly perhaps, that it has a defence to performance. 158 Schwenzer, in Schlechtriem and Schwenzer (n 9) p. 1104. 159 See the nuanced discussion and citation of authorities in Saidov (n 25) pp. 127–28; Magnus, ‘Remedies: Damages, Price Reduction, Avoidance, Mitigation, and Preservation’ in DiMatteo (n 24), p. 279. 160 See Bridge, ‘Mitigation of Damages in Contract and the Meaning of Avoidable Loss’ (1989) 105 LQR 398 (English law). 161 The burden of proof is discussed below, para. 87. 162 OLG Hamburg 28 February 1997 (n 93) (two weeks in a volatile market); OLG Düsseldorf 14 January 1994 (n 150) (two months in the fashion industry). 163 For a dramatic example in English law, see Banco de Portugal v Waterlow & Sons Ltd [1933] AC 452 (cost of withdrawing entire issue of bank notes at par when additional notes, whose printing had not been authorized, were mistakenly delivered to a criminal and put into circulation).

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by the buyer.164 Apart from the real difficulty of an obligee who is exercising its remedy of requiring performance, an obligee complaining of non-delivery or non-acceptance may be compelled to enter into a substitute transaction;165 a slow166 or an inadequate167 response to the non-performance will engage a reduction of damages under CISG Article 77. This prevents an obligee from relying upon the terms of a delayed substitute transaction. An obligee who enters into no substitute transaction at all will be remitted to a current price claim under CISG Article 76, which, in measuring damages according to the current price at the time of avoidance, produces an outcome that accords with mitigation. The mitigation requirement should not, however, compel the obligee to agree to a variation of the contract that is favourable to the obligor.168 It may, however, require a notice of intended action to be given to the breaching party if it might have led to action by that party reducing the loss.169

6. Damages and the Cost of Mitigation The other side of the coin to the requirement that the obligee mitigate is the obligee’s 85 entitlement to recover as damages the cost of mitigation. Certainly, the cost of reasonable measures is recoverable; reasonable expenditure will also be compliant with the foresight test in CISG Article 77. A less easy question relates to the cost of measures that the obligee took when those measures would not have been required of it under CISG Article 77. An obligee’s costs, it is submitted, may sometimes be reasonable even though it would not have been reasonable to require the obligee to take the measures that it did. This proposition, however, should not be taken too far. An obligee, for example, may enter into a risky substitute transaction. If this is successful, the costs should be chargeable to the obligor, but if the transaction leads to ruinous consequences, the loss thereby caused should not be recoverable as damages under CISG Article 74. Similarly, the cost of expensive measures disproportional to the value of the transaction will not be recoverable as damages.170 What are reasonable costs of mitigation is very much a factual question. A buyer, 86 faced with late delivery by the seller and under contract to resell the goods to a subbuyer, may recover the cost of a discount it has offered to the sub-buyer in order to retain the benefit of the sub-contract.171 Where there is a case for taking rapid action, compliance with the mitigation requirement may be found even if the obligee buyer takes the commercially reasonable decision to break up the goods and dispose of their parts at the best salvage price.172 Similarly, an obligee seller may be justified in taking rapid action to dispose of the goods in favour of another buyer.173

164 Ukraine Arbitration No. 48 of 1 January 2005 (translated at http://cisgw3.law.pace.edu/cases/050000 u5.html). 165 BGer 17 December 2009 (translated at http://cisgw3.law.pace.edu/cases/ 091217s1.html). 166 Ukrainian Arbitration No. 48 of 1 January 2005 (n 164). 167 OLG Celle 2 September 1998 (n 51). 168 Rb Arnhem 1 March 2006 (translated at http://cisgw3.law.pace.edu/cases/060301n1.html). 169 LG Darmstadt 9 May 2000 (translated at http://cisgw3.law.pace.edu/cases/000509g1.html). 170 BGH 25 June 1997 (translated at http://cisgw3.law.pace.edu/cases/970625g2.html). 171 ICC Arbitration Case No. 8786 of January 1997 (available at http://cisgw3.law.pace.edu/cases/97878 6i1.html). 172 HG St Gallen 3 December 2002 (translated at http://cisgw3.law.pace.edu/cases/021203s1.html). 173 US Eleventh Circuit 12 September 2006 (available at http://cisgw3.law.pace.edu/cases/060912u1. html) (Treibacher Industrie AG v Allegheny Technologies Inc).

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7. Burden of Proof 87

The allocation of the burden of proof is a nuanced matter. So far as the obligor asserts that the obligee ought to have taken measures to mitigate loss, the burden of proof should lie on the obligor.174 The burden is not discharged by a simple assertion that the obligee should have done more than it did.175 Nevertheless, the obligor may not have data concerning the exact circumstances of the obligee, so that it is both just and sensible for evidence of that position to be afforded to the obligor in order for the obligor to be able to discharge its burden.176 Nevertheless, where measures have in fact been taken by the obligee, the burden of proof should rest on the obligee to demonstrate that these measures were reasonable and were in fact taken in order to mitigate loss.177 In the latter instance, this is consistent with ordinary rules of damages liability. It is for the obligee to both prove the loss and demonstrate its foreseeability. If it is the obligor who asserts that action taken by the obligee in fact serves to diminish the loss arising from the breach of contract,178 the burden should fall on the obligor. ‘He who asserts must prove.’179 Consistent with the autonomy of the contracting parties, questions relating to mitigation ought to be raised by the parties themselves and not by a court or tribunal acting ex officio.180

X. Currency 88

A contracting party’s failure to perform may give rise to currency losses suffered by the other party.181 A distinction has been drawn between losses due to the declining internal value of the currency and losses due to the international value of a currency.182 In the former case, the obligee, whether it is the unpaid seller or the buyer prevented from realizing a profit, suffers a loss because of the depreciating purchasing power of the currency of payment or profit in the interval between the time it should have been received and the time in fact it was received. Here, the award of interest is the appropriate way to compensate the obligee. In the latter case, the currency of payment may not be the currency in which the obligee conducts its affairs and it may suffer a loss that is due to adverse currency movements between the currency of payment and the currency in which it conducts its affairs. The obligee, for example, might have had a better rate of exchange if the money had been paid on time. The protection to be given to the obligee against international currency movement should be for the period between the date the sum payable fell due and the date it was eventually paid, whether voluntarily or in the form of a damages award.183

174 US Eleventh Circuit 12 September 2006 (n 173) (Treibacher Industrie AG v Allegheny Technologies Inc); ICC Arbitration No. 9187 of June 1999 (UNILEX). 175 OGH 6 February 1996 (translated at http://cisgw3.law.pace.edu/cases/960206a3.html). 176 OLG Celle 2 September 1998 (n 51) (buyer required to submit offers received for substitute transaction). See also Djordjević, in Kröll et al (n 9) pp. 1024–25. 177 Schwenzer, in Schlechtriem and Schwenzer (n 9) p. 1110 (referring simply to the burden being on the obligee); Djordjević, in Kröll et al (n 9) p. 1025. 178 See above discussion. 179 Aristotle, The Dialectic. 180 Cf BGH 24 March 1999 (n 24). 181 There are numerous issues concerning currency that fall outside this work, for example, whether a court can give judgment only in its domestic currency, which may not be the currency of account or of payment, and on what date, if it cannot do so, it should order a conversion into its own currency. 182 See Saidov (n 25) pp. 54–57 and the sources therein cited. 183 See HG Zürich 5 February 1997 (translated at http://cisgw3.law.pace.edu/cases/970205s1.html).

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Taking, then, the case of international value, it is in accordance with the CISG and 89 the compensation principle that damages should be calculated according to the currency of the loss.184 If the currency of payment is US dollars, but the obligee conducts its affairs in euros, it follows that the obligee’s damages should be increased by any loss it suffers because the US dollar has depreciated against the euro. Recovery in such a case, however, should accord with the foresight principle in CISG Article 74. It should also be subject to any mitigation that the obligee, at the appropriate time, might reasonably have taken by way of a hedging transaction.

XI. Interest The CISG makes provision for interest in two places. First, there is CISG Article 78, 90 in a section of the Convention adjoining the damages section,185 which in the most general of statements provides that interest is payable on the price, or on any other sum, when it is in arrears.186 CISG Article 78 therefore applies, for example, to the delayed payment of a sum owed under an agreed damages clause.187 Secondly, there is CISG Article 84, which provides that a seller bound to repay the price must pay interest on it as from the time the price was paid. Neither provision gives any guidance about the rate of interest, or about how it should be calculated, or about whether it should be simple or compound interest,188 or, if compound interest is allowable, at what rests (or intervals) it should be compounded. Nor does either provision express the currency in which interest should be awarded. CISG Article 78, in addition, does not state the commencement date. The lack of detail in these provisions, especially in CISG Article 78, is not a matter of oversight or contentment with the prospect of detail emerging in time through the practice of courts and tribunals. The subject of interest was one that engaged controversy throughout the processes that led to the CISG, especially in the final stages; laconism kept the lid on disagreement.189

1. Interest and Damages Interest has had a long and controversial history, mired in mediaeval and religious 91 prohibitions of usury. The history of interest is the history of money lending, but CISG Article 78 is not about money lending at all. This points the way to a treatment of interest in the CISG that is shorn of its historical associations with usury. Suppose that Djordjević, in Kröll et al (n 9) p. 990; Schwenzer, in Schlechtriem and Schwenzer (n 9) pp. 1084. Chapter V Provisions Common to the Obligations of the Seller and of the Buyer[:] Section III. Interest. CISG Article 78 may be common to both seller and buyer but it will almost always be the buyer who is subject to liability. 186 Contrast this with the PICC (2016), PICC Article 7.4.9(2): ‘The rate of interest shall be the average short-term lending rate to prime borrowers prevailing for the currency of payment at the place for payment, or where no such rate exists at that place, then the same rate in the State of the currency of payment. In the absence of such a rate at either place the rate of interest shall be the appropriate rate fixed by the law of the State of the currency of payment.’ 187 OLG Hamburg 25 January 2008 (translated at http://cisgw3.law.pace.edu/cases/080125g1.html). 188 For a general prohibition of an agreement to pay compound interest, see BGB § 248(1). 189 For unsuccessful attempts to have a more detailed provision than PICC Article 78, see First Committee Deliberations, 34th meeting (3 April 1980), A/CONF.97/C.1/SR.34. The sensitivities at stake are evident in the comments of the Egyptian and Iraqi delegates: paras 10, 14, 20. The delegates from Islamic countries unsuccessfully expressed a preference for a reservation on the subject. See further Ferrari, ‘Uniform Application and Interest Rates under the 1980 Vienna Sales Convention’ (1995) Cornell Review of the Convention on Contracts for the International Sale of Goods 3–19 (available at http://cisgw3.law.pace. edu). 184 185

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a contract of sale were to give the buyer 30 days’ credit and then to provide that the stipulated price should rise at intervals after the 30 days until the price was eventually paid. Payment in excess of the original price according to an agreed damages or penalty clause of this nature is not expressed as interest but is interest by another name. The keynote of many Islamic finance structures is not their rejection of economic realities but their insistence upon the observance of proper forms. If interest under CISG Article 78 could be assimilated to damages, then many of the problems associated with it would fall away. Suppose that a buyer is late in making payment. A seller may suffer loss in broadly one of two ways. The seller may have to borrow money to cover the period of delay, or may be denied the opportunity to put the buyer’s money to productive use in that same period. Either way, the seller has suffered a loss and deserves to be compensated. The difficulty lies in identifying and computing that loss. 92 An obvious problem with the assimilation of interest and damages in the CISG lies in the location and text of CISG Article 78 itself. CISG Article 78 is not in the damages section and, moreover, it states that damages may be recoverable in addition to interest. An insistence that the former point demonstrates a categorical difference between interest and damages introduces an unwarranted degree of formalism into the CISG and ascribes to its architects an intention to mark out a clear separation of the two that is not otherwise discoverable. On the distinction drawn between damages and interest in CISG Article 78 itself, there is scope for saying that interest therein deals with the ordinary losses that flow from delayed payment, whereas more unusual losses, if compensable at all, should be subject to the causation and foresight principles of CISG Article 74. A claim for damages for late payment under CISG Article 74 may certainly be combined with one for interest under CISG Article 78.190 A seller denied a payment may for example suffer financial hardship damaging to its business, such as a loss of business reputation that comes from an inability to service its own debts. A consequential loss of this sort is apt to be dealt with under CISG Article 74 rather than under CISG Article 78. 93 Ideally, therefore, CISG Article 78 should concentrate on the losses that ordinarily flow from delayed payment. The solution provided by the PICC calculates interest according to the average bank short-term lending rate to prime borrowers.191 This assumes that the obligee will have to borrow to cover the payment gap, but the obligee may not need to and instead may be denied a gain-making opportunity.192 If this opportunity is of a speculative character, it will not usually be susceptible to the degree of proof and foresight needed for a successful damages claim. A substitute for an unprovable damages claim of this sort is an award of interest that the obligee might have earned by placing the money on deposit. This amount would of course be less than might have to be paid by an obligee needing to borrow the money. It is therefore submitted that the PICC approach should not be adopted as a universal solution to the interest question under CISG Article 78. It is further submitted that interest goes to compensation, for non-performance of obligations arising under the contract of sale, which is very much a subject that falls within the CISG. A court or tribunal awarding interest should, in accordance with CISG Article 7(2), be guided by the principle of compensation193 for loss that underpins CISG Article 74 and by the associated principle that compensation is OLG Frankfurt 18 January 1994 (translated at http://cisgw3.law.pace.edu/cases/940118g1.html). PICC Article 7.4.9(2). 192 On the use of CISG Article 74 to give a seller damages for not having the use of the buyer’s money, see LG Stuttgart 31 August 1989 (translated at http://cisgw3.law.pace.edu/cases/890831g1.html); OLG Düsseldorf 24 April 1997 (translated at http://cisgw3.law.pace.edu/cases/970424g1.html). 193 ‘The purpose of [CISG Article 78] is to compensate an aggrieved party for the loss of the use of money’: Atamer, in Kröll et al (n 9) p. 1028. 190

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tailored to the individual case. This is subject to one reservation, namely that the basic entitlement to interest is conceded by CISG Article 78 without the obligee having to prove any loss. This suggests that, in the absence of proof of loss, the obligee should receive the minimum amount recoverable, which will normally be the amount that the obligee could have earned on deposit. CISG Article 78, thus understood, may therefore be regarded as allowing for damages for the loss of the use of money without proof of loss having to be provided.

2. Rate of Interest The case law under CISG Article 78 is particularly volatile and more often than 94 not unreliable in its reasoning, if not necessarily in its outcomes. Courts and tribunals have in the majority of cases held that the rate of interest falls outside the CISG, either because the CISG deals with the matter but provides no guidance, or because the matter falls altogether outside the CISG.194 The rate of interest has therefore been determined on a variety of grounds, including, by way of choice of law rules, the lex fori as befits a procedural matter,195 or the law that governs the substantive contractual relationship of the parties.196 A particularly wayward approach is to go directly to the European Directive on Combating Late Payment in Commercial Transactions.197 In a minority of cases, however, the interest rate is seen as governed by the CISG with guidance sought in determining it from the general principle of full compensation on which the CISG is based.198 This last approach is the correct, principled approach. It should lead to the law of the jurisdiction in which the obligee experiences its loss, which will normally be the country in which it has its business residence. This same approach would also lead to interest being awarded in the currency in which the obligee experiences its loss.199 By one means or another, courts and tribunals often arrive at the law of the obligee’s residence. In whatever way an award is divided into interest and damages for late payment, the obligee should receive integral compensation for late payment, with a minimum recovery of the amount that might have been earned from a deposit account. A useful accommodation of CISG Articles 74 and 78 would ascribe the recovery of this loss to CISG Article 78, leaving the obligee to prove for any additional amount as damages under CISG Article 74, which would require compliance with the foresight principle.

3. Interest on Damages Interest runs from the time the obligor is ‘in arrears’. There is no requirement that 95 it run only after a notice of default has first been served, as is required for debt claims

For the many cases, see UNCITRAL Digest of Case Law (2016), Article 78 note 44. Federal District Court (New York) 9 September 1994 (available at http://cisgw3.law.pace.edu/cases/9 40909u1.html) (Delchi Carrier v Rotorex). 196 For the many cases, see UNCITRAL Digest of Case Law (2016), Article 78 note 46. 197 Directive 2000/35/EC of the European Parliament and of the Council of 29 June 2000. See, e.g., LG Bielefeld 15 August 2003 (translated at http://cisgw3.law.pace.edu/cases/030815g1.html). (The 2000 Directive was recast as Directive 2011/7/EU in force as of 16 March 2013.). 198 See, e.g., Vienna Arbitration SCH-4318 of 15 June 1994 (translated at http://cisgw3.law.pace.edu/cas es/940615a4.html; Vienna Arbitration SCH-4366 of 15 June 1994 (translated at http://cisgw3.law.pace.edu /cases/940615a3.html); Serbia Arbitration 28 January 2009 translated at http://cisgw3.law.pace.edu/cases/ 090128sb.html). 199 See above discussion. Cf ICC Arbitration No. 6653 of 25 March 1993 (translated at http://cisgw3.law .pace.edu/cases/936653i1.html), wrongly basing the award of interest on the London Inter-Bank Offered Rate (LIBOR) as the appropriate rate for operators in international commerce. 194

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under the French Civil Code.200 A difficult question is whether interest runs on an entitlement to damages that has not yet been quantified by a court or tribunal, or even found to be recoverable.201 In other words, the question is whether the existence and amount of an entitlement to interest is retrospectively ascertained when a judgment or award is handed down. In one case, the principle of recovery of interest on a damages award was accepted,202 but in another case, so far as the damages claim was for lost profits, a buyer was required to show when those lost profits would have accrued and not merely the date of the breach.203 There is something incongruous, in any event, in the concept of interest on an award of damages for future losses that have not yet arisen at the point of judgment. Even if these losses were to be discounted to present value at the date of the breach, an award of this sum plus interest would approximate to just the future profits discounted to the later date of the judgment or the award. The body of support in the case law for interest on damages is insubstantial and the question must be asked whether any contested sum is properly said to be ‘in arrears’ until liability to make payment and the amount of payment have been adjudicated. It is not a breach of the contract of sale to resist a damages claim, so the argument that the obligee is entitled to compensation for being denied the use of its money begs the question and lacks conviction.

4. Interest in Restitution Cases CISG Article 84 provides a different entitlement to interest. Where restitution has to be made pursuant to avoidance, the seller is bound to pay the buyer interest on the price from the date on which the price was paid. There is no prior requirement that payment be formally requested by the buyer.204 Unlike CISG Article 78, there is no requirement that this repayment of the price be ‘in arrears’, but, if the seller delays in making restitution, its interest obligation from that date should be assessed from that time onwards under CISG Article 78 on the accumulated price and CISG Article 84 interest. 97 Interest is payable by the seller under CISG Article 84 regardless of whether the seller itself earned interest on the price.205 CISG Article 84 in effect requires the seller to make restitution of the gains it received from the price, subject to an irrebuttable presumption that the seller has invested the money or put it to some other productive use. The buyer may therefore claim interest without having to trace the money through the seller’s accounts or commercial activities. If the seller has in fact earned more from the price paid, the forensic difficulties facing a buyer seeking to recover a greater return are likely to be too great to merit the time and expense that the process would entail. Otherwise, 96

French Civil Code Article 1231–6. The same question, mutatis mutandis, applies to the award of damages for currency fluctuations in the same period. In the French Civil Code, interest on a damages award runs not from the date of the loss but from the date of judgment: French Civil Code Article 1231-7. In German law, the BGB § 288(1) makes provision for default interest only in the case of a money debt. The Polish Civil Code in Article 359(1) confines interest to acts in law or statutory law, and the decisions of courts or other competent authorities. See also the Spanish Civil Code Article 1108 (default on payment of an amount of money); CESL Article 166(1) (interest to be paid only as from the time payment is due). 202 KG Zug 21 October 1999 (translated at http://cisgw3.law.pace.edu/cases/991021s1.html) (assuming that the loss accrued on the date of the breach). The award of interest from the time the loss occurred is supported also by Bacher, in Schlechtriem and Schwenzer (n 9) p. 1114; Atamer, in Kröll et al (n 9) pp. 1029–30. 203 HG Zürich 5 February 1997 (n 183). 204 ICC Arbitration No. 6653 of 25 March 1993 (n 199). 205 See generally CISG-AC Opinion No. 9; Bridge, in Kröll et al (n 9) pp. 1121 et seq. 200 201

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interest should be calculated in accordance with the investment rate prevailing at the seller’s place of business.206 The rate at the seller’s place of business has usually been arrived at peremptorily by applying the forum’s rules of private international law, on the ground that the interest rate is not provided by the CISG.207 A better approach is to derive this rate directly from CISG Article 84.208 As befits the restitutionary character of the seller’s obligation, the seller should have to pay interest in the currency in which it was earned or was deemed to have been earned.209 A minority of cases prefers the rate of interest prevailing at the buyer’s place of business,210 but this is inconsistent with the restitutionary character of the seller’s duty to pay interest. A similar wrong approach is to apply the buyer’s rate as though an award of damages were being made.211 A further approach to be avoided is the calculation of interest by default at the rate of interest prevailing under the local law.212

XII. Requiring Performance One of the most distinctive differences that separate civil and Common Law is the 98 greater commitment of the Civil Law to the direct enforcement213 of contracts,214 whereas the Common Law treats direct enforcement as an exceptional case, with damages as the primary remedy. To a substantial extent, this difference is more one of attitude and presentation than of practice. Indeed, the award of damages to an obligee on the basis of substitute transactions may be presented as a type of direct enforcement with the obligee acting for the obligor. Where substitute performance is available, it will often be more convenient for the obligee to pursue this opportunity rather than submit to the frustration and delay involved in conducting proceedings to enforce the obligor to perform. All told, the issue of direct performance has not emerged in the case law as one of difficulty or controversy in the years since the CISG came into force and reference to the governing provisions, CISG Articles 46 and 62, has rarely been made. The relevant provisions dealing with direct performance are CISG Articles 28, 46 and 99 62.215 CISG Article 46(1) encapsulates the buyer’s general right to require performance, with specific examples in the form of requiring substitute goods or repaired goods HG Zürich 5 February 1997 (n 183). See, e.g, OLG Celle 24 May 1995 (translated at http://cisgw3.law.pace.edu/cases/950524g1.html); OLG Karlsruhe 19 December 2002 (translated at http://cisgw3.law.pace.edu/cases/021219g1.html); OLG Munich 8 February 1995 (n 131); ICC Arbitration No. 9978 of 1 March 1999 (UNILEX); Tr A Lugano 15 January 1998 (translated at http://cisgw3.law.pace.edu/cases/980115s1.html); Russia Arbitration No. 175/2003 of 28 May 2004 (translated at http://cisgw3.law.pace.edu/cases/040528r1.html). 208 Secretariat Commentary on the 1978 Draft (Article 69) para. 2; HG Zürich 5 February 1997 (n 183). 209 Cf ICC Arbitration No. 6653 of 25 March 1993 (n 199), focusing on the use the buyer could have made of the money. 210 See, e.g., Russia Arbitration No. 133/1994 of 19 December 1995 (translated at http://cisgw3.law.pace. edu/cases/951219r1.html); Hamburg Arbitration, 29 December 1998 (translated at http://cisgw3.law.pace. edu/cases/981229g1.html); CIETAC, 30 November 1998 (translated at http://cisgw3.law.pace.edu/cases/98 1130c1.html). 211 Käräjäoikeus Kuopio 5 November 1996 (translated at http://cisgw3.law.pace.edu/cases/961105f5.ht ml). 212 See, e.g., Juzgado de primera instancia Tudela 29 March 2005 (translated at http://cisgw3.law.pace.ed u/cases/050329s4.html); Russia Arbitration 439/1995 of 29 May 1997 (translated at http://cisgw3.law.pace. edu/cases/970529r1.html). 213 Where appropriate, this expression is used in preference to specific performance, which has distinctive Common Law overtones. 214 Schwenzer (n 7) paras 43.11 et seq. 215 See Walt, ‘For Specific Performance under the United Nations Sale Convention’ (1991) 26 Tex Int’l LJ 211. 206

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provided for in the remaining articles. CISG Article 62 provides in general terms for the seller’s right to require performance, listing separately the buyer’s duty to pay the price and its duty to take delivery or perform other obligations. CISG Article 28, which is sometimes referred to as a quasi-declaration, excuses courts from entering a judgment for specific performance if they would not do so in similar cases not governed by the CISG.

1. Buyer’s Right to Require Performance CISG Article 46(1) gives the buyer the right to require performance by the seller of its obligations under the contract. There is no reason to exclude particular obligations from this formula, for example, the seller’s duty to deliver goods free from third party claims.216 Whilst the existence of such claims may not affect the conforming character of the goods,217 and so not attract the buyer’s right to substitute goods or to a ‘repair’,218 the general words of paragraph (1) are clear enough. A seller may therefore be required to take steps to discharge the third party claim.219 Another claim covered only by paragraph (1) and not by the remainder of the article is a claim for undelivered goods where there has occurred a short delivery.220 101 The buyer’s right depends upon the buyer not having ‘resorted’ to an inconsistent remedy. The avoidance of the contract for fundamental breach or for failure to comply with a time notice will be such a case. So too will be a reduction of the price, either because this signifies the abandonment of any right to substitute goods in fundamental breach cases or because, in reducing the price, the buyer has expressed a desire to retain non-conforming goods along with a price reduction corresponding to lost value, which itself is largely a function of the cost of repair. A buyer who enters into a pre-avoidance purchase of substitute goods221 is not thereby acting inconsistently with a direct enforcement claim since the buyer may have an appetite for both. A buyer may also not claim direct enforcement at a time when a time notice222 is still running, for the additional reason that the CISG also prevents this elsewhere.223 A damages claim may or may not be consistent with direct enforcement. So far as the claim is of a moratory nature, or speaks to losses accruing before direct enforcement takes effect, it can sit alongside a claim for direct enforcement. There will be cases, however, where a buyer’s requirement of performance by a date later than the due performance date will also amount to a modification of the contract, whereby the buyer’s right to damages for late performance will have been surrendered. 102 Direct performance in the form of substitute goods can only be demanded by the buyer in cases of fundamental breach.224 The antecedent sale convention, ULIS, permitted direct enforcement even if the breach was not fundamental, thereby undermining 100

CISG Articles 41–42. CISG Article 46 falls under the heading Section II. Conformity of the goods and third party claims (emphasis added). 218 CISG Article 46(2), (3). 219 Cf Walt (n 215) pp. 215–216. A demand for substitute goods where the breach is not fundamental should fail on an analogical extension of CISG Article 46(2), even if the goods cannot be said to be non-conforming. 220 Müller-Chen, in Schlechtriem and Schwenzer (n 9) p. 743, who also treats the short delivery itself as a case of non-conforming goods when the non-conformity is in the delivery rather than in the goods. 221 See above, para. 60. 222 Secretariat Commentary on the 1978 Draft (Article 42), paras 5–6. 223 CISG Article 47(2). 224 CISG Article 46(2). 216

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the fundamental breach rule.225 The tendency in the case law towards a strict application of the doctrine of fundamental breach reduces thus the buyer’s opportunity to demand substitute goods. Where the breach is not fundamental, the buyer may require a repair of the goods to cure the lack of conformity. In both cases of substitution and repair, the buyer must exercise its right along with a notice of defect under Article 39 226 or within a reasonable time after the notice. The buyer’s direct enforcement rights of substitution and repair are therefore governed by the way the reasonable time rule has been applied in CISG Article 39 cases.227 Where the goods have not been delivered by the seller, the buyer’s right to require performance is subject only to the relevant limitation period in national law in those cases where the Limitation Convention228 does not apply. A buyer who unreasonably delays in seeking direct enforcement may be frustrated by the requirement that the CISG be interpreted in accordance with good faith.229 A particular case would be the buyer who sits back on a rising market and, instead of avoiding the contract, waits for the optimal time to seek direct enforcement. 230 The buyer’s right of direct enforcement in CISG Article 46 is not easy to reconcile 103 with the seller’s right to cure in CISG Articles 37 and 48, particularly the latter. A buyer may want substitute goods but the seller may insist on repair or adjustment. The weight of authority behind the effect of even a partial cure preventing the occurrence of a fundamental breach231 means that the buyer’s right to require substitute goods does not arise. Alternatively, and probably more rarely, the buyer may require repair when the seller wishes to substitute the goods in cases where the breach is not fundamental. Here, there is a real conflict between the cure and the direct enforcement provisions. It has been argued that the seller’s right to cure prevails over the buyer’s right to 104 direct performance.232 Direct performance is a primary right of a buyer, whereas cure is in the nature of a chance given to the seller to redeem itself.233 It is not easy to justify why a buyer’s primary right to require performance should be subordinated to a non-performing seller’s right to have a second chance, especially if any repairs effected by the seller need not be perfect. Subject to the buyer’s direct performance by repair being disproportionately more expensive than the seller’s substitution, where the interpretation of the CISG in accordance with good faith234 should come into play to limit the buyer’s right, the buyer should prevail. This ought to be the case even though CISG Article 48, whilst in an unclear way giving the buyer some input into the process of the seller’s cure, ultimately leaves to the seller the form of the cure. 235

CISG Article 42(1)(c). CISG Article 43 governs notice of non-compliance with CISG Articles 41–42. In such cases, an application by analogy of the reasonable time requirement to direct enforcement claims falling only under CISG Article 46(1) would be appropriate. 227 See Chap. 16. 228 United Nations Convention on the Limitation Period in the International Sale of Goods 1974, which in Article 8 lays down a limitation period of four years. 229 CISG Article 7(1). 230 Nor should the buyer be better off in such market circumstances by delaying the right of avoidance, as CISG Article 49 appears to allow it to do. See Chap. 20. In this case, there is the added restriction of mitigation. 231 See Chap. 17. 232 Will, in Bianca and Bonell (n 31) p. 356; Müller-Chen in Schlechtriem and Schwenzer (n 9) p. 765. 233 Comments of the Committee of the Whole on the 1977 draft (A/32/17), para. 276: ‘any possibility to cure was a privilege’. 234 CISG Article 7(1). 235 See Bridge, ‘Curing a Seller’s Defective Tender or Delivery in Commercial Cases’ in Büchler & Müller-Chen, Private Law: national, global, comparative (2011). 225 226

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2. Seller’s Right to Require Performance 105

The discussion above relating to direct enforcement by the buyer, with the exception of paragraphs (2)–(3), is applicable also to direct enforcement by the seller under CISG Article 62. Apart from the many cases where the seller is claiming the price of goods delivered,236 direct enforcement by the seller is a rare event in international trade.237

3. Other Matters Common to Seller and Buyer The right of an obligee to require performance is not expressed to be subject to a claim by the obligor for exemption under CISG Article 79. Indeed, CISG Article 79(5) goes so far as to say that it is only the right to damages that is affected by CISG Article 79: other rights may be exercised. It should not be concluded from this that a right to direct performance can be exercised in cases of impossibility or impracticability. A reservation to that effect is implicit in CISG Articles 46 and 62 themselves, apart from any good faith interpretation of the obligor’s right to direct enforcement. 107 There remains the question whether the right to direct performance is subject to the requirement of mitigation of loss. The Secretariat Commentary, a persuasive though not a binding authority, states in equivocal language that a buyer seeking to mitigate loss is ‘authorise[d]’ to carry out the repair itself or with the aid of a third party.238 This is less than a concession that the mitigation principle, which is contained in the damages section, prevails over the right to direct enforcement. As stated earlier, the preponderant right to require performance ought not to be exercised in those cases where an obligee acting in good faith would take action in mitigation instead.239 106

4. Quasi-Declaration in CISG Article 28 CISG Article 28 states that, in a case where a party is entitled to require performance, a court is not bound to enter a judgment for specific performance unless, applying its own law, it would do so for a similar sale contract.240 This article does not apply to arbitral tribunals.241 It is addressed only to courts and their procedural sensitivities and so should not be open to modification by the contracting parties, notwithstanding the expansive language of CISG Article 6. 109 The CISG refers to specific performance in only one place – Article 28. Otherwise it speaks of an obligee requiring performance. CISG Article 28 is more or less a rescript of a ULIS provision.242 Whilst CISG Article 28, perhaps because of the very words it employs in the English language version,243 has been widely seen as a concession to 108

See UNCITRAL Digest of Case Law (2016), Article 62 note 4. But see Zhejiang High People’s Court 24 April 2008 (translated at http://cisgw3.law.pace.edu/cases/0 80424c1.html) requiring the buyer to take delivery). 238 Commentary on the 1978 Draft (Article 42), para. 14. 239 See CISG Article 7(1). ULIS contained a more specific provision. ULIS Article 25 prevented the buyer from requiring performance by substitution where it was reasonably possible to purchase replacement goods elsewhere. 240 See Walt (n 215) p. 211. For a refusal by a Common Law court to invoke the power given by Article 28, see Federal District Court 7 December 1999 (available at http://cisgw3.law.pace.edu/cases/991207u1.ht ml) (Magellan International v Salzgitter Handel). 241 But, without a direct reference to CISG Article 28, direct enforcement of an 8–10 year contract to supply aluminium was denied to a buyer as inappropriate in Zürich Arbitration 31 May 1996 (translated at http://cisgw3.law.pace.edu/cases/960531s1.html). 242 ULIS Article 16. 243 But in the French version, for example, there is no differentiation in the language used in CISG Articles 28, 46 and 62. 236 237

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Common Law states,244 where specific performance is a discretionary remedy rarely available in sale of goods cases, there is no mention in the Secretariat Commentary of its being confined to Common Law countries. Indeed, it has been vigorously argued that there is no reason why Civil Law countries may not invoke it.245 The argument is sound save only that the Common Law flavour of CISG Article 28 suggests that it is not all cases of direct enforcement by courts where CISG Article 28 is in play. 246 Common Law countries typically distinguish between debt claims and specific performance claims. The recovery of a debt is not subject to any discretion, whereas the specific enforcement of a contract is. A seller’s successful action for the price of undelivered goods does not as such require the buyer to accept delivery. This should mean that the discretion in CISG Article 28 ought not be exercised against a seller claiming payment of the price (a debt claim), so that the seller should be able to recover the price under CISG Article 62 even if unable to do so in similar circumstances under its own national law.247 Where the matter concerns the buyer’s duty to take delivery of the goods, this is very much within the province of specific performance in Common Law systems and therefore within Article 28.

XIII. Price Reduction CISG Article 50 provides that, in the case of non-conforming goods,248 the buyer 110 may reduce the price, whether yet paid or not, according to the ratio between the value of the non-conforming goods at the time of delivery and their value at that same time had they been conforming.249 So, if goods priced at $100,000 on a rising market are non-conforming and worth $108,000 dollars at the time of delivery, when if conforming they would have been worth $120,000, the buyer is entitled to reduce the $100,000 price by one-tenth ((108,000 ÷ 120,000) x 100,000). This is not a damages action but rather a self-help remedy permitting the buyer to revise its price obligation under the contract. 250 Consequently, a buyer who has paid the price should be entitled to claim interest under CISG Article 78 on the amount by which the price is reduced from the time the buyer exercised the right of price reduction. CISG Article 50 permits the price to be reduced to zero in the case of worthless goods,251 which is useful for a buyer that has lost its 244 See First Committee Deliberations, 13th Meeting 19 March 1980, paras 41 et seq (A/CONF.97/C.1/ L.113, L.117). 245 Ferrari, ‘What Sources of Law for Contracts for the International Sale of Goods?’ (2006) 1 IHR 1, 18–19. The discretion in Article 28 was considered but rejected in HG Bern, 22 December 2004 (translated at http://cisgw3.law.pace.edu/cases/041221s1.html). 246 See Bridge, The International Sale of Goods (4th edn, 2017) para. 12.48. 247 In the United Kingdom, for example, it is normally required that the property in the goods shall pass to the buyer before the seller can claim the price in a debt action: Sale of Goods Act 1979, s 49. 248 But not non-conforming packaging (except in so far as the packaging affects the goods) according to OLG Koblenz, 14 December 2006 (translated at http://cisgw3.law.pace.edu/cases/061214g1.html). The right of price reduction has been extended to short delivery, not itself a case of non-conformity: CISG Article 51(1). As regards third party claims (under CISG Articles 41–42), these do not give rise to non-conformity since conformity is an expression that is not used in CISG Articles 41–42 (cf. Article 35): see para. 100. But an analogical extension of Article 50 ought to allow for a price reduction remedy in such cases. On this issue, see Magnus, ‘Remedies: Damages, Price Reduction, Avoidance, Mitigation, and Preservation’ in DiMatteo (n 24), pp. 278–79. 249 See Bergsten and Miller, ‘The Remedy of Reduction in Price’ (1979) 27 Am J Comp L 255. 250 See CJ Genève 15 November 2002 (translated at http://cisgw3.law.pace.edu/cases/021115s1.html) (unilateral exercise of a right to modify). 251 OGH 23 May 2005 (translated at http://cisgw3.law.pace.edu/cases/050523a3.html); OLG Frankfurt, 29 January 2004 (translated at http://cisgw3.law.pace.edu/cases/040129g1.html).

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right of avoidance.252 Since CISG Article 50 concerns price revision, the buyer may not claim under CISG Article 50 for the cost of repairs,253 which would be appropriate in a damages action. The buyer’s right under CISG Article 50 is subject to the seller’s right to cure.254 It also depends upon compliance with CISG Article 39, which requires notice of non-conformity.255 The buyer’s right of price reduction does not depend upon proof or foreseeability of loss and is also not affected by an exemption granted to the seller under CISG Article 79.256 111 A buyer thus reducing the price is not debarred from claiming damages so long as there is no double-counting and thus no over-compensation. A buyer, for example, would not be allowed to claim a price reduction and also for a loss of profit on a resale of the goods because the onward sale price has had to be reduced. If that same buyer, however, could not use the goods in fulfilment of a sub-contract and incurred a penalty payment under that contract, a damages claim satisfying the requirements of CISG Article 74 should be allowed in respect of that penalty. 112 The remedy of price reduction has Civil Law antecedents257 and has no exact counterpart in Common Law systems.258 The remedy afforded by CISG Article 50 stands comparison with a claim for damages under CISG Article 74. Returning to the above example where the price reduction remedy gave the buyer $10,000, a claim for damages should represent the difference between the value that conforming goods should have had at the date of delivery minus the value that in fact they did have in their non-conforming state, namely $12,000.259 Whereas on a rising market it would pay the buyer to sue for damages,260 on a falling market the buyer’s preference would be for a price reduction, which would yield a larger sum. The question is whether the buyer may freely choose the more favourable remedy under an instrument, the CISG, that in bringing together Civil Law and Common Law cultures creates this state of affairs. There seems to be no good reason to deny the buyer its choice.

G. Cross References & Additional Commentary 113

See, in particular, Chapter 17 (Performance and Breach of Contract), Chapter 20 (Avoidance), and Chapter 24 (Product Liability).

OLG Koblenz 14 December 2006 (translated at http://cisgw3.law.pace.edu/cases/061214g1.html). CJ Genève 15 November 2002 (translated at http://cisgw3.law.pace.edu/cases/021115s1.html). 254 See OLG Koblenz 31 January 1997 (translated at http://cisgw3.law.pace.edu/cases/970131g1.html). 255 OLG Hamburg 25 January 2008 (n 189). A buyer with a reasonable excuse for non-compliance with CISG Article 39 may still reduce the price: CISG Article 44. 256 Bach, in Kröll et al (n 9) p. 731. Whether price reduction can be claimed prior to delivery, (appears to be much more a theoretical than a practical question). Id. at p. 732). 257 It is the actio quanti minoris of Roman law and the action estimatoire of French law. 258 This is graphically demonstrated by Bence Graphics International Ltd v Fasson UK Ltd [1998] QB 87, where goods subject to a non-conforming feature rendering them worthless, were sold on to a sub-buyer who protested but made no claim against the buyer. The buyer suffered no loss and was therefore entitled only to nominal damages. A claim under the CISG would have yielded a recovery of the whole or (on the facts) substantially the whole of the price. See Magnus, ‘Remedies: Damages, Price Reduction, Avoidance, Mitigation, and Preservation’ in DiMatteo (n 24), p. 276 (no requirement of actual loss). 259 The cost of repairs in some cases will represent this difference. 260 Or if payment has not yet been made, exercise a right of set-off. 252

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H. Additional Sources Beale (ed), Chitty on Contracts (33rd edn, Sweet & Maxwell 2018); Bridge, ‘Mitigation of Damages in Contract and the Meaning of Avoidable Loss’ (1989) 105 LQR 398–423; Bridge, The International Sale of Goods (4th edn, OUP 2017); Farnsworth, Contracts (4th edn, Aspen Publishers 2004); Saidov, The Law of Damages in International Sales (Hart 2008); Ziegel, ‘The Remedial Provisions in the Vienna Sales Convention: Some Common Law Perspectives’ in Galston & Smit (eds), International Sales: The United Nations Convention on Contracts for the International Sale of Goods (Matthew Bender 1984) 9–37.

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CHAPTER 20 AVOIDANCE FOR BREACH OF CONTRACT1 Harriët N. Schelhaas and Harry M. Flechtner A. Topics Covered . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B. Introductory Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C. Statement of Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . D. Sampling of Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. CISG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. UNIDROIT Principles of International Commercial Contracts . . . . . . . . . . . . . . III. Principles of European Contract Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. American Uniform Commercial Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. The French Civil Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI. The German Civil Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VII. Chinese Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . E. Commentary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Nature and Consequences of Avoidance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Grounds for Avoidance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Procedure to Avoid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Restitution Following Avoidance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. General Comments on CISG Avoidance and Similar Doctrines under Other Instruments and Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F. Illustrations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Partial Non-Payment and Repudiation by Buyer, Divisible Installment Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Partial Non-Payment and No Repudiation by Buyer, Divisible Installment Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Single Delivery Contract, All Goods Non-Conforming . . . . . . . . . . . . . . . . . . . . . . IV. Single-Delivery Contract, Some Goods Non-Conforming . . . . . . . . . . . . . . . . . . . V. Partial Repudiation by Buyer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . G. Cross References & Additional Commentary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . H. Practitioner Tips & Contract Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Model Contract Clause: Grounds for Avoidance by Seller . . . . . . . . . . . . . . . . . . . . II. Model Contract Clause: Grounds for Avoidance by Buyer . . . . . . . . . . . . . . . . . . . III. Model Contract Clause: Avoidance for Prospective Non-Performance . . . . . . IV. Model Contract Clause: Restitution and Preservation of Goods Following Avoidance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. Seller’s Notice of Avoidance (Entire Contract) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI. Buyer’s Notice of Avoidance (Entire Contract) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Additional Sources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 5 12 18 18 19 20 21 22 23 24 25 25 46 60 72 84 86 86 91 93 100 106 112 113 114 115 116 119 121 122 123

A. Topics Covered This Chapter addresses avoidance for breach of an international sales contract. ‘Avoidance of contract’ here has the meaning given the phrase in the CISG: it refers to a party putting an end to the contracted-for exchange of the goods for the price and (subject to certain exceptions) to executory contract obligations, based on the other party’s failure or possible future failure properly to perform its obligations.2 Avoidance of contract is sometimes a prerequisite for a party to claim certain measures of damages. 2 As used in the CISG (and thus in this Chapter), the phrase ‘avoidance of contract’ does not necessarily have the same meaning as in other legal regimes. For example, 1

1 This updated second edition is based largely on the text of the first edition by Professor Harry Flechtner; some parts were left unchanged, some subject matter was added, and in many cases the text was updated. The parts on German, French, and Chinese law are entirely new. 2 See CISG Articles 49, 51, 64, 72 and 73, along with the related Articles 25, 26, 81 and 82.

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B. Introductory Note

Chapter 3 Section 2 of the PICC (Articles 3.2.1 through 3.2.17) specifies ‘Grounds for Avoidance’ of a contract that are not based on a party’s breach of its contractual obligations, but instead arise out of defects in a party’s consent to contract – e.g., mistake, fraud, threat, and gross disparity of contract terms. The same terminology is used in PECL.3 The term ‘avoidance’ in this Chapter is only used in relation to a breach of contract. Other instruments use a variety of terms for what the CISG and this Chapter denom- 3 inate ‘avoidance of contract’. The PICC and PECL for example, use the term ‘termination’.4 In Article 2 of the (US) UCC, the term ‘cancellation’ is employed,5 although under that instrument a buyer’s ‘rejection’ or ‘revocation of acceptance’ of goods also describes aspects of what the CISG calls ‘avoidance.’ To repeat, however, the phrase ‘avoidance of contract’ as used in this Chapter refers to a party putting an end to the exchange of goods for price and to many executory contract obligations based on the other party’s breach or threatened breach. Avoidance of contract must be distinguished from the related but distinct idea of the 4 temporary ‘suspension’ of performance. Like avoidance, suspension (which is discussed in Chapter 17 ‘Performance and Breach of Contract’ and Chapter 18 ‘Anticipatory Breach’) refers to a party’s non-performance based on the other party’s threatened or actual breach: if the other party does not perform its obligations or there is a threat that he will not perform or will not perform properly or on time, in most cases a creditor has the right to temporarily suspend its own performance pending or in anticipation of the non-performance of the other party. Avoidance, however, refers to the final or permanent putting-an-end-to contractual obligations, whereas suspension contemplates a temporary delay in rendering performance. In certain situations, however, suspension can transform into permanent non-performance and thus become ground for avoidance or its equivalent.

B. Introductory Note The general rule on avoidance of contracts in a situation where the seller does not 5 perform its contract properly is laid down in Article 49 CISG. In Article 64 CISG a corresponding provision is laid down for the situation where the buyer does not perform its obligations. According to Article 49 CISG, the buyer may declare the contract avoided if there is a fundamental breach by the seller, or by the absence of such fundamental breach if the seller does not perform within an additional period (the so-called ‘Nachfrist’) that the buyer offered to the seller. By virtue of Article 64 CISG, the seller has a corresponding right to avoid the contract for breach by the buyer; that is, in case of a fundamental breach or if the buyer is late in performing its contractual duties and still does not perform after he is granted an additional period to perform. Thus, CISG provisions generally permit avoidance only in the case of a serious (‘fundamental’) breach or in case of delayed performance if an extra period for performance is left unused. In addition, CISG allows for avoidance if there is not yet a fundamental breach, See PECL Chapter 4 (‘Validity’), Articles 4:101 through 4:119. See PICC Article 7.3.1 through 7.3.7; PECL Article 9:301 through 9:309. 5 See UCC § 2-106(4) (‘“Cancellation” occurs when either party puts an end to the contract for breach by the other …’). Compare the UCC meaning of the word ‘termination’, which is defined in UCC § 2-106(3): ‘“Termination” occurs when either party pursuant to a power created by agreement or law puts an end to the contract otherwise than for its breach.’ Thus in the UCC, the word ‘termination’ has a much different meaning than it does in the PICC and PECL where it is used as the equivalent of the CISG term ‘avoidance’ (i.e., putting an end to the contract for breach). 3

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but it is clear that one of the parties will commit a fundamental breach in the future (the concept of anticipatory breach: CISG Article 62). Under CISG Article 6, the parties are free to derogate from these standards. In general, most other legal regimes also limit avoidance or its equivalent to situations where a serious breach has occurred, although there are significant exceptions to this general rule. As to the consequences of the avoidance of contract for breach, CISG Article 81(1) prescribes that ‘[a]voidance of the contract releases both parties from their obligations under it, subject to any damages that may be due’, although avoidance ‘does not affect any provisions of the contract for the settlement of disputes or any other provision of the contract governing the rights and obligations of the parties consequent upon the avoidance of the contract.’ Under CISG Article 81(2), ‘[a] party who has performed the contract wholly or in part may claim restitution from the other party of whatever the first party supplied or paid under the contract.’ Other international instruments and domestic sales regimes contain equivalent concepts, but often employ different terminology. In the case of missing or non-conforming installment deliveries, or partial non-conforming individual deliveries, the CISG provides for avoidance of only a part of the contract.6 It has been said that, under the CISG, a contract ‘is not entirely annulled by … avoidance, but rather it is “changed” into a winding-up relationship’, and that avoidance constitutes a ‘framework of the reversal of the contract (restitution).’ 7 The CISG contemplates that avoidance will occur through a declaration of avoidance of which the other party is given timely notice,8 but (as discussed below) avoidance or its equivalent has sometimes been achieved without such a declaration. Other legal regimes also generally (but not always) require a notice in order to bring about avoidance. In some other legal regimes, a court may also effectuate an avoidance of the contract. As noted earlier, under CISG Article 81(2) upon avoidance the aggrieved party becomes entitled to certain types of damages, and each party owes the other ‘restitution … of whatever the [other] party has supplied or paid under the contract.’ The CISG contains a number of provisions elaborating on these restitutionary obligations: those provisions address such matters as a buyer’s obligations as to goods delivered under an avoided contract9 and a seller’s obligations with respect to refunding payments made under an avoided contract.10 Nevertheless, as discussed below, there are a number of issues concerning the restitutionary obligations that arise upon avoidance of contract which are not addressed in these provisions. Using the CISG as a baseline,11 this Chapter also explores the equivalent of avoidance of contract in other international instruments (PICC and PECL) as well as in US, French, German, and Chinese12 domestic sales law.13 The approaches in the internationSee CISG Articles 51 and 73. OGH 29 June 1999 (Dividing wall panels case), CLOUT Case No. 422, English translation available at http://cisgw3.law.pace.edu/cases/990629a3.html. 8 See CISG Articles 26, 49(2) and 64(2). 9 See CISG Articles 82, 84(2), and 86–88. 10 See CISG Article 84(1). 11 Since CISG is the baseline in this Commentary and CISG is limited to international B2B transactions, consumer sales law will not be dealt with. 12 Only the black letter text of the new Chinese Civil Code, which is enacted on 1 January 2021, will be taken into consideration. 13 For a comparison between CISG and UK law (primarily Common Law, since the Sale of Goods Act 1979 does not include a comprehensive set of rules regarding avoidance for breach, only some specific adjustments are made (for instance, Art. 15A Sale of Goods Act): Bridge, The International Sale of Goods (4 th edn OUP, 2017) Ch 9 on English law and para. 12.24–12.43 for a comparison. 6 7

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C. Statement of Issues

al instruments such as the PICC tend to be similar to – indeed, the approaches were generally substantially influenced by – that of the CISG. Some domestic rules sometimes diverge more significantly from the CISG approach.

C. Statement of Issues This Chapter introduces a number of important questions in relation to avoidance. These questions relate to (i) the nature of avoidance, (ii) the conditions for invoking the doctrine of avoidance, (iii) the consequences of avoidance if the conditions for invoking the concept of avoidance are met, and (iv) the preferred approach to avoidance of contract, considering the provisions in CISG, international instruments and domestic rules. In this section, these questions will be elaborated in more detail and attention will be paid to related topics that need to be addressed. These questions will be addressed in the subsequent section. The first issue that will be dealt with is related to the nature and consequences of avoidance. A number of questions related thereto will be touched on, such as what ‘avoidance of contract’ exactly means and what its consequences entail. What obligations and contractual provisions survive avoidance? What remedies are available to the aggrieved party following avoidance? May a contract be avoided if, under CISG Article 79 or similar rules, the non-performing party is exempted from damages (or is ‘excused’) for its non-performance? What is the effect of avoidance on responsibility for casualty to goods (risk of loss)? When can an aggrieved party avoid part of a contract and what are the consequences of such ‘partial avoidance’? How does ‘unilateral’ avoidance pursuant to the provisions of the CISG differ from ‘consensual’ avoidance pursuant to an agreement of the parties? These questions will be answered for the CISG, international instruments, and domestic laws (see part E.I, → mn. 25). The second important issue to be dealt with is related to the conditions under which a contract can be avoided. So when can a party avoid the contract, and is a fundamental breach always necessary? How does avoidance work in case of late performance? Is it necessary to give the other party an additional period of time before being able to avoid a contract, the so-called Nachfrist? What does this concept of ‘Nachfrist’, in which the other party is granted an additional period in case of late performance, entail exactly, and how can it help a party awaiting late performance? When can a party avoid based on prospective non-performance (threat of future breach) by the other party? What are the consequences if a party attempts to avoid without proper grounds? These questions related to the grounds for avoidance will be dealt with in part E.II., → mn. 46. The third relevant aspect of avoidance relates to the procedure of avoiding a contract. So, how does a party avoid a contract exactly? What form can notice of avoidance take – must it be written? How can notice of avoidance be transmitted – and is electronic notice effective? Can notice of avoidance be implied by actions? What must a notice of avoidance say? When must notice of avoidance be given? What happens if notice of avoidance is sent but not received and can it be retracted? Can the consequences of avoidance be achieved without giving notice? Under which circumstances does the court have jurisdiction to declare the contract avoided, and when will such court proceedings be preferable to a mere declaration of a party? These questions will be answered in discussing the modus operandi of avoidance (part E.III, → mn. 60). The nature of avoidance, the grounds for invoking avoidance, and its procedure lead to questions about its consequences. If a contract is avoided, everything that has already been performed must be returned. One of the essential questions related thereto

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is whether each party must return all payments and/or goods received from the other. If the seller must refund payments, does it owe interest and if so, at what rate? Many connected questions may arise, such as whether the buyer may avoid the contract if it cannot return to the seller delivered goods in good condition. What are the buyer’s obligations with respect to goods it must return? May an avoiding buyer recover its expenses of preserving goods while they await return? When, if ever, may a buyer that has avoided the contract sell goods it has received? If the avoiding buyer may resell, may it keep the proceeds of the sale? Who bears the risk when goods are returned following avoidance? Part E.IV (→ mn. 72) will be devoted on these issues. 17 Finally, some general comments will be made on the CISG approach towards avoidance for breach of contract, compared to similar doctrines in other legal regimes. The central question here is what are the comparative advantages and disadvantages of the CISG, other international contract instruments, and US, French, German, and Chinese domestic sales law?

D. Sampling of Laws I. CISG 18 Article 25 A breach of contract committed by one of the parties 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 the party in breach did not foresee and a reasonable person of the same kind in the same circumstances would not have foreseen such a result. Article 26 A declaration of avoidance of the contract is effective only if made by notice to the other party. Article 49 (1) The buyer may declare the contract avoided: (a) if the failure by the seller to perform any of his obligations under the contract or this Convention amounts to a fundamental breach of contract; or (b) in case of non-delivery, if the seller does not deliver the goods within the additional period of time fixed by the buyer in accordance with paragraph (1) of article 47 or declares that he will not deliver within the period so fixed. (2) However, in cases where the seller has delivered the goods, the buyer loses the right to declare the contract avoided unless he does so: (a) in respect of late delivery, within a reasonable time after he has become aware that delivery has been made; (b) in respect of any breach other than late delivery, within a reasonable time: (i) after he knew or ought to have known of the breach; (ii) after the expiration of any additional period of time fixed by the buyer in accordance with paragraph (1) of article 47, or after the seller has declared that he will not perform his obligations within such an additional period; or (iii) after the expiration of any additional period of time indicated by the seller in accordance with paragraph (2) of article 48, or after the buyer has declared that he will not accept performance. Article 51 (1) If the seller delivers only a part of the goods or if only a part of the goods delivered is in conformity with the contract, articles 46 to 50 apply in respect of the part which is missing or which does not conform. (2) The buyer may declare the contract avoided in its entirety only if the failure to make delivery completely or in conformity with the contract amounts to a fundamental breach of the contract.

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D. Sampling of Laws Article 64 (1) The seller may declare the contract avoided: (a) if the failure by the buyer to perform any of his obligations under the contract or this Convention amounts to a fundamental breach of contract; or (b) if the buyer does not, within the additional period of time fixed by the seller in accordance with paragraph (1) of article 63, perform his obligation to pay the price or take delivery of the goods, or if he declares that he will not do so within the period so fixed. (2) However, in cases where the buyer has paid the price, the seller loses the right to declare the contract avoided unless he does so: (a) in respect of late performance by the buyer, before the seller has become aware that performance has been rendered; or (b) in respect of any breach other than late performance by the buyer, within a reasonable time: (i) after the seller knew or ought to have known of the breach; or (ii) after the expiration of any additional period of time fixed by the seller in accordance with paragraph (1) of article 63, or after the buyer has declared that he will not perform his obligations within such an additional period. Article 72 (1) If prior to the date for performance of the contract it is clear that one of the parties will commit a fundamental breach of contract, the other party may declare the contract avoided. (2) If time allows, the party intending to declare the contract avoided must give reasonable notice to the other party in order to permit him to provide adequate assurance of his performance. (3) The requirements of the preceding paragraph do not apply if the other party has declared that he will not perform his obligations. Article 73 (1) In the case of a contract for delivery of goods by instalments, if the failure of one party to perform any of his obligations in respect of any instalment constitutes a fundamental breach of contract with respect to that instalment, the other party may declare the contract avoided with respect to that instalment. (2) If one party's failure to perform any of his obligations in respect of any instalment gives the other party good grounds to conclude that a fundamental breach of contract will occur with respect to future instalments, he may declare the contract avoided for the future, provided that he does so within a reasonable time. (3) A buyer who declares the contract avoided in respect of any delivery may, at the same time, declare it avoided in respect of deliveries already made or of future deliveries if, by reason of their interdependence, those deliveries could not be used for the purpose contemplated by the parties at the time of the conclusion of the contract. Article 81 (1) Avoidance of the contract releases both parties from their obligations under it, subject to any damages which may be due. Avoidance does not affect any provision of the contract for the settlement of disputes or any other provision of the contract governing the rights and obligations of the parties consequent upon the avoidance of the contract. (2) A party who has performed the contract either wholly or in part may claim restitution from the other party of whatever the first party has supplied or paid under the contract. If both parties are bound to make restitution, they must do so concurrently. Article 82 (1) The buyer loses the right to declare the contract avoided or to require the seller to deliver substitute goods if it is impossible for him to make restitution of the goods substantially in the condition in which he received them. (2) The preceding paragraph does not apply: (a) if the impossibility of making restitution of the goods or of making restitution of the goods substantially in the condition in which the buyer received them is not due to his act or omission; (b) if the goods or part of the goods have perished or deteriorated as a result of the examination provided for in article 38; or

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if the goods or part of the goods have been sold in the normal course of business or have been consumed or transformed by the buyer in the course of normal use before he discovered or ought to have discovered the lack of conformity.

CISG Advisory Council Opinion No. 5: The buyer's right to avoid the contract in case of non-conforming goods or documents 4.1 A fundamental breach of contract giving the buyer the right to avoid the contract or to ask for substitute goods presupposes that the defect has a serious importance to the buyer. In considering avoidance, one has to take into account whether the buyer can be required to retain the goods because he can be adequately compensated by damages or a price reduction. The substantiality of the detriment to the buyer may be ascertained by having regard to the terms of the contract, the purpose for which the goods are bought and finally, by the question of whether it is possible to remedy the defect. In any case, the question of time has to be given due consideration. CISG Advisory Council Opinion No. 9: Consequences of Avoidance of the Contract 3. Interpretation a. General remarks 3.1 Avoidance of the contract under Article 81 of the CISG is determined by Articles 49 (avoidance by the buyer) and 64 (avoidance by the seller) and can arise in two cases: first, where a fundamental breach has occurred and the party entitled to performance elects to avoid the contract; and secondly, where one party has served a time notice on the other, the other has failed to perform within the additional time prescribed in that notice, and the first party elects to avoid the contract. In either case, avoidance may occur where the non-performing party is not liable in damages as a result of an impediment beyond his control. b. Effects of avoidance 3.2 The basic effect of avoidance is that both parties are released from their primary performance obligations and are no longer entitled to perform those obligations. The primary obligations of the parties include the seller's obligations to make delivery and transfer ownership and the buyer's obligations to pay the price and take delivery. Other related obligations may also be avoided, such as maintenance and service agreements. Rights to damages that may have accrued by the time of avoidance remain in existence, even as against the avoiding party. Where avoidance occurs after unexempted non-performance by one of the parties, the liability of that non-performing party includes damages for future non-performance prevented by the avoidance of the contract. Avoidance may nevertheless occur as a result of exempted non-performance, where neither party is liable in damages for future non-performance.

II. UNIDROIT Principles of International Commercial Contracts 19 Article 7.3.1 Right to terminate the contract (1) A party may terminate the contract where the failure of the other party to perform an obligation under the contract amounts to a fundamental non-performance. (2) In determining whether a failure to perform an obligation amounts to a fundamental non-performance regard shall be had, in particular, to whether: (a) the non-performance substantially deprives the aggrieved party of what it was entitled to expect under the contract unless the other party did not foresee and could not reasonably have foreseen such result; (b) strict compliance with the obligation which has not been performed is of essence under the contract; (c) the non-performance is intentional or reckless; (d) the non-performance gives the aggrieved party reason to believe that it cannot rely on the other party’s future performance; (e) the non-performing party will suffer disproportionate loss as a result of the preparation or performance if the contract is terminated. (3) In the case of delay the aggrieved party may also terminate the contract if the other party fails to perform before the time allowed it under Article 7.1.5 has expired (Nachfrist extension). Article 7.3.5 Effects of termination in general (1) Termination of the contract releases both parties from their obligation to effect and to receive future performance.

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D. Sampling of Laws (2) Termination does not preclude a claim for damages for non-performance. (3) Termination does not affect any provision in the contract for the settlement of disputes or any other term of the contract which is to operate even after termination.

III. Principles of European Contract Law 20

Article 9:301 Right to terminate the contract (1) A party may terminate the contract if the other party's non-performance is fundamental. (2) In the case of delay the aggrieved party may also terminate the contract under Article 8:106 Article 9:302 Contract to be performed in parts If the contract is to be performed in separate parts and in relation to a part to which a counter-performance can be apportioned, there is a fundamental non-performance, and the aggrieved party may exercise its right to terminate under this Section in relation to the part concerned. It may terminate the contract as a whole only if the non-performance is fundamental to the contract as a whole. Article 9:305 Effects of Termination in General (1) Termination of the contract releases both parties from their obligations to effect and to receive future performance, but, subject to Articles 9:306 to 9:308, does not affect the rights and liabilities that have accrued up to the time of termination. (2) Termination does not affect any provision of the contract for the settlement of disputes or any other provisions which is to operate even after termination. Article 9:309 Recovery for performance that cannot be returned On termination of the contract a party who has rendered a performance which cannot be returned and for which it has not received payment or other counter-performance may recover a reasonable amount for the value of the performance to the other party.

IV. American Uniform Commercial Code 21

§ 2-106. Termination; cancellation (3) Termination. ‘Termination’ occurs when either party pursuant to a power created by agreement or law puts an end to the contract otherwise than for its breach. On "termination" all obligations which are still executory on both sides are discharged but any right based on prior breach or performance survives. (4) Cancellation. ‘Cancellation’ occurs when either party puts an end to the contract for breach by the other or its effect is the same as that of "termination" except that the cancelling party also retains any remedy for breach of the whole contract or of any unperformed balance. § 2-508. Cure by seller of improper tender or delivery; replacement (1) Where any tender or delivery by the seller is rejected because nonconforming and the time for performance has not yet expired, the seller may seasonably notify the buyer of his intention to cure and may then within the contract time make a conforming delivery. (2) Where the buyer rejects a nonconforming tender which the seller had reasonable grounds to believe would be acceptable with or without money allowance the seller may if he seasonably notifies the buyer have a further reasonable time to substitute a conforming tender. § 2-510. Effect of breach on risk of loss (1) Where a tender or 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. § 2-601. Buyer's rights on improper delivery Subject to the provisions of this Article on breach in installment contracts (section 2-612) and unless otherwise agreed under the sections on contractual limitation of remedy (sections 2-718 and 2-719), if the goods or the tender of delivery fail in any respect to conform to the contract, the buyer may: (1) Reject the whole; or (2) Accept the whole; or (3) Accept any commercial unit or units and reject the rest.

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Chapter 20 Avoidance for Breach of Contract § 2-602. Manner and effect of rightful rejection (1) Rejection of goods must be within a reasonable time after their delivery or tender. It is ineffective unless the buyer seasonably notifies the seller. § 2-603. Merchant buyer's duties as to rightfully rejected goods (1) Subject to any security interest in the buyer, when the seller has no agent or place of business at the market of rejection a merchant buyer is under a duty after rejection of goods in his possession or control to follow any reasonable instructions received from the seller with respect to the goods, and in the absence of such instructions to make reasonable efforts to sell them for seller's account if they are perishable or threaten to decline in value speedily. (3) In complying with this section the buyer is held only to good faith, and good faith conduct hereunder is neither acceptance nor conversion nor the basis of an action for damages. § 2-604. Buyer's options as to salvage of rightfully rejected goods If the seller gives no instructions within a reasonable time after notification of rejection, the buyer may store the rejected goods for the seller's account or reship them to him or resell them for the seller's account with reimbursement as provided in section 2-603. Such action is not acceptance or conversion. § 2-605. Waiver of buyer's objections by failure to particularize (1) The buyer's failure to state in connection with rejection a particular defect which is ascertainable by reasonable inspection precludes him from relying on the unstated defect to justify rejection or to establish breach, (a) Where the seller could have cured it if stated seasonably; or (b) Between merchants when the seller has after rejection made a request in writing for a full and final written statement of all defects on which the buyer proposes to rely. § 2-612. ‘Installment contract’; breach (2) The buyer may reject any installment which is nonconforming if the nonconformity substantially impairs the value of that installment and cannot be cured or if the nonconformity is a defect in the required documents; but if the nonconformity does not fall within subsection (3) and the seller gives adequate assurance of its cure the buyer must accept that installment. (3) Whenever nonconformity or default with respect to one or more installments substantially impairs the value of the whole contract there is a breach of the whole. § 2-706. Seller's resale including contract for resale (1) The seller may resell the goods concerned or the undelivered balance thereof. Where the resale is made in good faith and in a commercially reasonable manner, the seller may recover the difference between the resale price and the contract price together with any incidental damages, but less expenses saved in consequence of the buyer's breach.

V. The French Civil Code14 22 Art. 1224 Termination results either from the application of a termination clause, or, where the non-performance is sufficiently serious, from notice by the creditor to the debtor or from a judicial decision. Art. 1225 A termination clause must specify the undertakings whose non-performance will lead to the termination of the contract. Termination may take place only after service of a notice to perform which has not been complied with, unless it was agreed that termination may arise from the mere act of non-performance. The notice to perform takes effect only if it refers expressly to the termination clause. Art. 1226 A creditor may, at his own risk, terminate the contract by notice. Unless there is urgency, he must previously have put the debtor in default on notice to perform his undertaking within a reasonable time. 14 Translated by John Cartwright, Bénédicte Fauvarque-Cosson and Simon Whittaker, http://www.texte s.justice.gouv.fr/art_pix/THE-LAW-OF-CONTRACT-2-5-16.pdf.

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D. Sampling of Laws The notice to perform must state expressly that if the debtor fails to fulfil his obligation, the creditor will have a right to terminate the contract. Where the non-performance persists, the creditor notifies the debtor of the termination of the contract and the reasons on which it is based. The debtor may at any time bring proceedings to challenge such a termination. The creditor must then establish the seriousness of the non-performance. Art. 1227 Termination may in any event be claimed in court proceedings. Art. 1228 A court may, according to the circumstances, recognise or declare the termination of the contract or order its performance with the possibility of allowing the debtor further time to do so, or award only damages. Art. 1229 Termination puts an end to the contract. Termination takes effect, according to the situation, on the conditions provided by any termination clause, at the date of receipt by the debtor of a notice given by the creditor, or on the date set by the court or, in its absence, the day on which proceedings were brought. Where the acts of performance exchanged were useful only on the full performance of the contract which has been terminated, the parties must restore the whole of what they have obtained from each other. Where the acts of performance which were exchanged were useful to both parties from time to time during the reciprocal performance of the contract, there is no place for restitution in respect of the period before the last act of performance which was not reflected in something received in return; in this case, termination is termed resiling from the contract Restitution takes place under the conditions provided by articles 1352 to 1352-9. Art. 1230 Termination does not affect contract terms relating to dispute-resolution, nor those intended to take effect even in the case of termination, such as confidentiality or non-competition clauses.

VI. The German Civil Code15 23

Section 323 Revocation for nonperformance or for performance not in conformity with the contract (1) If, in the case of a reciprocal contract, the debtor does not render an act of performance which is due, or does not render it in conformity with the contract, then the creditor may revoke the contract, if he has specified, without result, an additional period for performance or cure. (2) The specification of a period of time can be dispensed with if 1. the debtor seriously and definitively refuses performance, 2. the debtor does not render performance by a date specified in the contract or within a period specified in the contract, in spite of the fact that, according to a notice given by the creditor to the debtor prior to conclusion of the contract or based on other circumstances attending at the time of its conclusion, the performance as per the date specified or within the period specified is of essential importance to the creditor, or 3. in the case of work not having been carried out in accordance with the contract, special circumstances exist 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 is given instead. (4) The creditor may revoke the contract before performance is due if it is obvious that the requirements for revocation will be met. (5) If the debtor has performed in part, the creditor may revoke the whole contract only if he has no interest in part performance. If the debtor has not performed in conformity with the contract, the creditor may not revoke the contract if the breach of duty is trivial.

15 Translation by the German Ministry of Justice: https://www.gesetze-im-internet.de/englisch_bgb/eng lisch_bgb.html#p1182.

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Chapter 20 Avoidance for Breach of Contract (6) Revocation is excluded if the creditor is solely or very predominantly responsible for the circumstance that would entitle him to revoke the contract or if the circumstance for which the debtor is not responsible occurs at a time when the creditor is in default of acceptance. Section 325 Damages and revocation The right to demand damages in the case of a reciprocal contract is not excluded by revocation. Section 349 Declaration of revocation Revocation is effected by declaration to the other party. Section 350 Extinction of the right of revocation after a period of time has been specified If a period of time has not been agreed for the exercise of the contractual right of revocation, then the other party may specify a reasonable period of time within which the person entitled to revoke must exercise that right. The right of revocation is extinguished if revocation is not declared before the end of that period. Section 437 Rights of buyer in the case of defects If the thing is defective, the buyer may, provided the requirements of the following provisions are met and unless otherwise specified (…) 2. revoke the agreement under sections 440, 323 and 326 (5) or reduce the purchase price under section 441 (…)

VII. Chinese Law 24 Art. 563 The parties to a contract may terminate the contract under any of the following circumstances: (1) It is rendered impossible to achieve the purpose of contract due to an event of force majeure; (2) Prior to the expiration of the period of performance, the other party expressly states, or indicates through its conduct, that it will not perform its main obligation. (3) The other party delays performance of its main obligation after such performance has been demand, and fails to perform within a reasonable period. (4) The other party delays performance of its obligations, or breaches the contract in some other manner, rendering it impossible to achieve the purpose of the contract (…). Art. 565 A party demanding termination of a contract in accordance with the law shall notify the other party. The contract shall be terminated upon the receipt of the notice by the other party; and if the notice states that the contract will be automatically terminated by the debtor's failure to perform the obligation within a time limit, and the debtor fails to do so, the contract shall be terminated at the expiration of the time limit stated in the notice. If the other party objects to such termination, either party may petition the people's court or an arbitration institution to adjudicate the validity of the termination of the contract. When one party fails to notify the other party and directly claims the termination of the contract by means of filing an action or applying for arbitration, if the people's court or arbitration institution confirms the claim, the contract shall be terminated when a copy of the written complaint or a copy of the arbitration application is served on the other party. Art. 566 After the termination of a contract, performance shall cease if the contract has not been performed; if the contract has been performed, a party may, in accordance with the circumstances of performance or the nature of the contract, request the other party to restore such party to its original state or adopt other remedial measures, and such party shall have the right to demand compensation for damages. If a contract is terminated because of breach of contract, the party who has the right to termination may request the party in breach to be liable for breach of contract, unless otherwise agreed by the parties.

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E. Commentary

E. Commentary I. Nature and Consequences of Avoidance As noted at the beginning of this Chapter, the phrase ‘avoidance of contract’ as used 25 herein refers to a party’s termination of a sales contract because the other party has failed properly to perform its obligations, or because such a failure may occur in the future. Avoidance is an option available to an aggrieved party, but it is not required and remedies alternative to avoidance (as described below) are usually also available for any breach. Indeed (as discussed below), because of the difficulty and potential for unnecessary expense in unwinding an international transaction, the grounds for avoidance prescribed by the CISG, other international instruments and French, German, and Chinese domestic sales law and generally – although less consistently – US domestic sales law) are demanding. In most cases, a fundamental breach is necessary16 and tribunals tend to interpret the grounds for termination stringently (see Section II below on the grounds for avoidance). As specified in CISG Article 81, avoidance ‘releases both parties [i.e., both the ag- 26 grieved party and the breaching party] from their obligations under’ the sales contract, including the basic obligation to exchange goods for price, subject to certain exceptions; avoidance also triggers a right in each party to claim restitution from the other of ‘whatever the first party has supplied or paid under the contract.’17 Thus when a contract is avoided, the buyer is relieved of the obligation to accept future deliveries or to make future payments, and it can recover (in restitution) amounts previously paid; the buyer, however, must make restitution of goods it has received under the contract. Upon avoidance the seller is relieved of the obligation to make future deliveries and can recover goods previously delivered under the contract, but it owes restitution of amounts the buyer has paid under the contract. However, these restitutionary obligations do not apply if the contract is only avoided for future obligations. Moreover, if avoidance only applies to a part of the goods, the consequences of avoidance only apply to that part (see CISG Article 51 (1)). Avoidance does not, however, render a contract entirely inoperative. Upon proper 27 avoidance the aggrieved party becomes entitled, under the CISG, to certain measures of damages representing the economic bargain that the aggrieved party has lost – specifically, damages measured by a properly-qualifying substitute purchase or sale (CISG Article 75) or, alternatively, damages measured by the ‘current price’ for the goods at the time of avoidance (or, if later, the time the aggrieved party has ‘taken over’ the goods) (CISG Article 76). In either case, under Article 74, the aggrieved party is also entitled to recover additional damages it may have suffered as a consequence of the breach.18 In addition, as provided in CISG Article 81(1), avoidance does not affect any provision of the contract for the settlement of disputes or any other provision of the contract

16 For German law, this applies to defective performance; in other cases a Nachfrist period shall be granted to the other party. In these cases, avoidance is only possible if this additional period to perform has not been used by the debtor. For a comparative law perspective, see Kleinschmidt, in Jansen & Zimmermann (eds), Commentaries on European Contract Law (OUP 2018) [hereafter: Jansen & Zimmermann Commentaries on European Contract Law], PECL Article 9:301 para. 7. 17 The restitutionary obligations triggered by avoidance are explored in more detail below, in Part IV of the Commentary section of this Chapter, → mn. 72. 18 For further discussion of CISG Articles 74–76 and related CISG provisions, see Chapter 17 ‘Performance and Breach of Contract’.

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governing the rights and obligations of the parties consequent upon the avoidance of the contract. 28 Thus arbitration or choice of court clauses survive avoidance of the contract, as do liquidated damage and penalty clauses and limitations of remedies (to the extent they are intended to apply if the contract is avoided), confidentiality clauses, clauses governing the preservation of goods if they are to be returned, and the like.19 Other international instruments (see PECL Article 9:305 (2) and PICC Article 7.3.5 (3)) and domestic law (see, for instance, French Civil Code Article 1230 and CCC Article 567) generally adopt the same principles. The underlying reason for this is that these type of clauses are, by their very essence, applicable to the same breach that also causes the avoidance of the contract. Generally speaking, parties must have had the intention that these clauses, triggered by the same non-performance that gives rise to a right to avoid the contract, would survive the avoidance of the contract.20 So, if a breach gives a reason to avoid the contract and also causes damages, the liquidated damages and/or penalty clauses can usually21 be invoked for claiming damages, exemption clauses can be invoked, and arbitration clauses will be valid. 29 The concept and effect of ‘termination’ of contract in the PICC and PECL are similar but not identical to the CISG provisions on avoidance. Under PICC Article 7.3.5, termination of a contract because of a party’s breach ‘releases both parties from their obligation to effect and to receive future performance’, although it ‘does not preclude a claim for damages for non-performance’22 and it ‘does not affect any provision in the contract for the settlement of disputes or any other term of the contract which is to operate even after termination.’ The language of PECL Article 9:305(1) describing the effects of termination is almost the same. 30 Thus both the PICC and PECL seem to limit the effect of termination to release from obligations of future performance – a limitation emphasized in the PECL by the addition of language in PECL Article 9:305(1) stating that, subject to rules concerning recovery of money paid and property delivered, termination ‘does not affect the rights and liabilities that have accrued up to the time of termination.’ The effect of CISG avoidance as described in CISG Article 81(1), on the other hand, is not so limited: avoidance of the entire contract puts an end to both past and future contractual obligations, triggering a claim by each party to restitution of whatever the party has ‘supplied or paid under the contract.’ Under the PICC, in contrast, except for contracts to be performed ‘at one time’ (e.g., single-delivery sales contracts),23 restitution after termination is generally 19 Honnold, Uniform Law for International Sales under the 1980 United Nations Convention (4 th edn, edited & updated by Flechtner, Kluwer Law International, 2009) [hereinafter ‘Honnold/Flechtner CISG Commentary’] 441–443; Hornung, in Schwenzer (ed), Schlechtriem & Schwenzer Commentary on the UN Convention on the International Sales of Goods (CISG) (4th edn, OUP, 2016) [hereinafter ‘Schlechtriem & Schwenzer CISG Commentary’] Article 81 para. 10; Bridge, in Kröll, Mistelis & Perales Viscasillas (eds), UN Convention on Contracts for the International Sale of Goods (CISG) (2nd edn, C.H. Beck, 2018) [hereinafter ‘Kröll/Mistelis/Perales Viscasillas Commentary’] Article 81 paras 7–9. 20 Bridge, in Kröll/Mistelis/Perales Viscasillas Commentary (n 19), Article 81 para. 9. 21 Unless parties made it clear that such clause does not apply if the contract is avoided for breach or is only aimed at a certain breach that was not the cause of avoidance. 22 Similarly to the CISG, the PICC provide, in case of termination of the contract, for damages measured either by a qualifying substitute transaction entered into by the aggrieved party (PICC Article 7.4.5) or by the ‘current price’ for the goods at the time the contract was terminated (PICC Article 7.4.6), along with damages for additional harm caused by the breach (PICC Article 7.4.2). 23 Upon termination of a ‘contract to be performed at one time’, the PICC provide for restitution of whatever has been supplied under the contract. PICC Article 7.3.6. A ‘contract to be performed at one time’ encompasses all single-delivery sales contracts, even if the price is to be paid over time in installments. See Official Comment 1 to PICC Article 7.3.6.

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limited to reclaiming payments or transferred property relating to post-termination performance;24 and under the PECL, restitution is generally available only for payments or transferred property for which a party has not, at the time of termination, already received the agreed return.25 The apparent differences between the effect of CISG avoidance and the ‘prospective’ operation of termination under the PICC and PECL tend to narrow, however, when one takes into account the possibility of partial avoidance of contract under the CISG (which may have the effect, e.g., of preserving completed installment deliveries),26 and of exceptions that permit restitutionary claims relating to the period before termination under the PICC and PECL. The most important exception under the PICC is related to the single-delivery sales 31 contracts. PICC Article 7.3.6 stipulates that ‘either party may claim restitution of whatever it has supplied under the contract, provided that such party concurrently makes restitution of whatever it has received under the contract.’ In other words, avoidance does not only have effect on future obligations, but also has restitutionary consequences. For these contracts, everything that has already been performed must be undone. 27 Furthermore, the PECL for instance recognize that situations exist where what was performed needs to be ‘undone’; for instance, if the other party performed its obligations but performance is due to the avoidance of the contract without value28 (PECL Article 9:306) or if it concerns property that was previously received but ‘its value (…) has been fundamentally reduced as a result of the other party’s non-performance’. 29 However, restitution for past performances is the exception under the PECL: avoidance has primarily a prospective effect.30 Some of the complications in the PICC and PECL regarding the prospective effect of termination and limitations on restitution under a terminated contract may arise out of the fact that the scope of these two instruments is not limited to sales contracts, but also encompasses, e.g., service contracts, where restitution of past performance creates special challenges. US domestic sales law – UCC Article 2 (enacted in every US state except Louisiana) 32 —contains a more complex system that produces results with some similarities to the above. In the event of specified breaches, UCC Article 2 gives the aggrieved party the right to ‘cancel’ the contract,31 which under UCC § 2-106(4) ‘occurs when either party puts an end to the contract for breach by the other.’ UCC cancellation, however, is

24 See PICC Article 7.3.7 (‘On termination of a long-term contract restitution can only be claimed for the period after termination has taken effect, provided the contract is divisible.’). 25 See PECL Articles 9:307 & 9:308. 26 Partial avoidance of contract is discussed below in this section. 27 For long-term contracts, restitution is limited to that what was performed over the period after termination has taken effect, provided that the contract is divisible: PICC Article 7.3.7. So, if a service contract is terminated after the third year, but the contract price for the fourth year has already been paid, restitution is limited to the payment for the fourth year. This is different if the performance is not ‘divisible’: retro-active restitution under PICC Article 7.3.6 is then possible. The notion of indivisibility has a physical and moral dimension. The physical dimension means that it is physically impossible to divide a performance, while the moral dimension refers to the situation where it is merely not adequate to exclude restitution, for instance if not receiving future performances makes past performances useless: Huber, in: Vogenauer (ed), Commentary on the UNIDROIT Principles of international Commercial Contracts (2 nd edn, OUP 2015) [hereinafter Vogenauer UNIDROIT Commentary], Art. 7.3.6 Para 5 and 7.3.7 Para 5. 28 Lando & Beale, Principles of European Contract Law – Parts I and II (Kluwer Law International 2000) [hereinafter Lando & Beale] 420. 29 For the prospective effects under the PECL: Hellwege, in Jansen & Zimmermann Commentaries on European Contract Law (n 16), PECL Article 9:305 para. 10 and PECL Article 9:306 paras 1 and 6 ff. 30 Kleinschmidt, in Jansen & Zimmermann Commentaries on European Contract Law (n 16), PECL Art. 9:302 para. 14. 31 See UCC §§ 2-703(f) and 2-711(1).

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prospective only—it discharges ‘all obligations which are still executory on both sides’32 —and is of limited significance. It is useful, e.g., where a party has repudiated future obligations, or where a buyer wants to put an end to future installment deliveries because of default with respect to earlier deliveries, but cancellation is not a prerequisite for an aggrieved buyer to recover damages measured by a substitute purchase or by the market price of goods. 33 In the important situation where goods have been delivered but, because of a breach by the seller (e.g., the goods were non-conforming or delivered late) the buyer has the right to refuse to keep and pay for the goods, UCC Article 2 provides that the buyer may ‘reject’ (or, if the goods had already been accepted by the buyer, to ‘revoke acceptance’ of) the goods: effective rejection or revocation of acceptance of goods relieves the buyer of the obligation to keep and pay the price for the goods.34 33 The French approach is different. As a starting point, avoidance releases parties from future obligations and restitution shall take place (French Civil Code Article 1229) if ‘the acts of performance exchanged were useful only on the full performance of the contract which has been terminated’. Avoidance does not have any restitutionary consequences if ‘the acts of performance which were exchanged were useful to both parties from time to time during the reciprocal performance of the contract’. The starting point for the German Civil Code is that the status quo before the conclusion of the contract has to be restored.35 This has two major legal consequences. First, this means that all (future) obligations that have not yet been performed cease to exist. Second (see explicitly German Civil Code Section 346), performances received are to be returned, without making a division between performances that are useful and those that are not. So, if parties already performed part of the contract, restitution is a starting point, although exceptions exist. German law also accepts the possibility of part avoidance, thereby leaving part of the contract and part of the past performances alive (German Civil Code Section 323(5)). CCC Article 566 states that: ‘a party may, in accordance with the circumstances of performance or the nature of the contract, request the other party to restore such party to its original state or adopt other remedial measures.’ Restitution of past performances is therefore the starting point. 34 As discussed above, the PICC and PECL (like the CISG) offer possibilities for restitution by both parties if a contract has been terminated,36 although the restitutionary rules of the PICC and PECL differ in some respects from those in the CISG and the starting point seems to be different. Whereas the starting point indicates that avoidance has a prospective effect, the exceptions to this rule make it clear that restitution of past performances is also possible under certain circumstances. Where a seller repudiates or fails to make delivery, or where the buyer rightfully rejects or revokes acceptance of delivered goods, UCC Article 2 provides that the buyer may recover ‘so much of the

32 The quoted language is from the definition of ‘termination’ in UCC § 2-106(3); the definition of ‘cancellation’ in UCC § 2-106(4) provides that cancellation has the same effect as termination. 33 See UCC § 2-711(1), which states that the damage measures mentioned in the text are available to an aggrieved buyer ‘whether or not’ the buyer has cancelled. 34 Cf. UCC § 2-607(1) (providing that the buyer must pay at the contract rate only for goods that are accepted). 35 Schwarze, in J. von Staudingers Kommentar zum Bürgerlichen Gesetzbuch mit Einführungsgesetz und Nebengesetzen, Buch 2. Recht der Schuldverhältnisse (Sellier/de Gruyter 2012-2020] [hereinafter Staudinger Commentary) BGB § 323 para. D21. In a comparative law perspective: Hellwege, in Jansen & Zimmermann Commentaries on European Contract Law (n 16), PECL Article 9:305 pars 5 and 9. 36 See PICC Articles 7.3.6 & 7.3.7; PECL Articles 9:306–9:309.

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price as has been paid’37 but must hold any goods it has received ‘with reasonable care at the seller’s disposition for a time sufficient to permit the seller to remove them.’ 38 Similarly to the CISG, the PICC and PECL both provide that, if a contract is properly 35 terminated because of a party’s breach, the terminating party may recover damages measured either by a qualifying substitute transaction entered into by the aggrieved party (PICC Article 7.4.5; PECL Article 9:506) or by the ‘current price’ for the goods at the time the contract was terminated (PICC Article 7.4.6; PECL Article 9:507), along with damages for additional harm caused by the breach (PICC Article 7.4.2; PECL Article 9:502). As noted previously, under UCC Article 2 an aggrieved buyer has equivalent damage measures available even if it does not ‘cancel’ the contract.39 In cases were only part of a seller’s performance fails to conform to the requirements 36 of the contract, the CISG provides for the possibility of avoiding only part of the contract while keeping other parts in force. If the seller makes a delivery that lacks the required quantity of goods, or in which some (but not all) of the delivered goods fail to conform to the contract, CISG Article 51(1) permits the buyer to apply its remedies, including avoidance of contract, to the missing or non-conforming portion of the delivery; thus the buyer may have grounds to avoid that part of the contract encompassing the missing or non-conforming goods, and thereby be relieved of its obligation to accept delivery of and pay for those goods. In addition, where the contract calls for installment deliveries of goods, CISG Article 73(1) permits a buyer to avoid an installment or installments, without avoiding the entire contract, provided grounds for avoidance exist as measured against the installment; CISG Articles 73(2) and (3), furthermore, create possibilities for the buyer to avoid as past and/or future installments without, once again, avoiding the entire contract. Of course in proper circumstances, a buyer that has received a partial or partially non-conforming delivery, or an installment buyer that has received one or more non-conforming installments, may be able to avoid the entire contract. The result of the partial avoidance rules of the CISG create a rather dizzying array of 37 possibilities for a buyer that has received a partial or partially-nonconforming delivery, especially in the case of an installment contract. For example, suppose a contract called for three installment deliveries of goods; the first delivery fully complied with the requirements of the contract, but when the second delivery arrived the buyer discovered that some (but not all) of the goods were non-conforming. In such a case the avoidance options possibly available to the buyer include the following: 1) if the buyer establishes grounds for avoidance with respect to the non-conforming portion of the second delivery, the buyer may avoid as to those goods (meaning buyer is relieved of the obligation to pay for those goods and owes restitution of those goods to the seller) while keeping the contract in force as to the goods in the first delivery, the conforming portion of the second delivery, and the (future) third delivery; 2) if the buyer establishes grounds for avoidance as to the entire second delivery, it may avoid as to that installment (thus relieving itself of the obligation to pay for the second installment but becoming obligated to give the seller restitution of the goods in the second delivery) while keeping the contract in force as to the first delivery and the (future) third delivery; 3) if the buyer UCC § 2-711(1). UCC § 2-602(2)(b). 39 Some other domestic rules also explicitly recognize the possibility to claim additional damages in case of avoidance for breach: German Civil Code Section 325 and 346(4), Chinese Civil Code Article 566. For French law, it follows from the general rule on the cumulation of remedies in French Civil Code Article 1217): sanctions that are not incompatible may be combined; damages may always be added to any of the other remedies. 37

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avoids as to the second installment (as in scenario 2), in certain circumstances the buyer may also have the right to avoid as to the third installment while keeping the contract in force as to first installment, or it may have the right to avoid also as to the first installment while keeping the contract in force as to the third installment; 4) finally, with proper grounds, the buyer may avoid the entire contract. 38 No provision of the PICC expressly provides for partial termination of contract, although it has been argued that PICC Article 7.3.1 should be interpreted to permit partial termination in the fashion of CISG Article 51.40 Thus, partial non-performance only gives rise to a right to terminate the entire contract if the partial non-performance also results in a fundamental non-performance of the whole contract. If this is not the case, PICC Article 7.3.1 provides for a right to terminate only the part of the contract that is not performed, provided that the non-performance of this part is fundamental. 41 As noted above, furthermore, upon termination of a contract ‘to be performed over a period of time’ (a long-term contract), the PICC require restitution of past performance only if the contract is not divisible.42 Thus if a divisible contract that is performable over time (as opposed to a ‘contract to be performed at one time’) is terminated after it has been partly performed, the completed performance will remain in place. The result, although achieved with a different approach than that in the CISG, has some resemblance to partial avoidance of contract. 39 The French approach to partial non-performance is theoretically different from the CISG solution, although in many cases it may ultimately have the same result. It does not devote specific attention to partial non-performance, but its yardstick is whether past performances were useful or not (French Civil Code Article 1229). In case past performances appear to be useful, no restitution of past performances is possible. In effect, the result is similar to other solutions: past performances that are in conformity with the contract will in most cases be useful and may therefore stay intact. The part that is not performed gives rise to (partial) avoidance and restitution of the contract. As under the PICC and the PECL, the French Civil Code makes it clear that partial non-performance only gives rise to a right to terminate the entire contract if the parts that were performed properly were ‘useful only on the full performance of the contract’. The German Civil Code follows a similar solution, where it states that in case of partial non-performance, the creditor may avoid the whole contract only if he has no interest in part performance (German Civil Code Section 323(5)). 40 Under PECL Article 9:305, termination of a contract releases the parties only from future performance obligations, and (subject to exceptions) ‘does not affect the rights and liabilities that have accrued up to the time of termination.’ Under PECL Article 9:302, furthermore, ‘[i]f the contract is to be performed in separate parts and in relation to a part to which a counter-performance can be apportioned, there is a fundamental non-performance, the aggrieved party may exercise its right to terminate under this Section in relation to the part concerned’. The example that is used in the official comments to PECL Article 9:302 is that of a cleaning company that is contractually obliged to clean an office 50 times a year. If the cleaning company does not show up See Bach, in Kröll/Mistelis/Perales Viscasillas Commentary (n 19) Article 51 para. 50. See Huber, in Vogenauer UNIDROIT Commentary (n 27) Article 7.3.1 paras 94, 95. Huber takes the example of a contract that provides for the delivery of 100 units of public relations equipment. If only 80 units are delivered, avoidance is in any case justified for the 20 remaining units. Avoidance of the whole contract is only possible if it is essential that the whole 100 units are delivered by the same seller. See also Kleinschmidt, in Jansen & Zimmermann Commentaries on European Contract Law Zimmermann (n 16) PECL Art. 9:302 para. 5. 42 See PICC Article 7.3.7. 40

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once, the contract may be terminated only in relation to this single no-show.43 Another example may be the situation of a sale where only a part of a number of items is delivered.44 PECL Article 9:302 states that the aggrieved party ‘may terminate the contract as a whole only if the non-performance is fundamental to the contract as a whole.’ An example may be the cleaning company that, after a few weeks of cleaning, appears to be totally unequipped for the job, uses too few employees, and refuses to employ more.45 Under PECL Article 9:306, furthermore, ‘[a] party who terminates the contract may reject property previously received from the other party if its value to the first party has been fundamentally reduced as a result of the other party's non-performance.’ The PECL solution to partial non-performance resembles the solution under the PICC. These rather complicated rules (which, except in the case of PECL Article 9:306, are not particularly addressed to sales contracts) may once again result in a form of partial avoidance of contract, but the starting point differs from the relatively straightforward partial avoidance rules of the CISG. Under the so-called ‘perfect tender rule’ of US domestic sales law (UCC § 2-601), if a 41 seller tenders non-conforming goods or otherwise makes a non-conforming tender (e.g., seller delivers late), the aggrieved buyer has the option to ‘accept any commercial unit or units and reject the rest.’ Where a buyer accepts only a part of the goods, according to an official comment to the UCC: ‘the price of any part accepted is, if possible, to be reasonably apportioned, using the type of apportionment familiar to the courts in quantum valebant cases, to be determined in terms of “the contract rate”, which is the rate determined from (the agreement) after the rules and policies of this Article have been brought to bear.’46 Suppose a party breaches in a way that would constitute grounds for avoidance or 42 termination of the contract by the other party, but the breaching party is exempt from liability for damages (i.e., is ‘excused’) under CISG Article 79 or equivalent rules (such as PICC Article 7.1.7).47 May the party who suffered the breach nevertheless avoid or terminate the contract? The answer is yes. CISG Article 79(5) provides, ‘Nothing in this article prevents either party from exercising any right other than to claim damages under this Convention’; this phrasing clearly permits the party suffering non-performance to avoid the contract even though it could not recover damages for the other party’s failure to perform.48 The PICC, PECL, and the UCC all provide for the same result.49 The same is true for French, German, and Chinese law, where no provision prescribes that the contract cannot be avoided if the requirements for claiming damages have not been met. Claiming damages and avoiding a contract are separate remedies for breach, with their own requirements. Thus, an excused non-performance prevents the other party from claiming damages but does not necessarily50 stand in the way of avoiding a contract for breach. Lando & Beale (n 28) p 412 (Illustration 1). Kleinschmidt, in Jansen & Zimmermann Commentaries on European Contract Law Zimmermann (n 16) PECL Art. 9:302 para. 1. 45 Lando & Beale (n 28) p 412 (Illustration 2). 46 Official Comment 1 to UCC § 2-607. 47 Exemption for non-performance is treated in Chapter 17 ‘Performance and Breach of Contract’. 48 See, e.g., Honnold/Flechtner CISG Commentary (n 19) § 435.4; Schwenzer, in Schlechtriem & Schwenzer CISG Commentary (n 19) Article 79 para. 50; Atamer, in Kröll/Mistelis/Perales Viscasillas Commentary (n 19) Article 79 para. 40; Bridge, The International Sale of Goods (4 th edn, OUP, 2017) para. 12.62. 49 See PICC Article 7.1.7(4); PECL Article 8:101(2); UCC § 2-616. 50 Whether a contract can in fact be avoided obviously depends on the requirement for this remedy. So under German law, avoidance is not possible if, for instance, the creditor is solely or very predominantly responsible for the circumstance that would entitle him to avoid the contract (German Civil Code Section 43

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Suppose a seller shipped goods via an independent carrier pursuant to a sales contract under which the buyer was to bear risk of loss while the goods were being transported; the goods were accidently destroyed while being transported by the carrier. Normally, of course, the buyer would be liable for the price of the goods despite their destruction. The buyer can prove, however, that the goods that the seller shipped were non-conforming when the seller handed them over to the carrier, and the non-conformity was serious enough that it would give the buyer grounds to avoid the contract. May the buyer exercise its right to avoid and thus escape the obligation to pay the price – in effect shifting the risk for casualty during transport to the seller? Under the CISG the answer is clearly yes. As stated in CISG Article 70, ‘If the seller has committed a fundamental breach of contract, [the Convention’s risk of loss rules] do not impair the remedies available to the buyer on account of the breach.’ One of the remedies available to the buyer in the event of a fundamental breach by the seller is avoidance of contract. Thus if a buyer who bore risk of loss when goods suffered casualty discovers that, at that time of the casualty, the seller had breached in a fashion that would justify the buyer in avoiding the contract, the buyer may avoid and thereby escape paying for the damaged or destroyed goods.51 Article 2 of the (US) UCC provides for a similar result.52 Other international instruments do not devote a specific provision to this problem, nor do all domestic rules, but normal rules regarding causality may lead to the same result. 44 An aggrieved party who chooses not to avoid (or terminate) the contract despite breach by the other party is not without remedies. As discussed in Chapter 17 ‘Performance and Breach of Contract’, under the CISG, the PICC, PECL, and domestic law a party who suffers breach but does not avoid the contract may have the right to demand that the other party perform its duties (e.g., a breaching seller may be required to deliver the goods, and a breaching buyer may be required to accept delivery and pay the price). Furthermore, as discussed in Chapter 19 ‘Remedies and Damages’, a non-avoiding aggrieved party may have the right to recover damages and/or interest; and, in particular, a buyer who has received a non-conforming delivery and does not avoid the contract may be able to reduce the price in proportion to the effect of the breach on the value of the goods, or to require the breaching seller to deliver substitute goods or repair non-conforming goods. 45 An aggrieved party’s unilateral avoidance or termination of the contract pursuant to provisions of the applicable law or rules of law should be distinguished from ‘consensual avoidance’ under which, in light of a breach (or alleged breach) by one party, both parties agree to release the aggrieved party from all or some of its obligations. Consensual avoidance is generally governed by the intent of the parties, as determined under applicable rules53—although to the extent the parties have failed to address issues in their consensual avoidance agreement it has been held that the avoidance provisions of 43

323(6)). This will presumably also prevent a claim for damages in this particular case, since performance may in this instance be excused too, but the requirements for both remedies are not the same. 51 See, e.g., Honnold/Flechtner CISG Commentary (n 19) § 381; Hachem, in Schlechtriem & Schwenzer CISG Commentary (n 19) Article 70 para. 3. Damage to the goods that occurs after risk passed to the buyer, of course, cannot be used as grounds for the buyer to avoid the contract. See CISG Article 36. 52 UCC § 2-510 (entitled ‘Effect of Breach on Risk of Loss’) provides in subpart (1): ‘Where a tender or 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.’. 53 See OGH 29 June 1999 (Dividing wall panels case), CLOUT Case No. 422, English translation available online at http://cisgw3.law.pace.edu/cases/990629a3.html; Tribunal of International Commercial Arbitration at the Russian Federation Chamber of Commerce and Industry, Russian Federation 3 March 1997 (Arbitral award No. 821996), English translation available online at http://cisgw3.law.pace.edu/cases/ 970303r1.html.

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the CISG can be applied by analogy.54 Some domestic rules treat the consequences of both consensual termination and avoidance for breach explicitly the same.55

II. Grounds for Avoidance Under the CISG, the following grounds will each justify an aggrieved party’s avoid- 46 ance of the contract: 1) the other party committed a fundamental breach of contract as defined in CISG Article 25;56 2) the other party failed to perform its basic obligations within an ‘additional period of time of reasonable length’ fixed by the aggrieved party pursuant to CISG Articles 47 (the buyer) or 63 (the seller);57 or 3) it is ‘clear’ that the other party will commit a future fundamental breach.58 If a buyer wishes to avoid, under CISG Article 51, the part of the contract relating to a non-conforming or missing portion of a delivery, one of the first two grounds specified in the previous sentence must be satisfied as to the non-conforming or missing portion. In the case of an installment contract, CISG Article 73 permits a party that has suffered a fundamental breach as to particular installments to sever deliveries and avoid as to individual installments. Both mechanisms (a fundamental performance as a requirement for avoidance and the notion of Nachfrist) are quite common in international and domestic rules and are meant to restrict the right to terminate a contract, thereby keeping the contract alive. 59 The most important ground for avoiding the contract is if the other party has 47 committed (or it is ‘clear’ that it will in the future commit) a ‘fundamental breach’ of contract.60 As discussed in Chapter 17 ‘Performance and Breach of Contract’, CISG Article 25 restricts a fundamental breach to a breach that has serious (and foreseeable) consequences for the aggrieved party – i.e., a breach that ‘results in such detriment to the other party as substantially to deprive him of what he is entitled to expect under the contract.’ CISG Advisory Council Opinion No. 5 elaborates in more detail on the meaning of ‘fundamental breach’ in relation to avoidance in more detail. If it is the buyer wishing to avoid the contract, it is necessary that the defect ‘has a serious importance to the buyer’. In assessing whether this is the case, it is relevant ‘whether the buyer can be required to retain the goods because he can be adequately compensated by damages or a price reduction’. More circumstances are relevant, according to Advisory Council Opinion No. 5, notably the other terms of the contract, the purpose for which the goods are bought, and whether the defect(s) can be remedied. The notion of fundamental breach is discussed in more detail in Chapter 17 ‘Performance and Breach of Contract’ of this Commentary. Of course all breaches, even those that do not rise to the level of a 54 See OGH 29 June 1999 (Dividing wall panels case), CLOUT Case No. 422, English translation available online at http://cisgw3.law.pace.edu/cases/990629a3.html. 55 French Civil Code Article 1227 first states that termination may result from a termination clause in a contract or from termination by breach, and then devotes provisions to the consequences of termination, whether the source of termination is a contract or the law. The same is true for German law (Section 346 et seq on the effects of termination apply to both contractual termination and the ‘statutory right of revocation’, including both termination for breach and contractual termination: Kaiser, in Staudinger Commentary 2012 (n 35) Vorbem zu §§ 346–354 para. 3) and Chinese law (Chinese Civil Code Article 556 enumerates the situations giving rise to termination, such as non-performance and termination by consent of the parties, without differentiating regarding the effects of termination). 56 See CISG Articles 49(1)(a) and 64(1)(a). 57 See CISG Articles 49(1)(b) and 64(1)(b). 58 See CISG Article 72. 59 Huber, ‘Comparative Sales Law’, in Reimann & Zimmermann (eds), The Oxford Handbook of Comparative Law (2nd edn OUP 2019), 956. 60 A fundamental breach by the seller is also a prerequisite for a buyer to require the seller to deliver goods in substitution for non-conforming goods previously delivered. See CISG Article 46(2).

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fundamental breach, entitle the aggrieved party to remedies; the restriction of grounds for avoidance to those breaches that are serious enough to be ‘fundamental’ expresses a policy to preserve the contract for performance purposes except where a non-performance has disrupted the parties’ relationship in an extreme fashion: avoidance has been characterized as a remedy of ‘last resort.’61 48 As discussed in Chapter 17 ‘Performance and Breach of Contract’, the PICC, and PECL provide for termination of contract in the event of ‘fundamental non-performance’ – a concept similar (although, particularly in the case of the PICC, not necessarily identical) to ‘fundamental breach’ under the CISG.62 US domestic sales law has traditionally featured the so-called ‘perfect tender rule’ under which a buyer may ‘reject’ goods (i.e., refuse to accept or pay for them) if the goods or the seller’s tender of delivery failed in any respect – even the most trivial – to conform to the requirements of the contract. The perfect tender rule is enshrined in current US domestic sales law in § 2-601 UCC. This perfect tender rule is, however, subject to many exceptions63 and limitations – so many, in fact, that there may be little left of the rule in practical effect and in some cases a substantial or material non-performance is also required. Other domestic rules also accept a rule that avoidance may only take place if the non-performance is sufficiently serious, as in French Civil Code Article 1224. Section 323 of the German Civil Code is less demanding, but only requires an aggravated non-performance in case of defective performance that the creditor may not avoid if the ‘breach of duty is trivial’. 64 In other cases a notice granting the other party an additional period to perform is required.65 Chinese law (CCC Article 563) departs from the principle that it is impossible to achieve ‘the purpose of the contract’, thereby implying that a minor non-performance not affecting the main purpose of the contract does not justify avoidance. In sum, CISG, the international instruments and the domestic rules under study all limit the availability of avoidance of a contract for breach to more serious breaches and, in most cases, also if the debtor is offered a second chance to perform. The underlying idea for these limitations to the right to avoid may be at least twofold. First, it is a consequence of the generally accepted adage of ‘pacta sunt servanda’. The second reason is a practical and economic one: in most cases avoidance results in restitution, which is sometimes difficult to

61 See BGH 3 April 1996 (Cobalt sulphate case), CLOUT Case No. 171, English summary available at http://www.unilex.info/case.cfm?pid=1&do=case&id=182&step=Abstract and English translation available at http://cisgw3.law.pace.edu/cases/960403g1.html. 62 See the test for determining ‘fundamental non-performance’ in PICC Article 7.3.1(2), and the definition of the term in PECL Article 8:103. 63 The perfect tender rule does not apply to a buyer’s rejection of an installment in an installment contract, nor to either party’s cancelation of an entire installment contract, both of which require a default or non-conformity that ‘substantially impairs,’ respectively, the value of the installment or the value of the entire contract. See UCC § 2-612 and the opening clause of UCC § 2-601. In a shipment contract, furthermore, if the seller breaches its obligation to make a ‘reasonable’ contract for carriage of the goods and/or its obligation to notify the buyer of shipment, the buyer may reject the goods only if ‘material delay or loss ensues.’ UCC § 2-504 (emphasis added). In addition, if the buyer initially accepts the goods and later discovers a non-conformity, it may ‘revoke acceptance’ (the equivalent of rejection at this stage of the transaction) only if the non-conformity ‘substantially impairs’ the value of the goods to the buyer. UCC § 2-608(1) (emphasis added). 64 Also, if the debtor does not perform by a specified date in the contract provided that this period is of essential importance to the other party: German Civil Code Section 323(2) and (5). Note that the German Sections on termination are explicitly applicable to sales as well: see German Civil Code Section 437. 65 In a comparative law perspective: Kleinschmidt, in Jansen & Zimmermann Commentaries on European Contract Law (n 16), PECL Article 9:301, para. 7 who notes that the concept of fundamental breach was rejected in the new German law of obligations, enacted in 2002.

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realize (how can one undo painting works, for example?) and expensive. 66 The PICC, the PECL and the domestic regimes (UCC, French, German, and Chinese law), furthermore, all permit the parties to derogate from the rules governing the requirements for avoidance or its equivalent;67 thus on this point it matters little which legal regime governs, provided the parties have addressed the issue in their contract and expressed their intent clearly. Under the CISG, the threat of a future fundamental breach permits the aggrieved par- 49 ty to avoid the contract without waiting for the breach actually to occur, provided it is ‘clear’ that such a breach will occur and the other requirements of CISG Article 72 are met. If a prospective breach does not meet the rather demanding standards of CISG Article 72 (i.e., if it is not truly ‘clear’ that the breach will occur, or if it not certain that the threatened breach would qualify as ‘fundamental’), the aggrieved party may still be able to (temporarily) suspend its own performance under CISG Article 71 and, if the other side does not provide adequate assurance of its future performance, may even be able then to avoid the contract. As discussed in Chapter 17 ‘Performance and Breach of Contract’ and Chapter 18 (‘Anticipatory Breach’) (which should each be consulted concerning the complex elements of CISG Article 71), however, the standard for a prospective breach that will justify suspension also appears strict (it must be ‘apparent’ that the other party will fail to perform ‘a substantial part of his obligations’), and CISG Article 71 does not make it clear whether a suspending party may avoid the contract if it does not receive adequate assurances. In contracts governed by the CISG, therefore, a contractual provision clarifying an aggrieved party’s rights when confronting a prospective breach by the other side may be particularly valuable. The PICC and PECL all provide for termination of the contract if it is ‘clear’ that a party will commit a fundamental non-performance.68 Under domestic US sales law either party may cancel the contract if the other party ‘repudiates the contract with respect to a performance not yet due the loss of which will substantially impair the value of the contract to the other’ (UCC §§ 2-610(b), 2-703 and 2-711);69 under UCC § 2-609, furthermore, a party who has ‘reasonable grounds for insecurity’ concerning the other side’s ability or willingness to perform may demand ‘adequate assurances’ from the other side; failure to provide such assurances within a reasonable time (not to exceed 30 days) constitutes a repudiation. German and Chinese law also acknowledge a right to terminate if it is clear that a breach will occur in the future, but French law lacks such a general principle.70 The subject of prospective non-performance is also explored in Chapter 17 ‘Performance and Breach of Contract’ and in Chapter 18 ‘Anticipatory Breach’. Through use of the so-called Nachfrist procedure described in CISG Articles 47 and 50 63, a buyer or seller that has suffered a breach may be able to avoid the contract without showing that the breach is fundamental. This is permitted only if the seller fails to deliver, or the buyer fails to take delivery or pay the price, within the deadline (CISG Article 49 (1)(b) for the buyer’s right to avoid the contract or for the seller CISG Article 64(1)(b)). Under this procedure, which is discussed in Chapter 17 ‘Performance and 66 Huber, ‘Comparative Sales Law’, in Reimann & Zimmermann (eds), The Oxford Handbook of Comparative Law (2nd edn, OUP 2019), 955. 67 This follows from the principle of freedom of contract: See PICC Article 1.5, PECL Article 1:102(2), UCC §§ 1-302(a) and 2-601; French Civil Code Article 1102; in German law this follows from the Federal Constitution Article 2(1); Chinese Civil Code Article 5. 68 See PICC Article 7.3.3, and PECL Article 9:304. 69 Under UCC § 2-611, however, a repudiating party may ‘retract’ the repudiation unless ‘the aggrieved party has since the repudiation cancelled or materially changed his position or otherwise indicated that he considers the repudiation final.’. 70 German Civil Code Section 323(4) and Chinese Civil Code Article 563.

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Breach of Contract’, an aggrieved party has the option, by giving notice to the other party, to ‘fix an additional period of time of reasonable length’ for the other party to perform its obligations. The period set in the notice must be both ‘reasonable’ and ‘additional’ — i.e., the deadline must be beyond the time for performance under the contract. If the breaching party fails to perform its most important obligations – for sellers, delivery of the goods; for buyers, taking delivery or paying the price – within the Nachfrist deadline, the contract may be avoided without proof that the breach is fundamental (CISG Articles 49(1)(b) or 64(1)(b)). Moreover, a court held that if the seller declares that it will not deliver within the additional period of time, the contract can be avoided even if the Nachfrist period has not lapsed.71 51 The purpose of using the Nachfrist avoidance procedure is to clarify how long a party awaiting late performance of the other party’s basic obligations must defer declaring the contract avoided, since it is difficult confidently to predict how long a delay must last before a tribunal will find that it constitutes a fundamental breach. Under CISG Articles 47 and 63 a Nachfrist deadline may be established for the performance of any obligation, but avoidance without showing a fundamental breach is permitted only if the seller fails to deliver, or the buyer fails to take delivery or pay the price, within the deadline (CISG Article 49 (1)(b) for the buyer’s right to avoid the contract or for the seller CISG Article 64(1)(b)). Thus there is no direct legal advantage in using the Nachfrist procedure in the context of avoidance of a contract for breach except where there is late performance of the major obligations of a sales contract:72 the seller is late in delivering or the buyer is late in accepting delivery or paying the price. Indeed, because a party setting a Nachfrist deadline is precluded from resorting to any remedy for breach until the deadline has passed,73 there is, apart from these late performance cases, a legal disadvantage in using Nachfrist for other kinds of breaches, such as delivery of non-conforming goods. There may, however, be practical and tactical advantages in providing the other party with an additional Nachfrist period for performance even where failure to meet the deadline would not relieve the aggrieved party of the burden to show that the other party’s breach was fundamental.74 For instance, fixing an additional period of time for the delivery of non-conforming goods, which does not fall within the category for which the Nachfrist period provides for a right to termination, can be useful for assessing whether this amounts to a fundamental breach. It might contribute to the conclusion that this obligation was given the facts and circumstance of the case was fundamental for the buyer. 75 52 The PICC and PECL all contain a procedures for a party to establish a reasonable additional period for the other side to perform and to terminate the contract if this deadline is not met, although these procedures may differ in significant respects from the Nachfrist procedure under the CISG.76 See the discussion in Chapter 17 ‘Performance and Breach of Contract’. Such a procedure is less needed under the remedial system of US domestic sales law, and Article 2 of the UCC does not provide for it. The legal consequences of an unreasonably short period for the Nachfrist period are not See Kantonsgericht des Kantons Zug, Switzerland, 14 December 2009, CISG-online No. 2026. Schwenzer, in Schlechtriem & Schwenzer CISG Commentary (n 19) Article 49 paras 15 & 16. 73 See CISG Articles 47(2) and 63(2). If the party setting the Nachfrist deadline receives notice that the other party will not perform within the deadline, the moratorium on resort to other remedies during the Nachfrist period does not apply. 74 See, e.g., Huber, in Kröll/Mistelis/Perales Viscasillas Commentary (n 19) Article 47 paras 4 & 11 and Article 49 para. 34 ff. 75 Müller-Chen, in Schlechtriem &, Schwenzer CISG Commentary (n 19) Article 49 para. 16. 76 See PICC Articles 7.1.5 and 7.3.1(3); and PECL Article 8-106. For a comparison of some of these provisions to the Nachfrist procedure in the CSIG see Bell, in Kröll/Mistelis/Perales Viscasillas Commentary (n 21) Article 63 paras 11–14. 71

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entirely clear in all regimes. PECL Article 8:106(3) and PICC 7.1.5 (3) essentially both provide that in such case the period is transformed into a period of reasonable length. A notice to terminate only has effect after this reasonable period of time has elapsed. However, CISG does not devote any provision to this issue.77 However, other domestic rules do contain (a variation on) the CISG Nachfrist pro- 53 cedure. So, under German Civil Code Section 323(1) the point of departure is that a creditor may ‘avoid the contract, if he has specified, without result, an additional period for performance or cure’. Some exceptions to this Nachfrist obligation exist (German Civil Code Section 323(2)): (i) the debtor seriously and finally refuses performance, (ii) the debtor does not perform within a strict and essential contractual deadline, or, not relevant for sales (iii) in case of work not having been carried out properly, special circumstances must justify immediate avoidance, and (iv) if performance appears to be impossible.78 In these cases immediate termination without the Nachfrist period is possible. Also, Chinese contract law requires that performance has been demanded and the debtor does not perform within a reasonable period (CCC Article 563(3)). The default rules for non-performance in French law (mise en demeure) also entail that the debtor should be put in default, granting him a reasonable period to perform (French Civil Code Article 1225).79 Where the seller makes a delivery that is short of the required quantity of goods, 54 or where the delivery includes some goods that fail to conform to the contract, CISG Article 51(1) provides that CISG Articles 46 to 50 – which contain the main remedies for an aggrieved buyer (including CISG Article 49, governing the buyer’s right to avoid) – apply with respect to the portion of the delivery that is missing or that contains non-conforming goods. This permits the buyer to treat the part of the contract relating to the missing or non-conforming goods as severable from the rest of the contract for remedies purposes, including for purposes of avoidance. In order to avoid the portion of the contract relating to the missing or non-conforming part of the delivery, however, the buyer must satisfy the requirements of CISG Article 49(1) with respect to that part of the contract. This means that the buyer must show either that there has been a fundamental breach with respect to the relevant part of the contract, or that the seller failed to deliver the goods relating to that part of the contract within a properly established Nachfrist deadline. Thus, for example, suppose that in a contract for a single delivery of ten tons of grain, the seller delivered ten tons but one ton was non-conforming and worthless; the other nine tons met contract specifications. The seller’s breach was probably not a fundamental breach of the entire contract – the value of the goods the buyer received was only 10% less than what it should have been. Thus (as CISG Article 51(2) makes clear) the buyer could not avoid the entire contract. With respect to the part of the contract relating to the non-conforming ton of grain, however, the breach was almost certainly fundamental: the entire value of that part of the contract was lost. Thus under CISG Article 51(1) the buyer could avoid the part of the contract relating to the non-conforming grain, in which case it would not be obligated to accept or pay for 77 For criticism: Kleinschmidt, in in Jansen & Zimmermann Commentaries on European Contract Law (n 16), PECL Article 9:301 para. 44. 78 German Civil Code Section 326-5. For a short overview of German law: Kleinschmidt, in Jansen & Zimmermann Commentaries on European Contract Law (n 16), PECL Article 9:301 para. 8. 79 This default notice is not required if a situation of urgency exists (French Civil Code Article 1226) or if it was agreed that termination was possible upon the occurrence of non-performance (French Civil Code Article 1225). These default rules are also applied in other jurisdictions, in contrast to German law even if these jurisdictions require a fundamental non-performance in order to avoid a contract: see Kleinschmidt, in Jansen & Zimmermann Commentaries on European Contract Law (n 16), PECL Article 9:301 para. 10.

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the non-conforming grain (although it would remain obligated to accept and pay for the nine conforming tons of grain). However, if the incomplete or partial non-conforming performance amounts to a fundamental breach of the entire contract, then avoidance of the whole contract is possible too (CISG Article 51(2)). This may occur, for instance, if several items are sold, but they form an intrinsic part of the whole package.80 55 Partial avoidance of contract by the buyer or seller is also possible under CISG Article 73, a provision that addresses avoidance in installment contracts (contracts under which the goods are to be delivered in more than one delivery). In contrast to CISG Article 51, CISG Article 73 applies to the situation where parties have explicitly agreed that the deliveries and payments would be made in consecutive instalments.81 CISG Article 73(1) permits avoidance as to a particular installment if the other party has committed a breach that is fundamental as measured against that installment, whether or not the breach is fundamental as measured against the entire contract; CISG Article 73(2) allows a party who has already suffered a breach with respect to one or more installments to avoid the contract ‘for the future’ if, because of the prior breach or breaches, the party has ‘good grounds to conclude that a fundamental breach of contract will occur with respect to future installments’; and CISG Article 73(3) permits a buyer who has avoided as to one or more deliveries under the preceding rules to avoid as to past or future deliveries that ‘by reason of the interdependence … could not be used for the purpose contemplated by the parties at the time of the conclusion of the contract.’ Of course if there has been a fundamental breach of the entire contract, then the entire contract – covering both past and future instalment deliveries and/or payments – may be avoided. 56 The PICC and PECL, neither of which is confined to contracts for the sale of goods but apply to all contracts, do not explicitly address the possibility of partial avoidance of contract.82 On this point the CISG, with its express provisions addressing the matter, is specified in more detail and therefore appears to offer a superior legal regime. US domestic sales law provides for both partial rejection of a delivery by an aggrieved buyer83 and for partial cancellation of the contract by an aggrieved seller.84 CCC Article 575 also explicitly provides for the possibility to partially terminate the contract for breach. The same is true for German law. This follows from the provision that in case of part performance, the creditor may only revoke the whole contract if he has no interest in part performance, thereby implying that part avoidance is possible too and in fact is the starting point (German Civil Code Section 323).85 French law does not explicitly provide for partial avoidance, but provides that no restitution is possible for parts of the performance that were useful (French Civil Code Article 1229). This results in a partial restitution of performances, thereby somewhat approaching the results of the CISG partial avoidance solution.

80 Müller-Chen, in Schlechtriem & Schwenzer CISG Commentary (n 19) Article 51 para. 10, who mentions the example of chairs that are not delivered, but are part of a room-program consisting of more furniture that is especially designed and produced for the buyer. 81 Fountoulakis, in Schlechtriem & Schwenzer CISG Commentary (n 19) Article 73 para. 42. 82 For discussion of this situation and an argument that the PICC (at least) should be interpreted to provide for partial avoidance, see Bach, in Kröll/Mistelis/Perales Viscasillas Commentary (n 19) Article 51 paras 50-53. 83 See UCC § 2-601 (‘[I]f the goods or the tender of delivery fail in any respect to conform to the contract, the buyer may … (c) accept any commercial unit or units and reject the rest.’). 84 See UCC § 2-703 (‘Where the buyer wrongfully rejects or revokes acceptance of goods or fails to make a payment due on or before delivery or repudiates with respect to a part or the whole, then with respect to any goods directly affected … the aggrieved seller may … (f) cancel.’). 85 Schwarze, in Staudinger Commentary 2020 (n 35) BGB § 323 para. D27.

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Suppose a party attempts to avoid the contract86 although it lacks the grounds to do 57 so. What are the consequences of this act under the CISG? Under US domestic sales law, a buyer may effectively reject goods (the equivalent of avoiding the contract with respect to the rejected goods) even though it lacks proper grounds to do so, provided it goes through the proper process for rejecting by sending notice of rejection within a reasonable time after the seller tendered delivery of the goods.87 Under UCC Article 2, such a ‘wrongful’ but ‘effective rejection’ means that the buyer has not accepted the goods and thus the exchange of the rejected goods and the price will not occur – the buyer does not have to keep the goods and is not liable for the price; the wrongful rejection, however, is a breach by the buyer and the seller is entitled to remedies (in most cases, recovery of damages) for the breach. Under UCC Article 2, such a wrongful but effective rejection of goods stands in contrast to an ‘ineffective’ rejection, in which a buyer (whether or not it has proper grounds for rejection) attempts to reject but fails to follow the proper procedure to do so – e.g., its gives notice of the intent to reject, but the notice is too late. If the buyer fails to make an ‘effective’ rejection, it is deemed to have accepted the goods and is liable for the full price, not merely damages; in other words, the exchange of the goods for the price occurs. Is the equivalent of a ‘wrongful but effective rejection’ possible under the CISG? If 58 a buyer or seller who lacks grounds for avoidance nevertheless follows the process for avoidance (as described in the next section, this process involves timely notice of the intent to avoid), will the contract be deemed ‘wrongfully but effectively avoided’? In other words, would the consequences of avoidance follow (the end of the obligation to exchange goods for price and of the aggrieved party’s right to require the other party to perform; the creation of an obligation for each party to give restitution to the other) with the party who sent the unjustified notice of avoidance becoming liable to the other party for breach? Or would the party’s attempt to avoid without grounds be deemed legally ‘ineffective’ (i.e., the party who sent the unjustified notice of avoidance would remain obligated to complete the exchange)? The CISG does not directly address the question of the effect of an unjustified notice of avoidance, but it is beyond substantial doubt that under the CISG an unjustified attempt to avoid is ineffective – i.e., the contract remains in force and un-avoided – rather than merely wrongful.88 Authoritative commentary on the CISG takes this position, and treats an unjustified attempt to avoid as a repudiation of the contract which the other party may choose, but is not obligated, to use as the basis for its own avoidance of the contract by virtue of CISG Article 64(1) or CISG Article 72 and/or for claiming damages for breach on the basis of CISG Article 61(1)b.89 Indeed, there is textual support for this position in the CISG, which provides that a party is entitled to require the other party to perform unless the first party ‘has resorted to a remedy which is inconsistent with this requirement’ (CISG Articles 46(1) and 62(1)): a 86 As explained in the next section, avoidance is accomplished by the aggrieved party giving notice to the other party. 87 See, e.g., UCC § 2-602(3) and Official Comment 3 thereto; United States Court of Appeals for the Second Circuit, United States, 23 May 1989 (Integrated Circuits Unlimited v E.F. Johnson Co., 876 F. 2 d 1040, 1042) (‘the buyer may make a procedurally ‘effective’ rejection of goods it purchased, even though such rejection is substantively wrongful. ‘Wrongful’ refers to a rejection of conforming goods, whereas an ‘effective’ rejection is timely and indicates the buyer has satisfied the procedural obligations attendant upon his rejection. The distinction is important because if a buyer's rejection is procedurally effective-even though wrongful-a seller is barred from recovering the contract price. But the buyer is subject to liability for the seller's actual damages brought about by the buyer's refusal to accept the goods it purchased’); Lawrence, 4 Lawrence’s Anderson on the Uniform Commercial Code § 2-602:61 (3 rd edn, 2014). 88 The same result is likely if there was an unjustified notice of termination under the PICC or PECL. 89 See Müller-Chen, in Schlechtriem & Schwenzer CISG Commentary (n 19) Article 49 paras 46–47; Huber, in Kröll/Mistelis/Perales Viscasillas Commentary (n 19) Article 49 para. 86.

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party that has merely received an unjustified notice of avoidance has itself done nothing inconsistent with requiring the other party to perform, and thus should retain the right to require the other side to perform. Furthermore, importing into the international sales regimes of the CISG a domestic law concept such as ‘wrongful but effective rejection’, which appears not to have found widespread acceptance outside of US domestic sales law, is unjustified absent clear incorporation by the CISG. The PICC do not devote a provision on the effects of unlawful termination, though it is argued that this is wrongful and amounts to a non-performance of the party wrongfully terminating the contract.90 59 A party who receives an unjustified notice of avoidance, however, may accede to the notice, either expressly, or by implication (e.g., a seller could take back delivered goods or a buyer could demand repayment of the price after receiving an unjustified notice of avoidance). If this occurs, the situation is more complicated. It has been suggested that the result is a ‘consensual’ avoidance of contract;91 alternatively, acceding to an unjustified notice of avoidance might be treated as an attempt by the party who received the unjustified notice to avoid the contract ‘unilaterally’ (i.e., avoidance pursuant to the terms of the CISG rather than by agreement of the parties), on the theory (described in the previous paragraph) that the unjustified notice of avoidance was a repudiation by the sender that justifies avoidance by the recipient. In certain ways the choice of theory does not matter: as noted above,92 to the extent the parties fail to address issues in their consensual avoidance agreement, the avoidance provisions of the CISG will likely supplement the agreement. On the other hand, there are differences between the two types of avoidance. For example, unilateral avoidance is subject to CISG Article 27, under which notice of avoidance that has been properly dispatched is effective even if it is delayed or lost; an agreement to avoid, in contrast, is most likely subject to (at least by analogy) the rule in CISG Article 18, under which an acceptance of an offer is not effective unless and until it is received by the addressee. Also, an attempt to argue unilateral avoidance based on notice of avoidance implied by conduct may raise issues. Given these uncertainties, a well-advised party who receives an unjustified notice of avoidance and who as a result wishes itself to avoid may choose to clarify the situation by sending express notice of unilateral avoidance under the terms of the CISG.

III. Procedure to Avoid 60

In order to avoid the contract (or any part thereof) under the CISG, a party with proper grounds for avoidance must declare the contract avoided by notice to the non-performing party.93 This procedure is a carefully-considered change from the predecessor of the CISG, the Uniform Law for International Sales (‘ULIS’), which in some circumstances provided for ‘ipso facto avoidance’—i.e., automatic avoidance without notice.94 Under the CISG, in contrast, avoidance is always optional, and requires notice. Notice of a declaration of avoidance of contract must be distinguished from notice of lack of conformity under CISG Article 39:95 A notice under CISG Article 39 conveys the buyer’s assertion that goods the seller has delivered are non-conforming, thereby Huber, in in Vogenauer UNIDROIT Commentary (n 27), Article 7.3.5 para. 7. See Müller-Chen, in Schlechtriem & Schwenzer CISG Commentary (n 19) Article 49 para. 45. 92 See the text accompanying para. 40 above. 93 See CISG Article 26. 94 See Fontoulakis, in Schlechtriem & Schwenzer CISG Commentary (n 19) Article 26 para. 1. This is not the case under CISG, since a notice is required. See for instance Kantonsgericht Zug, Switzerland, 30 August 2007, CLOUT case No. 938. 95 The requirements for notices under CISG Article 39 are discussed in → Chapter 16. 90

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preserving the buyer’s various remedies for such lack of conformity; notice of avoidance, on the other hand, invokes a particular remedy for the other party’s breach. If an aggrieved buyer wishes to avoid the contract (or some part thereof) based on a lack of conformity in delivered goods, the buyer must satisfy both the notice requirements of CISG Article 3996 and the requirements for notice of avoidance. The CISG does not mandate a particular form of notice; in keeping with the infor- 61 mality principle embodied in CISG Article 11, an oral as well as written notice is sufficient, unless the parties’ agreement provides otherwise. According to the CISG Advisory Council, electronic communication is possible too, ‘provided that the addressee expressly or impliedly has consented to receiving electronic messages of that type, in that format, and to that address’ since it is only relevant whether the information is actually transferred to the addressee, not in what form this is done.97 This means that, depending on the circumstances and notably on the consent of the other party, notice of a declaration of avoidance can be made by e-mail or other electronic means or even orally or by telephone,98 The disadvantage of these latter forms of communication (oral and by phone) is that the party giving notice has the burden of proving that the telephone call took place and contained a notice of avoidance.99 If parties agreed that a notice shall be in writing, which obviously has strong evidentiary advantages, it is submitted that this includes electronic communication, unless parties agreed otherwise. 100 In what circumstances implied notice of avoidance – particularly notice implied from conduct – will suffice is controversial;101 no well-advised party, of course, would intentionally rely on implied notice. The CISG does not specify the contents of a notice of declaration of avoidance, but 62 there is consensus concerning certain basic elements. The notice need not use the term ‘avoid’ or ‘avoidance’, but it should indicate that, because of the addressee’s breach, the sender will no longer perform the contract (or the part being avoided) and/or, where applicable, wants return of what it has supplied or paid under the avoided contract or part.102 Although rather vague communications have sometimes been held sufficient,103 a well-drafted notice of avoidance – an example of which is included below – should be unambiguous and employ proper CISG terminology. Time limits for declaring avoidance are specified in CISG Article 49(2) (for aggrieved 63 buyers) and CISG Article 64(2) (for aggrieved sellers). No time limits apply to an aggrieved buyer if the seller has not delivered the goods (or, in a partial avoidance 96 In certain circumstances, a buyer’s failure to satisfy the Article 39 notice requirement is excused. See CISG Article 40 and 44, discussed in → Chapter 16. 97 CISG Advisory Council Opinion No 1 (Electronic Communications Under CISG), CISG Article 25. 98 Björklund, in Kröll/Mistelis/Perales Viscasillas Commentary (n 19) Article 26 para. 3. 99 Björklund, in Kröll/Mistelis/Perales Viscasillas Commentary (n 19) Article 26 para. 3; Schroeter in Schlechtriem & Schwenzer CISG Commentary (n 19) Article 27 para. 3. 100 Fountoulakis in Schlechtriem & Schwenzer CISG Commentary (n 19) Article 26 para. 6. 101 See Björklund, in Kröll/Mistelis/Perales Viscasillas Commentary (n 19) Article 26 paras 7–11; Fontoulakis, in Schlechtriem & Schwenzer CISG Commentary (n 19) Article 26 paras 6, 7. 102 See Björklund, in Kröll/Mistelis/Perales Viscasillas Commentary (n 19) Article 26 para. 4; Fontoulakis, in Schlechtriem & Schwenzer CISG Commentary (n 19) Article 26 paras 7 & 8; Müller-Chen, in Schlechtriem & Schwenzer CISG Commentary (n 19) Article 49 para. 24; Rechtbank van Koophandel Kortrijk 4 June 2004 (Steinbock-Bjonustan EHF v NV Duma), English translation available online at http:// cisgw3.law.pace.edu/cases/040604b1.html. 103 In Rechtbank van Koophandel Kortrijk 4 June 2004 (Steinbock-Bjonustan EHF v NV Duma), English translation available online at http://cisgw3.law.pace.edu/cases/040604b1.html, for example, a letter from the aggrieved party stating that ‘the glass is full’ and ‘enough is enough’ was held to indicate that ‘the repayment of the purchase price and the transport costs was asked and restitution of the wrong truck delivered was required; this can only indicate that the avoidance of the initial contract by the sender of such a letter has been confirmed.’.

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situation, the relevant part of the goods),104 nor to an aggrieved seller if the buyer has not paid the price (or the part of the price relating to installments as to which the seller is avoiding under CISG Article 73(1) or (2)).105 Once a breaching seller delivers, however, an aggrieved buyer’s declaration of avoidance is subject to time limitations that depend on the type of breach committed by the seller. A buyer must declare avoidance based on late delivery within a ‘reasonable time’ after the buyer ‘has become aware that delivery has been made’ (CISG Article 49(2)(a)). In the case of other breaches (e.g., delivery of non-conforming goods), CISG Article 49(2)(b) requires the buyer to declare the contract avoided within a ‘reasonable time’ that is measured from various points in time, depending on the circumstances: generally, avoidance within a reasonable time from when the buyer ‘knew or ought to have known of the breach’ is required.106 A notice is also required after the lapse of a Nachfrist-period: the creditor still has the choice not to avoid the contract after the lapse of this period. However, if he is still determined to avoid the contract, the buyer must avoid within a reasonable time from the expiration of the Nachfrist deadline or from the moment the seller declared that he would not perform. Once a breaching buyer pays, a seller’s declaration of avoidance is subject to parallel time limitations under CISG Article 64(2)(a) & (b). 64 Time limits for avoidance of contracts need to be distinguished from time limits in the context of statutes of limitation. Limitation periods fall outside the scope of CISG. 107 65 CISG Article 27 applies to notice of a declaration of avoidance. This provision states that a party may rely on a communication made in accordance with Part III of the CISG (CISG Articles 25–88) despite a ‘delay or error in the transmission of the communication’ or its ‘failure to arrive’, provided the communication was made ‘by means appropriate in the circumstances’. Thus a properly and timely dispatched notice of avoidance sent by appropriate means will be effective even if it is lost before it reaches the addressee, is delayed and arrives late, and/or becomes incomprehensible because of an error in transmission. The adoption of the dispatch principle in CISG Article 27 for most communications pursuant to CISG Part III (which applies after the contract has been concluded) stands in contrast to the receipt rule adopted in CISG Article 18(2) (in Part II of the Convention) for indications of assent to (i.e. acceptances of) an offer. 66 Under the CISG, may notice of a declaration of avoidance, once dispatched (or even received), be ‘retracted’ (or ‘revoked’) by another communication from the aggrieved party, so that the contract remains (or once again becomes) ‘un-avoided’? The CISG does not explicitly address the question, and the issue is a matter of controversy in commentary: some argue that the declaration is effective and non-revocable as soon as it is dispatched; others argue that that the notice should be revocable until it is received; yet others argue that the notice remains revocable until the recipient relies on it. 108 104 Bach, in Kröll/Mistelis/Perales Viscasillas Commentary (n 19) Article 49 para. 67; Müller-Chen, in Schlechtriem & Schwenzer CISG Commentary (n 19) Article 49 para. 27. 105 Bell, in Kröll/Mistelis/Perales Viscasillas Commentary (n 19) Article 64 para. 11; Mohs, in Schlechtriem & Schwenzer CISG Commentary (n 19) Article 64 para. 22. 106 CISG Article 49(2)(b)(i). If the buyer has established a Nachfrist deadline for the seller to perform, however, the buyer must avoid within a reasonable time from the expiration of that deadline or the time the seller declared that he will not perform by the deadline; if the seller has established a period in which it intends to cure its breach under CISG Article 48, the must avoid within a reasonable time from the time that period expires or the time the buyer declares it will not accept seller’s cure. See CISG Article 49(2)(b)(ii) & (iii). 107 Bach in Kröll/Mistelis/Perales Viscasillas Commentary (n 19) Article 49 para. 83, who states that, as a consequence, in many cases domestic law applies, but also mentions the possibility that the UN Limitation Convention might be applicable. 108 See Fontoulakis, in Schlechtriem & Schwenzer CISG Commentary (n 19) Article 26 paras 12 and authorities cited therein; Björklund, in Kröll/Mistelis/Perales Viscasillas Commentary (n 19) Article 27

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Are there any circumstances in which a contract is deemed avoided under the CISG 67 despite the lack of a notice of a declaration of avoidance – even an implied one – by the aggrieved party? There is authority for the proposition that no notice is required where the other party has ‘definitively’ and ‘finally’ refused to perform, although this raises some issues with regard to calculating damages under CISG Articles 75 or 76. 109 In addition, CISG Article 80 has sometimes been invoked to protect a party who, in response to the other party’s breach, has failed to perform its own obligations but has done so without declaring the contract avoided – although this use of Article 80 has been criticized.110 The way to minimize controversies, obviously, is to issue notice whenever avoidance is desired. Controversy exists regarding the interplay between the right to cure defects by the 68 seller, and the right to avoid the contract for breach. According to CISG Article 48, the seller may even, after the due date for delivery (and also before: see CISG Article 37), remedy its failure to perform it obligation if it can do so within unreasonable delay and without causing the buyer unreasonable inconvenience. The article makes clear that this right exists ‘subject to Article 49’; i.e., the right to avoid the contract. This last sentence makes it clear that the right to avoid the contract takes precedence over the right to cure. However, it is less clear if and to what extent the fact that the seller is willing and able to perform, plays a role in deciding whether the non-performance was fundamental.111 It is submitted that the possibility to cure the defect plays a role in the gravity of the breach, in the sense that the seller’s willingness to perform has a negative influence on the gravity of the breach, unless the buyer has a legitimate interest in having the contract avoided immediately.112 In addition, it seems to be the prevailing opinion that the sequence of affairs – i.e., whether the seller was first in offering cure or the buyer was first in terminating the contract – is irrelevant. It boils down to the essential question of whether the requirements for terminating a contract in CISG Article 49 are met. If this is the case, the buyer may terminate the contract, regardless of whether the seller made an offer to cure.113 The PICC (Article 7.3.2(1)) and PECL (Article 9:303) both require notice in order 69 to terminate the contract.114 Like the CISG, these international instruments appear tolerant about the form, means and content of the notice.115 The PICC (Article 1.10(2)) however, reject the ‘dispatch principle’ of CISG Article 27 and stipulates that notice of avoidance (as well as other types of notice and communications) are not effective paras 14–18 and authorities cited therein (Björklund argues that the arguments against the possibility to revocation are ‘not persuasive’). For an overview: Kleinschmidt, in Jansen & Zimmermann Commentaries on European Contract Law (n 16), Article 9:303 para. 13. 109 See Fontoulakis, in Schlechtriem & Schwenzer CISG Commentary (n 19) Article 26 para. 9. 110 See Flechtner, ‘The Exemption Provisions of the Sales Convention, Including Comments on ‘Hardship’ Doctrine and the 19 June 2009 Decision of the Belgian Cassation Court’ (2011) 59 Belgrade L Rev 84, 87, also available online at http://www.cisg.law.pace.edu/cisg/biblio/flechtner10.html. 111 See Huber & Mullis, The CISG – A new textbook for students and practitioners (Sellier 2007) [hereafter Hubert & Mullis] 222. 112 Bach, in Schlechtriem & Schwenzer CISG Commentary (n 19) Article 49 para. 15; Müller-Chen, in Schlechtriem & Schwenzer CISG Commentary (n 19) Article 48 para. 15; Huber & Mullis (n 111), 223. 113 Müller-Chen, in Schlechtriem & Schwenzer CISG Commentary (n 19) Article 48 para. 17; Huber & Mullis (n 111), 224. 114 PECL recognizes two exceptions in Article 8:106(3) (after a Nachfrist period it is not necessary to issue a notice of termination) and Article 9:304(4) (a contract terminates automatically if performance is excused because it was due to a total and permanent impediment: see Comment D to PECL Article 9:303. 115 See PICC Article 1.2 (‘Nothing in these Principles requires a contract, statement or any other act to be made in or evidenced by a particular form’) and Article 1.10(1) (‘Where notice is required it may be given by any means appropriate to the circumstances’); PECL Article 1:303(1) (‘Any notice may be given by any means, whether in writing or otherwise, appropriate in the circumstances’).

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unless and until received.116 This clear rule without exception was deliberately chosen because the CISG regime was felt to be too complicated with its different regimes and ill-defined exceptions117 PICC Article 1.10(3) clarifies when a notice reaches a person: this is the case when it is given orally to a person, or delivered at a person’s place of business or mailing address.118 The PECL generally adopt a ‘receipt rule’ for a notice to be effective, but the PECL provide that notice of termination (and other notices given where the addressee is in default) are governed by a dispatch rule.119 The PECL expressly provide that a notice may be retracted if the retraction reaches the addressee before the notice.120 PICC 7.3.2(2) requires that notice of termination be given within a ‘reasonable time’ after the aggrieved party becomes or ought to have become aware of either 1) an offer by the breaching party to perform late or 2) the existence of non-conforming performance; PECL Article 9:303(2) & (3) contains a similar approach. Under both international instruments, there are no time limits for giving notice of termination unless the breaching party has either performed or offered to perform 121—which (as was noted earlier) is also the case for notice of avoidance under the CISG. 70 Under US domestic sales law (UCC Article 2), to reject or revoke acceptance of goods – actions that result in avoidance-like consequences—an aggrieved buyer must notify the seller;122 no form of notice is specified, but the statute addresses, to some extent, the content of the notice.123 Notice of rejection must be given within a reasonable time after the goods are delivered or tendered (UCC § 2-602(1)) and notice of revocation of acceptance ‘must occur within a reasonable time after the buyer discovered or should have discovered the ground for it’ (UCC § 2-608(2)). Chinese law also requires notice for avoiding the contract and accepts the receipt theory: the contract is regarded as terminated upon the receipt of the notice (Article 565 CCC). The notice shall provide the other party ‘a reasonable time’ to perform (Article 563 CCC), although it is not clear when this reasonable time limit starts to run. In any case, the right to avoid the contract is prescribed one year from the day when the party that has the right to termination knows or should know the cause of termination, or within a reasonable period after the other party makes a demand to perform (CCC Article 564). German law also requires a notice for avoiding the contract, even after a Nachfrist period lapsed,124 and also departs from the principle that this notice only takes effect once received by the person in breach (German Civil Code Section 349 in conjunction with Section 130).125 71 French law acknowledges another possibility to avoid a contract. Parties are granted the possibility to avoid a contract by notice, but the court may also effectively terminate the contract (French Civil Code Articles 1226 and 1227). So even if the creditor did not terminate the contract by notice, the court is entitled to declare the contract termi-

See PICC Article 1.10(2)–(4). Vogenauer, in Vogenauer UNIDROIT Commentary (n 27), Article 1.10 PICC para. 10. 118 It is therefore decisive whether the notice enters the sphere of control of the addressee: Vogenauer, in Vogenauer UNIDROIT Commentary (n 27), Article 1.10 PICC para. 13. 119 See PECL Article 1:303(4) and comment D thereto. 120 See PECL Article 1:303(5). According to the drafters, it seems in cases of default ‘appropriate to put the risk of loss, mistake or delay in the transmission of the message on the defaulting party rather than on the aggrieved party’: Lando & Beale (n 28), p. 129. 121 See Official Comment 2 to PICC Article 7.3.2; PECL Article 9:303(3) and Comment C(2) thereto. 122 See UCC §§ 2-602(1) & 2-608(2). 123 See UCC § 2-605 (concerning the contents of notice of avoidance) and official comment 5 to § 2-608 (concerning the contents of notice of revocation of acceptance). 124 See Schwarze, in Staudinger Commentary 2020 (n 35) BGB § 323 para. D1. 125 Schwarze, in Staudinger Commentary 2020 (n 35) BGB § 323 para. D8. 116 117

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nated.126 In such case, the contract is terminated on the date set by the court or in the absence thereof, on the day on which the proceedings were commenced (French Civil Code Articles 1228 and 1229).127 A request to have the contract terminated by the court rather than by the creditor may prove to be helpful if the facts and circumstances supporting avoidance are complicated and the creditor would like to be sure that the contract is terminated permanently, without the chance that the other party challenges the notice of avoidance.

IV. Restitution Following Avoidance CISG Article 81(2) provides that, if a contract is avoided, each party (both the 72 avoiding party and the breaching party) ‘may claim restitution from the other party of whatever the first party has supplied or paid under the contract’; furthermore, ‘if both parties are bound to make restitution, they must do so concurrently.’ Thus a seller must refund payments it has received under an avoided contract and, under CISG Article 84(1), must pay interest on those payments ‘from the date on which the price was paid.’128 Similarly, if the seller has delivered goods and the contract is then avoided (either by the buyer or the seller), the buyer is subject to a claim for restitution of the goods; under CISG Article 84(2)(a), furthermore, a buyer who is obliged to make restitution ‘must account to the seller for all benefits which he has derived from the goods or part of them.’ Indeed, a buyer’s obligation to make restitution of goods it has received under an 73 avoided contract is so central to the concept of avoidance that CISG Article 82(1) precludes a buyer from avoiding the contract (or claiming substitute goods under CISG Article 46(2)) if the buyer cannot make restitution of the goods ‘substantially in the condition in which he received them’; CISG Article 82(2), however, provides for liberal exceptions to this requirement, including where the buyer’s inability to make restitution (or to make restitution of the goods substantially in their original condition) ‘is not due to his act or omission’ (CISG Article 82(2)(a)) and where, before the buyer discovered (or ought to have discovered) a lack of conformity, the goods ‘have been sold in the normal course of business or have been consumed or transformed by the buyer in the course of normal use’ (CISG Article 82(2)(c)). Where the buyer cannot make restitution of delivered goods but is able to avoid the contract under the exceptions in CISG Article 82(2), the buyer ‘must account to the seller for all benefits which has derived from the goods or part of them’ (CISG Article 84(2)). Complementing an avoiding buyer’s restitutionary obligations is CISG Article 86(1), 74 which requires a buyer that has ‘received’ goods that it intends to ‘reject’, for instance

126 This is different from CISG, since it is not the court that may avoid a contract: commencing a law suit with the court, claiming avoidance of contract, will usually be treated as notice of avoidance by the creditor: Cour d’appel Paris, France, 14 June 2001, CLOUT case No. 481; Oberster Gerichtshof, Austria, 5 July 2001, CLOUT case No. 535. 127 If a notice of avoidance is used, then termination takes effect at the date of receipt of this notice by the debtor (French Civil Code Article 1229). 128 CISG Article 84, like the other CISG article providing for recovery of interest (CISG Article 78), does not specify the rate of recoverable interest, leading to a substantial volume of decisions addressing the issue. See decisions cited in Article 84 § 3 of the ‘UNCITRAL Digest of Case Law on the United Nations Convention on Contracts for the International Sale of Goods (2012 and 2016 edition), available online at http://www.uncitral.org/pdf/english/clout/CISG-digest-2012-e.pdf and https://www.uncitral.org/pdf/engl ish/clout/CISG_Digest_2016.pdf.

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since it intends to avoid the contract for breach129 to ‘take such steps to preserve them as are reasonable in the circumstances.’ To prevent a buyer from circumventing this preservation obligation simply by refusing to receive delivery, CISG Article 86(2) requires a rejecting buyer to take possession of goods on behalf of the seller if the goods ‘have been placed at his disposal at their destination’. This obligation, however, does not apply unless it can be performed ‘without payment of the price and without unreasonable inconvenience or expense’. In addition, the obligation to preserve the goods does not apply ‘if the seller or a person authorized to take charge of the goods on his behalf is present at the destination.’ A buyer who incurs expenses to preserve goods under CISG Article 86 is entitled to reimbursement from the seller and, indeed, is permitted to retain the goods until it receives such reimbursement.130 CISG Article 87 expressly authorizes a party obligated to preserve goods to ‘deposit them in a warehouse of a third person at the expense of the other party, provided that the expense incurred is not unreasonable’— although this is not necessarily the only permitted method of preservation. 75 An avoiding buyer that is under an obligation to preserve goods for the seller pursuant to CISG Article 86 need not preserve them forever: Article 88(1) authorizes the buyer to sell the goods ‘by any appropriate means’ if the seller has unreasonably delayed in taking the goods back or in reimbursing the buyer for the costs of preservation; the buyer must give the seller ‘reasonable notice of the intention to sell.’ CISG Article 88(2) even requires a buyer who is under an obligation to preserve goods to take ‘reasonable measures to sell’ them if they are ‘subject to rapid deterioration or their preservation would involve unreasonable expense’131 In such case of an emergency sale, the buyer has a duty to take ‘reasonable measures’, by the absence of which he is liable for damages caused by not selling the goods.132 This duty of care does not mean that the buyer needs to sell the goods at all costs, but he must make use of a reasonable opportunity to sell the goods.133 Of course the goods that an avoiding buyer sells pursuant to CISG Article 88 are goods for which the seller can claim restitution under CISG Article 81(2), and they thus in effect belong to the seller.134 Therefore, after deducting the ‘reasonable expenses of preserving the goods and selling them’, CISG Article 88(3) requires an avoiding buyer who sells the goods to ‘account to the other party for the balance.’ 76 Note that, although an avoiding buyer who sells goods pursuant to CISG Article 88 is authorized to ‘retain’ preservation and sale expenses from sale proceeds, the provision does not authorize the buyer to retain other amounts, such as payments to the seller for which an avoiding buyer may claim restitution under CISG Article 81(2).135 On the 129 ‘Rejection’ of goods under CISG Article 86(1) occurs if the buyer: 1) avoids the contract for breach, and thus must make restitution of the goods under CISG Article 81(2)); 2) requires, under CISG Article 46(2), that the seller provide substitutes for non-conforming goods (and thus, impliedly, must return the original delivered goods); 3) refuses an early delivery or the excess portion of a delivery under CISG Article 52. See Honnold/Flechtner CISG Commentary (n 19) § 455.1 at 682; Bacher, in Schlechtriem & Schwenzer CISG Commentary (n 19) Article 86 para. 5; Sono, in Kröll/Mistelis/Perales Viscasillas Commentary (n 19) Article 86 para. 8. 130 See the second sentence of CISG Article 86(1). 131 A buyer who is required to attempt to sell goods under CISG Article 88(2) is required to give the seller notice of the intent to sell ‘[t]o the extent possible.’. 132 Sono, in Kröll/Mistelis/Perales Viscasillas Commentary (n 19) Article 88 para. 35, stating that the legal grounds for liability are to be found in CISG Article 45(1)b or 61(1)b. 133 Bacher, in Schlechtriem & Schwenzer CISG Commentary (n 19) Article 86 para. 16; Sono, in Kröll/ Mistelis/Perales Viscasillas Commentary (n 19) Article 88 para. 34. 134 The question of who, as a legal matter, has title (i.e., owns) the goods before or (after) an avoiding buyer resells them under Article 88 is not governed by the CISG. See CISG Article 4(b). The property question is governed by other applicable (domestic) law. See Sono, in Kröll/Mistelis/Perales Viscasillas Commentary (n 19) Article 88 para. 4. 135 See Sono, in Kröll/Mistelis/Perales Viscasillas Commentary (n 19) Article 88 para. 38.

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other hand, CISG Article 81(2) states: ‘If both parties are bound to make restitution they must do so concurrently.’ That may authorize an avoiding buyer to refuse to pay the balance of an CISG Article 88 sale over to the seller unless and until the seller tenders refund restitution of the buyer’s payments;136 indeed, the avoiding buyer may have a right to set off (or recoup) from the sale proceeds its claim for a refund of payments, although (at least in the opinion of some) this question is arguably governed by applicable domestic law rather than the CISG.137 Thus the parties’ basic obligations to make restitution if a contract is avoided are set 77 out in some (although certainly not complete) detail in the CISG. However, the CISG does not address the actual process for making restitution, other than by providing in CISG Article 81(2) (as noted earlier) that, if both parties must make restitution, ‘they must do so concurrently.’ It has been asserted that: ‘The Convention is so lacking in detail about how and in what circumstances restitution is made under the Convention that any comment has to be restricted to constructing a system of rules dealing with these matters.’138 Among the many open issues, perhaps the most important is: when, during the process of restitution of the goods, does the risk for casualty to the goods that is not the fault of either party pass back to the seller from the buyer? One commentary argues that the buyer should bear the risk until the goods are redelivered to the seller at the place of their location when the contract was avoided, or until there is failure of timely redelivery due to the seller’s fault;139 if the goods are transported back to the seller via third party carrier, it is said, the seller should bear the risk ‘especially if the contract was avoided for the seller’s non-performance.’140 The scope of the restitutionary obligations imposed by the PICC and PECL when 78 a contract has been terminated were explored in Part I of this Commentary.141 It is important to realize that it is generally argued in literature that it is very difficult to describe the restitutionary effects of avoidance from a comparative and international law perspective because there is no unified approach.142 PICC Article 7.3.6 lays down the consequences of restitution: the starting point is that both parties shall make restitution of their performances under the contract. If restitution is not possible or appropriate, a reasonable allowance should be made, unless the impossibility to make restitution is attributable to the other party. This last exception, which is laid down in PICC Article 7.3.6(3) means that the risk of damage to the goods is on the party that has to return the goods.143 To conclude, if expenses are made for preserving or maintain the goods, these have to be compensated for by the seller (Article 7.3.6(4). However, in contracts to the CISG, the PICC make no provision for the seller to recover the value of the buyer’s use of goods delivered under a terminated contract, nor for the buyer to recover interest on payments it has made. As stated in the Official Comment to the PICC provision governing restitution following contract termination: ‘The Principles do not Bacher, in Schlechtriem & Schwenzer CISG Commentary (n 19) Article 88 para. 20. See Bacher, in Schlechtriem & Schwenzer CISG Commentary (n 19) Article 88 para. 20; Fountoulakis in Schlechtriem & Schwenzer CISG Commentary (n 19) Article 81 para. 23; Honnold/Flechtner CISG Commentary (n 19) § 444 pp. 656–58; Sono, in Kröll/Mistelis/Perales Viscasillas Commentary (n 19) Article 88 para. 38. 138 See Bridge, in Kröll/Mistelis/Perales Viscasillas Commentary (n 19) Article 81 para. 17. 139 See Bridge, in Kröll/Mistelis/Perales Viscasillas Commentary (n 19) Article 81 paras 30–31. 140 Bridge, in Kröll/Mistelis/Perales Viscasillas Commentary (n 19) Article 81 para. 32. 141 See part E.I above, on ‘Nature and Consequences of Avoidance’, → mn. 25. 142 For an overview of authors, describing the difficulties: Hellwege, in Jansen & Zimmermann Commentaries on European Contract Law (n 16), PECL Article 9:306 para. 2 and for an overview of some different approaches: paras 3–12. 143 See Official Comment 3 to PICC Article 7.3.6 and Huber, in Vogenauer UNIDROIT Commentary (n 27), Article 9.6.3 para. 13. 136

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take a position concerning benefits that have been derived from the performance, or interest that has been earned.’144 The approach to these issues in PECL is not entirely clear: it is argued that this issue is either left to national law or PICC’s refusal to take a stand in fact means that the PICC exclude claims for benefits.145 If the contract is terminated, PECL authorize a buyer to recover interest on payments that the seller must refund,146 and it authorizes a seller to recover the value of goods that the buyer should but cannot return.147 In contrast to the CISG,148 however, the PECL do not expressly authorize a seller who terminates a contract to recover the benefit a buyer derived from goods that it returns. The problem of risk allocation in relation to avoidance for breach (who has to bear the consequences if the product is accidentally damaged once it has to be returned?) is not addressed under the PECL.149 Another issue that falls outside the scope of all international regimes (CISG, PECL and PICC) is the proprietary effect of avoidance: the question of whether avoidance results in an automatic return of property and reivindicatio claims or merely in an obligation to return the goods150 is left to the applicable national law.151 79 The PICC and PECL are more liberal than the CISG in permitting a buyer to substitute a monetary equivalent for goods that, when the contract is terminated, the buyer is obligated to return to the seller. As noted earlier, CISG Article 82(1) prevents a buyer from avoiding the contract if it cannot make restitution of goods substantially in the condition in which they were received, but then CISG Article 82(2) provides for liberal exceptions to this rule; if a buyer takes advantage of these exceptions and avoids despite being unable to make restitution, CISG Article 84(2)(b) requires the buyer to ‘account to the seller for all benefits which he has derived from the goods or part of them.’152 Under the PICC and PECL, however, there is no need for a buyer to invoke an exception in order to terminate a contract where the buyer cannot make restitution of goods: under these international instruments, where restitution is not possible a monetary equivalent can freely be substituted for the actual property.153 Indeed, the PICC permit such a monetary substitution even where actual restitution is possible, if actual restitution would not be ‘appropriate’ (PICC Article 7.3.6(2)). This is the case when restitution in kind would cause unreasonable effort or expense.154 Neither PECL Official Comment 6 to PICC Article 7.3.6. Huber, in Vogenauer UNIDROIT Commentary (n 27), Article 7.3.6, para. 23, who argues that the latter approach is more convincing. 146 See PECL Article 9:508 and Comment D to Article 9:307. 147 See PECL Article 9:309. 148 See CISG Article 84(2(a). 149 See, also in relation to other international provisinos on risk allocation in cases of avoidance for breach: Hellwege, in Jansen & Zimmermann Commentaries on European Contract Law (n 16), PECL Article 9:306 para. 21 for PECL and for other legal systems paras 19-20. 150 As under German law: Kaiser, in Staudinger Commentary 2012 (n 35) BGB § 346 para. 70. 151 See also explicitly Hellwege, in Jansen & Zimmermann Commentaries on European Contract Law (n 16), PECL Article 9:306 para. 21. 152 It is argued that the provision of the CISG that the right of avoidance is excluded if restitution is in fact not possible is ‘outmoded’: see Magnus, ‘Remedies, Price Reduction, Avoidance, Mitigation and Preservation’ in DiMatteo (ed), International Sales Law: A Global Challenge (CUP 2014) 273. 153 See PICC Article 7.3.6(2) and Official Comment 3 thereto; PECL Article 9:309. As Illustration 3 in Comment B to PECL Article 9-309 demonstrates, however, under the PECL a party who cannot return goods for which it owes restitution is liable only for the benefit it received from the goods, even if that benefit is less than the cost or value of the goods. 154 Illustration 5 in Official Comment 3 to PICC Article 7.3.6 refers to the example of the goods that should be returned but are located on a ship that sank. Huber, in Vogenauer UNIDROIT Commentary (n 27), Article 7.3.6, para. 9 uses the less imaginary example of goods that are sold to a third party that is only willing to resell the property for a large sum of money. 144

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nor PICC make it clear how to assess the compensation for the value of the goods: which point in time should be used to assess the value and should the subjective value with reference to the value of the counter-performance or the objective value of the product be the guiding principle?155 Unlike the CISG, the PICC do not impose an express obligation on a buyer to 80 preserve goods that are subject to a seller’s claim for restitution; an incentive to preserve, however, arises from the fact that, as discussed in the last paragraph, the buyer must provide a monetary substitute if it cannot return the goods. Indeed, the PICC expressly provide for a party to recover the reasonable costs of preserving goods that must be returned following termination, 156 and the official comment to the PICC even suggests a rule for dealing with the risk of casualty to goods between the time of termination and the time of their return to the seller.157 If both parties owe restitution to the other, the PICC (like CISG Article 82(2)) provide for the restitution to be made ‘concurrently’. 158 Where a buyer has received goods under a contract that has been terminated and the 81 other party fails to accept or retake the property, the PECL impose an express obligation on the buyer ‘to protect and preserve the property.’159 A buyer may fulfil this obligation – indeed, may discharge not only its obligation to preserve but also its obligation to make restitution of the property – by ‘depositing the property on reasonable terms with a third person to be held to the order of the other party [e.g., warehousing the goods] and notifying the other part of this,’ or ‘by selling the property on reasonable terms after notice to the other party, and paying the net proceeds to that party.’160 In the latter case, the buyer ‘is entitled to be reimbursed or to retain out of the proceeds of sale any expenses reasonably incurred.’161 Under US domestic sales law, an aggrieved buyer who has rejected or revoked accep- 82 tance of the goods – actions that result in the equivalent of avoidance – must thereafter refrain from any ‘exercise of ownership’ over the goods;162 if the buyer took possession of 155 For an overview: Hellwege, in Jansen & Zimmermann Commentaries on European Contract Law (n 16), PECL Article 9:306 para. 34, who argues (para. 35) that the objective value approach should be followed. 156 See PICC Article 7.3.6(4). 157 See the passage following Illustration 8 in Comment 4 to PICC Article 7.3.6 (‘The question of the recipient’s liability to pay the value of the performance only arises in cases where the deterioration or destruction occurs before termination of the contract. If what has been performed deteriorates or is destroyed after termination of the contract, the normal rules on non-performance apply, as after termination the recipient of the performance is under a duty to return what the recipient has received. Any non-performance of that duty gives the other party a right to claim damages according to Article 7.4.1, unless the non-performance is excused under Article 7.1.7.’). 158 PICC Article 7.3.6(1). 159 Under PECL Article 7:110(1), ‘[a] party left in possession of tangible property … because of the other party’s failure to … retake the property must take reasonable steps to protect and preserve the property.’ As explained in a Comment to the provision, it applies ‘where a contract has been lawfully terminated’ because in that situation a buyer ‘who has received property has then to return it to the other party. If the other party refuses to accept it, Article 7:110 applies’. 160 PECL Article 7:110(2). If the goods are ‘liable to rapid deterioration’ or preservation would be ‘unreasonably expensive,’ a buyer is obliged to ‘take reasonable steps’ to dispose of them. PECL Article 7:110(3). In that case, the buyer ‘may discharge its duty to … return by paying the net proceeds to the other party.’. 161 PECL Article 7:110(4). 162 A buyer’s exercise of ownership over goods after rejecting or revoking acceptance of them – e.g., continuing to use them – may invalidate the rejection or revocation. See, e.g., Valentino v Glendale Nissan, Inc., 740 N.E. 2 d 538 (Ill. App. 2000); Gasque v Mooers Motor Car Co., 313 S.E.2 d 384 (Va. 1984). Case law, however, generally recognizes that a buyer is permitted to make ‘reasonable’ use of goods after rejecting or revoking acceptance of them. See, e.g., Swan Lake Holdings, LLC v Yamaha Golf-Car Co., 2011 WL 781598 (U.S. D.C.N.D. Ind.); Basselen v General Motors Corp., 792 N.E. 2 d 498 (App. Ct. Ill. 2003).

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the goods before rejecting them, it is obliged to ‘hold them with reasonable care at the seller’s disposition.’163 Indeed, a substantial change from the condition in which goods were received precludes the buyer from revoking acceptance of them, unless the change was caused by the goods’ own defects.164 A rejecting or revoking buyer may recover expenses reasonably incurred in preserving the goods as ‘incidental damages’,165 and case law suggests that such a buyer must compensate the seller for the value the buyer derived from the goods.166 83 German law has quite a sophisticated regime. The starting point is that parties have to reciprocally return performances received.167 However, the law prescribes that, in three cases, compensation for the value has to take place instead of return of the goods in kind (German Civil Code Section 346(2)). The first case is where restitution or return is excluded by the nature of what has been obtained, which primarily applies to contracts other than sales, such as contract to deliver services: to return what in fact has been done, such as painting of a house, is as a matter of fact impossible.168 Secondly, restitution is also impossible if the debtor has used up, disposed of, encumbered, processed, or redesigned the object received. In this case, compensation is again more realistic. Thirdly, compensation has to be paid instead of restitution if the object received has deteriorated or has been destroyed, although deuteriation by normal and intended use does not qualify for reimbursement. The German starting point is clear and the exceptions thereto all make sense and reflect reality. However, exceptions to this duty to compensate for value exist too (German Civil Code Section 346(3)) if (1) the defect justifying avoidance only became apparent during processing or transformation of the object, (2) the person entitled to claim the return of the good (i.e., the seller) is responsible for the deterioration or destruction or the damage would also have occurred if the object had remained with him,169 or (3) the decrease in value of the product occurred at the place of the person entitled to avoid the contract, but he is able to show that he exercised good care in relation to the product. The last exception means that no compensation is possible for an accidental decrease in value. In all three cases, no compensation for the value of the product shall be paid. At the most, an amount for an enrichment caused by the use of the product (if any) shall be paid. This is justified by the idea that, in these cases, the decrease in value is essentially beyond the control of the buyer and, as a consequence, there is no good reason to make him pay a compensation for the value of the goods.

163 See UCC § 2-602(2); for a rejecting buyer’s further obligations and options with respect to rejected goods, see UCC §§ 2-603 & 2-604. Under UCC § 2-608(3), a buyer who revokes acceptance of goods ‘has the same rights and duties with regard to the goods involved as if he had rejected them.’. 164 UCC 2-608(2). Compare CISG Article 82. 165 See UCC § 2-715(1). 166 See, e.g., Valentino v Glendale Nissan, Inc., 740 N.E. 2 d 538 (Ill. App. 2000.). 167 This is not a right in rem and therefore no right to revendicate (reivindicatio) exists, but it is an obligation to return the goods and the contract price: Kaiser, in Staudinger Commentary 2012 (n 35) BGB § 346 para. 70. 168 Kaiser, in Staudinger Commentary 2012 (n 35) BGB § 346 para. 99. 169 Here it was felt unjustifiable for the buyer to pay compensation for the damaged product, for it was the seller who was responsible for the defect: Kaiser, in Staudinger Commentary 2012 (n 35) BGB § 346 para. 190.

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V. General Comments on CISG Avoidance and Similar Doctrines under Other Instruments and Law The CISG, the PICC, the PECL and the domestic rules (UCC, German, French and 84 Chinese law) all contain coherent and workable – and not radically dissimilar – systems for putting an end to performance of the contract because of the other side’s breach. Under all systems (CISG, international instruments and domestic rules) except for US domestic law, the principle underlying the doctrine of termination is that termination is not possible for any breach, but requires that this breach shall be sufficiently serious. 170 Moreover, in many cases a Nachfrist period gives the other party still a chance to perform and prevent termination of the contract. Obviously, the exact requirements and additional rules differ. However, the perfect tender rule in US domestic law enables termination even for minor breaches, though exceptions to this rule are also accepted. The PICC and PECL have the disadvantage of not being limited to sales of goods, and thus their rules are not always specifically tailored for these kinds of contracts. As a result, for example, the PICC are less clear and detailed than the CISG concerning a buyer’s obligation to preserve goods that it must return under an avoided/terminated contract. The PICC and PECL also are not the product of bodies with law-making authority and (although they are often referred to as ‘rules of law’) they lack the legallybinding force of law; thus their status and operation if adopted to govern a transaction is not entirely clear and may vary with the dispute-resolution context (e.g., litigation or arbitration) in which they are being invoked.171 The UCC system governing termination of obligations for breach is considerably more complex and has the disadvantage – in the case of international sales transactions – of being domestic law not specifically focused on international contracts and not necessarily familiar or acceptable to both parties to such a contract. The same is obviously true for the other domestic rules, although they sometimes contain quite sophisticated rules (such as the German regime on the effects of restitution and the exceptions thereto). German, French, and Chinese law have the additional disadvantage of a language that is not commonly used in international trade. The CISG avoids the disadvantages just described in the PICC, the PECL and domes- 85 tic sales law: it is designed specifically for international sales, and as a treaty it enjoys full legal authority where it is in force. Compared to the PICC and PECL, furthermore, the CISG has a larger body of case law and more extensive commentary – a valuable feature in an area like avoidance, where significant issues (such as the process for restitution) are not clearly settled in the text of any of the instruments. On the other hand, the CISG has some complicated rules in relation to avoidance, such as the provision that no avoidance is possible if restitution is in fact not possible, subject to many exceptions. Moreover, it does not address all issues that can arise in international sales. For example, questions concerning the validity of a contract clause governing avoidance matters are beyond the scope of the CISG;172 thus, unlike the other international instruments just mentioned, the CISG must be supplemented on such validity questions by other applicable law. Of course the PICC and PECL have the advantage of being international instruments 170 For German law, this aggravated form of non-performance is primarily required for defective performance; in other cases the Nachffrist period will in most cases prevent that a contract will be avoided too easily: Kleinschmidt, in Jansen & Zimmermann Commentaries on European Contract Law (n 16), PECL Article 9:301 para. 7. 171 A choice for the applicability of these international rules in arbitration is usually accepted, whereas the applicability of these soft law principles in state courts is usually prevented by rules of private international law: see, for instance, the Preamble of the PICC and official comment 4 a thereto. 172 See CISG Article 4(a).

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that were produced after the CISG, and thus they could correct perceived problems and shortcomings in the earlier instrument. There is, however, little evidence of such correction in their provisions on termination.

F. Illustrations I. Partial Non-Payment and Repudiation by Buyer, Divisible Installment Contract 86

Illustration One: Pursuant to a valid contract, Seller made six installment deliveries which the buyer accepted. The contract required divisible payments for each delivery, but Buyer paid for only the first delivery; it has declared it will not pay for the remaining five deliveries.

If the CISG is the applicable law, Seller may declare the entire contract avoided provided Buyer’s failure to pay for the last five deliveries constitutes a fundamental breach of contract as defined in CISG Article 25.173 If Seller properly avoids the entire contract (by notice pursuant to CISG Article 26), Seller may claim restitution of the goods in all six deliveries, and Buyer may claim restitution of the single payment it made (CISG Article 81(2)). Alternatively, pursuant to CISG Article 73(1) Seller may declare the contract avoided only as to the five deliveries for which Buyer did not pay, since that failure to pay doubtless constitutes a fundamental breach with respect to those five deliveries; in that event, Seller may claim restitution only as to the goods in those five deliveries and the Buyer may not claim restitution of its single payment. In either case, Seller will be able to claim damages pursuant to CISG Articles 74–76 with respect to the avoided contract or part thereof. 88 If the PICC or PECL were the applicable law (or ‘rules of law’), Seller may terminate the contract by giving Buyer notice (PICC Article 7.3.2(1) and PECL Article 9:303) provided Buyer’s failure to pay constitutes a fundamental non-performance.174 Under these instruments, however, Seller will not be able to ‘undo’ the first delivery, for which it has received payment; it will only have the right to reclaim the goods from the later five deliveries and it will not owe restitution of Buyer’s payment for the first delivery. Under both instruments, if Seller properly terminates the contract it is entitled to damages. 175 89 If US domestic sales law (Article 2 of the UCC) governs the transaction, Seller would not have the right to recover any of the goods it delivered to Buyer. Seller’s only remedy would be a claim for the unpaid price for the last five deliveries, along with any incidental damages the seller may have suffered from Buyer’s breach.176 90 Under German law, by contrast, the starting point is that Seller may only partially avoid the contract: he may declare the contract avoided as to the five deliveries for which Buyer did not pay, since that failure is not ‘trivial’ with respect to those five deliveries. Since the buyer ‘seriously and definitively’ refused performance, a Nachfrist period is not necessary (German Civil Code Section 323(2)). Full avoidance does not seem to be an option here, since there are no circumstances giving reasons for the belief that Seller has ‘no interest in part performance’ (German Civil Code Section 323(5)). Partial avoidance will also be possible under CCC Article 575 and French law: the French Civil Code 87

See CISG Article 49(1)(a). See PICC Articles 7.3.1(1) & (2); PECL Articles 8:103 & 9:301(1). 175 See PICC Articles 7.4.2, 7.4.5 and 7.4.5; PECL Articles 9:502, 9:506 and 9:507. 176 See UCC §§ 2-709(1) and 2-710. 173 174

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(Article 1229) stipulates that for the parts of the performance of an avoided contract that were useful, no restitution will take place. In fact, this means that the contract is avoided partially. Under all three domestic law systems, claiming additional damages is possible.

II. Partial Non-Payment and No Repudiation by Buyer, Divisible Installment Contract 91

Illustration Two: Same facts as Illustration One except Buyer, who was late in making the payments for the last five deliveries, did not declare that it would refuse to pay for those installments.

As noted in Illustration One, under the CISG, the PICC and PECL Seller may avoid/ 92 terminate the contract if Buyer’s delay in payment constitutes a fundamental breach/ fundamental non-performance. Unless the contract included a valid clause proving that timely payment was ‘of the essence’ of the agreement,177 however, determining how late Buyer’s payments must be before the delay becomes fundamental may be difficult. Under all of the mentioned international instruments, Seller may choose to notify Buyer that it is establishing a particular deadline for Buyer to make the payments.178 Provided that the additional time for payment that Seller established was ‘reasonable’, Seller may avoid/terminate the contract with respect to the last five installments if Buyer fails to pay by the deadline.179 Also, German law will require a Nachfrist period to the buyer, unless the contract included a fatal payment term that was of essential importance to the creditor (German Civil Code Section 323(2)). French law is less strict with regard to payment periods: even then, the debtor should be granted an extra chance to perform unless ‘there is urgency’ (Article 1226 French Civil Code). Chinese law lacks an exception for payment periods and requests a notice ‘with a time limit’ (CCC Article 565), suggesting that termination for breach does not take place immediately. No similar procedure would be available if US domestic sales law (UCC Article 2) applied and, as noted in connection with Illustration One, Seller’s remedy would be limited to recovery of the unpaid price and incidental damages.

III. Single Delivery Contract, All Goods Non-Conforming 93

Illustration Three: Seller delivered three machines in a single delivery as called for by its contract with Buyer, but the machines did not conform to the requirements of the contract. Buyer had prepaid half the purchase price for the three machines before they were delivered.

If the CISG, the PICC or PECL applies to the transaction, Buyer may avoid or termi- 94 nate the contract (by notice to Seller) provided the goods’ non-conformity constitutes a fundamental breach/fundamental non-performance.180 Buyer’s right to avoid under the CISG will in addition depend on whether it can make restitution of the goods to Seller substantially in the condition in which Buyer received them (CISG Article 82(1)) and, if it cannot do so, whether the reason for this inability falls within any of the exceptions in CISG Article 82(2); if the buyer is able to avoid even though it cannot return the goods Examples of contract clauses making timely performance ‘of the essence’ are provided below. See CISG Article 63; PICC Article 7.1.5(1) & (2) and PECL Article 8-106(1) & (2). 179 CISG Article 64(1)(b); PICC Articles 7.1.5(3) & (4) & 7.3.1(3) and PECL Article 8:106(3). 180 See CISG Articles 25 & 49(1)(a); PICC Article 7.3.1(1), (2) and PECL Articles 8:103 & 9:301(1). 177

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substantially in their original condition, it ‘must account to the seller for all benefits which he has derived from the goods or part of them.’181 Under the other instruments Buyer may avoid whether or not it can make restitution of the goods themselves, but inability to return the goods triggers an obligation to give Seller a monetary substitute.182 95 US domestic sales law includes a ‘perfect tender rule’ that would apply in a situation like Illustration Three. This rule permits a buyer to reject goods if they fail to conform to the contract ‘in any respect.’183 Thus if US domestic law applies in Illustration Three, Buyer could reject the goods even if the machines’ non-conformities were minor. Buyer would do so by giving notice of rejection within a reasonable time after the goods were tendered;184 the notice of rejection should specify the goods’ non-conformities.185 If, however, Buyer initially accepted the machine and then later wished to revoke that acceptance, it could do so only if: the non-conformities substantially impaired the machines’ value to Buyer (i.e., no perfect tender rule in this situation); the buyer accepted the goods on the reasonable assumption that the non-conformities in the machines would be cured, or because it was unaware of the non-conformities due to Seller’s assurances or the difficulty of discovering the non-conformities before acceptance; Buyer revokes before any substantial change in the condition of the machines that was not caused by their own defects; and Buyer notifies Seller of revocation within a reasonable time after Buyer discovered or ought to have discovered the non-conformity.186 The other domestic sales laws differ from the US starting point: they all allow avoidance for breach only if the non-performance is serious enough (Chinese law stipulating that termination is possible if the purpose of the contract cannot be achieved, French law by requiring a sufficient serious non-performance in French Civil Code Article 1224) and German law by accepting immediate avoidance only if the debtor ‘seriously and definitively’ refuses performance and, in less serious cases, only if a Nachfrist period has been left unused (German Civil Code Section 323). 96 Avoidance or termination of the contract under the CISG, the PICC or PECL, and rejection or revocation of acceptance of goods under Article 2 of the UCC, all trigger restitutionary obligations. Under the CISG, upon contract avoidance each party ‘may claim restitution from the other party of whatever the first party has supplied or paid under the contract.’ Thus in Illustration Three, if the CISG governs and Buyer avoids the contract, Seller may reclaim the (non-conforming) goods and Buyer may reclaim the part of the price it paid, along with interest under CISG Article 84(1). Similarly, under the PICC, if a terminated contract is ‘to be performed at one time’ (as in Illustration Three), ‘either party may claim restitution of whatever it has supplied under the contract’, so that Seller and Buyer may claim the same restitution as under the CISG.187 Under the PECL, upon termination Buyer ‘may recover money paid for a performance which it did not receive or which it properly rejected’,188 and Seller may CISG Article 84(2). See PICC Article 7.3.6(2) (‘If restitution in kind is not possible or appropriate, an allowance has to be made in money whenever reasonable.’); PECL Article 9:309 (‘On termination of the contract a party who has rendered a performance which cannot be returned and for which it has not received payment or other counter-performance may recover a reasonable amount for the value of the performance to the other party.’). 183 UCC § 2-601. 184 See UCC § 2-602. 185 See UCC § 2-605. 186 UCC § 2-608. 187 According to Official Comment 6 to PICC Article 7.3.6, however, it is unclear whether Buyer would be entitled to interest on its refunded payments. 188 PECL Article 9:307. 181

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recover ‘property which can be returned and for which it has not received payment or other counter-performance.’ Thus if Buyer terminates the contract under PECL, Buyer has ‘rejected’ all three machines, and is entitled to restitution of the amount it paid Seller, plus interest;189 and, because (after claiming restitution of payments) Buyer will have paid nothing, Seller is entitled to recover all the delivered goods. Under the other domestic rules, the starting point is reciprocal restitution too. 190 This 97 means that the seller has to refund the party payment and the buyer has to return the defective goods. German law has some detailed exceptions to this rule, but these do not apply here: restitution is possible, the situation that an object has been processed or disposed does not apply, and the illustration does not state that the non-conformity of the machines was caused after it was used by the buyer.191 If the CISG applies in Illustration Three and Buyer avoided the contract (thereby 98 ‘rejecting’ the goods), Buyer (who would owe restitution of the delivered goods to Seller) would be under an obligation to ‘take such steps to preserve [the goods] as are reasonable in the circumstances.’192 The PECL would impose on Buyer an obligation to take reasonable steps to protect and preserve the property.’193 The PICC , in contrast, does not expressly provide for an equivalent duty to preserve goods subject to restitution – although if Buyer fails to preserve the goods and thus cannot fulfil its restitutionary obligations described above, Buyer will have to provide a monetary substitute. If Buyer does preserve the goods for Seller, Buyer may recover the reasonable costs of such preservation under express provisions of the PICC.194 Under US domestic sales law, because the goods have been delivered and are in the possession of Buyer, it is obliged to ‘hold them with reasonable care at the seller’s disposition’,195 and it may recover incidental damages for expenses reasonably incurred in preserving the goods.196 Under German law, the duty of care for the goods follows from German Civil Code Section 346(3): this provision implies that as long as the buyer exercises good care over the goods delivered, he is not liable for any deuteriation of the goods. Moreover, in other systems a duty of care may follow from the concept of mora debitoris or from general rules on good faith and fair dealing. If the CISG governed the transaction in Illustration Three and Buyer avoided the 99 contract, Buyer would be entitled to damages measured by the difference between the contract price for the three non-conforming machines and either the price in a reasonable purchase of substitute machines (CISG Article 75) or the ‘current price’ of conforming machines (CISG Article 76), along with any further damages suffered (CISG Article 74) provided those damages were foreseeable and could not have reasonably been avoided (CISG Article 77). Under the PICC or PECL, if Seller properly terminates the contract it is entitled to similar damage measures.197 If Buyer rightfully rejects or

See PECL Article 9:508 and Comment D to PECL Article 9:307. French Civil Code Article 1229, Chinese Civil Code Article 566, German Civil Code Section 346. 191 German Civil Code Section 346. 192 CISG Article 86. One way the buyer may fulfil this obligation is to deposit the goods in a third-party warehouse, ‘provided the expense incurred is not unreasonable.’ CISG Article 87. 193 PECL Article 7:110(1). Buyer could fulfil this obligation by, inter alia, depositing the goods ‘on reasonable terms’ in a warehouse ‘to the order of ’ Seller, and notifying Seller of this, or ‘by selling the property on reasonable terms after notice to the other party.’ PECL Article 7:110(2). 194 See PICC Article 7.3.6(4). 195 UCC § 2-602(2). 196 See UCC § 2-715(1). 197 See PICC Articles 7.4.2, 7.4.5 and 7.4.5; PECL Articles 9:502, 9:506 and 9:507. 189

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revokes acceptance of the machines under US domestic sales law, Buyer would again be entitled to similar damage measures.198

IV. Single-Delivery Contract, Some Goods Non-Conforming 100

Illustration Four: Same facts as Illustration Three, except only one of the three machines that Seller delivered failed to conform to the Contract; the other two machines were conforming.

Under CISG Article 51 Buyer could separate the part of the contract relating to the single non-conforming machine and apply the Convention’s avoidance provisions to that part. As a result, Buyer could avoid the contract as to the one non-conforming machine, provided the non-conformity constituted a fundamental as measured against that one machine breach – i.e., the non-conformity substantially and foreseeably deprived Buyer of what it was entitled to expect under that part of the contract (CISG Article 25). If Buyer wanted to avoid the entire contract based on the non-conformity in the one machine, however, it would have to prove a fundamental breach of the whole contract – i.e., as measured against all three machines. That is unlikely unless the machines are designed to work together in some fashion, so that the problem with one machine would substantially impact Buyer’s use of all three machines. If Buyer avoids as the one non-conforming machine, the consequences described in the discussion of Illustration Three will apply, but only with respect to the part of the contract relating to that machine. Thus Buyer would be entitled to a refund (plus interest) of what it has paid seller for the one machine, although it will not be able to recover payments related to the conforming machines and will remain responsible for payment of the balance of the price for those two machines; Buyer would be under an obligation to preserve the non-conforming machine it was rejecting and, of course, to give restitution of that machine to seller (concurrently with receiving its refund); and it would be entitled to recover damages measured by the difference between the contract price for the one machine and either the price in a reasonable purchase of a substitute machine (CISG Article 75) or the ‘current price’ of a conforming machine (CISG Article 76), along with any further damages suffered (CISG Article 74) provided those damages are foreseeable and could not have reasonably been avoided (CISG Article 77). 102 The PICC make no explicit provision for partial avoidance of contract. Thus if the instrument were applied literally to Illustration Four, Buyer could only terminate the entire contract, and could do so only if it could show (unlikely) that the non-conformity in the single machine constituted a ‘fundamental non-performance’ of the entire contract. 199 It has been argued by several authors, however, that PICC Article 7.3.1 shall be interpreted to permit partial termination in the fashion of CISG Article 51.200 If that argument were indeed accepted, Buyer may be able to terminate the contract as to the single defective machine (while keeping, and remaining obligated to pay for, the other two conforming machines) provided the non-conformity qualified as a fundamental non-performance as measured against that single machine. 101

See UCC §§ 2-712, 2-713 & 2-715. Illustration Four appears to involve a ‘contract to be performed at one time,’ so that restitution upon termination of the contract would be governed by PICC Article 7.3.6 rather than by Article 7.3.7 (which applies to ‘contracts to be performed over a period of time’). 200 See Bach, in Kröll/Mistelis/Perales Viscasillas Commentary (n 19) Article 51 para. 50; Huber in Vogenauer UNIDROIT Commentary (n 27) Art. 7.3.1 para. 95 and 96. 198 199

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The first sentence of PECL Article 9:302 provides as follows: ‘[i]f the contract is to be 103 performed in separate parts and in relation to a part to which a counter-performance can be apportioned, there is a fundamental non-performance, the aggrieved party may exercise its right to terminate under this Section in relation to the part concerned.’ Thus in Illustration Four, if the delivery of the single non-conforming machine was a ‘separate part’ of the contract to which a part of the price could be apportioned,201 under the PECL Buyer could terminate the contract in relation to just that machine, provided the non-conformity was a fundamental non-performance in relation to that machine. The fact that in Illustration Four the three machines were conveyed to Buyer in a single delivery makes it unclear if the contract is properly deemed ‘to be performed in separate parts’ for purposes of this rule. At any rate, under the PECL Buyer ‘may terminate the contract as a whole only if the non-performance is fundamental to the contract as a whole.’202 If US domestic sales law (as found in Article 2 UCC) applied in Illustration Four, 104 Buyer could reject the single non-conforming machine and accept the two conforming machines (assuming those two machines constituted a ‘commercial unit or units’); alternatively, Buyer could reject all three machines. See UCC § 2-601.203 In either case, because the contract in Illustration Four would be subject to the so-called perfect tender rule in UCC § 2-601 – i.e., the contract calls for a single delivery (rather than delivery in installments) and the parties have apparently not contracted out of the perfect tender rule – the non-conformity in the one machine would justify such rejection without regard to how serious Seller’s breach was. On the other hand, if the non-conformity in the one machine was a latent defect that Buyer did not discover until after it had accepted all three machines,204 and after discovery Buyer wished to return the non-conforming machine to Seller and get a refund of the price of that machine, Buyer would need to revoke its acceptance of the machine under UCC § 2-608; this would require that the non-conformity substantially impair the value of the machine to Buyer.205 If Buyer wished to revoke acceptance of all three machines, it would have to show that the non-conformity in the one machine substantially impaired the value to Buyer of all three machines. If one of the other domestic rules were to apply, the situation is as follows. German 105 law would only allow for avoidance of the whole contract if the debtor ‘has no interest in part performance’. This might, for instance, be the case if the three machines are designed to work together, so that the problem with one machine would leave the other machines useless and part performance is without relevance. If not, then only partial avoidance is possible.206 While French and Chinese law are less clear, both CCC Article 575 and French Civil Code Article 1229 seem to allow for part avoidance; obviously the 201 According to Comment A to PECL Article 9:302, this ‘typically’ occurs where there is ‘a separate price for each performance.’ Thus, it is more likely the partial avoidance rule of PECL Article 9:302 would apply in Illustration Four if the contract stated a separate price for each machine. On the other hand, Comment C to PECL Article 9:302 states: ‘Sometimes one party’s obligation to perform consists of distinct parts, and the non-performance affects only one of those parts, but the payment to be made for them is not split into equivalent sums. If nonetheless the first party’s performance is really divisible and the payment can be properly apportioned, Article 9:302 applies and termination is allowed in respect of the part affected.’ This might permit Buyer to terminate as to the single non-conforming machine, even if the price was not apportioned in the contract. See in more detail: Kleinschmidt in Jansen & Zimmermann (eds) Commentaries on European Contract Laws (n 16) PECL Article 9:302 paras 3 & 8. 202 See the second sentence of PECL Article 9:302. 203 Under the wording of UCC § 2-601 it is even possible that Buyer could reject the non-conforming machine along with one of the conforming machines, while accepting a single conforming machine. 204 UCC § 2-606 addresses how a buyer ‘accepts’ goods. 205 See UCC § 2-608(1). 206 German Civil Code Section 323(5).

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requirements for termination – namely, the breach must be sufficiently serious – must be met.

V. Partial Repudiation by Buyer 106

Illustration Five: Seller and Buyer entered into a contract for the sale of three machines. Before the date for delivery or payment arrived, Buyer informed Seller that Buyer now needed only one of the machines, and it would not accept delivery or pay for the other two machines.

If the CISG is the applicable law, Seller may avoid the contract under CISG Article 72 (with the consequences specified for Illustration One) provided it is ‘clear’ that Buyer will commit a fundamental breach (as defined in CISG Article 25). On the facts of Illustration Five it appears clear that Buyer will breach (by refusing to take or pay for two of the three machines), but whether that breach would be fundamental under the strict standards that have developed for that concept is not entirely certain; if Seller declares the contract avoided without sufficient grounds, Seller may itself be in breach. In an anticipatory breach situation like Illustration Five the CISG does not expressly authorize Seller to avoid just the part of the contract relating to the two machines Buyer intends to refuse, even though failure to receive or pay for those two machines would clearly constitute a fundamental breach as to that portion of the contract.207 There is, however, little reason to require Seller to prepare and tender delivery of all three machines given Buyer’s clear declaration regarding two of them, and a tribunal may permit partial avoidance.208 As an alternative to immediate avoidance under CISG Article 72, Seller may attempt to suspend (temporarily) its performance pursuant to CISG Article 71 (under which the standards for the required seriousness of a threatened breach may be somewhat lower than under CISG Article 72), in hopes that Buyer will either change its mind or that, if Buyer does not provide ‘adequate assurances’ of its full performance, a tribunal may permit Seller to avoid the entire contract. CISG Article 71, however, is also fraught with vague standards and uncertain procedures.209 It is clear that contractual provisions to supplement or replace the CISG rules on threats of future breach may be particularly desirable. 108 If the PICC or PECL applied in Illustration Five, Seller could terminate the contract if it is ‘clear’ that Buyer will commit a ‘fundamental non-performance.’210 Although the future breach by Buyer appears clear, it is not certain that a refusal to receive and pay for two of the three machines would constitute a fundamental non-performance for the whole contract under the rules in those instruments.211 109 UCC § 2-610 permits a party to ‘resort to any remedy for breach’ if the other party ‘repudiates the contract with respect to performance not yet due the loss of which will substantially impair the value of the contract to the other.’212 Among the available reme107

207 Article 51, the CISG provision expressly providing for partial avoidance, would not directly apply in Illustration Five because there has been no partial or partially non-conforming delivery and it is the seller, rather than the buyer, who wishes to avoid. 208 For example, a tribunal could treat the Convention’s failure to provide for partial avoidance in a partial repudiation scenario as an internal gap in the Convention and, pursuant to CISG Article 7(2), apply the principles of Article 51 by analogy. 209 See the discussion of Article 71 in Chapter 17 ‘Performance and Breach of Contract’. 210 See PICC Article 7.3.3 and PECL Article 9:304. 211 See PICC Article 7.3.1(2) and PECL Article 8:103. 212 Alternatively, a party suffering a repudiation may ‘for a commercially reasonable time await performance by the repudiating party.’ UCC § 2-610(a). Even if this option is chosen initially, the party suffering

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dies is ‘cancellation’ of the contract,213 which has an effect similar to avoidance or termination of the contract.214 Thus if US domestic sales law applied in Illustration Five, Seller could cancel the contract provided Buyer’s refusal to take or pay for two of the three machines would substantially impair the value of the entire contract to Seller.215 The ‘substantial impairment’ standard would likely be satisfied on the facts of Illustration Five. Nothing in the UCC, however, expressly authorizes partial cancellation of a contract; thus it is not clear whether Seller could cancel the contract and seek damages with respect to two machines while keeping the contract in force with respect to the single machine Buyer is willing to take – although it would not be terribly surprising if such partial cancelation were permitted. An alternative available to Seller if US domestic sales law applied in Illustration Five 110 would be to invoke UCC § 2-609 by making written demand that Buyer provide ‘adequate assurances’ of its performance. This would allow Seller to ‘suspend any performance for which he has not already received the agreed return’,216 provided such suspension is ‘commercially reasonable’, until Seller receives adequate assurances from Buyer. Thus if Seller in Illustration Five has not yet received payment for the three machines, proceeding under UCC § 2-609 would allow Seller to suspend its performance with respect to all three machines while awaiting Buyer’s response. If Seller does not receive adequate assurances from Buyer ‘within a reasonable time not to exceed thirty days’, this constitutes a repudiation of the contract;217 in that case, however, there would still be no express authorization for Seller to cancel only the part of the contract that covers the two machines Buyer said it would not take. Both German and Chinese law explicitly acknowledge the doctrine of anticipatory 111 breach in relation to termination. German Civil Code Section 323(3) makes it clear that the contract may be terminated before performance is due if it is obvious that the requirements for avoidance will be met. So, if before the performance is due it is clear that the other party will not perform its obligation at all or will not perform it adequately or in time, the other party may – depending on the circumstances – wholly or partially terminate the contract. To do so, it must be obvious that the other party will not perform, for instance, since he makes it clear that he will refuse to perform. 218 Illustration 5 is a perfect example of this situation of anticipatory breach by the buyer, giving the seller the opportunity to partly avoid the contract. The same is true for Chinese law: according to CCC Article 563(2), it is already possible to terminate a contract if the other party, prior to the expiration of the period of performance, expressly states, or indicates through its conduct, that it will not perform its main obligation. French law lacks such explicit provision, enabling the contracting parties to terminate the contract even before the performances are due.

the repudiation may change its mind and resort to remedies for breach ‘even though he has notified the repudiating party that he would await the latter’s performance and has urged retraction.’ UCC § 2-610(b). 213 See UCC §§ 2-703(f) and 2-711(1). 214 See UCC § 2-16(4). 215 This assumes that Buyer’s declaration that it would refuse to take delivery of or pay for two of the machines was clear enough to constitute a ‘repudiation’. 216 According to Official Comment 2 to UCC § 2-609, ‘‘[s]uspend performance’ under this section means to hold up performance pending the outcome of the demand, and includes also the holding up of any preparatory action.’. 217 UCC § 2-609(4). 218 Schwarze, in Staudinger Commentary 2020 (n 35) BGB § 323 para. B63.

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G. Cross References & Additional Commentary 112

As noted throughout the foregoing Commentary, a variety of other topics relating to international sales transactions are relevant to the topic of avoidance of contract. They include the material on ‘Performance and Breach of Contract’ in Chapter 17 (including the topics of Fundamental Breach, Nachfrist, and Prospective Non-Performance); the material on ‘Anticipatory Breach’ in Chapter 18; the material on ‘Remedies and Damages’ in Chapter 19; and the material on ‘Excuse and Hardship’ in Chapter 22.

H. Practitioner Tips & Contract Clauses 113

The model clauses below are drafted for a sales contract that is governed by the CISG and that calls for a single delivery of goods by Seller and a single payment by Buyer. If the contract calls for multiple installment deliveries or multiple payments, the terms should be adjusted, and parties may well wish to provide for partial avoidance of contract where the grounds for avoidance affect less-than-all deliveries or payments. If instruments or laws other than the CISG govern the transaction, the terminology used in these clauses should be modified (e.g., substitute ‘termination’ for ‘avoidance’ if the PICC or PECL apply), and the substance of the clause may also require adjustment.

I. Model Contract Clause: Grounds for Avoidance by Seller 114

Any one or more of the following constitutes219 grounds for Seller to avoid the contract for breach: a) failure of the Letter of Credit specified in Clause … to be issued on the terms and by the date specified in that Clause; b) failure by Buyer to take delivery of tendered goods at the place and time specified Clause …;220 c) failure by Buyer to make payment in the form, on the terms, and at the time specified in Clause …;221 d) prospective non-performance by the Buyer that satisfies the terms of Clause … [see Prospective Non-Performance Clause below]; [Add any other desired specific grounds for avoidance by Seller, such as Buyer’s insolvency, commencement of bankruptcy or insolvency proceedings for Buyer, etc …] e) Buyer’s commission of any other fundamental breach of contract. Upon occurrence of any of the foregoing, Seller may, by notice dispatched to Buyer, declare the contract avoided without prior demand on or notice to Buyer. To the extent anything in this clause conflicts with or varies from the terms of the CISG, the parties intend to derogate from and/or vary the effect of the provisions of the CISG.

219 If Seller does not want to limit avoidance to these grounds only, it may be advisable to express this in the text, by adding that other grounds may give rise to termination too. 220 Alternatively, ‘(b) failure by Buyer to take delivery of tendered goods at the place and within [e.g., three] business days of the time specified Clause …’ If such an alternative is used, it should be specified that the clause does not relieve Buyer of liability for damages for any failure to take delivery at the time specified in Clause …; it might also be wise to include an agreed damages provision providing for specified amounts for each day Buyer is late in taking delivery. 221 Alternatively, ‘b) failure by Buyer to make payment in the form, on the terms, and within [e.g., three] business days of the time specified in Clause …’ If such an alternative is used, it should be specified that the clause does not relieve Buyer of liability for damages for any failure to make payment at the time specified in Clause … it might also be wise to include an agreed damages provision providing for specified amounts for each day Buyer is late in paying.

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II. Model Contract Clause: Grounds for Avoidance by Buyer Any one or more of the following constitutes222 grounds for Buyer to avoid the 115 contract: a): failure by Seller to make any delivery at the place and time specified in Clause …;223 b) delivery by Seller of any non-conforming goods;224 c) failure by Seller to perform any of the obligations specified in Clauses … and … [specify provisions giving Seller service obligations] in the manner, meeting the standards, and at the time specified in those Clauses; d) prospective non-performance by the Seller that satisfies the terms of Clause … [see Prospective Non-Performance Clause below]; [Add any other desired specific grounds for avoidance by Buyer, such as Seller’s insolvency, commencement of bankruptcy or insolvency proceedings for Buyer, etc …] e) Seller’s commission of any other fundamental breach of contract. Upon occurrence of any of the foregoing, Buyer may, by notice dispatched to Seller, declare the contract avoided without prior demand on or notice to Seller. To the extent anything in this clause conflicts with or varies from the terms of the CISG, the parties intend to derogate from and/or vary the effect of the provisions of the CISG.

III. Model Contract Clause: Avoidance for Prospective Non-Performance Either party may avoid the contract if the party acquires reasonably reliable infor- 116 mation that it is more likely than not the other party will in the future commit a fundamental breach of contract. If time permits, a party who desires to proceed under this section must request adequate assurance of future performance from the other party, unless the first party has already made such a request with regard to the same potential breach in connection with suspension of the first party’s performance. The parties agree that in any case the following circumstances make it more likely than not that a party will commit a future beach: a) the commission by a party or its affiliate of a current breach under this contract or any other contract between the parties or their affiliates, if a similar breach would be possible in the future under this contract and no circumstances make it clear such a future breach would not occur; b) failure by a party to provide adequate assurances of its future performance to a requesting party within 30 days after receipt of a request for such assurances made under this clause or in connection with suspension of the first party’s performance; c) any other facts or circumstances that make it more likely than not that a party will commit a future breach.

222 If Buyer does not want to limit avoidance to these grounds only, it may be advisable to express this in the text, for instance by adding that other grounds may give rise to termination too. 223 Alternatively, ‘a) failure by Seller to make any delivery at the place and within [e.g., three] business days of the time specified in Clause …’ If such an alternative is used, it should be specified that the clause does not relieve Seller of liability for damages for any failure to make delivery at the time specified in Clause …; it might also be wise to include an agreed damages provision providing for specified amounts for each day Seller is late in making delivery. 224 As drafted, this subpart b) would allow Buyer to avoid for any lack of conformity in delivered goods – a form of perfect tender rule. This ground for avoidance, however, should be consistent with the terms of the quality obligations (often denominated ‘warranties’) that the contract imposes on Seller. Thus if the Warranty provision of the contract allows Seller to repair or replace non-conforming goods for, e.g., a period of 30 days following notice of lack of conformity, the grounds for avoidance should be adjusted to reflect this.

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The parties agree that, for purposes of avoidance of contract by Seller under this Clause, the following would constitute225 a fundamental breach of contract: a) any of the grounds for avoidance specified in the Clause entitled Grounds for Avoidance by Seller; b) failure by Buyer to make timely payments due Seller or its affiliates under contracts or obligations other than this contract; c) failure by Buyer to timely accept delivery under contracts with Seller or its affiliates other than this contract; d) [add any further desired further threatened breaches that the parties agree would justify avoidance by Seller]. The parties agree that, for purposes of avoidance of contract by Buyer under this Clause, the following would constitute fundamental breaches: a) any of the grounds for avoidance specified in the Clause entitled Grounds for Avoidance by Buyer; b) failure by Seller to make timely delivery under contracts with Buyer or its affiliates other than this contract; c) delivery by Seller of non-conforming goods under contracts with Buyer or its affiliates other than this contract; [add any further desired further threatened breaches that the parties agree would justify avoidance by Buyer]. 118 Except as otherwise provided in this Clause, if a party has grounds for avoidance under this Clause the party may, by notice dispatched to the other party, declare the contract avoided without prior demand on or notice to the other party. To the extent anything in this clause conflicts with or varies from the terms of the CISG, the parties intend to derogate from and/or vary the effect of the provisions of the CISG. 117

IV. Model Contract Clause: Restitution and Preservation of Goods Following Avoidance 119

If the contract is avoided, and either or both parties are under an obligation to make restitution, the following provisions apply. a) If the buyer is under an obligation to preserve and make restitution of goods delivered under this contract and in the buyer’s possession, it retains risk of their loss until the goods are delivered into the possession of the seller or its authorized agents, or the goods are handed over to the first carrier for transmission to the seller. b) If under CISG Article 84(2) the buyer must account to the seller for benefits it derived from the goods or part of them, the buyer will provide the seller accurate information concerning such benefits. c) If under CISG Article 84(1) the seller is bound to refund the price or part thereof paid under this contract, it shall pay interest on such amounts at the rate of [x]% per annum from the date such payments were made.

120

To the extent anything in this clause conflicts with or varies from the terms of the CISG, the parties intend to derogate from and/or vary the effect of the provisions of the CISG.

V. Seller’s Notice of Avoidance (Entire Contract) 121

[Name of avoiding party], the seller under the contract between [names of parties] dated [date of contract] for the sale of [types of goods] (hereinafter, the ‘Contract’), hereby declares the Contract avoided, pursuant to the terms of the Contract and the provisions of the United Nations Convention 225 If parties do not want to limit the notion of fundamental breach to these grounds, it may be advisable to express this in the text, for instance by adding that other grounds may constitute fundamental breach too.

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I. Additional Sources on Contracts for the International Sale of Goods, because of the failure of [name of other party] to perform its obligations under the Contract.226 This declaration of avoidance is effective as of [date and time], the time of dispatch of this notice. [Name of avoiding party] hereby requires restitution of all property supplied under the Contract, along with an accounting of all benefits that [name of other party] has derived from the property. [Name of avoiding party] hereby offers restitution of payments it received from [name of other party] under the Contract, along with interest thereon from the date of payment, provided [name of avoiding party] simultaneously receives restitution to which it is entitled. Contact [name of avoiding party] by [designate email, regular mail or other means of communication, provided the designated means is proper] at [address] in order to make necessary arrangements.

VI. Buyer’s Notice of Avoidance (Entire Contract) [Name of avoiding party], the buyer under the contract between [names of parties] dated [date of contract] for the sale of [types of goods] (hereinafter, the ‘Contract’), hereby declares the Contract avoided, pursuant to the terms of the Contract and the provisions of the United Nations Convention on Contracts for the International Sale of Goods, because of the failure of [name of other party] to perform its obligations under the Contract.227 This declaration of avoidance is effective as of [date and time], the time of dispatch of this notice. [Name of avoiding party] hereby requires restitution of all payments made under the Contract, along with interest from the date of payment. [Name of avoiding party] hereby offers restitution of all property it received under the Contract, provided [name of avoiding party] simultaneously receives restitution to which it is entitled. Contact [name of avoiding party] by [designate email, regular mail or other means of communication, provided the designated means is proper] at [address] in order to make necessary arrangements.

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I. Additional Sources Honnold, Uniform Law for International Sales under the 1980 United Nations Convention (4th edn, edited and updated by Flechtner, Kluwer Law International 2009) 441–443; Huber, ‘Comparative Sales Law’, in Reimann & Zimmermann (eds), The Oxford Handbook of Comparative Law (2 nd edn, OUP 2019), 933–960; Jansen & Zimmermann (eds), Commentaries on European Contract Laws (OUP 2018); Kritzer, CISG Database, sponsored by the Institute of International Commercial Law of Pace University School of Law, http://www.cisg.law.pace.edu/; UNCITRAL Digest of Case Law on the United Nations Convention on Contracts for the International Sale of Goods (2012 and 2016 edition), available online at http://www .uncitral.org/pdf/english/clout/CISG-digest-2012-e.pdf and https://www.uncitral.org/pdf/english/cl out/CISG_Digest_2016.pdf; Kröll, Mistelis & Perales Viscasillas (eds), UN Convention on Contracts for the International Sale of Goods (CISG) (2nd edn C.H. Beck 2018); Magnus, ‘Remedies, Price Reduction, Avoidance, Mitigation and Preservation’ in DiMatteo (ed), International Sales Law: A Global Challenge (CUP 2014) 257; Magnus, ‘The Remedy of Avoidance of Contract under CISG: General Remarks and Special Cases’ (2005–06) 25 J L & Com 423; Schwenzer (ed), Schlechtriem & Schwenzer Commentary on the UN Convention on the International Sale of Goods (CISG) (4th edn, OUP 2016); Vogenauer (ed), Commentary on the UNIDROIT Principles of International Commercial Contracts, (2 nd edn, OUP 2015).

226 If avoidance is based on the other party’s anticipated breach, the last part of this sentence should be changed to the following: ‘because of the anticipated failure of [name of other party] to perform its obligations under the Contract.’. 227 If avoidance is based on the other party’s anticipated breach, the last part of this sentence should be changed to the following: ‘because of the anticipated failure of [name of other party] to perform its obligations under the Contract’.

Harriët N. Schelhaas and Harry M. Flechtner

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CHAPTER 21 RISK OF LOSS Michael Bridge A. Topics Covered . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B. Introductory Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C. Statement of Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . D. International Sales Transaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . E. Sampling of Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. CISG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Common European Sales Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. German Bürgerliches Gesetzbuch . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. French Code Civil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. Spanish Código Civil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI. American Uniform Commercial Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VII. United Kingdom Sale of Goods Act 1979 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VIII. Chinese Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F. Commentary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Meaning of Transfer of Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Allocation of Risk to the Seller . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Risk Events . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Seller’s Obligations and Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. A Normal Voyage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Evidentiary Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. Risk Transfer in the CISG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Effect of the Transfer of Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Fundamental Breach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Preserving the Buyer’s Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Restitution of the Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Evidentiary Difficulties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d) Time Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . e) Non-Fundamental Breach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . f) Quality of Carriage Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . g) Post-Avoidance Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. First Carrier Rule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) The Rule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Reservation of Title . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Handing Over and Delivery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d) Seller as Carrier? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . e) CISG and INCOTERMS 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . f) Particular Place Exception . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . g) Identification of Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . h) Excluding the CISG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. Sale in Transit Rule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Meaning of ‘Sold’ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Divided Risk and Retrospectivity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Seller’s Awareness of Casualty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5. Residual Risk Rule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Taking Over and Handing Over . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) The Delaying Buyer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Delay where there is No Carrier . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . G. Cross References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . H. Practitioner Tips . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Additional Sources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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D. International Sales Transaction

A. Topics Covered This Chapter deals with the key elements related to the transfer of risk: (1) the mean- 1 ing of risk of loss, (2) the allocation of risk, (3) the transfer of risk, and (4) the effects of the transfer of risk. It reviews the CISG’s risk of loss scheme and finds that risk under the CISG is narrower than the central role that transfer of risk plays in commercial law and commercial dealings. The Chapter also focuses on the seller’s obligations (and failure to meet those obligations) and their impact on the transfer of risk. Finally, the Chapter reviews the assortment of rules that have been developed to deal with issues involving the transfer of risk, including the first carrier rule, sale in transit rule, residual risk rule, and the particular place exception.

B. Introductory Note The subject of risk, more particularly its transfer, is dealt with in CISG Articles 66–70. 2 Although CISG Article 4(b) excludes from coverage the effect that the contract might have on the property in the goods, it will be shown below that risk is not a proprietary concept but rather a contractual one. Since the passing of property is a subject excluded from risk, and since there is no necessary connection between the transfer of risk and the passing of property, the latter subject is not dealt with in this work.

C. Statement of Issues The issues to be covered include: (1) the distinction between transfer of risk and 3 passing of property; the transfer of risk being contractual in nature and the transfer of title being within the domain of property law, (2) the relationship between the seller’s quality obligations and the transfer of risk, and (3) the role of fundamental breach in the transfer of risk. Other issues to be discussed include the relationship between the CISG and INCOTERMS; evidentiary issues, such as determining whether any defect in delivered goods arose prior to or after the transfer of risk, and proving the non-conformity of goods after the goods have been lost; the importance of the identification of goods; post-avoidance risk, reservation of title, and the burden of proof.

D. International Sales Transaction In view of the greater likelihood of damage to goods that are being transferred 4 internationally – over long distances, involving multiple modes of transit, the perils of the sea, and multiple loadings and unloadings – it is of paramount importance to determine when risk is transferred. Although the CISG does not lay down a comprehensive set of risk of loss rules, INCOTERMS if used by the parties provide a reliable scheme for allocating the risk of loss between the contracting parties. It is important that international sales contracts provide provisions dealing with the numerous issues discussed in this Chapter.

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E. Sampling of Laws I. CISG 5 Article 4 This Convention governs only the formation of the contract of sale and the rights and obligations of the seller and the buyer arising from such a contract. In particular, except as otherwise expressly provided in this Convention, it is not concerned with: (b) the effect which the contract may have on the property in the goods sold. Article 36 (1) The seller is liable in accordance with the contract and this Convention for any lack of conformity which exists at the time when the risk passes to the buyer, even though the lack of conformity becomes apparent only after that time. Article 66 Loss of or damage to the goods after the risk has passed to the buyer does not discharge him from his obligation to pay the price, unless the loss or damage is due to an act or omission of the seller. Article 67 (1) If the contract of sale involves carriage of the goods and the seller is not bound to hand them over at a particular place, the risk passes to the buyer when the goods are handed over to the first carrier for transmission to the buyer in accordance with the contract of sale. If the seller is bound to hand the goods over to a carrier at a particular place, the risk does not pass to the buyer until the goods are handed over to the carrier at that place. The fact that the seller is authorized to retain documents controlling the disposition of the goods does not affect the passage of the risk. (2) Nevertheless, the risk does not pass to the buyer until the goods are clearly identified to the contract, whether by markings on the goods, by shipping documents, by notice given to the buyer or otherwise. Article 68 The risk in respect of goods sold in transit passes to the buyer from the time of the conclusion of the contract. However, if the circumstances so indicate, the risk is assumed by the buyer from the time the goods were handed over to the carrier who issued the documents embodying the contract of carriage. Nevertheless, if at the time of the conclusion of the contract of sale the seller knew or ought to have known that the goods had been lost or damaged and did not disclose this to the buyer, the loss or damage is at the risk of the seller. Article 69 (1) In cases not within articles 67 and 68, the risk passes to the buyer when he takes over the goods or, if he does not do so in due time, from the time when the goods are placed at his disposal and he commits a breach of contract by failing to take delivery. (2) However, if the buyer is bound to take over the goods at a place other than a place of business of the seller, the risk passes when delivery is due and the buyer is aware of the fact that the goods are placed at his disposal at that place. (3) If the contract relates to goods not then identified, the goods are considered not to be placed at the disposal of the buyer until they are clearly identified to the contract. Article 70 If the seller has committed a fundamental breach of contract, articles 67, 68 and 69 do not impair the remedies available to the buyer on account of the breach.

II. Common European Sales Law 6 Article 105(1)–(2) Relevant time for establishing conformity 1. The seller is liable for any lack of conformity, which exists at the time when the risk passes to the buyer under Chapter 14.

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E. Sampling of Laws 2. In a consumer sales contract, any lack of conformity which becomes apparent within six months of the time when risk passes to the buyer is presumed to have existed at that time unless this is incompatible with the nature of the goods or digital content or with the nature of the lack of conformity. Article 140 Effect of passing of risk Loss of, or damage to, the goods or the digital content after the risk has passed to the buyer does not discharge the buyer from the obligation to pay the price, unless the loss or damage is due to an act or omission of the seller. Article 141 Identification of goods or digital content to contract The risk does not pass to the buyer until the goods or the digital content are clearly identified as the goods or digital content to be supplied under the contract, whether by the initial agreement, by notice given to the buyer or otherwise.

III. German Bürgerliches Gesetzbuch 7

§ 434 Material defects (1) The thing is free from material defects if, upon the passing of the risk, the thing has the agreed quality. To the extent that the quality has not been agreed, the thing is free of material defects: 1. if it is suitable for the use intended under the contract, 2. if it is suitable for the customary use and its quality is usual in things of the same kind and the buyer may expect this quality in view of the type of the thing. Quality under sentence 2 No. 2 above includes characteristics which the buyer can expect from the public statements on specific characteristics of the thing that are made by the seller, the producer (§ 4(1) and (2) of the Product Liability Act [Produkthaftungsgesetz]) or his assistant, including without limitation in advertising or in identification, unless the seller was not aware of the statement and also had no duty to be aware of it, or at the time when the contract was entered into it had been corrected in a manner of equal value, or it did not influence the decision to purchase the thing. § 446 Passing of risk and of charges The risk of accidental destruction and accidental deterioration passes to the buyer upon delivery of the thing sold. From the time of delivery the emoluments of the thing accrue to the buyer and he bears the charges on it. If the buyer is in default of acceptance of delivery, this is equivalent to delivery. § 447 Passing of risk in the case of sales shipment (1) If the seller, at the request of the buyer, ships the thing sold to another place than the place of performance, the risk passes to the buyer as soon as the seller has handed the thing over to the forwarder, carrier or other person or body specified to carry out the shipment. (2) If the buyer has given a particular instruction on the method of shipping the thing and the seller, without a strong reason, does not adhere to this instruction, the seller is liable to the buyer for the damage arising from this.

IV. French Code Civil 8

Article 1196 As regards contracts whose object is to alienate property or the assignment of some other right, transfer takes place at the time of the conclusion of the contract. This transfer may be deferred by the will of the parties, by the nature of the things in question or by the effect of legislation. The transfer of property entails the transfer of risk in the thing. Nevertheless, the debtor of an obligation to deliver regains the risk in it from the time of being put on notice to perform, in conformity with article 1344-2 and subject to the rules provided by article 1351-1. Article 1304-6 An obligation becomes unconditional from the moment when the suspensive condition is fulfilled. However, the parties may provide that the fulfilment of the condition will have retroactive effect from the date of the contract. The thing which is the subject matter of the obligation remains still at the risk of the debtor, who retains its management and has the right to its fruits until the condition is fulfilled.

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Chapter 21 Risk of Loss If a suspensive condition fails, the obligation is deemed never to have existed. Article 1344-2 A notice to deliver a thing passes the risk to the debtor, if the risk has not already passed. Article 1585 Where goods are not sold in bulk but by weight, number or measure, a sale is not complete, in that the things sold are at the risk of the seller until they have been weighed, counted or measured; but the buyer may claim either the delivery or damages, if there is occasion, in case of non-performance of the undertaking.

V. Spanish Código Civil 9 Article 1,452 Damages or improvements in the things sold after perfecting the contract shall be regulated by the provisions of articles 1.096 and 1,182. This rule shall apply to the isolated sale of fungible things for a lump sum price, or without considering their weight, number or measurement. If the fungible things should be sold for a price set in relation to their weight, number or measurement, the risk shall not be transferred to the purchaser until they have been weighed, counted or measured, unless the latter has incurred in default. Article 1,096 Where a specific thing is to be delivered, the creditor may compel the debtor to perform delivery, irrespective of the rights granted to him under article 1101. If the thing should be indeterminate or generic he may request the performance of the obligation at the debtor’s expense. If the obligor should default on his obligation, or should have undertaken to deliver the same thing to two or more different persons, he shall be liable for any fortuitous events until delivery thereof. Article 1,182 The obligation consisting of delivering a specific thing shall be extinguished when the thing should be lost or destroyed without fault on the part of the debtor and before the debtor has incurred in default.

VI. American Uniform Commercial Code 10 § 2-105(4) Definitions Undivided shares. An undivided share in an identified bulk of fungible goods is sufficiently identified to be sold, although the quantity of the bulk is not determined. Any agreed proportion of such a bulk or any quantity thereof agreed upon by number, weight or other measure may to the extent of the seller's interest in the bulk be sold to the buyer who then becomes an owner in common. § 2-319 F.O.B. and F.A.S. terms (1) Unless otherwise agreed the term F.O.B. (which means "free on board") at a named place, even though used only in connection with the stated price, is a delivery term under which (a) When the term is F.O.B. the place of shipment, the seller must at that place ship the goods in the manner provided in this Article (section 2-504) and bear the expense and risk of putting them into the possession of the carrier; or (b) When the term is F.O.B. the place of destination, the seller must at his own expense and risk transport the goods to that place and there tender delivery of them in the manner provided in this Article (section 2-503); (c) When under either paragraph (a) or (b) the term is also F.O.B. vessel, car or other vehicle, the seller must in addition at his own expense and risk load the goods on board. If the term is F.O.B. vessel the buyer must name the vessel and in an appropriate case the seller must comply with the provisions of this Article on the form of bill of lading (section 2-323). (2) Unless otherwise agreed the term F.A.S. vessel (which means "free alongside") at a named port, even though used only in connection with the stated price, is a delivery term under which the seller must

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E. Sampling of Laws (a)

At his own expense and risk deliver the goods alongside the vessel in the manner usual in that port or on a dock designated and provided by the buyer; and (b) Obtain and tender a receipt for the goods in exchange for which the carrier is under a duty to issue a bill of lading. (3) Unless otherwise agreed in any case falling within subsection (1) paragraph (a) or (c) or subsection (2) the buyer must seasonably give any needed instructions for making delivery, including when the term is F.A.S. or F.O.B. the loading berth of the vessel and in an appropriate case its name and sailing date. The seller may treat the failure of needed instructions as a failure of cooperation under this Article (section 2-311). He may also at his option move the goods in any reasonable manner preparatory to delivery of shipment. (4) Under the term F.O.B. vessel or F.A.S. unless otherwise agreed the buyer must make payment against tender of the required documents and the seller may not tender nor the buyer demand delivery of the goods in substitution for the documents. § 2-320(2) C.I.F. and C&F terms Unless otherwise agreed and even though used only in connection with the stated price and destination, the term C.I.F. destination or its equivalent requires the seller at his own expense and risk to (a) Put the goods into the possession of a carrier at the port for shipment and obtain a negotiable bill or bills of lading covering the entire transportation to the named destination; and (b) Load the goods and obtain a receipt from the carrier (which may be contained in the bill of lading) showing that the freight has been paid or provided for; and (c) Obtain a policy or certificate of insurance, including any war risk insurance, of a kind and on terms then current at the port of shipment in the usual amount, in the currency of the contract, shown to cover the same goods covered by the bill of lading and providing for payment of loss to the order of the buyer or for the account of whom it may concern; but the seller may add to the price the amount of the premium for any such war risk insurance; and (d) Prepare an invoice of the goods and procure any other documents required to effect shipment or to comply with the contract; and (e) Forward and tender with commercial promptness all the documents in due form and with any indorsement necessary to perfect the buyer's rights. § 2-509 Risk of loss in the absence of breach (1) Where the contract requires or authorizes the seller to ship the goods by carrier, (a) If it does not require him to deliver them at a particular destination, the risk of loss passes to the buyer when the goods are duly delivered to the carrier even though the shipment is under reservation (section 2-505); but (b) If it does require him to deliver them at a particular destination and the goods are there duly tendered while in the possession of the carrier, the risk of loss passes to the buyer when the goods are there duly so tendered as to enable the buyer to take delivery. (2) Where the goods are held by a bailee to be delivered without being moved, the risk of loss passes to the buyer (a) On his receipt of a negotiable document of title covering the goods; or (b) On acknowledgment by the bailee of the buyer's right to possession of the goods; or (c) After his receipt of a nonnegotiable document of title or other written direction to deliver, as provided in section 2-503, subsection (4), para.(b). (3) In any case not within subsection (1) or (2), the risk of loss passes to the buyer on his receipt of the goods if the seller is a merchant; otherwise the risk passes to the buyer on tender of delivery. (4) The provisions of this section are subject to contrary agreement of the parties and to the provisions of this Article on sale on approval (section 2-327) and on effect of breach on risk of loss (section 2-510). § 2-510(1)–(2) Effect of breach on risk of loss (1) Where a tender or 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. (2) Where the buyer rightfully revokes acceptance, he may to the extent of any deficiency in his effective insurance coverage treat the risk of loss as having rested on the seller from the beginning.

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VII. United Kingdom Sale of Goods Act 1979 11 Section 20 Passing of risk (1) 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. (2) But where delivery has been delayed through the fault of either buyer or seller the goods are at the risk of the party at fault as regards any loss, which might not have occurred but for such fault. (3) Nothing in this section affects the duties or liabilities of either seller or buyer as a bailee or custodier of the goods of the other party. (4) In a case where the buyer deals as consumer or, in Scotland, where there is a consumer contract in which the buyer is a consumer, subsections (1) to (3) above must be ignored and the goods remain at the seller’s risk until they are delivered to the consumer. Section 20A Undivided shares in goods forming part of a bulk (1) This section applies to a contract for the sale of a specified quantity of unascertained goods if the following conditions are met— (a) the goods or some of them form part of a bulk which is identified either in the contract or by subsequent agreement between the parties; and (b) the buyer has paid the price for some or all of the goods which are the subject of the contract and which form part of the bulk. (2) Where this section applies, then (unless the parties agree otherwise), as soon as the conditions specified in paragraphs (a) and (b) of subsection (1) above are met or at such later time as the parties may agree— (a) property in an undivided share in the bulk is transferred to the buyer, and (b) the buyer becomes an owner in common of the bulk. (3) Subject to subsection (4) below, for the purposes of this section, the undivided share of a buyer in a bulk at any time shall be such share as the quantity of goods paid for and due to the buyer out of the bulk bears to the quantity of goods in the bulk at that time. (4) Where the aggregate of the undivided shares of buyers in a bulk determined under subsection (3) above would at any time exceed the whole of the bulk at that time, the undivided share in the bulk of each buyer shall be reduced proportionately so that the aggregate of the undivided shares is equal to the whole bulk. (5) Where a buyer has paid the price for only some of the goods due to him out of a bulk, any delivery to the buyer out of the bulk shall, for the purposes of this section, be ascribed in the first place to the goods in respect of which payment has been made. (6) For the purposes of this section payment of part of the price for any goods shall be treated as payment for a corresponding part of the goods.

VIII. Chinese Law 12 Article 604 The risk of damage to or loss of a subject matter shall be borne by the seller prior to the delivery of the subject matter and by the buyer after delivery, except as otherwise stipulated by law or agreed upon by the parties. Article 605 Where a subject matter fails to be delivered within the agreed time limit because of the buyer, the buyer shall bear the risk of damage to or loss of the subject matter as from the date it breaches the agreement. Article 606 Where the seller sells a subject matter delivered to a carrier for carriage and is in transit, unless otherwise agreed upon by the parties, the risk of damage to or loss of the subject matter shall pass to the buyer at the time of formation of the contract. Article 607 After the seller has the subject matter transported to the place designated by the buyer and delivered to the carrier in accordance with the agreement, the risk of damage to or loss of the subject matter shall be borne by the buyer.

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F. Commentary Where there is no agreement between the parties as to the place for delivery or such agreement is not clearly, and the subject matter needs carriage according to the provisions of paragraph 2(1), Article 603 of this Code, the risk of damage to or loss of the subject matter shall be borne by the buyer after the seller has delivered the subject matter to the first carrier. Article 608 Where the seller has placed the subject matter at the place of delivery in accordance with the agreement or in accordance with the provisions of paragraph 2(2), Article 603 of this Code, while the buyer fails to take delivery in breach of the agreement, the risk of damage to or loss of the subject matter shall pass to the buyer on the date of breach of the agreement. Article 609 The failure of the seller to deliver the documents and information relating to the subject matter as agreed upon shall not affect the passing of the risk of damage to or loss of the subject matter. Article 610 Where the quality of the subject matter does not conform to the quality requirements, making it impossible to achieve the purpose of the contract, the buyer may refuse to accept the subject matter or may terminate the contract. If the buyer refuses to accept the subject matter or terminate the contract, the risk of damage to or loss of the subject matter shall be borne by the seller. Article 611 Where the risk of damage to or loss of the subject matter is borne by the buyer, the buyer's right to demand the seller to bear liability for breach of contract because the seller's performance of its obligations is not in conformity with the agreement shall not be affected.

F. Commentary I. Meaning of Transfer of Risk The principle of risk1 governs the question which of the two parties, buyer or seller,2 13 has to suffer the consequences of damage to, or the loss or destruction of, the goods 3 due to an event for which the seller is not contractually responsible. This loss or damage is hereinafter, where convenient, referred to as casualty suffered by the goods. Although it is sometimes considered to be a proprietary notion, owing to its long association in some legal systems with ownership,4 risk is essentially contractual in nature. Hence, although the CISG Article 4(b) excludes property matters, it deals with risk in more detail in CISG Articles 66–70 and does not tie the transfer of risk to the passing of property.5 As a contractual notion, the significance of risk lies in the consequences of its transfer to the buyer for the rights and duties of the parties. In the words of one writer: 1 See generally Schlechtriem & Schwenzer (eds), Commentary on the UN Convention on the International Sale of Goods (CISG) (4th edn, 2016) (Hachem); Kröll, Mistelis and Perales Viscasillas (eds),(2 nd edn, 2018) UN Convention on Contracts for the International Sale of Goods (CISG) (2011) (Erauw/Raymond). 2 Where a potential buyer has received the goods but no binding contract has yet been concluded at the time of loss or damage, the CISG’s rules on risk should not apply given the absence of a contract of sale: OLG Schleswig-Holstein 29 October 2002 (translated at http://cisgw3.law.pace.edu/cases/021029g1.html). 3 Erauw, in Kröll et al (n 1) p. 856 (as well as damage, destruction or defects in the documents relating to the goods). 4 According to Roman law, risk passed when the sale was perfected (emptio perfecta) and a sale was broadly speaking perfected at the same time as the property passed: de Zulueta, The Roman Law of Sale (1945) p. 34. Roman law did not as such subscribe to the principle of res perit domino. That principle was adopted in the Civil Law under the influence of Grotius before the codification movement: Schwenzer, Hachem & Kee, Global Sales Law (2012) paras 38.21 et seq. 5 Cf Argentina Cámara Nacional de Apelaciones en Lo Comercial 31 October 1995 (translated at http:// cisgw3.law.pace.edu/cases/951031a1.html). A Chinese court has ruled, under Chinese law, that a C&F

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The practical questions raised by the principle of risk are (1) whether the seller is entitled to demand payment from the buyer for goods that have been lost, destroyed or damaged;7 and (2) whether the buyer has a claim for damages for non-delivery or for the delivery of non-conforming goods (CISG Articles 74–76), or the right to require performance taking the form of repaired or replacement goods (CISG Article 46). It is normally the first of these two questions that is the more prominent. 15 A buyer to whom the risk has been transferred is bound to pay notwithstanding the casualty suffered by the goods and may not plead force majeure.8 The seller may therefore require payment by the buyer (CISG Article 62) even if unable to tender conforming goods, or indeed any goods at all. Moreover, the buyer may not reduce the price (CISG Article 50) to the extent of any casualty suffered by the goods. If payment has already been made, the seller is entitled to retain it. The buyer on risk may not, as a defence to payment, insist on concurrent performance by the seller, as it otherwise could in the presumptive case where delivery and payment are concurrent.9 Thus the buyer may not subvert the seller’s entitlement to the price by requiring performance in the form of repaired or replacement goods. In addition, the buyer may not avoid the contract for fundamental breach (CISG Article 25) if the goods are severely damaged or not delivered at all. Nor may the buyer claim damages for non-delivery or, if the goods survive in a damaged state, assert its right to conforming goods under CISG Article 35 with a claim for damages to the extent of their non-conforming character (see CISG Article 74). In effect, the transfer of risk to the buyer means that the seller is deemed to have performed its delivery and conformity obligations for the purpose of securing its right to the price. As the party asserting that the risk has been transferred to the buyer, the burden of persuasion to this effect is on the seller.10 14

II. Allocation of Risk to the Seller 16

If the goods have suffered a casualty but the risk remains on the seller, the provisions dealing with risk are not as such engaged since their concern is with the transfer of risk to the buyer. Rather, the question now is whether the seller unable to perform may claim an exemption under CISG Article 79.11

buyer to whom the risk but not the property has passed has an insurable interest in the goods: Wuhan Maritime Court 10 September 2002 (translated at http://cisgw3.law.pace.edu/cases/020910c1.html). 6 Sealy, ‘Risk in the Law of Sale’ [1972B] CLJ 225, 226–27 (English law). 7 Hof Ghent 16 June 2004 (translated at http://cisgw3.law.pace.edu/cases/040616b1.html); Audiencia de Valencia 15 February 2003 (translated at http://cisgw3.law.pace.edu/cases/030215s4.html); AG Duisburg 13 April 2000 (translated at http://cisgw3.law.pace.edu/cases/000413g1.html); OLG Oldenburg 22 September 1998 (translated at http://cisgw3.law.pace.edu/cases/980922g1.html); OLG Hamm 23 June 1998 (translated at http://cisgw3.law.pace.edu/cases/980623g1.html); Cámara Nacional (n 5). 8 Hungarian Court of Arbitration 10 December 1996 (translated at http://cisgw3.law.pace.edu/cases/96 1210h1.html). 9 Article 58(1). Or prior performance where credit has been granted to the buyer. 10 OLG Hamm (n 7). 11 In the case of pre-contractual casualty, an issue arises as to whether this is governed by Article 79 or whether, as an aspect of mistake (or initial impossibility), it falls outside the CISG further to Article 4(a) so as to be decided by the applicable law.

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Any discussion involving the transfer of risk is almost invariably concerned with 17 events during, or proximate to the time of, delivery. Under the CISG Articles 67–69 and most12 leading legal systems, the risk will be regarded as having been transferred to the buyer by that time. Most frequently, risk is an issue when the goods suffer casualty at a time when they are in the hands of a third party, such as a carrier or warehouse keeper, in which case rules on constructive delivery come into play. By the time the buyer takes actual possession of the goods, it will be rare for risk to remain on the seller at that point or indeed for a time thereafter. The seller, having performed its contractual responsibilities, should be entitled to regard the contract as a completed affair. If goods perish a number of years after delivery and payment, for reasons that fall within the purview of risk, it may be technically correct to say that the risk is on the buyer but in truth the question would never be raised. The question might, however, be posed if the goods perish shortly after delivery because this in some cases will raise a question about the conformity of the goods at the time of delivery. The seller’s quality obligations run only to the time when risk is transferred to the buyer,13 but the seller will remain liable for a subsequently occurring lack of conformity that is due to a breach of the seller’s obligations (CISG Article 36(2) and CESL Article 140).

III. Risk Events The CISG does not designate the events that fall within the ambit of risk except in 18 the most general terms when it refers to loss or damage (CISG Article 66). Clearly, risk under the CISG does not have the broad meaning that it possesses in commercial law in general, where it underpins the entire structure of commercial law and commercial dealings. Taking a contractual example, a seller and a buyer entering into a forward contract on the basis of a present fixed price are engaging with the risk of market movement. The seller bears the risk of the market price of goods rising after the contract date, and the buyer the risk of the market price falling after the contract date. Had they each delayed their contractual commitment in these two contrasting cases, they would have been better off. But had the market moved in the opposite direction, they would have been worse off. By contracting now instead of later, they are managing market risk. This type of contractual risk falls outside the scope of CISG Articles 66–70. Similarly, the existence of a resale market for the goods in the buyer’s hands is an excluded topic. As stated above, risk under the CISG embraces the loss of and damage to the contract 19 goods. But it does not extend to all loss or damage; loss or damage due to the default of the seller or buyer, as the case may be, is excluded.14 The doctrine of risk is therefore not 12 See, e.g., BGB § 446; Polish Civil Code Article 548(1); UCC § 2-509; Chinese Civil Code Article 604. But the French Civil Code bases the transfer of risk upon when the property passes, except that risk reverts to the party bound to deliver if put upon notice to perform: Articles 1196–3, 1344–2. The UK Sale of Goods Act provides that risk presumptively is transferred with the passing of property, but, since in practice the property normally passes on delivery (see Carlos Federspiel & Co SA v Charles Twigg & Co Ltd [1957] 1 Lloyd’s LR 240), risk normally passes with delivery. 13 Article 36(1). See also Common European Sales Law (CESL) (a draft Regulation of the European Parliament and of the Council: COM (2011) 635 final), Article 105(1). (The Regulation was not adopted but the CESL remains a useful point of reference.) This is explicitly so in German law (BGB § 434(1)), which in consumer contracts raises an evidentiary presumption of non-conformity in the case of defects appearing within six months of the transfer of risk (BGB § 477).When Article 11 of Directive (EU) 2019/771 of the European Parliament and of the Council of 20 May 2019 on certain aspects concerning contracts for the sale of goods is transposed into German law, the six month period will be increased to one year. 14 See CISG Article 36 (seller’s liability for non-conformity arising prior to the transfer of risk to the buyer); OLG Linz 23 January 2006 (translated at http://cisgw3.law.pace.edu/cases/060123a3.html).

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concerned with inherent flaws in the goods for which the seller remains responsible. 15 The core area of risk in the CISG is such casualty to the goods as is caused by acts of God or the default of third parties. In the words of one Chinese tribunal: ‘Risk refers to the damages by accident, such as loss or damages by natural or fortuitous accidents in transit.’16 Going beyond loss or damage in the narrow sense, we come to governmental intervention, taking, for example, the form of requisition, expropriation or governmental embargo. This should be treated as a type of loss for the purpose of CISG Article 66, 17 though it is more likely to arise in long-term contracts such as time charter parties. 18 As a result of the transfer of risk, governmental intervention, after the risk has passed to the buyer, preventing the use of the goods in the way that the buyer intended, leaves the buyer with no claim against the seller.19 If, however, the seller has assumed responsibility for the buyer’s unhindered use of the goods, then the parties’ agreement affects the impact of the transfer of risk to the buyer. Moreover, if the reason for government intervention is a flaw in the goods engaging liability on the part of the seller under CISG Article 35, the attribution of risk to the buyer will not deprive the buyer of a claim for breach of contract against the seller.20

IV. Seller’s Obligations and Risk 1. A Normal Voyage 20

The relationship of the seller’s obligations respecting the fitness and quality of the goods to the transfer of risk to the buyer requires further analysis. In the case of carriage, the goods, in order to comply with CISG Article 35 (see Chapter 14 on ‘Conformity of Goods’), must be fit to withstand a normal, contemplated voyage. The fact that the goods have deteriorated in transit does not necessarily mean that, if the risk has passed to the buyer on shipment, the buyer must bear the burden of deterioration. The facts of an English case21 illustrate the problem. It concerned a cargo of Cyprus spring potatoes consigned on C&F (equivalent of INCOTERMS CFR) Liverpool terms. At journey’s end, the potatoes were found to be inedible because of soft rot. The seller maintained that

15 CISG Article 35. One Dutch decision (Rb Arnhem 17 July 1997 (translated at http://cisgw3.law.pace .edu/cases/970717n1.html)) wrongly applied the risk provisions in the CISG to the faulty attribution of a work of art to a particular artist so that the risk of this fell on the buyer. This decision has been correctly criticized for unduly extending risk to include contractual (or economic) risk (see Erauw, ‘Observations on Passing of Risk’ in Ferrari, Flechtner & Brand, The Draft UNCITRAL Digest: And Beyond (2004) p. 295). The correctness of attribution is a matter of contractual risk that can be allocated one way or other under the contract. 16 CIETAC Arbitration Proceeding 1 April 1997 (translated at http://cisgw3.law.pace.edu/cases/970401c 1.html). 17 In support and signalling a change from earlier editions, see Hachem, in Schlechtriem & Schwenzer (n 1) pp. 959–60). Cf Erauw, ‘Observations on Passing of Risk’ in Ferrari, Flechtner and Brand (n 15), p. 296. 18 In some national risk provisions, only accidental loss or damage is mentioned: e.g., BGB § 446; Polish Civil Code Article 538(1). 19 Hof Ghent (n 7) (rejecting the buyer’s contention that the possibility of intervention was implicit in the goods at the time of delivery); Rb Leper 18 February 2002 (UNILEX). 20 CISG Article 36; OLG Frankfurt 29 January 2004 (translated at http://cisgw3.law.pace.edu/cases/040 129g1.html). 21 Mash and Murrell Ltd v Joseph I. Emmanuel Ltd [1961] 1 WLR 862, reversed on other grounds [1962] 1 WLR 16.

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the potatoes were edible on shipment, when the risk passed, and therefore conforming. 22 The court, however, ruled that the seller’s quality and fitness responsibilities demanded that the potatoes should be fresh enough to withstand a normal voyage and fulfil their commercial function in the English consumer market. It found on the facts, however, that the condition of the goods was due not to the state of the goods on shipment but to a risk event in transit. The potatoes had lain unventilated for five days in an intermediate Cypriot port. CISG Article 66, in holding the seller responsible for loss or damage due to its acts or omissions, thereby recognizes the above reconciliation of seller and buyer’s interests. Under the CISG, if the damage to the goods stems from their precarious condition on shipment, the risk of damage in transit will still be on the buyer but the buyer will have a compensating claim against the seller for breach of contract.23 In the great majority of cases, this is a technical distinction, since, outside infrequent cases of fundamental breach, the economic outcome will be the same, whether the risk has been transferred to the buyer or not.

2. Evidentiary Questions Where goods arrive at their destination in a damaged state, there may be difficult 21 evidentiary questions to deal with in order to determine whether they were already unfit at the point when risk was transferred or whether their unfitness was due to events occurring in transit. A buyer examining the goods further to CISG Article 39 may do so after an extensive transit. In having to demonstrate the seller is in breach of its quality and fitness obligations,24 the buyer will have to show that any damage to or deterioration of the goods was not due to an event that occurred in transit. To avoid unnecessary evidentiary disputes, it is wise to arrange in the contract for examination at the point where the goods are handed over to the carrier,25 and even for such examination to be carried out by a disinterested third party issuing a certificate of examination that is binding on both seller and buyer.26 This proposal obviously works better for goods, like commodities, that can be adequately examined in a superficial manner than it does for complex manufactured goods with hidden flaws. In some of these latter cases, however, the goods will be subject to extensive pre-delivery trials.

22 The transfer of risk to the buyer does not of course mean that the buyer loses rights relating to a seller’s earlier non-performance under CISG Article 35: see a Mexican Compromex Arbitration Proceeding 29 April 1996 (translated at http://cisgw3.law.pace.edu/cases/960429m1.html). 23 OLG Koblenz 14 December 2006 (translated at http://cisgw3.law.pace.edu/cases/061214g1.html). Cf Cámara Nacional (n 5); Wuhan Maritime (n 5). See CISG Article 36(2). 24 HO Helsinki 31 May 2004 (http://cisgw3.law.pace.edu/cases/040531f5.html); Cámara Nacional (n 5); OLG Innsbruck 1 July 1994 (translated at http://cisgw3.law.pace.edu/cases/940701a3.html); LG Flensburg 24 March 1999 (translated at http://cisgw3.law.pace.edu/cases/990324g2.html). A number of cases hold that the seller has to prove the condition of the goods at the time risk is transferred to the buyer: LG Bamberg 23 October 2006 (http://cisgw3.law.pace.edu/cases/061023g1.html); OLG Frankfurt (n 20) (affirmed BGH 2 March 2005 translated at http://cisgw3.law.pace.edu/cases/050302g1.html); AH Bern 11 February 2004 (translated at http://cisgw3.law.pace.edu/cases/040211s1.html). There is no support for this approach in CISG Article 36 but the burden of proof is frequently a nuanced affair, with evidence raising an inference in the course of proceedings that might be rebutted by contrary evidence, so that in an evidentiary manner the burden shifts back and forth. 25 The seller should insist upon this: see the result in Xiamen Intermediate People’s Court 5 September 1994 (UNILEX D.1994-21.1). 26 Clauses of this kind are an established feature of international commodity sale agreements (e.g., GAFTA (Grain and Feed Trade Association) standard forms). See Bridge, The International Sale of Goods (4th edn, 2017) paras 2.34–35.

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V. Risk Transfer in the CISG 22

The transfer or ‘passing’ of risk is dealt with in five articles of the CISG.27 First of all, Article 66 provides a partial statement of the legal consequences of the transfer of risk. It states that the buyer is not discharged from its obligation to pay the price when the goods are lost or destroyed after the risk has passed. CISG Article 66 then goes on to provide an exception to this rule, where the casualty is due to an act or omission of the seller.28 Secondly, the rules relating to the time when the risk is transferred to the buyer do not prejudice a buyer claiming remedies in respect of the seller’s fundamental breach of contract.29 Thirdly, CISG Article 67 embraces what may be called the first delivery rule. Where carriage is involved, the risk is transferred when the seller hands over the goods to the first carrier, except where the goods are to be handed over at a particular place, in which case the risk passes when the goods are handed over to the carrier at that place.30 For the risk to pass on the handing over in either case, the goods must first be clearly identified to the contract.31 Fourthly, CISG Article 68 contains a special rule for goods sold in transit. The risk is transferred at the contract date or, if the circumstances so indicate, when the seller hands over the goods to the carrier issuing the documents that embody the contract of carriage.32 In neither case will risk be transferred if the seller was aware of loss or damage to the goods at the contract date.33 Fifthly, the residual rule, for cases not otherwise dealt with in CISG Articles 67–68, is stated in CISG Article 69. It provides that risk is transferred when either (1) the buyer takes over the goods, or (2) the goods have been placed at the buyer’s disposal and the buyer, late in taking over the goods, commits a breach of contract in failing to do so.34 An exception to this second case arises if the goods are to be taken over at a place other than the seller’s place of business, in which case the buyer is on risk when the buyer becomes aware that the 27 The rules on the transfer of risk in CISG Articles 66–70 have been said not to apply to risk in the course of unwinding an avoided contract further to CISG Articles 81–84: OGH 29 June 1999 (translated at http://cisgw3.law.pace.edu/cases/061214g1.html). 28 ‘Loss of or damage to the goods after the risk has passed to the buyer does not discharge him from his obligation to pay the price, unless the loss or damage is due to an act or omission of the seller.’ For the different case of the seller’s continuing obligations regarding the condition of the goods as from shipment, where the risk remains on the buyer, see para. 19. 29 CISG Article 70: ‘If the seller has committed a fundamental breach of contract, articles 67, 68 and 69 do not impair the remedies available to the buyer on account of the breach.’ 30 ‘(1) If the contract of sale involves carriage of the goods and the seller is not bound to hand them over at a particular place, the risk passes to the buyer when the goods are handed over to the first carrier for transmission to the buyer in accordance with the contract of sale. If the seller is bound to hand the goods over to a carrier at a particular place, the risk does not pass to the buyer until the goods are handed over to the carrier at that place. The fact that the seller is authorized to retain documents controlling the disposition of the goods does not affect the passage of the risk.’ See also Chinese Civil Code Article 607. 31 ‘(2) Nevertheless, the risk does not pass to the buyer until the goods are clearly identified to the contract, whether by markings on the goods, by shipping documents, by notice given to the buyer or otherwise.’. 32 The Chinese Civil Code Article 606 provides for the risk in such cases to pass at the contract date unless the parties otherwise agree. 33 ‘The risk in respect of goods sold in transit passes to the buyer from the time of the conclusion of the contract. However, if the circumstances so indicate, the risk is assumed by the buyer from the time the goods were handed over to the carrier who issued the documents embodying the contract of carriage. Nevertheless, if at the time of the conclusion of the contract of sale the seller knew or ought to have known that the goods had been lost or damaged and did not disclose this to the buyer, the loss or damage is at the risk of the seller.’ 34 ‘(1): In cases not within articles 67 and 68, the risk passes to the buyer when he takes over the goods or, if he does not do so in due time, from the time when the goods are placed at his disposal and he commits a breach of contract by failing to take delivery.’ Lateness on the part of the buyer is implicit in breach of contract and need not have been specifically mentioned.

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goods have been placed at its disposal at that place.35 CISG Article 69 then goes on to provide that the goods are not at the buyer’s disposal until they are clearly identified to the contract.36

1. Effect of the Transfer of Risk The relevant provisions here are CISG Articles 66 and 70. It was stated above that 23 CISG Article 66 only partially states the effect of transfer of risk. This is because, as stated earlier still, the transfer of risk also precludes the buyer from avoiding the contract, reducing the price or claiming damages. These broader, unstated consequences should not be taken to be ruled out by CISG Article 66 for, unless they are understood to be implicitly included, their absence would nullify the effect of CISG Article 66. Three further features of CISG Article 66 call for consideration. First, it states the buyer’s position in the negative terms of not being discharged from its duty to pay instead of the more natural positive terms of still being bound to pay notwithstanding the casualty suffered by the goods. Its meaning, however, is clear enough. Secondly, CISG Article 66, unlike ULIS Article 96, does not extend to deterioration, a word capable of embracing ‘natural spoilage or evaporation’.37 Deterioration, nevertheless, is implicit in ‘loss or damage’.38 Thirdly, in providing for the case of the seller whose act or omission leads to the casualty to the goods, CISG Article 66 seems to state that the risk is nevertheless transferred to the buyer, though the buyer is discharged from its duty to pay the price. This may be a matter of some significance when CISG Article 70 comes into play.

2. Fundamental Breach a) Preserving the Buyer’s Remedies Turning now to CISG Article 70, on which there are no cases reported in the 24 UNCITRAL Digest, it makes no explicit mention of any reversal of risk but merely preserves the buyer’s remedies for the seller’s breach of contract from the effect of the risk transfer provisions.39 Since the buyer’s remedies for breach survive even if the breach is not fundamental, the only significance of CISG Article 70 lies in its preservation of the right of avoidance.40 The failure in CISG Article 70 to express a reversal of risk transfer is consistent with the drafting of CISG Article 66. ULIS Article 97(2) took a different approach in stating that the risk of loss was never transferred to the buyer on delivery41 in those cases where the buyer avoided the contract or required replacement goods. Under CISG Articles 46(2) and 49(1)(a), both instances presuppose a fundamental breach of contract. Since it could not be known at the time when risk 35 ‘(2) However, if the buyer is bound to take over the goods at a place other than a place of business of the seller, the risk passes when delivery is due and the buyer is aware of the fact that the goods are placed at his disposal at that place.’ 36 ‘(3) If the contract relates to goods not then identified, the goods are considered not to be placed at the disposal of the buyer until they are clearly identified to the contract.’ 37 Nicholas, in Bianca and Bonell (eds), Commentary on the International Sales Law (1987) p. 484. 38 But if deterioration is due to the non-conforming condition of the goods on shipment, the buyer will have a claim against the seller. See above. 39 See OLG Koblenz (n 23) (reducing the seller’s price claim to zero because of a fundamental breach). But Nicholas speaks of a re-transfer of risk to the seller: Bianca (n 36) p. 510. 40 US law radically provides in all cases of non-conformity that the risk is not transferred at all until the buyer accepts the goods or the seller cures them: UCC § 2-510(1). This provision invites insurance difficulties. French law provides that the risk remains on the seller until the time when a suspensive condition (condition precedent) is lifted: Civil Code Article 1304–6. 41 The normal rule in ULIS cases: Article 97(1).

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would normally pass under ULIS how a buyer might respond in the future even after receiving a seriously non-conforming delivery of goods, there was always something awkward about the retrospective approach thus adopted by Article 97.42 25 For the rule in CISG Article 70 to apply, the casualty to the goods need not be related to any breach of contract committed by the seller. Take for example the case of a seller who undertakes to make shipping arrangements for the goods and ships altogether different goods, useless for the buyer’s needs, from those required by the contract. The carrier takes charge of the goods on board an ocean-going vessel and the vessel founders when leaving the port of shipment. The risk in such a case will be on the buyer,43 but, assuming that the buyer would have been able to reject the goods and avoid the contract for fundamental breach (see CISG Article 49(1)(a)), the buyer should be able to resist the seller’s claim for the price or recover the price if it has already been paid. The buyer’s right of avoidance for fundamental breach is to a degree affected by the fate of the goods. There is no question of the seller’s right to cure determining the existence or not of a fundamental breach (as would be the case under CISG Articles 37 and 48); there are no goods to cure. Moreover, case law treating avoidance for fundamental breach as an ultima ratio, unavailable where the goods are of some use to the buyer (see Chapter 20 on ‘Avoidance’), may not usefully be invoked against the buyer when those goods because of their loss cannot be of any use to the buyer.44 Otherwise, buyers would obtain singularly little protection from CISG Article 70. b) Restitution of the Goods 26

A normal prerequisite of the buyer’s right of avoidance is that the buyer makes restitution of the goods. CISG Article 82 states that a buyer loses the right of avoidance if unable to make restitution of the goods in substantially the condition in which the buyer received them. One exception to this rule is where restitution is impossible and this is not due to the buyer’s act or omission. See CISG Article 82(2)(a). This should include the case of goods lost or damaged as a result of the risk event when risk is on the seller. Risk, as stated above, can be translated into the language of contractual rights and duties. Various provisions of the CISG, taken together, express this by arriving at a risk-based solution without even mentioning risk. See CISG Articles 70, 81(2), and 82(2)(a). c) Evidentiary Difficulties

27

One difficulty facing a buyer seeking the protection of CISG Article 70 is an evidentiary one. For example, the loss of goods may render it difficult for the buyer to prove the gravity of a seller’s non-conforming delivery. This may not be unduly difficult in the case of a single item of the wrong sort, as expressed in the above example. The non-conformity may be evidenced by documents. It will be more difficult if the contract concerns a large number of items, some of which but not all were defective. It is not merely difficult to prove the existence and extent of the defects. There is the further

42 Retrospectivity is also present in US law where, in the case of a breach serious enough for a buyer to revoke its previous acceptance of the goods, the risk is said to be on the seller ‘from the beginning’: UCC § 2-510(2). 43 See CISG Article 67. It is routinely mentioned that the CISG does not accept the distinction drawn in some Civil Law systems between a peius and an aliud, the effect of which distinction being that the delivery of an aliud is no delivery at all. 44 If the goods are useless to the buyer but still have a substantial market value, the buyer in such a case might not have a substantial claim for a price reduction under CISG Article 50.

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question of determining whether the quantity of defects taken in gross amount to a fundamental breach. d) Time Notices CISG Article 70, in applying only to fundamental breach, makes no mention of the 28 case where the buyer avoids the contract after setting an additional period of time for the seller to perform under CISG Article 47(1) and the seller fails to do so under CISG Article 49(1)(b). The CISG treats avoidance here as a separate case from fundamental breach, though in some cases the seller’s lateness will also amount to a fundamental breach. Suppose, for example, that the seller is bound to deliver the goods at the buyer’s premises no later than a stated date. When the goods do not arrive on that date, the buyer gives the seller an additional two weeks to deliver. The goods arrive three weeks after the buyer’s notice and in a damaged state, owing to an accident in transit. In such a case of late delivery, the buyer may avoid the contract within a reasonable time of becoming aware that a delivery has been made under CISG Article 49(2)(a). The buyer does not have to declare avoidance before the delivery of the goods. According to one view, the absence of a fundamental breach means that the buyer is on risk and may not avoid the contract, being reduced instead to a claim for damages for late delivery.45 This is not a satisfactory result and is best avoided by treating the matter as a gap in the Convention to be filled under CISG Article 7(2) so that the outcome would be the same as in the case of fundamental breach. e) Non-Fundamental Breach The CISG does not provide explicitly for the case where the goods are non-conform- 29 ing but the breach is not a fundamental one. Consider the case of goods that are non-conforming but then are lost or destroyed when the buyer is on risk for a reason that is not connected to their non-conforming character. May the buyer, if it has not already done so, claim a reduction in the price under CISG Article 50? There seems no good reason why the buyer may not do so even if, at the time of the casualty, the buyer had not yet claimed a price reduction. The reduction of the price is a type of self-help remedy by which the buyer is permitted to rewrite the agreed contract price (see Chapter 18 on ‘Remedies and Damages’). A claim for damages for loss caused by the defective goods, however, could not survive an event, which, in eliminating the goods, prevented them from causing to the buyer the loss for which damages are being claimed. CISG Article 74 does not allow for damages in excess of the loss suffered by the claimant. f) Quality of Carriage Contract In cases where the seller is responsible for arranging carriage, the seller has a duty 30 to enter into such a contract of carriage as is necessary, providing for a means of transportation that is appropriate and on the usual terms (CISG Article 32(2)). In very many cases, terms in the contract of carriage dealing with the carrier’s duties and freedom to exclude or limit those duties will be dealt with by uniform rules,46 but the terms agreed to by the seller may include, for example, an arbitration clause that is unfavourable to the buyer. If this involves a breach of the seller’s duty, it bears no relation 45 Nicholas, in Bianca (n 37) p. 511, draws attention to an early proposal to deal with this issue in favour of the buyer, which was never carried out. 46 See the Hague Rules, Hague-Visby Rules, Hamburg Rules and Rotterdam Rules.

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to risk. As regards loss or damage due to an act or omission of the seller, provided for in CISG Article 66(2), this may occur as a result of the conditions on which the goods are carried.47 A CIF seller, for example, may engage a carrier to transport oil to northern waters in winter when there is a risk of the oil solidifying in the tanker if there are no heating coils. Assuming no breach of contract is committed by the carrier, the buyer receiving defective goods at the discharge port will, apart from an insurance claim, have a claim only against the seller. Similar examples concern the carriage of perishable foods in unrefrigerated vessels, a failure to arrange for direct shipment to the discharge port and shipment on deck instead of below deck. Unless there has occurred a fundamental breach of contract by the seller, the buyer will remain on risk but will have an action for damages against the seller.48 If, however, goods are not shipped on a refrigerated vessel when they ought to have been, but the vessel sinks before they suffer any damage, the buyer remains bound to pay the price and has no substantial damages claim to offset against the seller’s claim. g) Post-Avoidance Risk 31

This is a subject that is not dealt with by the CISG. The provisions dealing with the effects of avoidance49 are skeletal in detail. The process of restitution may be seen as giving rise to a type of reverse sale, from the buyer back to the seller, but it should not be assumed that this sale will be on exactly the same terms as the original sale. A sale on CPT terms to the buyer, where the risk will be on the seller throughout the transit, does not mandate a reverse sale on CPT terms to the buyer, with the buyer, usually the one who will have avoided the contract, bearing the risk of loss in transit.50 A sensible approach would be to leave the buyer on risk in the period before the buyer makes physical restitution of the goods.51 By way of exception, if the seller is at fault in failing to make restitution of the price or in failing to collect the goods, there is a compelling case for imposing the risk on the seller from the time the seller is in default. 52

3. First Carrier Rule a) The Rule 32

Of the provisions in the CISG stipulating when risk is transferred to the buyer, Article 67 is the most important in practice since in the normal case the services of one or more independent53 carriers will be involved in the performance of the contract. CISG Article 67(1) provides for the transfer of risk when the goods are ‘handed over to the

47 OLG Koblenz (n 23); OLG Schleswig-Holstein 22 August 2002 (translated at http://cisgw3.law.pace.e du/cases/020822g2.html). 48 Cf s 32(2) of the UK Sale of Goods Act 1979, where, if the seller does not enter into a ‘reasonable’ contract of carriage, the buyer has the choice of either claiming damages or of treating the delivery of the goods by seller to carrier as not tantamount to a delivery to the buyer. The latter course in effect reverses any transfer of risk that might have taken place. 49 CISG Articles 81–84. 50 See OGH 29 June 1999 (translated at http://cisgw3.law.pace.edu/cases/990629a3.html); Bridge, in Kröll et al (n 1) p. 1104. Similarly, in Polish law, the seller will bear the risk of loss in transit: Civil Code, Article 567(2). 51 Cf Chinese Civil Code Article 610, which puts the risk on the seller. In cases falling short of termination, where, however, the seller fails to deliver documents or information concerning the goods, this does not affect the transfer of risk to the buyer: Article 609. 52 Bridge, in Kröll et al (n 1) p. 1103–04. 53 Not the employees of either seller or buyer.

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first carrier for transmission to the buyer’ 54 unless the goods are to be delivered in a ‘particular place’.55 This is a more exact statement than those rules in national laws that provide for the transfer of risk on delivery to the carrier.56 This rule is subject to the requirement that the goods be identified to the contract. CISG Article 67(1) has been supported as sound policy in that, especially where the buyer and seller are resident in different countries and where the goods have arrived in the buyer’s country, the buyer as the person on the spot is better able to determine what has happened to the goods in transit.57 The annotation of bills of lading referring to the condition of the goods on shipment, as well as the common practice in some trades of having the goods inspected by a disinterested third party, support this policy, which is particularly apt for combined transport arrangements. b) Reservation of Title A reservation of title by the seller has no effect upon the incidence of risk. 58 This 33 is consistent with the abandonment of any reference to the transfer of ownership in these risk rules59 and is consistent too with international sales practice. The reference in CISG Article 67(1) to the seller being ‘authorized’ to retain documents controlling the disposition of the goods is odd but of no practical significance. c) Handing Over and Delivery CISG Article 67(1) uses the expression ‘handed over’, not ‘delivered’.60 A seller hand- 34 ing over goods to a carrier, nevertheless, performs its duty to deliver under CISG Article 31(a). That provision states that a seller delivers to the buyer when handing over the goods to the first carrier for transmission to the buyer.61 CISG Article 31, therefore, contemplates complex carriage as the presumptive case, though in many cases there will be only one carrier. d) Seller as Carrier? The rule in CISG Article 67(1) is not explicit about who is a carrier. It has been 35 argued that the carrier could be the seller itself,62 where the seller uses its own resources and employees. This argument suggests a confusion of the carrier and the vessel used by the carrier: a lorry, train or ship is not a carrier, but rather the instrument of the carrier. 54 See AG Duisburg (n 7); BGer 16 December 2008 (translated at http://cisgw3.law.pace.edu/cases/0812 16s1.html). 55 A similar exception appears in UCC § 2-509(1)(b) (FOB a named destination). 56 See, e.g., BGB § 447(1); UCC § 2-509(1)(a). See also CESL Article 141 (delivery to the carrier in contracts between traders). 57 Nicholas, in Bianca (n 37) p. 494. 58 Federal District Court (New York) 26 March 2002 (available at http://cisgw3.law.pace.edu/cases/0203 26u1.html) (St Paul Guardian Insurance Company v Neuromed Medical Systems & Support). 59 This is mentioned in a number of cases, see OLG Schleswig-Holstein (n 2). See also Torsello, ‘Transfer of Ownership and the 1980 Vienna Sales Convention’ (2000) International Business LJ 939. 60 For the complexities posed by delivery, especially in translating the expression, see Report of the Secretary General on ‘‘Delivery’ in the Uniform Law on the International Sale of Goods (ULIS)’ (A/CN.9/ WG.2/WP.8) in Documentary History of the Uniform Law for International Sales (1989) pp. 73–92. 61 See BGH 2 March 2005 (translated at http://cisgw3.law.pace.edu/cases/050302g1.html) (goods delivered by seller directly to the sub-buyer, with risk passing when the first freight forwarder received the goods); AG Duisburg (n 7); CIETAC 6 September 1996 (translated at http://cisgw3.law.pace.edu/cases/960 906c1.html). 62 See von Hoffman, ‘Passing of Risk in International Sale of Goods’ in Sarcevic & Volken, International Sale of Goods: Dubrovnik Lectures (1986) pp. 286–87.

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The carrier has to be an independent third party63 because a seller placing goods in its own vehicles is not handing over the goods to anyone. The possibility of the risk passing to the buyer when the seller is still in control of the goods is also undesirable, since it would encourage litigation to determine whether the seller was at fault if the goods suffer a casualty.64 e) CISG and INCOTERMS 2020 36

The rule in CISG Article 67(1), even when allowance is made for the particular place exception, is unsuitable for certain long-established terms used in international sale transactions involving marine carriage, namely, FOB65 and CIF.66 The Working Group knew that the rule in CISG Article 67(1) would be widely departed from in practice, 67 but a rule so detached as this one from commercial practice in marine trades is hard to justify. It is well understood in marine trades that FOB means that the risk is transferred to the buyer upon shipment,68 that is, when the goods are placed on board the vessel, and not when the goods are taken in hand by the carrier for shipment69 or even by a prior inland carrier charged by the seller with having the goods loaded on board a vessel. Risk is transferred according to commercial expectations at that same time. For loose goods, like wheat and oil, a continuing transfer of risk would be appropriate as the goods are incrementally loaded.70 If the transfer rule in CISG Article 67(1) were to be applied, risk would pass to the FOB buyer just as it would under an FAS (free alongside) contract.71 This is the position under Article 2 of the US Uniform Commercial Code72 63 TR-C Valais 23 June 1998 (translated at http://cisgw3.law.pace.edu/cases/980623g1.html). See also Honnold, Uniform Law for International Sales (3rd edn, 1999) p. 403; Nicholas, in Bianca (n 37) 490. 64 See CISG Article 66; Nicholas in Bianca (n 36) 490. 65 Free on board, where the seller’s delivery duty is discharged when the goods are placed on board the vessel. The word ‘free’ has a counter-intuitive meaning. It signifies that the seller bears no other delivery responsibilities or expense once the goods are placed on board the ship, and not that the process of placing the goods on board is without cost. 66 Cost insurance and freight, where the seller’s duty to deliver the goods at an agreed destination is substituted by a duty to deliver documents for their carriage to that destination and for their insurance in the course of the voyage. But note that risk passes on handing over to the carrier under INCOTERMS 2020 CPT (carriage paid to) (A2–3 and B2–3) and CIP (carriage and insurance paid to) (A2–3 and B2–3). 67 The Working Group on International Sales set up by UNCITRAL at its second session on 26 March 1969. See Progress Report of the Working Group on the International Sale of Goods (5 th session Geneva) (A/CN.9/87), para. 219 (rejecting an explicit cross-reference to the usage provision). See Honnold, Documentary History of the Uniform Law for International Sales (1989) p. 194. 68 As in INCOTERMS 2020 FOB (A2–3 and B2–3). The generic rules for carriers in INCOTERMS 2020 FCA (free carrier) (A5 and B5) similarly require the goods to have been loaded on the means of transport if the carrier collects the goods from the seller’s premises, but require only that the goods be handed over to the carrier where loading takes place elsewhere. See Russia Arbitration No. 342/1998 of 17 May 1999 (translated at http://cisgw3.law.pace.edu/cases/990517r1.html). 69 But a German court has stated that a seller does not hand over goods to the carrier until the seller places the goods on board the carriage vehicle: LG Bamberg (n 24). This unduly stretches the wording of CISG Article 67(1). One Chinese court has applied the first carrier rule in an FOB case, and has done so without analyzing Article 67: Higher People’s Court of Ningxia Hui 27 November 2002 (translated at http://cisgw3.law.pace.edu/cases/021127c1.html). 70 For oil, it is common for contracts to make express provision for the incremental transfer of risk at the point where the oil passes the vessel’s first permanent hose connection, see Total General Terms and Conditions for FOB Sales of Crude Oil, cl. II.1: ‘Notwithstanding any right of Seller to retain the shipping documents until payment, risk and property in the Oil and all liabilities with respect thereto shall pass to Buyer when the Oil passes the flange connection between the delivery hose and the permanent hose connection of the Vessel at the Loading Terminal.’. 71 See INCOTERMS 2020 (FAS) (free alongside ship) (A2–3 and B2–3). 72 CISG Article 67(1) accords with the risk rule in UCC § 2-509(1)(b), which is applicable to cases where the seller engaging a carrier is required to deliver the goods at a ‘particular destination’ (‘when the

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but it is certainly not the position in English law73 or in INCOTERMS. INCOTERMS make it very plain indeed that risk passes when the goods are placed on board.74 In any case, the time when goods are handed over to the carrier may be uncertain. It may not be clear whether it is the port authority that is in charge of the loading process or an independent stevedoring company. And if it is the latter, it may not be clear whether that company is acting for the seller or for the carrier. For these reasons, the CISG rules on risk transfer should be excluded in FOB contracts. The rule in CISG Article 67(1) is unsuitable also for CIF contracts,75 which present 37 other problems as well for CISG Article 67(1). There is a well-grounded commercial expectation that risk in CIF contracts will pass on shipment and not when the goods are handed over to the carrier for shipment.76 f) Particular Place Exception The rule in CISG Article 67(1) does not apply if the goods are to be handed over to a 38 carrier ‘at a particular place’. The burden will be on the party claiming a departure from the first carrier rule to show an agreement to this effect.77 Where the particular place exception applies, the risk will not pass until the goods are handed over to the carrier at that place.78 Allowance is thus made for risk to pass when the goods are handed over to a second or even subsequent carrier.79 Suppose that soya beans are handed over to an inland carrier using barges for transportation down the Mississippi river, to be loaded on board a vessel in Baton Rouge in performance of an FOB Baton Rouge contract. The use of the expression FOB Baton Rouge signifies the buyer’s and seller’s agreement that the risk will not pass to the buyer when the goods are handed over by the seller to the inland carrier. Baton Rouge is the ‘particular place’ but the same problem concerning handing over versus shipment on board would now arise in Baton Rouge. Apart from goods are duly delivered to the carrier’). When quantifying the seller’s duties, the UCC in § 2-319 distinguishes between an FOB contract nominating a place of shipment and one that goes further and stipulates FOB vessel. In the latter case only, the risk is transferred when the goods are placed on board: UCC § 2-319(1)(c). 73 The traditional approach of English law is that risk passes, not when the goods are placed on board as such but when they cross the ship’s rail, a rule criticized by a distinguished commercial judge (Devlin J.), referring to risk passing backwards and forwards as goods in a sling hover over the ship’s rail: Pyrene Co Ltd v Scindia Navigation Co Ltd [1954] 2 QB 402, 419. The ship’s rail test was applied in an FOB contract in HO Helsinki (n 24); OGH 6 February 1996 (translated at http://cisgw3.law.pace.edu/cases/960206a3.ht ml). 74 INCOTERMS 2020 (FOB) (A2–3 and B2–3). INCOTERMS formerly referred to the goods crossing the ship’s rail: INCOTERMS 2000 FOB (A5 and B5). 75 As in INCOTERMS 2020 CIF (A5 and B5). The same applies for CFR (cost and freight) contracts (A2–3 and B2–3). The ship’s rail test was applied in CIETAC 1 April 1997 (n 16). 76 Cf UCC § 2-320(2) (possession of the carrier). English law requires actual shipment: Biddell Bros v E. Clemens Horst Co [1911] 1 KB 934; Comptoir d’Achat et du Boerenbond Belge S/A v Luis de Ridder Lda (The Julia) [1949] AC 293. 77 OLG Cologne 7 July 1997 (translated at http://cisgw3.law.pace.edu/cases/970709g3.html) (a price term, ‘list price ex works’, did not establish a particular place agreement); LG Duisburg (n 7). A contract calling for ‘free delivery’ at the buyer’s premises does provide for delivery at a particular place, ousting the first carrier rule: OLG Karlsruhe 20 November 1992 (translated at http://cisgw3.law.pace.edu/cases/92112 0g1.html). 78 But risk has been held to pass, in a delivery at frontier case, at the moment the goods have crossed the frontier: Foreign Trade Court of Arbitration Yugoslavia (12 July 1994 translated at http://cisgw3.law.pace.e du/cases/940712sb.html). 79 The handing over to the second carrier may be effected for present purposes by the first carrier, and need not be done personally by the seller: see Nicholas in Bianca (n 36) 492. Otherwise the particular place exception in CISG Article 67(1) would have no scope, since no sellers would intervene to take personal charge of handing the goods over to the second carrier.

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this latter issue, the particular place rule is consistent with the approach adopted in INCOTERMS.80 39 A CIF contract need not necessarily identify the loading port or may give the seller such a broad discretion that it could not be said that shipment occurs in a ‘particular place’.81 Since in these cases the particular place exception is not satisfied, the risk would pass under CISG Article 67(1) when the goods are handed over to an inland carrier preparatory to their delivery to the marine carrier (assuming they have been identified to the contract further to CISG Article 67(2)). Nor is the discharge of the goods at the port of destination to be regarded as a delivery at a particular place. The carrier, when surrendering the goods to a cargo receiver, is not acting as the CIF seller’s agent. Such delivery as takes place at that point is not delivery under the contract of sale but delivery under the contract of carriage. The only delivery that a CIF seller makes to the buyer is the delivery of the shipping documents, which according to CISG Article 67(1) has no bearing on the transfer of risk. CISG Article 67(1) is wholly inappropriate for CIF contracts. The parties to such contracts should exclude the provision, either in specific terms or by expressly incorporating INCOTERMS. 40 The particular place exception amounts in substance to a rule of contrary intention. The parties are free in other cases to depart from the risk rules in the CISG further to CISG Article 6.82 g) Identification of Goods CISG Article 67(2) provides that the transfer of risk under the rule and its exception in Article 67(1) requires that the goods first ‘are clearly identified to the contract, whether by markings on the goods, by shipping documents, by notice given to the buyer or otherwise’.83 Since identification may be, but need not be, accomplished by notice to the buyer, there might be a problem for some buyers who do not know that the carriage has commenced and might not have sufficient information to effect insurance. There is a duty on sellers to provide buyers with all the available information ‘necessary’ to effect insurance, though only on the buyer’s request,84 but the impact of non-performance by the seller on the transfer of risk is not stated. This should not be major problem for sophisticated operators in the export trade.85 Experienced buyers often have a floating policy covering all shipments of a stated type and within a designated period, which dispenses with any need to be notified of identification by the seller. 42 The CISG itself gives no guidance on the meaning of identification. Identification suggests some action by the seller evidencing a clear intention to use certain goods in fulfilment of the contract. The packaging of goods with labels and addresses is one example. It is not clear, however, what the position would be if the seller arranged carriage and retained the right under the contract of carriage to alter the identity of the cargo receiver.86 In those FOB contracts where the buyer chooses the carrier, identification 41

80 ‘D’ terms at INCOTERMS 2020: DAP (delivered at place) (A2–3 and B2–3), DPU (delivered at place unloaded) (A2–3 and B2–3), and DDP (delivered duty paid) (A2–3 and B2–3). 81 For example: ‘Gulf of Mexico port(s)’. 82 For a case where the court might unduly have found such an intention, where the contract called for ‘free delivery, duty-paid, untaxed’, the seller being French and the buyer German, see OLG Karlsruhe (n 76). The risk during transit was held still to be on the seller. Risk was to pass only when the goods were handed over to the buyer in Germany, a result that runs counter to CISG Article 67(1). 83 See also CESL Article 141. Certain national laws refer to risk not being transferred until goods have been weighed, measured or counted: French Civil Code Article 1585; Spanish Civil Code Article 1452. 84 CISG Article 32(3). 85 See Wimble v Rosenberg [1913] 3 KB 743. 86 As is common where goods are shipped under a sea waybill instead of a bill of lading.

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should consist of the seller causing goods to be loaded in response to the buyer’s notice that the ship is ready to load. If, less commonly, it is the FOB seller who takes overall charge of the shipment process, the naming of the buyer as consignee will achieve the same effect. If the goods are loose and fungible, like wheat or other grains, then it should not 43 matter if they are mixed with like goods when loaded on board the ship. On one view, goods once identified should not be regarded as losing their identity when mixed with other goods on or after loading. Similarly, it might be arguable that goods are sufficiently identified if their location is precisely known, as it would be if they were on board a named vessel, even if the individual soya beans destined for a particular buyer cannot be known until the goods have been unloaded at the discharge port. The mixing of goods for different buyers poses a particular problem. Suppose that the 44 cargo of a vessel is damaged in part and that the several contractual quantities, damaged and undamaged, cannot be separated. The practical solution is to have the buyers in gross share rateably in the transfer of risk, just as ownership of a diminished mass can be reduced rateably. 87 Those buyers will in the usual case have marine insurance policies that in gross cover all of the goods on board the vessel. It would therefore make little commercial sense to keep the risk of loss on a seller who is not insured, just because a strict test of identification has not been met.88 The need for the goods to be identified presents a more acute problem in CIF con- 45 tracts. The FOB buyer is usually responsible for selecting the carrier, either by booking liner space or by chartering a ship. But the CIF seller or, more likely still, an earlier shipper in a string of CIF sales, will be responsible for the shipping arrangements. In such cases, the buyer will not be the named consignee in the bill of lading. This is because shipment will very commonly taken place before a seller takes the decision to commit a particular cargo, or part thereof, on board a named ship to a particular buyer. It may be that the goods suffer a casualty on board the named ship before the seller gives a notice to the buyer identifying a particular cargo or part thereof. The question whether a seller may in such a case retrospectively transfer risk on identification is dealt with in the case of sales in transit.89 h) Excluding the CISG A reference to CIF, FOB or other named shipping terms in the contract of sale has 46 been said to show an intention not to be bound by the CISG rules on the transfer of risk.90 If this is so, however, it diminishes the significance of the CISG rules to a remarkable degree, given the great frequency with which such shipping terms are employed in international sales. Yet it is not certain that the use of such shipping terms would sufficiently demonstrate an exclusionary intention for the purpose of CISG Article 6. Indeed, some tribunals have applied the CISG rules when dealing with contracts containing shipping terms.91 An implied intention might, however, be shown if the UCC § 2-105(4); UK Sale of Goods Act s 20A. Contrast Honnold (n 63) p. 408, who relies in a way that is hard to understand upon ‘clearly identified’ to state that a division of risk between buyers in this way can be achieved only by a contract between them, which is achievable if they both contract with the seller on the basis of the same standard form contract but not otherwise. 89 Although CISG Article 68 may not apply to particular cases of CIF contracts, the rule on identification that it adopts should apply by analogy in other cases. 90 See St Paul Guardian Insurance (n 57); Hachem, in Schlechtriem & Schwenzer (n 1) pp. 962–963 (relationship between INCOTERMS and the CISG). 91 See Cámara Nacional (n 5); Ningxia Hui (n 69) (FOB). 87

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shipping term used was created by the International Chamber of Commerce (ICC) when promulgating INCOTERMS92 or if the abbreviation of the shipping term is rendered in the INCOTERMS style as opposed to another style.93 47 A difficult question is whether INCOTERMS amount to binding usage under CISG Article 9, even in the absence of incorporation by the parties. They probably need to be expressly incorporated, since the ICC is a private body and since express incorporation is such an easy matter.94

4. Sale in Transit Rule 48

CISG Article 68 states the general rule that, in the case of goods sold afloat, the risk passes from the time of conclusion of the contract. Exceptionally, the risk may pass retrospectively from the time the goods were handed over to the carrier ‘if the circumstances so indicate’. This exception should apply in CIF contracts where the insurance policy covering risks from shipment is part of the contractual package.95 Nevertheless, Article 68 then goes on to provide that the risk remains on the seller if at the time the contract was concluded the seller knew that loss or damage had already been caused to the goods and did not disclose this fact to the buyer. a) Meaning of ‘Sold’

49

The words ‘sold in transit’ should be understood as referring to goods made the subject of a contract of sale after they have been shipped and are part way to their destination. The text of CISG Article 68 does not justify interpreting these words as applicable to goods that are appropriated or identified after the start of the transit to a contract previously concluded. It has been asserted that CISG Article 68 is directed at a sale of specific goods, subject to an exception being made for consignments of bulk goods.96 This exception is sensible: the application in limited cases of a retrospective allocation of risk presupposes that the goods were not identified before the risk was transferred to the buyer. Apart from this exception, the identification rules in CISG Article 67(2) should apply by analogy, notwithstanding their absence from CISG Article 68. As stated above, however, the requirement of identification can be met in any case where goods are shipped in bulk despite the absence of any physical separation of the buyer’s portion. b) Divided Risk and Retrospectivity

50

The basic rule in CISG Article 68 is subject to the criticism that, in leaving pre-contractual casualty at the risk of the seller, it divides transit risk between seller and buyer. This may not be a clear-cut affair, for example, when goods are subject to a damaging process, such as seawater seepage or contamination from traces of a previous cargo. 97 Hence, a green light is given ‘if the circumstances so indicate’, a remarkably unclear expression, for risk to be transferred from the time the goods are handed over to the See delivery CPT (carriage paid to) a stated destination. CFR is the INCOTERMS 2020 abbreviation for the C&F term and EXW is the abbreviation for the ex works term as used in some countries. If the parties use the CFR or EXW abbreviation, it might be taken to signify an intention to use INCOTERMS that ousts an inconsistent allocation of risk under the CISG. 94 But see St Paul Guardian (n 56) (CIF – a term not invented by INCOTERMS). 95 In a CFR case, where the buyer was responsible for arranging insurance, risk was held to pass from the date of the contract: CIETAC 1 April 1997 (n 16). 96 Hachem, in Schlechtriem (n 1) p. 986. 97 For example, grain may be carried in a vessel previously used to carry bauxite or some other mineral. 92

93

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carrier.98 The undesirability of using this event, rather than shipment on board, has already been noted. Provision is thus made for the retrospective allocation of risk, an appropriate thing to do for CIF contracts,99 where the extent and type of insurance provision is a matter for the contract and, if not explicitly mentioned therein, can be determined according to long-standing industry standards. It is for this reason that English lawyers accept retrospectivity so that risk passes ‘as from shipment’, a formula that is deliberately different from the ‘on shipment’ language used for FOB contracts. Retrospective risk allocation would certainly not be appropriate in cases, like FOB contracts, where the seller is not providing transferable insurance to the buyer, with the possible exception of trades where to the seller’s knowledge the buyer already has in place a suitable floating policy of insurance. Where retrospective risk transfer is allowed, CISG Article 68 would even permit it to 51 be imposed on the buyer in respect of events that have occurred before the contract date. This is a major concession to the retrospectivity principle,100 but it depends upon the seller not knowing at the contract date that the goods had been lost or damaged or not disclosing the fact to the buyer. As for the extent of knowledge, the seller may know of some damage but not of other damage or that the damage is so serious that the goods have become a total loss. The need for a clear rule supports those writers who would altogether deny a retrospective allocation of risk in such cases.101 c) Seller’s Awareness of Casualty Some sellers may become aware of loss or damage after the contract has been 52 concluded but before the goods are identified. CISG Article 68 does not prevent the retrospective transfer of risk in such cases. A major controversy in English sale of goods law concerns contracts where cargoes had been lost in the course of war before the seller issued a notice of appropriation connecting those cargoes to particular contracts of sale. The imperfect case law supports the seller’s right to appropriate in such instances, 102 even if the seller knows of the loss at the time of the appropriation.103 CIF contracts provide for over-insurance (often 110 per cent of the invoice value) of the goods. The essential character of a CIF contract should allow for a retrospective transfer of risk even in those cases where the seller knows of loss or damage occurring after the contract date. Intermediate traders dealing with cargoes of goods are not so much buying and selling goods as entering into financial differences contracts.

5. Residual Risk Rule The rules in CISG Article 69 are engaged when the first carrier rule in CISG Article 53 67 and the sale in transit rule in CISG Article 68 do not apply. An international sale for the purpose of CISG Article 1(1)(a) can arise even if performance is carried out entirely 98 CISG Articles 6 and 9 could have achieved the same result by means of contrary agreement and usage. 99 A Chinese tribunal declined to backdate the risk in a case involving a CIF sale of fishmeal, where the contract was concluded some 12 days after the goods were loaded on board: CIETAC 1 April 1997 (n 16). 100 Not even English law has sanctioned this. See Couturier v Hastie (1856) 5 HLC 673. Much might depend, however, upon the exact words used by the parties and thus the construction of the contract. 101 Nicholas, in Bianca (n 37) p. 499–500; Honnold (n 63) p. 411. 102 See Manbre Saccharine Co Ltd v Corn Products Co Ltd [1919] 1 KB 198; Arnhold Karberg & Co v Blythe, Green, Jourdain & Co [1916] 1 KB 495; C. Groom Ltd v Barber [1915] 1 KB 316; Re Olympia Oil and Cake Co Ltd [1915] 1 KB 293. 103 Cf Bridge (ed), Benjamin’s Sale of Goods (11 edn, Sweet & Maxwell 2020), paras 19–122 et seq (Rose). Contrast, Bridge, The International Sale of Goods: Law and Practice (4th edn, OUP 2017) paras 7.65–73.

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in the seller’s country, as is the case with an ex works contract, provided the parties are located in different Contracting States. But ex works contracts are more likely to be purely domestic in character, with the result that CISG Article 69 should apply only in relatively rare cases. CISG Article 69 provides that risk passes (1) when the goods are taken over by the buyer, or (2) when the buyer commits a breach of contract in not taking over goods placed at its disposal, or (3) if the goods are to be taken over at a place other than the seller’s place of business, when the buyer is aware that the goods are at its disposal. The goods will not be considered to be placed at the buyer’s disposal until they have been identified. a) Taking Over and Handing Over Taking over the goods is one component of the buyer’s duty to take delivery, the other component consisting of the buyer’s duty to perform all reasonable acts to enable the seller to make delivery.104 The buyer’s taking over of the goods, therefore, is the complement of the seller’s handing over of the goods. The CISG often eschews certain words that have a domestic legal connotation, such as possession,105 but the transition from handing over to taking over amounts to the transfer of possession and indeed to a case of actual delivery. The moment when risk is transferred from seller to buyer will often be clear enough, though difficulties might arise where the parties, between them, damage the goods during the process. So long as the seller retains an active role in the process of delivery, the goods should remain at the seller’s risk. 55 The characteristic cases dealt with by CISG Article 69(1) in this way will be contracts that do not involve the engagement of an independent carrier. The buyer will personally take over the goods at the seller’s premises, as in an ex works contract, or will take them over at its own premises in the rare case where the seller undertakes carriage in person.106 CISG Article 69 has, however, been applied where goods have been handed over at the seller’s premises to a carrier engaged by the buyer, but the case could equally have been dealt with under CISG Article 67(1), with no difference in the outcome on the facts of the case.107 A difference in result could however arise where the buyer in breach of contract never sends the carrier to collect the goods, for CISG Article 67(1) would have the risk pass only when the goods are handed over to the first carrier, whereas CISG Article 69(1) would have it pass when the buyer is in breach of contract. Here, CISG Article 69(1) should apply as lex specialis and because the seller is prevented from placing the goods in the hands of the carrier owing to the buyer’s default in sending the carrier.108 54

b) The Delaying Buyer 56

Risk may be transferred to the buyer under CISG Article 69(1) even in cases where the buyer does not take over the goods, namely, when the buyer is in breach of contract 104 CISG Article 60. This complementarity between seller and buyer is missing in the case of the seller’s duty to deliver, where no reference is made to the performance of acts reasonably required of the seller to enable the buyer to take over the goods: Articles 30–31. 105 Possession is mentioned only in CISG Articles 85–86 and 88, which deal with the preservation of goods, and therefore are not concerned with the transfer of possession. 106 Rander Byret 8 July 2004 (translated at http://cisgw3.law.pace.edu/cases/040708d1.html). 107 OLG Schleswig-Holstein (n 2); Hungarian Court (n 8)) (FOB Kladovo contract performed by delivery at the seller’s premises in Kladovo). 108 See however OLG Cologne (n 76), where the court appears to have applied CISG Article 67(1) when CISG Article 69(1) would have been more appropriate, but the seller was not able to prove that delivery to the carrier had been made.

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for lateness in taking over goods placed at its disposal.109 CISG Article 69 does not explain what amounts to placing goods at the buyer’s disposal and makes no mention of any notice from the seller that the goods are at the buyer’s disposal. The goods, it is submitted, are placed at the buyer’s disposal when the goods are in a state to be taken over by the buyer without undue delay. Goods that have to be dismantled or subjected to an elaborate process of packaging cannot be said to be at the buyer’s disposal. The buyer’s awareness that the goods are at its disposal seems to be implicit in CISG Article 69. Awareness on the part of the buyer is explicitly mentioned in CISG Article 69(2) for the different case of the buyer taking over the goods at a place other than the seller’s place of business.110 If the buyer did not have to be aware under CISG Article 69(1), an example of the buyer in breach of contract for not taking over the goods would be hard to conceive. Assuming that the buyer has notice or is otherwise aware that the goods are ready, the next question is how much time does the buyer have before it commits a breach of contract. The difficult case is where the contract does not state a precise time for delivery. The CISG assumes that the initiative for triggering performance lies with the seller. 57 In the absence of any time provision in the contract, the seller is required to deliver the goods within a reasonable time under CISG Article 33(c), which is an elastic period. There is less guidance in the CISG on the buyer’s correlative duty to take delivery, even though delivery and taking delivery are two sides of the same coin. Hence, the requirement of a reasonable time must define the two complementary obligations of seller and buyer, though the computation of that period in the two cases may be different. This is because the buyer must be given time to respond to the seller’s advice that the goods are ready for collection. If the seller declares availability within a reasonable time, the seller cannot be in breach for any delay on the part of the buyer thereafter, whether the delay is reasonable or unreasonable (see CISG Article 80). If the buyer does not respond within a reasonable time to the seller’s statement of availability, then the buyer commits a breach of contract. The time needed by the buyer to respond may depend upon whether the sale is a cash on delivery transaction, for in such a case especially the buyer is entitled to examine the goods before making payment (see CISG Article 58(3)). The critical importance of examination in the CISG, coupled with the severe consequences facing a buyer who does not give a sufficient and timely notice of defect, under CISG Articles 38 and 39, suggest that the examination at the seller’s establishment might in complex cases take some time. However quickly the buyer must act to take over the goods, the calculation of the 58 time that must elapse before the buyer is in breach will vary according to the facts of the case, which is unfortunate because, if any rule requires a bright definitional line, it is the rule that determines when risk is transferred from the seller to the buyer. One objection to the buyer breach rule in CISG Article 69(1), when the seller is still in possession, is that it benefits only the seller’s insurer. A better rule for the transfer of risk might have required that the buyer’s delay to amount to a fundamental breach of contract, or to a

109 Placing the goods at the buyer’s disposal suffices under INCOTERMS 2020 EXW (A2–3 and B2–3); there is no requirement that the buyer be in breach of contract. The Chinese Civil Code places the risk on a buyer failing to take delivery in breach of the sale agreement: Article 605 (see also Article 608). The UK Sale of Goods Act puts the risk of loss on the delaying party whether this is the seller or the buyer: s 20(2). Polish law provides that, if the buyer delays receiving the goods, the seller can transfer the risk by placing the goods in safekeeping: Article 551(1). 110 See OLG Oldenburg 22 September 1998 (translated at http://cisgw3.law.pace.edu/cases/980922g1.ht ml). In an Article 69(2) case, delivery must also be ‘due’. If delivery is to take place on the buyer’s demand, Article 69(2) will not apply if such a demand has not been made: OLG Hamm (n 7).

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failure to comply with a notice from the seller under CISG Article 63 making time of the essence of the contract. 59 The length of the period that will elapse before the buyer commits a breach of contract may depend upon whether a buyer is facing temporary difficulties in taking over the goods within the terms of the exemption from liability in CISG Article 79. The clock should stop until the difficulties have abated. If the buyer is in breach before the exempting circumstances arise, but the goods suffer casualty at a time when the exemption requirements in CISG Article 79 are satisfied, then the buyer as the bearer of the risk will not be able to claim the benefit of CISG Article 79. The buyer would not have found itself in difficulties in taking over the goods had it not been in breach of contract in the first place. c) Delay where there is No Carrier Where delivery does not involve a carrier, and is not to be effected at the seller’s premises, CISG Article 69(2) states that risk is transferred to the buyer when delivery is due111 and the buyer is made aware that the goods are at his disposal in a place other than the seller’s place of business.112 The most likely case caught by this provision is where the buyer is required by the contract to collect the goods from a warehouse maintained by a third party.113 It is commonly the case that a buyer will leave the goods for quite a long time in storage, so that it would be inappropriate for the seller to retain the risk given the practical completion of the contract of sale. It has been argued that the rule can equally apply to delivery at the buyer’s premises,114 but the difficult case is that of the seller who does not receive necessary cooperation from the buyer to place the goods at there at its disposal. An application of the provision by analogy would be appropriate in this case. 61 The burden of proof will be on the seller to show that the buyer is aware, just as the seller will bear the burden of proving any facts needed to effect a transfer of the risk.115 Where the goods are held by a third party, such as a warehouse keeper, the placing of the goods at the buyer’s disposal must mean more than informing the buyer that the goods are in the warehouse. It must also mean that the warehouse keeper is committed to releasing the goods to the buyer, though opinions may differ as to whether the commitment must be enforceable, not just by the seller, but also by the buyer. 116 This commitment will often take a documentary form as a transferable warehouse receipt or warrant. 62 CISG Article 69(2), unlike CISG Article 69(1), puts the buyer on risk before committing a breach of contract. The buyer is given no time to order its affairs before the transfer of risk. There is no provision allowing response time. There is a case for an implied provision that requires the seller to give the buyer sufficient advance information to insure in those cases where the goods are to be collected from a third party’s premises.117 Such a solution might establish a fair balance between the needs of a seller, 60

See OLG Hamm (n 7). Applied in a DDP (Delivered Duty Paid in the country of importation) case by the OLG Oldenburg 22 September 1998 (translated at http://cisgw3.law.pace.edu/cases/980922g1.html). 113 UCC § 2-509(1)(c) provides that risk is transferred when the buyer receives a document of title (e.g., a warehouse receipt) or the third party acknowledges the buyer’s right to the goods. Similarly, see English law Sterns Ltd v Vickers Ltd [1923] 1 KB 78. 114 Hachem, in Schlechtriem & Schwenzer (n 1) p. 993. 115 See OLG Hamm (n 7). 116 UCC § 2-509(1)(a) refers generally to the third party’s acknowledgment of the buyer’s right. 117 See CISG Article 7(2); cf CISG Article 32(3) (information about carriage so that the buyer might insure). 111 112

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whose own insurance might not extend to goods held on a third party’s premises, and a buyer, who has not yet had the opportunity to insure.

G. Cross References See Chapters 10 on ‘Trade Terms,’ 14 on ‘Conformity of Goods,’ 19 on ‘Remedies and 63 Damages,’ and 20 on ‘Avoidance.’

H. Practitioner Tips For the reasons stated above, the risk provisions in the CISG are flawed, particularly 64 in the marine trades,118 and do not provide the certainty that traders need. Those entering into international sale transactions governed by the CISG are advised to incorporate INCOTERMS 2020, the effect of which will be to exclude the corresponding risk transfer rules of the CISG. The incorporation of INCOTERMS will not, however, exclude the fundamental breach rule in Article 70. That rule, designed for rare and difficult cases, can stand because, as expressed, it does not modify the transfer of risk. Instead, it allows the available remedies of the buyer to override certain effects of transfer.

I. Additional Sources Bridge (ed), Benjamin’s Sale of Goods (11th edn, Sweet & Maxwell 2020) paras 19–122 et seq.; Bridge, The International Sale of Goods: Law and Practice (4th edn, OUP 2017) paras 7.49–7.73; Erauw, ‘Observations on Passing of Risk’ in Ferrari, Flechtner & Brand, The Draft UNCITRAL Digest: And Beyond (Sellier 2004) 292 et seq.; Kröll, Mistelis & Perales Viscasillas (eds), UN Convention on Contracts for the International Sale of Goods (CISG) (2nd edn, Beck, Hart, Nomos 2018) 850–81; Nicholas, in Bianca & Bonell (eds), Commentary on the International Sales Law (Giuffre 1987); Schlechtriem & Schwenzer (eds), Commentary on the UN Convention on the International Sale of Goods (CISG) (4th edn, OUP 2016).

118 For the view that terms like CIF and FOB (which give rise to particular difficulties for the CISG provisions) are unsuitable for the container trade, see Ramberg, ‘To What Extent Do INCOTERMS 2000 Vary Articles 67(2), 68 and 69 CISG?’ (2005) 25 Journal of Law and Commerce 219.

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CHAPTER 22 EXCUSE: FORCE MAJEURE AND HARDSHIP Larry A. DiMatteo A. Topics Covered . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B. Introductory Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C. Statement of Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . D. International Sales Transaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . E. Sampling of Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. CISG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Excuse under CISG Article 79 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. CISG Article 79: Case Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Private Autonomy as Obstacle to Claim for Excuse . . . . . . . . . . . . . . . . . . . . . b) Sphere of Control Approach and Fungibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Extraordinary Events . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d) Increases in the Costs of Production and Market Price Fluctuations as Impediments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . e) Foreseeability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Hardship and CISG Article 79 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Mainstream View: Hardship as Internal Gap and is Precluded . . . . . . . . . . b) Minority View: CISG Advisory Council Opinion No. 7 . . . . . . . . . . . . . . . . . . c) AC Opinion No. 20 of 2020, “Hardship under CISG” . . . . . . . . . . . . . . . . . . . aa) Case against Opinion 20 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . bb) Substance of Opinion 20 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d) Authoritative Value of CISG Advisory Opinion . . . . . . . . . . . . . . . . . . . . . . . . . II. UNIDROIT Principles of International Commercial Contracts . . . . . . . . . . . . . . III. Common European Sales Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Principles of European Contract Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. German Bürgerliches Gesetzbuch . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI. French Code Civil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VII. Spanish Código Civil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VIII. American Uniform Commercial Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IX. English Sales Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . X. Common Law of Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XI. American Restatement (Second) of Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XII. Chinese Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Force Majeure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Change of Circumstances (Hardship) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F. Commentary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Excuse-Hardship Distinction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Force Majeure and Principle of Good Faith . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Hardship Provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Onerousness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Type of Event . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Hardship and Custom . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. Sampling of Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Common Excuse Scenarios . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Crop and Production Failure Cases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Cost Increases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Failure of Source of Supply . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. Issue of Restitution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. Force Majeure and Hardship Case Study: Coronavirus Pandemic . . . . . . . . . . . G. Illustrations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Just-in-Time Contracting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Strike or Quarantine . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Goods in Receivership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Changed Circumstances before Offer and Acceptance . . . . . . . . . . . . . . . . . . . . . . . V. Suez Canal Closure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI. Government Permission or Intervention . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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A. Topics Covered VII. Long-Term and Relational Contracts: Supply Contracts and Distributorships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VIII. Hardship in Arbitration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IX. Relationship between CISG Article 79 and Article 6 . . . . . . . . . . . . . . . . . . . . . . . . . X. Is Force Majeure Narrower in the International Context? . . . . . . . . . . . . . . . . . . . . XI. Related Provisions of Contract Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XII. Long-Term Contracting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XIII. Force Majeure Relating to Non-Performance or Partial Performance versus Delayed Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . H. Cross References & Additional Commentary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Practitioner Tips . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Drafting of Contract Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Force Majeure Clause . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Moving Beyond the Standard Force Majeure Clause . . . . . . . . . . . . . . . . . . . . . . . . . 1. Uniform Customs & Practices for Documentary Credit Transactions (Force Majeure) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. International Chamber of Commerce (Force Majeure) . . . . . . . . . . . . . . . . . . . 3. Other Examples of Force Majeure Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Example 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Example 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. Exchange Rate Fluctuations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Hardship Clause . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. ICC Hardship Clause 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Questions to be asked in Drafting Force Majeure and Hardship Clauses V. Related Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . J. Additional Sources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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A. Topics Covered This Chapter explores the universally accepted notion of ‘Excuse’—the idea that 1 under certain situations a party shall not be held liable for breach of contract. Excuse is premised on the occurrence of an unforeseen event or the non-occurrence of an expected event, which precludes a party’s performance and for which the non-performing party could not have been expected to prevent or overcome. This limitation of liability for breach comes under various names in the different legal systems including, impossibility, force majeure, frustration of purpose, change of circumstances, hardship, impediment, impracticability, and so forth. At times of economic volatility and crisis, social upheaval, and wars, the use of these doctrines of excuse and exemption play an increasing role in cases where a party seeks to unwind its contractual obligations. Relatively novel situations challenge notions of foreseeability, beyond control, and undue burden. Many of the excuse doctrines are substantially malleable for courts and arbitral tribunals to assess and manage the events of the present, but how they actually apply the doctrines to these events creates a great deal of uncertainty. The 2008 financial crisis and subsequent ‘Great Rescission’ have challenged the application of other contract doctrines and the enforcement of contract terms. For the purposes of this Chapter, the generic or umbrella term of ‘excuse’ will be used for the idea of a party being relived from liability related to breach due to the occurrence or non-occurrence of an event. For purposes of organization this Chapter divides the excuse doctrines into two 2 groups—impossibility or force majeure and hardship or change of circumstances. This is necessitated by the fact that some national legal systems only recognize the first group, while other countries recognize both groups of excuse. The first group requires impossibility of performance. This type of excuse is generally limited to events that make it objectively impossible for a party to perform. However, some countries, such as Germany, also recognize subjective impossibility. An extension of the impossibility doc-

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trine is seen in the frustration of purpose doctrine where even though it is objectively possible to perform, the purpose for the contract is no longer in existence and, therefore, performance serves no reasonable purpose. 3 The second group or type of excuse is where it is objectively possible to perform and such performance still serves the purpose of the contract, but the performance will create an undue hardship on a performing party. Under some legal systems, the creation of hardship due to an unexpected change of circumstances (between the conclusion of the contract and the time of performance) triggers an obligation on the contracting parties to renegotiate terms of the contract to ameliorate the hardship on the performing party. Both groups of excuse will be discussed in the ‘Sampling of Laws’ and the ‘Commentary’ sections found later in this Chapter. 4 The Chapter also examines the consequences stemming from a claim of excuse. Two topics to be discussed include whether an excuse results in the avoidance of the contract or may only trigger a suspension of the duty to perform. The second topic to be addressed is if the contract is terminated are the parties required to return goods or materials and to make restitutionary payments. The Chapter also examines the ubiquitous force majeure clause found in most contracts, as well as the use of hardship clauses to extend excuse where performance is still possible. Finally, the importance of custom designing force majeure and hardship clauses is emphasized.

B. Introductory Note Excuse, although an accepted principal in all legal systems, varies dramatically in scope and in frequency of application. The scope of excuse varies more greatly in legal systems that also accept hardship as a shield against liability for breach as opposed to those that only possess the traditional impossibility doctrine. There also is a great deal of variety among countries that limit the types of occurrences that reach the threshold of impossibility between those that narrowly construe impossibility (France) and those countries that recognize a more expansive list of force majeure events. 6 In order to assure some level of flexibility in the enforcement of performance obligations, most contracts incorporate a force majeure clause. The problem with such clauses is that a great majority of them are standard or boilerplate type of clauses that merely mimic what excuse law already provides. Therefore, this Chapter stresses the importance of drafting customized clauses that take into account the particularities of international, as apposed to domestic transactions, and the types of risks unique to the given trade or industry of the contracting parties. The hardship clause, although common, is not as widely used as the force majeure clause. This is unfortunate especially in cases of longterm supply contracts where substantial changes in circumstances effecting contractual equilibrium are more likely to occur. 7 It is important to understand the difference between the law of excuse as written and the law in action. In many cases courts have been predisposed not to grant excuse in other than very extraordinary situations. The CISG provides what has generally been interpreted as a force majeure provision that does not recognize hardship as an excuse. Furthermore, CISG case law has narrowly construed the provision and has rarely granted an excuse even in areas traditionally recognized as force majeure events. The American UCC adopted the doctrine of impracticability, which was intended to liberalize the Common Law of excuse by allowing the courts to provide relief in situations more akin to hardship than to traditional impossibility. In practice, American courts rarely have interceded in response to claims of impracticability. 5

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To understand excuse law in order to make cogent arguments for and against its application on behalf of clients, the practitioner needs to be able to manipulate the underlying tensions and concepts that make this area of law uncertain and difficult to obtain relief from contractual liability. Freedom of contract suggests that a contract should be strictly enforced as a product of private autonomy. The certainty and predictability of contract enforcement is the bedrock of contract law. Thus, many claims of excuse are denied under the rubric of allocated risk, which notes that no relief is warranted because the basis of the claim is a risk that was allocated in the contract, either expressly or implicitly. The other side of the tension is that some relief from strict enforcement of contract is needed to prevent injustice. Strict enforcement of contracts should give way in situations where an unexpected occurrence renders performance impossible or where a dramatic change of circumstances between the conclusion of the contract and the time of performance has resulted in the creation of an undue burden if a party is required to render the contractual performance. In the later case, it seems reasonable to require the parties to re-negotiate the terms of the contract. Freedom of contract rationales can also be used to justify such flexibility in the performance obligation. For example, the parties intended their contract to produce certain reciprocal benefits, however, that balance of benefits fails to occur due to an unexpected event or change of circumstances. Alternatively stated, the parties had reasonable expectations of the contractual outcome at the time they concluded their contract, but those expectations were not realized due to the occurrence of a mostly unforeseeable event that shifts the contractual balance so dramatically to render it substantially unfair to one of the parties. This Chapter will examine the nuances of excuse law across different legal systems in order to alert the practitioner of the importance of being proactive in the drafting of an international sales contract. As noted above, there are two strains of ‘excuse’—those focused on party expectations and those focused on the change of contractual balance or equilibrium. The former is aligned with doctrines such as force majeure and impossibility; the latter is associated with doctrines such as hardship, frustration of purpose, impracticability, and Wegfall der Geschäftsgrundlage. The first set of doctrines focus on the subjective intent of the parties—was the risk related to the claim of excuse allocated by the parties? The second set of doctrines focus on the objective change or alteration of the contract between the time it was struck and a future point affected by an unexpected change of circumstances. Has the contract become an undue burden, excessively onerous on one party? Do the additional costs to one party exceed the benefits received by the other party if performance is required?1 One scholar distinguishes force majeure and hardship or rebus sic stantibus (‘things thus standing’ or the assumption that contract is based upon conditions existing at the conclusion of the contract): ‘Rebus sic stantibus should not be confused with force majeure. Force majeure excuses the obligor to perform only if there is an irresistible obstacle. In force majeure, the performance must be physically or legally impossible and must not be merely more onerous to perform. Thus, the fundamental difference is that, unlike rebus sic stantibus, force majeure does not include economic hardship or economic impossibility.’2 The main purpose of contracts is to bind parties to future obligations so that businesspersons may conduct and plan their business activities accordingly. However, all 1 See Yuldrum, Equilibrium in International Commercial Contracts (Wolf Legal Publishers 2011) pp. 49–50. 2 Saliba, ‘Rebus sic stantibus: A Comparative Survey’ (2001) 8 Murdoch University e-Law Journal, available at http://www.murdoch.edu.au/elaw/issues//v 8n3/saliba83_text.html.

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contracts are conducted under a degree of uncertainty since the future is unknowable and includes both foreseeable (breach of contract) and unforeseeable (force majeure) events. The longer the term of the contract, the greater the degree of uncertainty will be. The purpose of a contract, at least partially, is to provide for the consequences for both foreseeable and unforeseeable future occurrences. Along with the subject matter of the contract (sale of goods; mixed sales), the length of a contract requires different types of provisions to protect the parties from future events. Long-term supply of goods contracts often provide for adjusting the price (price escalation and renegotiation clauses), adjustment in quality (requirement and output clauses), design changes (modification clause), improvements made by the purchaser of the goods (grant-back clause), and so forth. All contracts should provide for the allocation of unexpected risks. The force majeure and hardship clauses are generic clauses used to provide exemption from contractual liability and for adjustment of the contract. But see, related clauses in section entitled Practitioner Tips. Most often in determining whether a party should be relieved of its contractual obligations, the law looks at three factors: (1) the unforeseeability of the event prevents a party, either absolutely or impracticably, from performing. If the event was foreseeable at the time of contracting, than the risk of the event happening will be deemed to have been an allocated risk for which the risk-bearing party is not allowed an excuse, (2) the supervening event was beyond the control of the party claiming an excuse, and (3) any ability of the party to overcome the obstacle to performance can only be undertaken by incurring an undue burden or costs. The different excuse doctrines – change of circumstances, force majeure, frustration, impediment, impossibility, impracticability, and hardship – vary on the degree of emphasis they put on these three factors. These factors will be more closely examined in the sections on ‘Sampling of Laws’ and ‘Commentary’. A heuristic for the requirement of foreseeability is the nature of the obstructing event. The more an event is considered an ‘extraordinary event’, the more likely a court or arbitrator will determine that it was not a foreseeable event. But, how extraordinary must the event be and when does a generally foreseeable event become extraordinary? Alternatively, at what level does an occurrence move from a difference in degree to a difference in kind? For example, currency fluctuations are seen as foreseeable events. The contractual designation of payment in a currency can be seen as an express allocation of risk, or, minimally, as an implied allocation of risk, to the party obligated to pay in that currency. However, if the currency fluctuation is determined to be extraordinary, then it can be argued that such a drastic change was not a foreseeable event. The determination of what type of change is considered grounds for granting an excuse will often be based upon an historical analysis of the currency rates between the currency of the contract and the payer’s national currency. Again, the excuse doctrines are flexible enough to turn the ordinary into the extraordinary, but different courts and arbitral panels will have different thresholds for making this conversion. One factor likely to be weighed by the courts is the duration of the contract. The longer the term of the contract the more difficult the argument of the foreseeability of greater or ahistorical shifts in exchange rates over prolonged periods of time. Another factor, that weighs against the party claiming an excuse are the existence of instruments that would hedge or minimize the risk of currency fluctuations, such as currency options, future, and forward contracts. In order to avoid the costs of such protection, the party could use the simple expedient of negotiating a clause in the contract to address the issue of currency fluctuations. For example, the force majeure clause in the contract could be tailored to allow for a cancellation of the contract if a currency 694

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fluctuation exceeds a given threshold. If the parties want to preserve the contract a contractual provision that allows for a price adjustment, cost sharing, or the obligation to renegotiate the contract should be considered. Other factors in favor of granting an excuse include excessive bargaining power disparities, informational asymmetries, and the unsophistication of one of the parties. A major ancillary issue to the granting of an excuse is the nature of the remedial 16 scheme that attaches to a successful claim. Under the Common Law, the ordinary remedy would be to void the contract. Rarely, will Common Law courts reform contractual terms in order to preserve the contract or a long-term contractual relationship. CISG Article 79 provides for a suspension of the contract, but not the avoidance of the contract. It leaves unanswered a key question as to the length of time in which a suspension is to be permitted before leading to a termination of the contract?

C. Statement of Issues The comparative analysis undertaken here will illustrate the commonalities and 17 numerous differences in the law of excuse across national legal systems, as well as differences among different regional and international legal instruments. The issues to be addressed include: (1) how does each system covered in this Chapter define excuse? Which factors or facts are most predictive of a successful excuse claim? More specifically how do these legal systems differentiate between force majeure (impossibility) and hardship (changed circumstances)? (2) How has CISG Article 79 (impediment) been interpreted? (3) Is the scope of CISG Article 79 broad enough to encompass the notion of hardship? (4) How can contracting parties best protect themselves from the occurrence of an unforeseeable event or the non-occurrence of an expected event? What types of provisions should transactional lawyers consider in order to best protect the interests of their client? (5) How does the length or duration of a contract impact the application of excuse?

D. International Sales Transaction As compared to domestic sales transactions, there is a greater diversity of risks in 18 international transactions. In the international business arena, the law of excuse increases in complexity and uncertainty. It is important that the parties understand and the contract delineate both the generic risks of international sales transactions, as well as the specialized risks pertaining to the particular goods and the countries of export-import. The choice of the rules of the CISG, UNIDROIT Principles of International Commercial Contracts, or a national law is subject to various interpretations, especially when being applied by a foreign court. Because of this uncertainty, careful contract drafting is the best means to protecting a client in an international sales transaction, especially when the transaction is long-term in nature (long-term supply contracts; distribution contracts). Numerous terms have been used for this purpose including, price escalation, re-negotiation, quantity adjustment, excusable delay, government approval, exchange rate fluctuation, take or pay, force majeure, and hardship clauses. The last two provisions – force majeure and hardship – are often neglected through the use of vague, formulaic standard terms. The importance of customizing these two provisions will be explored in-depth later in this Chapter. Chain of Transactions: International sales transactions are often parts of a chain or 19 series of transactions beginning with contracts between the manufacturer-seller to its Larry A. DiMatteo

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suppliers and subcontractors and downstream from manufacturer to seller (if different parties) to a number of middlemen, wholesalers, or assemblers to retailers and ultimate purchasers. In the case of a claim of excuse, the place in the chain of transactions where it is claimed will determine how far the force majeure needs to be ‘traced backed’. Professor Michael Bridge explains the concept of ‘tracing back’ as requiring someone who makes a force majeure event claim due to a lack of supply or a prohibition on exports to tie that claim to a previous force majeure event that prevented it from obtaining the needed materials and products or from obtaining an export license. For example, ‘intermediate sellers in a string [have] to trace back to a shipper affected by the prohibition and [base] their own protection on the shipper’s protection. It [is] not enough to trace back only as far as a trader who sometimes received notices from other traders and sometimes shipped goods on its own account.’3 20 A simpler version of tracing back is found in CISG Article 79(2) which describes the situation where a contracting party’s failure to perform relates to a failure of a third party to perform (such as, a supplier or subcontractor). In such a situation the party claiming excuse must fulfil the requirements of CISG Article 79(1) ‘impediment’ and prove that the third party would also be able to claim an impediment. The party may also have to show that it took reasonable steps or precaution to mitigate the effects of the force majeure event, such as a government intervention. Prohibition clauses are generally construed strictly. So, for example, if a subsequent government regulation makes the cost of exporting more expensive the seller would not be able to use that as a ground for excuse since it is physically and legally able to perform. The use of expert customs brokers and freight forwarders, as well as crafting well-tailored contracts, as noted above, are needed to manage the unique risks of international transactions.

E. Sampling of Laws I. CISG Article 79 (1) A party is not liable for a failure to perform any of his obligations if he proves that the 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 it or its consequences. (2) If the party’s failure is due to the failure by a third person whom it engaged to perform the whole or a part of the contract, that party is exempt from liability only if: (a) he is exempt under the preceding paragraph; and (b) the person whom he has so engaged would be so exempt if the provisions of that paragraph were applied to him (3) The exemption provided by this article has effect for the period during which the impediment exists. (4) The party who fails to perform must give notice to the other party of the impediment and its effect on his ability to perform. If the notice is not received by the other party within a reasonable time after the party who fails to perform knew or ought to have known of the impediment, he is liable for damages resulting from such non-receipt. (5) Nothing in this article prevents either party from exercising any right other than to claim damages under this Convention.

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1. Excuse under CISG Article 79 CISG Article 79(1) incorporates the criteria that underlie most of the national excuse 21 laws: (1) non-foreseeability of the occurrence of the impediment at the time of contracting and (2) the occurrence of the impediment was beyond the control of the party claiming an excuse. CISG Article 79 fails to recognize the principle of undue burden in assessing a party’s excuse claim and its ability to overcome the impediment. This begs the more important question of what constitutes an impediment. Is an impediment some occurrence that objectively prevents a party from performing the contract or is it an occurrence that can only be overcome at undue expense to the party claiming an excuse? A claim of excuse can also be based upon the failure of a third-party to perform 22 (CISG Article 79(2)) on behalf of one of the parties if the claiming party can prove that the reason for the third party’s failure to perform was due to an impediment that satisfies the above two criteria. In cases of the delegation of contractual obligations, when permitted under the contract, the contracting party delegating its performance obligations must prove a ‘double impediment’, in order to claim an CISG Article 79 excuse. The contracting party must show that both its delegate and itself could not have performed due to an impediment. If the party assuming the contracting party’s performance obligation is prevented from performing the contracting party remains obligated to seek an alternative performance. This places the contracting party in a predicament of remaining obligated to the delegate (CISG Article 79 suspension) and needing to seek an alternative performance.4 CISG Article 79(3) provides that the relief to be granted in case of the granting of 23 excuse is exemption from liability ‘for the period during which the impediment exists.’ Professor Davies examines the issue of whether and when the period of suspension is so prolonged that it gives the parties a right of termination: Article 79 also leaves unanswered when an extended suspension gives way to a right to terminate the contract. The CISG case law needs to be continually analyzed to determine the answer to these issues and questions. Unfortunately, CISG case law fails to provide guidance to when a right of termination is triggered by an extended period of suspension. The best practice would be for the contract to provide a specific period of time from the commencement of the impediment when either party may terminate the contract. A more generic wording, not specifically providing a fixed time period would be as follows: ‘Where the duration of the impediment 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 notification within a reasonable period to the other party.’5

Also, left unanswered is whether the non-claiming party may ask for substituted per- 24 formance. If rather fungible goods are entrapped by a port strike is it too much for the non-breaching party to request that the seller send alternative goods from another port? If such a demand is recognized should the buyer be required to share the additional costs of transit? Huber and Mullis argue that such a request for substituted performance is not authorized under CISG Article 79 or other CISG provisions.6 CISG Article 79(4) places a duty on the party failing to perform to give notice to the 25 other party of the existence of the impediment. If due notice is not given in a reasonably timely manner, then the non-preforming party, who knew or ought to have known of Id. p. 618. Davies, ‘Excuse of Impediment and Its Usefulness’ in DiMatteo (ed), International Law Sales: A Global Challenge (CUP 2014) pp. 305–306. 6 Huber & Mullis, The CISG: A New Textbook for Students and Practitioners (Sellier 2007) pp. 192–193. 4

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the impediment, is liable for damages that would have been avoided if timely notice was given. 26 Finally, the CISG does not contain a hardship provision. A restrictive view of impediment would require the event to make it temporally impossible for a party to perform. A more liberal or expansive view of impediment could include hardship as the grounds for excuse. Impediment qua hardship circles back to the factor of undue hardship discussed above. The impediment does not objectively prevent a party from performing, but that performance can only be undertaken at great or undue costs. This issue will be discussed in more detail in the below section’s coverage of CISG case law.

2. CISG Article 79: Case Law Because of the neutrality of the word ‘impediment’ and CISG Article 79’s generic list of criteria, most of which are found in national contract laws, how CISG Article 79 should be applied becomes an interesting proposition – should it include not only absolute impossibility of performance, but also ‘mere hardship’? CISG case law needs to provide the answers. Unfortunately, there is a sparse body of case law applying CISG Article 79. Most significantly, claims for CISG Article 79 excuse have rarely been sustained. The more likely grounds for excuse are found in force majeure and hardship clauses or in national excuse doctrines. Why is this so? First, a customized force majeure clause is sound contract practice. Such a clause can take into account the idiosyncrasies of the parties, the transaction-type, and the peculiarities of an industry, and its customs, usages, and practices. Troublingly, such tailored clauses are an exception to the rule of using standard or boilerplate force majeure clauses that often simply restate the parameters of excuse already available in law. Second, the wording of CISG Article 79 and its current interpretation by the courts has made the granting of an excuse almost unobtainable.7 28 For example, CISG Article 79’s requires that the party claiming an excuse must show that it ‘could not reasonably be expected to have taken [the alleged impediment] into account at the time of the conclusion of the contract’ has been read very broadly. The unforeseeability of a future change of circumstances is taken from two perspectives – the particular party and the reasonably prudent party. Thus, if a reasonable party would have foreseen a possible change of circumstances, then a court or arbitral panel will likely reject the claim on the basis that the party knowingly accepted the risk. 29 A survey of the case law has not produced an answer to the many questions that CISG Article 79 presents, such as what factors should be considered in determining foreseeability, beyond control, and whether the burden placed on one of the parties should be a factor in granting an excuse? In sum, the reported judicial and arbitral case law has taken a very restrictive view of excuse under CISG Article 79. There are only a few cases in which a court has recognized an impediment warranting an excuse. The courts have also failed to provide substantive rationales for their decisions. Instead, they have used sparse and formulaic reasoning, such as, the event was foreseeable or it was not beyond the party’s control to prevent or avoid the impediment. 30 CISG jurisprudence addresses the following eleven issues, but fails to answer or provide solutions to the questions presented by these issues. 27

7 Schlechtriem and Schwenzer (eds), Commentary on the UN Convention on the International Sale of Goods (CISG) (3rd edn., OUP 2010) p. 1063 (‘The provision’s drafting history, systematic placement and wording imply that such an exemption should be considered only under very narrow conditions’).

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a) Private Autonomy as Obstacle to Claim for Excuse A theme that runs throughout the CISG case law is that a party claiming excuse 31 should have protected itself through incorporating a term in the contract excluding liability for certain occurrences or non-occurrences. In a Dutch case, due to bad weather a grower did not obtain the normal crop yield to fully perform on its contract. The Court denied a claim for exemption (excuse) holding that the seller in negotiating the contract should have factored in adverse weather conditions and lower crop yields. Furthermore, the court reasoned that a diligent grower considers possible unfavorable weather conditions when entering into a sales contract; the seller, in the instant case, could only allege an impediment if the harvest was below ‘a minimum of crop yield of 90% of the previous years’ harvests.8 b) Sphere of Control Approach and Fungibility In one case, powdered milk was contaminated and the seller claimed an excuse.9 It 32 was uncertain whether the contamination occurred prior to or after the transfer of risk. The seller argued that it should not be able held liable because it used a state of the art production process and that any such contamination could not have been detected or removed. The court held that there is a presumption in favor of the buyer that the contamination occurred during the manufacturing process. That since this was in the seller’s sphere of control it had the burden of proving otherwise. The existence of a market for fungible goods has also been used as a reason for denying a claim of excuse. In one case, the seller’s supplier was unable to deliver due to a force majeure event.10 But, because the goods were available in the marketplace it was still within the seller’s sphere of control to perform. c) Extraordinary Events A surrogate approach to determining whether an event was unforeseeable is to ask 33 whether the event is considered to be an extraordinary in nature. However, CISG case law has narrowly construed extraordinary in that even traditional force majeure events, such as natural disasters and governmental interventions, have been found to be below the threshold of an impediment under CISG Article 79. The courts have rationalized that such events can nonetheless be considered allocated risks implied into the contract. Thus, an event can be unforeseeable and, at the same time, be considered an allocated risk under the contract. This was the result in cases involving the government imposition of an import quota11 and failing to issue a necessary license.12 The restrictive nature of CISG Article 79, as interpreted by the courts, include rejections of impediment claims

8 District Court Maastricht 9 July 2008 (Agristo N.V. v Macces Agri B.V.), translation available at http://c isgw3.law.pace.edu/cases/080709n1.html. 9 BGH 9 January 2002 (Powdered milk case), translation available at http://cisgw3.law.pace.edu/cases/02 0109g1.html. 10 BGH 9 January 2002 (Powdered milk case), translation available at http://cisgw3.law.pace.edu/cases/0 20109g1.html. 11 CIETAC 17 September 2003 (Australia cotton case), translation available at http://cisgw3.law.pace.ed u/cases/030917c1.html. 12 Arbitration Proceeding 96/1998 (Russia), 24 November 1998, translation available at http://cisgw3.la w.pace.edu/cases/981124r1.html.

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involving a miner’s strike at a company of the seller’s supplier,13 shortage of carrier ships,14 flooding,15 and heavy rainfall reducing crop yields.16 d) Increases in the Costs of Production and Market Price Fluctuations as Impediments 34

Restrictive interpretations of CISG Article 79 have denied exemptions for events involving economic hardship. Even drastic increases in the costs of inputs or goods have been held to be foreseeable events. A Russian arbitral tribunal asserted that: ‘no possible change of market conditions can release the buyer from its duty to accept the goods.’ 17 In another case, a party argued that the contract had been frustrated due to a threefold jump in market prices. A Chinese arbitration panel held that there was no legal basis to incorporate frustration of purpose within the meaning of CISG Article 79’s impediment principle.18 However, the panel did acknowledge that drastic changes of circumstances could be the basis for an CISG Article 79 exemption, but the claiming party had failed to prove a fundamental change of the circumstances. e) Foreseeability

It is important to note that CISG Article 79 does not use the words foreseeable or unforeseeable. Instead it states that the party claiming an impediment could not have been expected to have ‘taken’ it ‘into account’ at the time of the conclusion of the contract. Nonetheless, numerous courts refer to the foreseeability of an event in discussing CISG Article 79. Due to the restrictive wording of CISG Article 79 and the internationalization of the market place many events formerly considered as grounds for excuse, such as, poor weather or delayed transportation, as well as war, hostilities, embargoes and terrorism have been increasingly seen as foreseeable events. 19 36 The restrictiveness of CISG Article 79 is borne out in the UNCITRAL Secretariat Commentary: 35

All potential impediments to the performance of a contract are foreseeable to one degree or another. Such impediments as wars, storms, fires, government embargoes and the closing of international waterways have all occurred in the past and can be expected to occur again in the future. Frequently, the parties to the contract have envisaged the possibility of the impediment, which did occur. Sometimes they have explicitly stated whether the occurrence of the impeding event would exonerate the non-performing party from the consequences of the non-performance. In other cases it is clear from the context of the contract that one party has obligated himself to perform an act even though certain impediments might arise. In either of these two classes of cases, [the parties’ freedom of

13 Hamburg Arbitration Proceeding 21 March 1996 (Chinese goods case), translation available at http://c isgw3.law.pace.edu/cases/960321g1.html. 14 CIETAC 28 April 1995 (Rolled wire rod coil case), translation available at http://cisgw3.law.pace.edu/c ases/950428c1.html. 15 CIETAC 14 March 1996 (Dried sweet potatoes case), translation available at http://cisgw3.law.pace.ed u/cases/960314c1.html. 16 CIETAC 14 March 1996 (Dried sweet potatoes case), translation available at http://cisgw3.law.pace. edu/cases/960314c1.html; OLG Hamburg 4 July 1997 (Tomato concentrate case), translation available at http://cisgw3.law.pace.edu/cases/970704g1.html. 17 Arbitration Proceeding 255/1994 (Russia) 11 June 1997, translation available at http://cisgw3.law.pac e.edu/cases/970611r1.html. 18 CIETAC 2 May 1996 (FeMo alloy case), translation available at http://cisgw3.law.pace.edu/cases/9605 02c1.html. 19 See Flechtner, ‘The Exemption Provisions of the Sales Convention, Including Comments on the “Hardship” Doctrine and the 19 June 2009 Decision of the Belgian Cassation Court’ (2010) 59 Belgrade L Rev 84.

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In sum, the non-foreseeability requirement is the most difficult of the requirements 37 to prove under CISG Article 79. In order to succeed, both the extraordinary type of occurrence and the large magnitude of the occurrence must be present.

3. Hardship and CISG Article 79 a) Mainstream View: Hardship as Internal Gap and is Precluded The language, legislative history and case law overwhelmingly shows that the sole 38 excuse under CISG Article 79 is impossibility or force majeure. Hardship comes within the scope of CISG Article 79 but is rejected as a principle to excuse non-performance to claim an adaptation of the contract. First, the language of ‘impediment’ is closely aligned with impossibility, with hardship being a separate principle. Second, the legislative history shows that the concept of hardship or change of circumstances was recognized in earlier versions of CISG Article 79 and subsequently excluded in the final version. Working Group (1974) (A/CN.9/87) provided two versions of ULIS Article 74 (CISG Article 79). Alternative B uses the language of impediment: ‘Such non-performance if he proves that it was due to an impediment of a kind which could not reasonably be expected.’ Alternative A uses broader language that can be plausibly interpreted as including hardship: ‘Performance of that obligation has become impossible or has so radically changed as to amount to performance of an obligation quite different from that contemplated by the contract.’ Working Group (1975) A/CN.9/100 was critical of Alternative A: ‘Although this proposal was supported by some representatives, other representatives thought it gave too much relief to the non-performing party.’ Finally, Working Group (1976) A/CN.9/116 decided in favor of a narrow excuse doctrine 39 based upon objective impediment to the performance (Para 4) and excluded the language of hardship: ‘so radically changed’. Also removed from CISG Article 79 is any notion of the parties’ expectations at the time of contracting and that a change of circumstances ‘amounted to performance of an obligation quite different from that contemplated by the contract.’ John Honnold notes that the word impediment was substituted for the word ‘circumstances’ in order to disallow the granting of an exemption ‘merely because performance became more difficult or unprofitable.’21 Most importantly, the reading of hardship into CISG Article 79 has been almost 40 uniformly rejected in the case law. A 1993 Italian case refused to apply the doctrine of ‘supervening excessive onerousness’. In that case, Nuova Fucinati v Fondmetall International,22 the court rejected the seller’s argument that the international market price ‘rose remarkably and unforeseeably to the point that it upset the balance between the corresponding performances and justified, at least, a price correction.’ The Court took a hard line against the idea that hardship is within the scope of CISG Article 79 impediment. In the same year, a German court held that the doctrine of Wegfall der Geschäftsgrundlage does not apply because the CISG ‘fills the field in this area.’ A Belgium court in 1975 held that fluctuations of prices are foreseeable events in international trade and far from rendering the performance impossible they result in an economic loss well included 20 UNCITRAL Secretariat, Commentary on the Draft Convention on Contracts for the International Sale of Goods, U.N. Doc. A/Conf. 97/5, 1978, p. 55. 21 Honnold, Uniform Law for International Sales under the 1980 United Nations Convention (3 rd edn., 1999) § 423. 22 District Court Monza 14 January 1993 (Nuova Fucinati v Fondmetall International), translation available at http://cisgw3.law.pace.edu/cases/930114i3.html.

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in the normal risk of commercial activities. Another German court in 1997 ruled that an impediment has to be judged according to the contractual allocation of risks; not exempted by the fact that acquiring the goods elsewhere would have led to considerable financial loss. A Russian tribunal in the same year stated a change of market condition cannot serve as an excuse. An Austrian court, in 1998, held that CISG Article 79 did not sustain a claim based on market deterioration and the party could not rely on a frustration of contract as a consequence of a radically changed market situation. A 2004 Swiss case noted that impediments were objective obstacles in contrast to things that are personal circumstances that constitute incapacity to perform. In a case from Greece (2016), a low quantity harvest due to a draught did not rise to the level of an impediment. The court reasoned that CISG Article 79 does not release a party from its contractual obligations due to change of the economic background. A 2008 German case emphasized the restrictive nature of CISG Article 79, which does not allow for changing of the allocation of contractual risks and an impediment is based upon objective circumstances. A in 2008, a Dutch court held that the weather is often unsettled and therefore, a farmer should only have entered a contract based a 90% harvest. A 2012 Ukraine case noted that CISG Article 79has the character of a ‘force majeure clause’ and a 2015 Spanish case held that CISG Article 79 requires material impossibility. 41 The case pointed to as supporting the claim that hardship may be implied in CISG Article 79 is the 2009 Belgium case of Scafom v. Lorraine Tubes. But the case has been widely perceived as a poorly written decision and as a product of homeward bias. The case cites to provisions in the UNIDROIT Principles of International Commercial Contracts and CISG Advisory Council Opinion No 7. Both sources are weak for different reasons. First, the use of the UNIDROIT Principles to interpret the CISG is not part of the CISG mandated interpretive methodology. CISG Article 7(2) states that the CISG is to be interpreted by resort to general principles and if no applicable principles are found then to the rules of private international law (national law). Thus, the use of international or soft law instruments is precluded by the CISG. Second, resort to national law is also precluded in cases when an issue is covered by the CISG such as in CISG Article 79’s impediment (force majeure) as the sole excuse doctrine allowed under the CISG. The use of the CISG Advisory Council Opinion as an authoritative source is discussed in the next section. b) Minority View: CISG Advisory Council Opinion No. 7 42 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). The language of Article 79 does not expressly equate the term "impediment" with an event that makes performance absolutely impossible. Therefore, a party that finds itself in a situation of hardship may invoke hardship as an exemption from liability under Article 79. 3.2 In a situation of hardship under Article 79, the court or arbitral tribunal may provide further relief consistent with the CISG and the general principles on which it is based.

The Opinion concludes that 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 CISG Article 79(1). It poses that the meaning of CISG Article 79 does not expressly equate the term ‘impediment’ with an event that makes performance absolutely impossible. Therefore, a party that finds itself in a situation of hardship may invoke hardship as an exemption from liability under CISG Article 79. 44 The Opinion stands contradictory to the overwhelming conclusion found in the case law and numerous commentaries that CISG Article 79 does not allow an exemption for 43

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hardship. The Opinion recognizes that few claims for an exemption under CISG Article 79 have been successful and that Civil Law judges have not resorted to national views on hardship or have looked for fault to deny an exemption claim. It notes that CISG Article 79 jurisprudence has been scant in discussing what standards are to be used to determine if the requirements of CISG Article 79 have been met; instead, they make summary statements, such as, a certain event is not an ‘impediment’ or that preventing and avoiding the obstacle was not beyond the control of the claiming party. This Opinion is taken from a mostly Civil Law perspective or bias and should not 45 be considered an autonomous interpretation in which hardship can be implied into the word ‘impediment.’ One of the few decisions granting an excuse under CISG Article 79 was one involving economic hardship. The Belgium Supreme Court in the 2009 Scaform International case held that a seventy percent increase in the price of steel was not foreseeable and placed an undue burden on the performing party.23 The key issue remains whether hardship is within the scope of CISG Article 79. If so, then the above court should not have sought recourse to a national law of hardship and that is exactly what the Belgium Supreme Court did in holding that hardship was within the scope of CISG Article 79.24 The problem with the case is that it is not an autonomous interpretation of CISG 46 Article 79. First, the court focused on the undue burden aspect of the case, while CISG Article 79 does not state undue burden as a criterion for excuse, although there is a strong argument that it is implied in the criterion that the party cannot ‘reasonably overcome the impediment.’ Second, the determination of undue burden was analyzed through the Civilian notion of contractual equilibrium; that is, the equilibrium between the parties at the time of contract formation had been sufficiently altered to justify the recognition of a hardship. This interpretation is difficult to justify based upon the wording of CISG Article 79. Third, the court reasoned that an exemption for hardship could be implied in the 47 word impediment through the good faith principle found in CISG Article 7. Once again, this is very much a Civil Law type of reasoning. Fourth, the Court used the UNIDROIT Principles in the interpretation of CISG Article 79. This reasoning by analogy to a soft law instrument is not allowed under CISG interpretive methodology and is inherently flawed.25 This is because the UNIDROIT Principles possess two provisions – one for force majeure or impossibility and a separate provision for hardship. The CISG tellingly does not possess the latter type of provision that expressly recognizes the hardship exemption. c) AC Opinion No. 20 of 2020, “Hardship under CISG” aa) Case against Opinion 20 Despite the overwhelming majority of CISG cases rejecting claims for hardship, the 48 CISG AC elected to write another opinion on CISG Article 79, some 13 years after publishing Opinion 7 and 32 years after the adoption of the CISG. Of the 20 CISG AC Opinions, this is the first time that two opinions focused on the same article of the CISG. Opinion 20 argues for a broad interpretation of impediment to include cases of hardship. In fact, many courts have narrowly defined impediment as it relates to 23 Court of Cassation (Belgium) 19 June 2009 (Scaform International BV v Lorraine Tubes S.A.S.), translation available at http://cisgw3.law.pace.edu/cases/090619b1.html. 24 Ibid. 25 See DiMatteo & Janssen, ‘Interpretive Uncertainty: Methodological Solutions for Interpreting the CISG’ (2012) 2 Netherlands Journal of Commercial Law 52.

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impossibility or force majeure. As noted above, most courts and many scholars have equated impediment to impossibility (force majeure). The legislative history shows that hardship language (change of circumstances) was deleted in the final version of CISG Article 79. This makes sense due to the divide on the issue between the common and Civil Laws. Hardship does not exist in the Common Law with the exception of the doctrine of impracticability in the American Uniform Commercial Code. In reality, the impracticability doctrine has largely been rejected by American courts. Comments to the Opinion notes that “hardship, may exempt the debtor from liability for lack of performance has been a highly debated issue in various legal systems and under some international law instruments.” It further states that “many Civil Law jurisdictions accept the theory of hardship.” Opinion 20 is very much a Civil Law gloss of the meaning of CISG Article 79. bb) Substance of Opinion 20 Along with recognizing hardship within the meaning of impediment, the opinion follows the Civil Law in stating that the hardship must be of an “excessively onerous” kind and must not have been an allocated risk in the contract (“risk of a change of circumstances was assumed”). Opinion 20 does not recognize a duty of the parties to renegotiate in good faith and recognizes the remedy of suspension and not avoidance: “Under the CISG, a court or arbitral tribunal may not bring the contract to an end in case of hardship.” The Opinion provides a list of factors that can be applied in determining if a hardship exists under CISG Article 79: allocation or assumption of risk in the contract; speculative nature of the transaction; duration of contract; nature of seller’s supplier (usual, long-term supplier); and a party undertook a type of hedging. 50 Opinion 20 provides a source for lawyers arguing a hardship claim in front of a court or arbitration tribunal. But, from an academic perspective it is a weak argument that the Opinion is an autonomous interpretation of CISG Article 79. In the future one of two things is likely to happen. First, courts will continue to narrowly construe impediment as not including hardship. Second, in CISG Article 79 cases, Civil Law courts will apply the hardship doctrine and Common Law courts will reject it. 49

d) Authoritative Value of CISG Advisory Opinion 51

The CISG Advisory Council is made up of an excellent group of CISG scholars. However, it is important to note that as a source of law it was not established or authorized by the CISG. Because of its unofficial status, the Council’s opinions should be viewed as a commentary with not more force than numerous other high-quality commentaries on the CISG. An excellent court or arbitral panel decision should first discuss applicable general principles and reference the best or most well-reasoned opinions of other countries when interpreting the CISG. In attempting to understand the express and implied principles of the CISG reference to commentaries and scholarly works is a good practice but placing too much emphasis on a single secondary source is not. CISG Advisory Opinion No. 7 is just that an opinion on the scope of CISG Article 79. Scaform International case shows the danger of relying on such Opinions as a key authoritative source.

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II. UNIDROIT Principles of International Commercial Contracts Article 7.1.7. Force Majeure (1) Nonperformance by a party is excused if that party proves that the non-performance was due to an impediment beyond its control and that it 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 it or its consequences; (2) When the impediment is only temporary, the excuse shall have effect for such a period as reasonable having regard to the effect of the impediment on the performance of the contract; (3) The party who fails to perform must give notice to the other party of the impediment and its effect on its ability to perform (…). Article 6.2.2. Definition of Hardship There is hardship where the occurrence of events fundamentally alters the equilibrium of the contract either because the cost of a party’s performance has increased or because the value of the performance a party receives has diminished, and: (a) the events occur or become known to the disadvantaged party after the conclusion of the contract; (b) the events could not reasonably have been taken into account by the disadvantaged party at the time of the contract; (c) the events are beyond the control of the disadvantaged party; and (d) the risk of the events was not assumed by the disadvantaged party.

Because of the vagaries of the foreseeability requirement, the courts view of the 52 allocation of risks in the contract (express or implied) as a surrogate of foreseeability: ‘Attention should not be paid to the unclear foreseeability test but to more transparent criteria such as risk allocation.’26 If the risk is deemed to be unallocated, then, another important factor often considered is the ‘fault’ of the claiming party as to whether it exercised due care when the change of circumstances become known. Article 6.2.3. Effects of Hardship (1) In case of hardship the disadvantaged party is entitled to request renegotiations. The request shall be made without undue delay and shall indicate the grounds on which it is based; (2) The request for renegotiation does not in itself entitle the disadvantaged party to withhold performance; (3) Upon failure to reach agreement within a reasonable time either party may resort to the court; (4) If the court finds hardship it may, if reasonable, (a) terminate the contract at a date or on terms to be fixed; or (b) adapt the contract with a view to restoring contractual balance or equilibrium.

Note that equilibrium has nothing to do with the old Common Law’s equality of con- 53 sideration, but with the deal struck based upon the basic assumptions or conditions at the time of contracting. Therefore, equilibrium includes maintaining the one-sidedness struck by the original bargain. Thus, the concept of protecting the weaker (commercial) party is generally not a concept recognized in international sales law. Relationship between UNIDROIT principles Article 7.1.7 and 6.2.2: The hardship 54 and force majeure provisions should be read in conjunction with one another. In some situations, the change of circumstances may support either a claim of force majeure and hardship. The claim chosen will depend on the remedy preferred by the disadvantaged party – termination-rescission (excuse-force majeure) or renegotiation-reformation (hardship).

26 Keilhack, The hardship approach in the UNIDROIT Principles of International Commercial Contracts and its equivalent in German Law of Obligations (Grin 2003) p. 3, citing Doudko, ‘Hardship in Contract: The UNIDROIT Principles Approach and Legal Developments in Russia’ (2000) 3 Unif L Rev 483 at 498 et seq.

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III. Common European Sales Law The relevant provisions relating to excuse are found in CESL Articles 87 to 89. CESL Article 87(1) differentiates between non-performance and fundamental non-performance. Non-performance includes non-delivery of goods, delivery of non-conforming goods, and late or non-payment of price. CESL Article 87(2)(a) defines fundamental non-performance as a failure that ‘substantially deprives’ a party of what it was ‘entitled to expect under the contract.’ CESL Article 87(2)(b) extends fundamental non-performance to future obligations when it is ‘clear that the non-performing party’s future performance cannot be relied upon. This last provision is most relevant to installment sales contracts and in cases of implied anticipatory breach. 56 The CESL provides two provisions – one best described as excuse and the other as hardship. CESL Article 88(1) mimics the recognition of impediments found in CISG Article 79. It states that a party is excused ‘due to an impediment beyond that party’s control and that party could not be expected to have taken the impediment into account at the time of the conclusion of the contract, or to have avoided or overcome the impediment or its consequences.’ Also, like CISG Article 79, it provides for the suspension of contractual obligations as opposed to an outright voiding of the contract. However, unlike the CISG, CESL Article 88(2) provides guidelines for determining when suspension versus termination is appropriate. CISG Article 79(3) provides that the excuse (exemption) ‘has effect for the period during which the impediment exists.’ CESL Article 88(2) provides that a ‘temporary’ impediment results in a suspension, however, ‘if the delay amounts to a fundamental non-performance, the other party may treat it as such.’ As in most excuse laws, notice of impediment or force majeure is an important condition in obtaining an excuse. 57 Unlike the CISG, CESL incorporates a hardship or ‘change of circumstances’ provision. CESL Article 89(1) pays homage to party intent (risk allocation) by stating a party must perform despite the performance becoming more onerous. However, if performance becomes ‘excessively onerous’ and that the cause is an ‘exceptional’ change of circumstances, then the parties’ are under a duty to negotiate an adjustment or termination. If the parties fail to reach a mutually agreeable resolution, then a court may adapt or terminate the contract. In adapting or reforming the contract, the court should be guided by adjusting the contract to be in accordance to ‘what the parties would reasonably have agreed at the time of contracting if they had taken the change of circumstances into account.’ The court should factor into consideration: (1) whether the change of circumstances happened subsequent to the formation of the contract, (2) whether the party requesting relief could not have taken into account the possibility or scale of the change, and (3) whether the requesting party did not assume or be expected to have assumed the risk of the particular change of circumstances. The notion of fairness is embedded in such hardship provisions where the courts look to realign unexpected contractual imbalances in order to return the contract to equilibrium. CESL Article 89 is set in the context of the CESL’s commitment to fairness. Two of its underlying principles are good faith-fair dealing (CESL Article 2) and the duty to co-operate (CESL Article 3). CESL Article 3 states that the ‘parties are obligated to co-operate with each other to the extent that this can be expected for the performance of their obligations.’ What can be expected is articulated in the concept of reasonableness in CESL Article 5. Reasonableness is determined based upon the ‘nature and purpose of the contract.’ 55

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IV. Principles of European Contract Law The operative provision on excuse is found in PECL Article 6:111. The PECL and 58 the CESL provisions on ‘Change of Circumstances’ are mostly identical but for two minor variations found in the PECL. First, in adapting the contract in response to the changed circumstances, the CESL instructs the court to bring the contract into balance with what the parties’ reasonable expectations at the time of entering the contract. In contrast, the PECL states the court shall ‘distribute between the parties in a just and equitable manner the losses and gains resulting from the change of circumstances.’ Although seeking the same goals, the CESL provision is superior to that of the one found in the PECL. The distribution of gains by itself is problematic. If one party obtains a windfall due to external factors then it should not be under any obligation to share its unexpected gains. The concept of onerousness refers to additional costs to perform. The obligee’s gain may remain the same, while the obligor’s costs have unexpectedly become excessively onerous. Thus, PECL’s instruction to distribute gains resulting from a change in circumstances is not the type of occurrence that the excuse doctrines are meant to rectify. The second variation is the additional provision found in the PECL that a ‘court may 59 award damages for the loss suffered because of a party refusing to negotiate or breaking off negotiations contrary to good faith and fair dealing.’ Although not explicitly stated in CESL, the power to assess damages in such situations is implied in CESL’s language that the parties are to undertake negotiations to adapt the contract is framed as a ‘duty’. In most cases, if the contractual imbalance is substantial it is due to an unexpected loss or costs to one party and an unexpected gain by the other party. For example, in cases or shortages of supply or increases in the costs of component parts, the markets are likely to reflect such changes to the benefit of the buyer.

V. German Bürgerliches Gesetzbuch In contrast, to the Common Law, German law, as well as the UNIDROIT Principles, 60 PECL, and the CESL, recognize two categories of exemption – impossibility and hardship.27 Under the German BGB (Bürgerliches Gesetzbuch), in contrast to the Common Law’s strict interpretive methodology, the enforcement of contracts is more teleological or purposive in approach. Thus, the interpretation and enforcement of contracts is performed through the prism of the purpose of the contract. If the purpose of the contract has been defeated or greatly diminished, then that should necessarily impact its interpretation, enforcement, and the granting of relief for changed circumstances. 28 BGB § 311 a discusses the issue of an impediment to performance existing at the time of the conclusion of the contract (e.g. mistake). It provides that a contract may still be concluded despite the impediment and where a party is not obligated to perform under BGB § 275(1)–(3). The other party may demand compensation in lieu of performance or reimbursement of expense as provided in BGB § 284. However, such payment is not required if the obligor had no knowledge of the impediment and was not responsible for its lack of knowledge. BGB § 275(1) recognizes liability exemption when performance becomes objectively 61 impossible (doctrine of Unmöglichkeit) to perform. BGB § 275(2) enunciates a benefitSee Bank Line Ltd. v Arthur Capel & Co. [1919] AC 435, 459, as cited in McKendrick (n 20) at 38. See DiMatteo, ‘Contractual Excuse in International Commercial Contracts: The CISG and Beyond’, (2014) Pace Int’l L Rev. 27

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cost analysis on whether a party should be required to perform: ‘The obligor may refuse to perform in so far as performance requires expenditure which … is manifestly disproportionate to the obligee’s interest in performance.’ In making this determination a court should be guided by the subject matter of the obligation, the principle of good faith, and whether the obligor is responsible for the impediment. Unlike the Common Law, German law recognizes the need to provide an exemption in some cases of subjective impossibility (occurrences within the sphere of the obligor, such as financial problems and work stoppage). 62 German law also recognizes hardship or change of circumstances in its doctrine of Wegfall der Geschäftsgrundlage (‘collapse of the foundation of the contract’) or Störung der Geschäftsgrundlage (‘interference with the foundation of the contract’) now ensconced in BGB § 313 of the BGB, which provides: (1) If circumstances upon which a contract was based have materially changed after the conclusion of the contract and if the parties would not have concluded the contract or would have done so upon different terms if they had foreseen that change, adaptation of the contract may be claimed in so far as, having regard to all the circumstances of the specific case, in particular the contractual or statutory allocation of risk, it cannot reasonably be expected that a party should continue to be bound by the contract in its unaltered form. (2) If material assumptions have become the basis of the contract subsequently turn out to be incorrect, they are treated in the same way as a change in circumstances. (3) If the adaption of the contract is not possible or cannot be reasonably imposed on one party, the disadvantaged party may terminate the contract. In the case of a contract for the performance of a recurring obligation, the right to terminate is replaced by the right to terminate on notice

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However, mere changes of currency rates or inflation are not in itself a ground for relief under BGB § 313 since they are generally regarded as allocated risks. Finally, under German Procedural Law the court is not empowered to fashion the relief given, but only to grant or reject the relief being claimed by the party.

VI. French Code Civil 64 Article 1218 In contractual matters, there is force majeure where an event beyond the control of the debtor, which could not reasonably have been foreseen at the time of the conclusion of the contract and whose effects could not be avoided by appropriate measures, prevents performance of his obligation by the debtor. If the prevention is temporary, performance of the obligation is suspended unless the delay which results justifies termination of the contract. If the prevention is permanent, the contract is terminated by operation of law and the parties are discharged from their obligations under the conditions provided by articles 1351 and 1351-1. Article 1351 Impossibility of performing the act of performance discharges the debtor to the extent of that impossibility where it results from an event of force majeure and is definitive unless he had agreed to bear the risk of the event or had previously been given notice to perform. Article 1351-1 Where the impossibility of performance is a result of the loss of the thing that is owed, the debtor who has been given notice to perform is still discharged if he proves that the loss would equally have occurred if his obligation had been performed. He must, however, assign to the creditor his rights and claims attached to the thing. Article 1195 If a change of circumstances that was unforeseeable at the time of the conclusion of the contract renders performance excessively onerous for a party who had not accepted the risk of such a change, that party may ask the other contracting party to renegotiate the contract. The first party must continue to perform his obligations during renegotiation.

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E. Sampling of Laws In the case of refusal or the failure of renegotiations, the parties may agree to terminate the contract from the date and on the conditions which they determine, or by a common agreement ask the court to set about its adaptation. In the absence of an agreement within a reasonable time, the court may, on the request of a party, revise the contract or put an end to it, from a date and subject to such conditions as it shall determine.

French law embraces the binding nature of contractual obligations. As such, French courts rarely intervene even in cases of unforeseen changes of circumstances (rebus sic stantibus). The French CC does not recognize hardship as a means to adjust or rescind a contract. The Cour de cassation in De Gallifet c. Commune de Pélissanne held that a contract price couldn’t be revised even though the contract duration had reached three centuries in length.29 The closest French Law comes to recognizing hardship is the principle of imprévision, which is found in administrative law; some scholars have argued for its application in commercial law cases. French Civil Code Articles 1218 and 1351 provide relief strictly for traditional cases 65 of force majeure. It states that ‘no damages are owed when, because of force majeure or fortuitous event (‘foreign cause’), an obligor was prevented from giving or doing what he was bound to give or do.’ French Civil Code Article 13511 allows for the cancellation of a contract under the narrow exception when the subject of the obligation ‘has perished, is out of commerce, or is lost.’ But, the obligor must also prove that the fortuitous event was not its fault and that the event was prior to any default on the obligation. Force majeure under French law is relatively narrow. It requires ‘an event which is 66 reasonably irresistible, unforeseeable and exterior.’ Exterior means that financial force majeure is not recognized under French law. The main requirement of irresistibility means that excuse is not available if performance is still possible but is more difficult or onerous. The success of a force majeure claim or defense is more likely if the court takes an in concreto approach rather than an in abstracto approach. French courts have utilized both approaches.30 In sum, other than in government contracts, French civil courts do not recognize hardship or imprévision.31 Given French law’s strict theory of unforeseeability, the incorporation of a hardship 67 clause is especially important. Just as parties are free to extend the list of traditional force majeure events, they are free to include a hardship clause which courts are obligated to enforce even though French law does not provide relief for hardship. However, a proposal related to revising the French CC adopts the approach of CESL Article 89 and PECL Article 6:111: when performance becomes ‘excessively onerous’ than the parties have a duty to negotiate an adaptation of the contract; if the parties fail to reach agreement, then either party may petition the court for relief.

VII. Spanish Código Civil The Spanish CC does not contain a provision granting relief for change of circum- 68 stances. However, the Spanish Supreme Court has recognized the need to adjust contracts due to change of circumstances, but only in rare cases. Courts are more likely to adjust the amount of damages to be paid by the non-performing party. However, the 2009 ‘Spanish Proposal for a Modernisation of the Law of Obligations’ brings Spanish law in conformity with the view of change in circumstances, found in the PECL, CESL, BGB, and other European CCs. Article 1213 of the proposed new Law of Obligations Chambre Civil, 6 March 1876, Dalloz Périodique, 1876, 1, 193. Levasseur, Comparative Law of Contracts (Carolina Academic Press 2008) pp. 172–73. 31 Gordley & von Mehren, An Introduction to the Comparative Study of Private Law (CUP 2006) p. 524. 29 30

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allows for relief when performance becomes excessively onerous. However, it makes clear that the continuation of the contract should be the primary goal, thus, making adjustment or reformation of the contract the ordinary remedy available to the court. 32 The proposed CC also provides an alternative test for determining whether relief is warranted. As noted previously, the normal test is the perspective of the obligor-promisor as to whether its performance has become excessively onerous. An alternative test is taken from the perspective of the obligee-promisee: Is it reasonable for the obligee ‘to keep engaged the affected party’?33

VIII. American Uniform Commercial Code UCC Section 2-615 moves beyond the confines of objective impossibility and commercial frustration to a seemingly more flexible doctrine of impracticability. The notion that a contract may be rescinded or reformed when an event that renders the contract impracticable to perform by one of the parties at first sight, brings excuse in American sales law closer to the concept of changed circumstances or hardship. However, the case law has not borne this out. Despite some sensational cases where the courts intervened to reform a contractual term that was causing hardship, American courts rarely apply the doctrine of impracticability beyond events previously recognized prior to the enactment of the UCC or subsequently recognized in the Common Law of contracts under the impossibility and frustration doctrines. 70 An American court explains UCC § 2-615 as follows: 69

Three elements must be proven before excuse or adjustment becomes available under Section 2-615: (1) the seller must not have assumed the risk of some unknown contingency; (2) the nonoccurrence of the contingency must have been a basic assumption underlying the contract; and (3) the occurrence of that contingency must have made performance commercially impracticable. 34

This description of the requirements of UCC § 2-615 raises numerous questions: How does one determine if performance has been rendered impracticable? What occurrences or non-occurrences are basic assumptions of the contract? 72 A key area of debate is whether radical price changes in seller inputs in producing goods, especially in long-term supply contracts, can render a contract impracticable? Under the Common Law no excuse would be given since it is still possible for the seller to produce the goods and the contract has not been frustrated because the purpose of the contract remains unchanged. If impracticability is a liberalization of excuse, then radical change in cost inputs that create a substantial imbalance in the contract, based upon the parties’ expectations, would be the type of change in circumstances that would support a claim of excuse. In reality, American courts have overwhelming rejected such cost increases as a ground for excuse. Comment 4 to UCC § 2-615 states that cost increases alone are not grounds for a dispute ‘unless the rise in cost is due to some unforeseen contingency which alters the essential nature of the performance.’ Just as the buyer cannot use a radical change in market price (collapse in market price) as an excuse to get out of a high priced contract, the courts have generally held that the seller is not entitled to an excuse due to the rise of the cost of production inputs. The idea that radical changes in costs are often unforeseeable has not moved courts to hold that the ‘essential nature’ of the performance has been substantially changed. White and Summers, in the 71

32 Vaquer, ‘Spain: Modernising Performance and Non-Performance’ in Schulze & Zoll (eds), The Law of Obligations In Europe: A New Wave of Codifications (Sellier 2013) p. 456. 33 Id. 34 Iowa Electric Light & Power Co. v Atlas Corp., 467 F.Supp. 129, 134 (N.D. Iowa 1978).

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1980 edition of their treatise on the UCC, look into the future and see a globalized marketplace where disruptions in supplies and volatility in prices is likely to be a common occurrence.35 As such, such radical changes in costs or disruptions in supply will become increasingly foreseeable. Therefore, such changes of circumstances are best seen as implied risk allocations not subject to excuse. Thus, the best way to view the impracticability doctrine is that the performing party must prove the impracticability of performing. If it fails to do so, then no relief is available. If the party can show impracticability, it must than go forward and prove that the risk of the occurrence or non-occurrence was not allocated in the contract (express or implied) and that the event was not foreseeable. Another issue dealt with under UCC § 2-615(b) is the situation where the impractica- 73 bility results in a shortage of goods preventing the seller from fully performing on its existing contracts. This provision requires the seller to allocate its inventory of goods among its different contract orders or customers: UCC Section 2-615(b) adds that if the impracticability results in a shortage of goods relating to multiple contracts the seller has agreed to supply said goods, then the “seller must allocate production and deliveries among his customers but at his option include regular customers not then under contract.” The duty to allocate is softened by a subsequent sentence that the “seller may so allocate in any manner which is fair and reasonable”

Thus, a strict pro rata allotment is not required. However, the seller has the burden of 74 proving that its allocation was a fair and reasonable one. In the end, the doctrine of impracticability has done little to expand the Common 75 Law doctrines of impossibility and frustration. Comment 4 to UCC § 2-615(b) notes that a market collapse is normal business risk, ‘but a severe shortage of raw materials or of supplies due to a contingency such as war, embargo, local crop failure, unforeseen shutdown of major sources of supply or the like, which either causes a marked increase in cost or altogether prevents the seller from securing supplies necessary to his performance, is within the contemplation of this section.’ Thus, a shortage alone is not the basis of excuse but must be tied to another unforeseen occurrence.

IX. English Sales Law The English Sale of Goods Act 1979 (s 7) states that a contract may be cancelled if the 76 goods specified to the contract have been destroyed prior to the transfer of risk to the buyer. However, English Sale of Goods Act 1979 s 7 would not offer relief in most cases involving international sales contracts because the goods are rarely specified to the particular contract. Thus, recourse would have to be to the Common Law’s doctrines of impossibility or frustration where ‘mere difficulty or economic hardship is insufficient to sustain excuse in cases of fungible goods.’36 Old English law held that contractual obligations were absolute and independent. 77 This strict liability approach was loosened with the adoption of the doctrines of impossibility and frustration of purpose. However, the sanctity of contractual obligation remains strong in English law and its excuse doctrines are used frugally. Because of this, it is paramount that the parties negotiate a provision relating to impossibility and frustration in the contract. English courts have strictly interpreted the requirements for excuse. ‘It is one thing 78 for both parties to contemplate that goods will be supplied from the stocks within 35 36

White & Summers, Uniform Commercial Code (2nd edn., West 1980) p. 133. Id. p. 277.

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a named country and different for the contract to also to require that the goods be supplied from that country’37 (Finnish birch wood case). Also, English law broadly construes risk of loss and ‘fault’ of non-performing party. For example, one case involved the shipping of goods from an island country. Unfortunately, for the seller there was a single vessel that served the island and it was not able to book space on that vessel. The seller asked for the excuse of frustration arguing that there was an implied condition of the contract that the seller would be able to secure the shipping space. The court held that the seller should have protected itself by securing the space before entering into the contract or by inserting a clause making its obligation dependent or conditional on being able to book the needed space. The English courts unwillingness to imply a term or condition in a contract to rescue a seller of goods is preempted when a transfer of risk has been effectuated to the buyer. Once the risk has been transferred, the buyer may not claim an excuse if the goods are destroyed or rendered useless due to a force majeure event.

X. Common Law of Contracts The Common Law has witnessed a loosening of the strict application of pact sunt servanda over the past century and a half. This expansion of exemption from liability for breach has come in two forms. First, multiple excuse doctrines have been developed – from impossibility to frustration, and in the United States with the doctrine of impracticability – that have provided greater leeway to courts to rescind or reform contracts due to the occurrence of unexpected events or the non-occurrence of expected events or conditions. Second, the list of recognized excusable events have expanded to a limited extent. English law’s impossibility and frustration doctrines are inflexible in that they provide for a discharge of the contract, but not for its adjustment. This makes them ill-equipped to deal with cases of delayed performance, partial performance, or temporary frustration.38 80 In practice the English courts have been strict in the enforcement of contracts and reluctant to reform or rescind contracts based upon change of circumstances or hardship. For example, large jumps of inflation of about 25%39 or a large currency fluctuation40 were deemed not radical enough to frustrate a contract. Although some English courts have recognized that a large jump of inflation may be the basis of frustration of purpose,41 in practice, such claims are rarely sustained. However, in a 2019 case, Judge Smith in Canary Wharf v European Medicines Agency,42 reasoned that: ‘There will, no doubt, be many cases where something can be foreseen as a theoretical possibility, but where neither party can be criticised for failing to take it into account. The court must also beware of framing questions of foreseeability too closely to the exact, specific, nature of the supervening event that ultimately occurred.’ This statement warns against the use of a strict foreseeability standard. Many events can technically (especially with the effect of hindsight bias) been foreseeable but should still be accommodated by the impossibility, frustration of purpose and hardship doctrines, such as an epidemic or pandemic. The 2020 COVID-19 pandemic (to be discussed later in this Chapter) was 79

Bridge, The International Sale of Goods (3rd edn., OUP 2013) p. 617. Id. p. 616. 39 Wates Ltd v Great London Council [1983] 25 BLR 1 (CA). 40 Multiservice Bookbinding Ltd v Marden [1979] Ch 84. 41 National Carriers Ltd v Panalpina Northern Ltd [1981] AC 675. 42 [2019] EWHC 335, paras [211]–[212]. 37

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foreseeable but is not such an event that most parties would have taken into account when drafting a contract. Of course, foreseeability or taking into account are fluid concepts. The 2020 global shutdown due to the Coronovirus is such an event that questions the usefulness of the foreseeability standard in apply impossibility, frustration of contract, and hardship to extraordinary events. Force majeure clauses will likely be modified to include an express excuse or exemption for such occurrences.

XI. American Restatement (Second) of Contracts Second Restatement § 261 adopts the language of impracticability found in the UCC, 81 but makes explicit that a defense may be used only when the occurrence was not due to any fault committed by the party claiming the defense. The supervening event under both the Restatement and the UCC must go to a basic assumption upon which both parties entered into the contract. Comment b to Second Restatement § 261 notes that events such as changes in market prices of the goods or the financial instability of a party are not basic assumptions to which an excuse can be attached. However, the Comment states that the language of impracticability is broad and flexible enough to provide relief even when ‘the event was foreseeable, or even foreseen, does not necessarily compel a conclusion that its non-occurrence was not a basic assumption.’ Comment b’s allowance for a possible avoidance of the unforeseeable requirement common to most excuse doctrines is best understood by referring to Comment c of Second Restatement § 261. It notes that an excuse may be warranted even if the event making it impracticable to perform was foreseeable at the time of contracting. It gives the following example: ‘Factors such as the practical difficulty of reaching an agreement on the myriad of conceivable terms of a complex agreement may excuse a failure to deal with improbable contingencies.’ 82 See also: § 263 Destruction, Deterioration or Failure to come into Existence of Thing Necessary for Performance If the existence of a specific thing is necessary for the performance of a duty, its failure to come into existence, destruction, or such deterioration as makes performance impracticable is an event the non-occurrence of which was a basic assumption on which the contract was made. § 264 Prevention by Governmental Regulation or Order If the performance of a duty is made impracticable by having to comply with a domestic or foreign governmental regulation or order, that regulation or order is an event the non-occurrence of which was a basic assumption on which the contract was made. § 265 Temporary Impracticability or Frustration Impracticability of performance or frustration of purpose that is only temporary suspends the obligor’s duty to perform while the impracticability or frustration exists but does not discharge his duty or prevent it from arising unless his performance after the cessation of the impracticability or frustration would be materially more burdensome than had there been no impracticability or frustration.

XII. Chinese Law 1. Force Majeure 83

Article 180 If the failure to fulfil civil obligations is caused by force majeure, no civil liability shall be borne. Force majeure is unforeseeable, unavoidable and insurmountable objective conditions.

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Chapter 22 Excuse: Force Majeure and Hardship Article 563 The parties to a contract may terminate the contract under any of the following circumstances: – it is impossible to achieve the purpose of the contract due to force majeure; Article 590 Where a party is unable to perform a contract due to force majeure, it shall be exempted from liability in part or in whole in light of the impact of the force majeure, except otherwise provided by law. Either party that is unable to perform the contract due to force majeure shall promptly notify the other party in order to reduce the losses sustained by the other party and shall provide evidence of such event within a reasonable time. The party subjecting to force majeure upon the delay of performance shall not be exempted from the liabilities for breach of contract. Article 832 The carrier is liable for the damage to or loss of the cargoes in the course of carriage, provided that it is not liable if it proves that such damage to or loss of the cargoes is caused by force majeure, the intrinsic characteristics of the cargoes, reasonable depletion, or the fault of the consignor or consignee.

Chinese law accepts that force majeure and change of circumstances are two separate doctrines: ‘The result of force majeure is that the performance of the contract is impossible, while change in circumstances primarily leads to a severe imbalance in the interests of both parties rather than the impossibility of performance.’43 Article 563(1) of Chinese Contract Law allows either part to terminate the contract when a force majeure event frustrates the purpose of the contract. Article 180 of the Chinese Contract Law defines force majeure as an occurrence or non-occurrence that is ‘unforeseeable, unavoidable, and insurmountable.’ This has been interpreted to mean that even though force majeure generally encompasses natural disasters, war and strikes, and government intervention, those events alone do not justify a force majeure excuse. For example, earthquakes are common in some parts of China and therefore are foreseeable and precautions can be taken to preserve the goods. However, a major earthquake that destroys the goods or makes transit impossible may sustain a force majeure defense.

2. Change of Circumstances (Hardship) 84

Chinese Contract Law does not allow for a unilateral modification of contract based upon a change of circumstances. However, subsequently, the Supreme Court of China has recognized changed circumstances can be a ground for contract adjustment. 44 The courts generally focus on the type of risk to determine if it was foreseeable or, if foreseeable, whether the degree of the risk occurrence is of such a magnitude materially different then the foreseeability of that risk would have expected. The risk cannot be that of ordinary commercial risks. Normal commercial risks include increased difficulty of performance and price changes. A claim for relief due to changed circumstances will rarely be recognized in cases involving sales of bulk commodities, given the fungible nature of such goods. Like most Western laws, a successful claim of change of circumstances entitles the claiming party to ask for renegotiation of the contract. Only after an unsuccessful negotiation, may a court adjust or cancel the contract. A lower court must first submit its proposed adjustment or cancellation to a higher court for approval.45 In practice, courts rarely grant relief under this doctrine.46

43 Huang, ‘Performance, Termination and Cancellation’ in Bu (ed), Chinese Civil Law (Beck, Hart, Nomos 2013) p. 60. 44 Id. p. 59. 45 Article 2 of the Notice on Correctly Applying Interpretation II (Chinese Supreme Court). 46 Huang in Bu, Chinese Civil Law p. 60.

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Article 26 of the Supreme People’s Court’s ‘Interpretation on Issues Concerning the 85 Application of Chinese Contract Law (II)’ (effective 13 May 2009) states that ‘after the conclusion of the contract, if fundamental circumstances have significantly changed due to unforeseeable, non-force majeure and not commercial risk reasons, to continue the performance of the contract is obviously unfair to one party or cannot fulfil the expectations of the parties, if one part claims for termination or recession of the contract, the People’s Court shall determine to terminate or revise by taking the case-by-case situations into consideration in light of the principle of fairness.’ Thus, in order to claim a hardship, the claiming party must show: (1) that the circumstances upon which the parties’ reasonable expectations had been based have dramatically changed, (2) a reasonable person would not have foreseen the change or the nature of the change (normal commercial risks cannot be a basis for a claim of changed circumstances), (3) the change of circumstances or the consequences from the change of circumstances cannot be due to the fault of the party claiming hardship, such as conduct that violates the principle of good faith, and (4) The change of circumstances has caused a major imbalance in the contract (not in the contemplation of the parties at the time of concluding the contract) that would make unfair or unjust the strict enforcement of the contract. 47

F. Commentary The above sampling of laws shows a great deal of commonality in the excuse doc- 86 trines found in international private law instruments and across national laws. However, variations in substance and scope make knowledge of the differences essential to the transactional lawyer. This knowledge can be used in determining a choice of law and in the crafting of contract terms to protect clients from unexpected liabilities. The importance of drafting certain clauses will be discussed later in this Chapter in the section entitled ‘Practitioner Tips’.

I. Excuse-Hardship Distinction The principle of impossibility or force majeure, that excuses a party from liability 87 for breach of contract, is recognized in most national laws. This excuse is captured under the CISG Article 79’s notion of ‘impediment.’ These types of excuses most often lead to a termination of the contract or suspension in the case of CISG Article 79. In contrast, hardship, whether recognized in law or by a provision in the contract, generally requires the parties to negotiate in good faith an adjustment to the contract terms. Force majeure and hardship are often conflated because they grant relief to a party technically in breach of the contract.48 Force majeure or impossibility is only recognized when the event (occurrence-non- 88 occurrence) was not foreseeable at the time of contract and was beyond the control of the party claiming an excuse. The second requirement is not as clear-cut among various laws. In the Common Law, the occurrence or non-occurrence must make the performance objectively impossible (e.g. dock workers’ strike). However, German law is broader and recognizes types of subjective impossibility (e.g. financial condition of performing party). In contrast, hardship (sometimes referred to as change of circumstances) 47 Jiao, Change in Price and Changed Circumstances: A Comparative Analysis of Chinese, English, German, US law and international rules (Societas 2013) pp. 16–18. 48 DiMatteo, International Contracting: Law and Practice (Wolters Kluwer 2013) p. 96.

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only requires that performance has become substantially burdensome. One view of the difference between the two doctrines or provisions is that under force majeure the ability to overcome the obstacle places an undue burden on the performing party, ‘while the burden under hardship relates to the impact on the expected benefits of the contract to one of the parties.’49 89 Although hardship is not recognized under most Common Law systems, it has been used as the basis to support a finding of impossibility (force majeure). English courts have consistently focused on the actual language of the provisions in contracts and have adjudicated on a case-by-case basis. English courts have, at times, broadly words such as ‘prevent’ or ‘delay’, sometimes finding force majeure because the delay has made performance substantially more onerous. Indian Common Law, which as stayed closely aligned with English Common Law (for example, it continues to reject an implied duty of good faith), has recognized that the standard for an impossibility claim is not one of literal impossibility. In Energy Watchdog vs. Central Electricity Regulatory,50 , the Indian Supreme Court held that: ‘The performance of an act may not be literally impossible, but it may be impracticable and useless from the point of view.’

II. Force Majeure and Principle of Good Faith It should be noted that the role of the good faith principle in different legal systems likely impacts the flexibility of courts providing relief for claims of force majeure, as well as hardship. The dominate role played by BGB § 242 (good faith) in the German legal system allows courts to more easily see a party’s unwillingness to excuse a party from a contract due to an extraordinary event or to negotiate and adjust a contract in cases of hardship as acts of bad faith. In fact, the German recognition of ‘subjective’ impossibility (internal to non-performing party) can also be seen as a concretization of the good faith principle. While in the Common Law system, where English law rejects the good faith principle and the United States accepts it, but fails to enthusiastically apply good faith, the excuse doctrines, including impracticability, are more rigidly and frugally applied. 91 Chinese Contract Law directly relates force majeure to the principle of good faith. Professor Wei states: 90

Force majeure and change of circumstances are based on the principle of good faith. The obligations, which the parties shall perform [are] based on the circumstances, which can be foreseen at the conclusion of the contract this is in compliance with the principle of good faith. If the circumstances have changed greatly, and we still require the parties to perform their obligations in accordance with the original contract, it is not in compliance with the principle of good faith.51

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Professor Wei explains that since Chinese law does not recognize change of circumstances, frustration or hardship it lacks flexibility in not being able to adjust or reform contracts. He notes that change of circumstances is a broader concept and that force majeure is ‘a specific situation of change of circumstances.’ The lack of a hardship provision in Chinese contract law – were performance is possible but leads to an unfair result – is due to the courts inability to distinguish a change of circumstances leading to hardship and ordinary commercial risks. He argues that the current strict force majeure regime be expanded to include some change of circumstances that do not rise to the level of impossibility. The courts should use a two-step approach to distinguish the types Id. p. 97. Civil Appeal Nos.5399-5400 of 2016. 51 Wei, ‘Research on Problems of Incident in Contract Law: From Perspective of Wenchuan Earthquake’ (2008) 8 Political Science & Law 14, as translated by Wang (Quanzhou Normal University). 49 50

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of change of circumstances that should be granted relief and those that are to be considered ordinary commercial risks. First, the change of circumstances severely impacts the purpose and foundation of the contract. Second, the change of circumstances reallocates the costs and benefits within the contract to such a level to be considered unreasonable. In the case of the Wenchuan earthquake, he argues that contracts entered before the earthquake should be able to obtain force majeure relief (termination or modification), but those entered soon after would not since aftershocks are foreseeable occurrences. Although Chinese courts have strictly applied force majeure, as well as not formally 93 recognizing hardship as an excuse, the strong recognition of the principle of good faith52 provides hope that the law of excuse will be liberalized in the future. In the meantime, extra caution should be used in the drafting of force majeure clauses when Chinese law is applicable. Professor Wei argues that it is important to draft as detailed a clause as possible in order to minimize a strict interpretation of the clause by the courts.

III. Hardship Provision Unlike, impossibility which relieves a non-performing party of liability for breach of 94 contract, and often results in a discharge of the contract, hardship can be used by the non-performing party to keep the other party bound to the contract, albeit a reformed or adjusted one. The CISG does not provide for a hardship claim and its excuse of impediment has been narrowly construed; thereby making a hardship claim unlikely to succeed. The rationale for reforming, instead of cancelling, a contract due to hardship is that the contract remains possible to perform and its purpose has not been frustrated. In addition, the party claiming a hardship may have invested substantial monies in performing or preparing to perform of the contract.53 It is, therefore, in the interest of that party that the contract is preserved with an equitable adjustment. Hardship is not recognized under many legal systems. Thus, the best way to ensure the recognition of hardship is through contractual means, such as, an express hardship or re-negotiation clause. It is vital that the hardship provision, not only defines the grounds for claiming 95 a hardship, but also specifies the process by which the parties are to proceed. An escalating process should be required in order to increase the chances of an amicable resolution that preserves the contractual relationship. Such an escalating process of resolution would include specific wording regarding notice of hardship, negotiations, ‘internal’ dispute resolution, mediation, and binding arbitration. The 2020 revision of the ICC Hardship clause provides, as in most national laws that 96 recognize the doctrine, that a change of circumstances, which makes it more onerous to perform is not sufficient to relieve a party form its performance obligations. The party claiming hardship must meet the threshold of ‘excessively’ onerous. ICC Model Hardship Clause 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

52 53

See Chinese Civil Code, Article 7 (principle of good faith) and Article 6 (fairness). Bridge, The International Sale of Goods (3rd edn., OUP 2013) p. 618.

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Chapter 22 Excuse: Force Majeure and Hardship 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 to overcome the consequences of the event.

Alternative Versions of Paragraph 3 provide for the options of Termination or Adaptation. Paragraph 3A Where paragraph 2 of this Clause applies, but where the parties have been unable to agree alternative contractual terms as provided in that paragraph, the party invoking this Clause is entitled to terminate the contract but cannot request adaptation by the judge or arbitrator without the agreement of the other party. Paragraph 3B Where paragraph 2 of this Clause applies, but where the parties have been unable to agree alternative contractual terms as provided for in that paragraph, either party is entitled to request the judge or arbitrator to adapt the contract with a view to restoring its equilibrium, or to terminate the contract, as appropriate. Paragraph 3C Where paragraph 2 of this Clause applies, but where the parties have been unable to agree alternative contractual terms as provided in that paragraph, either party is entitled to request the judge or arbitrator to declare the termination of the contract.

97

Paragraph 3A allows for the party claiming hardship to terminate the contract if the parties are unable to negotiate a modification. Paragraph 3B leaves it to an arbitrator or judge to determine whether termination or adaptation is the appropriate remedy. Paragraph 3C provides that either party may seek termination (but not adaptation) from a judge or arbitrator if the parties are unable to renegotiate the relevant contract terms.

1. Onerousness 98

The type of hardship caused by a change of circumstances must be undue or excessively onerous to support a right to re-negotiation. A court in a Suez Canal case held that a thirty percent or so increase in the cost of freight did not constitute a hardship. Lower than expected profits are not considered a sound rationale by itself to constitute a legal hardship. The length of the contract may also weigh in a courts determination if the hardship is sufficiently onerousness. Something not deemed to be onerous in a single-shot transaction might be sufficient in a long-term supply contract.

2. Type of Event 99

Unlike force majeure or impossibility, a hardship claim does not depend upon the nature of the event or impediment since it goes to a material change in the equilibrium of the contract. The crucial factor is not the nature of the event that caused the hardship, but the degree of the hardship. That said, a clearly foreseeable event or an express allocation of the risk prevents the claim of hardship. Hardship is an umbrella term that may be applied to national concepts including, change of circumstances, frustration of purpose, Wegfall der Geschäftsgrundlage, imprévision, onerosità sopravvenuta, and so forth.

3. Hardship and Custom 100

In a number of fact scenarios – crop failures and source of supply cases – the customs of the particular trade are critical factors in the courts’ determination of allocation of risk. Assuming there is no express allocation of risk, courts generally imply the risk 718

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to the party where the risk fails within its sphere of performance. The rationale being that if the party intended a different allocation it should have negotiated an express risk allocation clause into the contract. An exception could be drawn from the trade usage and customs of the particular trade. That is a risk allocation may be implied based on merchant practice.

4. Sampling of Laws All legal systems provide some sort of relief from liability by way of excuse, exemption, or hardship. Some countries only provide an exemption in case of absolute objective impossibility – physical or illegality. The France Civil Code only recognizes force majeure (physical or illegality), but not economic hardship as grounds for a liability exemption for non-performance. The CISG also only recognizes the excuse of impediment, which has largely been interpreted to mean traditional force majeure events. Examples of provisions that are akin to force majeure include: CISG Article 79, PECL Article 8:108 and the UNIDROIT Principles Article 7.1.7. Many legal systems recognize instances where relief is warranted despite the fact that performance is still possible. The Common Law recognizes both impossibility and frustration purpose. The later provides an excuse from liability for breach of contract when the purpose of the contract has been frustrated, even though objectively there is no physical or legal obstacle preventing performance. However, English law does not recognize an exemption based purely on economic hardship. Other legal systems have liberalized excuse to include cases where the purpose of the contract technically still exist and the performance still remains possible. The German Civil Code possesses separate provisions dealing with impossibility and change of circumstances (hardship). The United States is a sort of hybrid between English law and German law. It accepted the Common Law’s impossibility and frustration of purpose doctrines. In the 1960 s, the American Uniform Commercial Code included the Doctrine of Impracticability in UCC § 2-615. The term impracticable has a close affinity to the term hardship. The concept of change of circumstances is prevalent in European law. The new Czech Civil Code recognizes the ability to intervene when ‘circumstances change fundamentally, the change was unpredictable and if a party cannot influence the change which causes serious disproportion of rights of contractual parties.’54 The current Polish Civil Code recognizes substantial changes in the purchasing power of currency as a basis for excuse.55 Hungarian Civil Code Article 241 focuses on changes in long-term relationships. However, change in market prices is not enough to claim excuse. Instead, a party must show not the economic nature of the change, but ‘the consequences of the change of circumstances in a particular legal relationship.’56 Mere changes in market prices are deemed to be normal business risks. The restrictive nature of the excuse of changed circumstances in Hungarian law is demonstrated by placing the burden on the claiming party to show that ‘the change of circumstances does not belong to normal business risk.’57 Nordic law provides an interesting use of general clauses as a means to providing relief in hardship scenarios. Sale of Goods Act s 24 allows for relief in cases of impossibility due to an unexpected extraordinary event but does not recognize hardship as a ground 54 Selucká, ‘Contract Formation and Non-Performance in Czech Civil Law’ in Schulze & Zoll (eds), The Law of Obligations In Europe: A New Wave of Codifications (Sellier 2013) p. 61. 55 Polish CC, Article 352, § 3 (1964). 56 Nemessányi, ‘Contract Formation and Non-performance in the Changing Hungarian Civil Law’ in Schulze & Zoll (eds), The Law of Obligations In Europe: A New Wave of Codifications (Sellier 2013) p. 136. 57 Id. pp. 136–37.

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for relief. However, the Finish Contracts Act, as does the contract acts of Denmark, Sweden, and Norway, provide in s 36 a general clause that allows the courts to deem a term to be unreasonable either at the time of contract or, subsequently, in the application (performance) of the term. It provides that ‘the court shall take into account not only the whole contract and the situation of the parties when the contract was entered into, but also the situation of the parties thereafter.’58 Furthermore, s 36 applies even when the parties incorporate a hardship clause into their contract.

IV. Common Excuse Scenarios 1. Crop and Production Failure Cases The standard approach to crop failures or production stoppages is that unless the contract specifically states that the harvest, output, or production is to come from a specific plant, mine, or manufacturing plant, then no hardship can be claimed. The rationale is that fungible goods are available in the marketplace. Therefore, the seller may honor the contract by providing substituted goods through market transactions, or alternatively, pay damages if the buyer elects to cover (purchase substituted goods). The seller’s claim that in the case of a crop failure it should be excused from losses due to market price increases is rarely given. However, the issue remains of whether the parties contemplated whether the goods would be from a specific source and is essentially an output contract in which a hardship claim should be allowed. As noted above such a determination may be based on trade usage that impliedly allocates the risk. 106 An example of the frugality in which American courts provide an exemption for impracticability is a case where an owner of a gas reserve was unable to honor its supply comments due to an unexpected depletion of the gas.59 The court reasoned that the estimation of the quantity of mineral reserves is always subject to variation. Therefore, early depletion is a foreseeable risk that is borne by the seller. The court held that no excuse was warranted because there was an ‘implied guarantee of production from the well.’60 105

2. Cost Increases 107

The problem of cost increases in the production of goods that disrupt the contractual balance is especially acute in long-term supply contracts. Again, courts have generally viewed cost or market changes as allocated risks. A number of contract clauses can be asserted to expressly allocate or minimize these risks, such as, price escalation, take or pay, and price reduction.

3. Failure of Source of Supply 108

Sellers and manufacturers depend on sources of materials and component parts from its suppliers and sub-contractors. Can a failure of a source of supply be grounds for an excuse or hardship claim? The general answer is that the seller assumes the risk of its suppliers not performing. The mainstream argument is that such risks are internal to the

58 Möller, ‘The Nordic tradition: application of boilerplate clauses under Finish law’ in Cordero-Moss (ed), Boilerplate Clauses, International Commercial Contracts and the Applicable Law (CUP 2011) p. 263. 59 Sunflower Electric Corp. v Tomlinson Oil Co., 638 P.2 d 963 (Kan. 1981). 60 Ostas & Darr, ‘Understanding Commercial Impracticability: Tempering Efficiency with Community Fairness Norms’ (1996) 27 Rutgers Law Journal 342, 377.

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seller or within its sphere of control. However, under some national laws an unexpected loss of supply may be grounds for relief.

4. Issue of Restitution If an excuse is granted and the parties are released from liability on the contract, 109 the issue remains whether there should be reimbursement or restitution for any benefits received during the time the contract was in effect. At the time of the excuse the contact may be purely executory, partially performed by one of the parties, or partially performed by both of the parties. For example, the seller may have produced or delivered a portion of the goods or the buyer may have made some advanced payments. The issue becomes whether the seller can claim payment on work performed or, on the other hand, whether the buyer may seek return of payments made. And, whether the party claiming an excuse or hardship may seek restitution. In the case of complete non-performance, the buyer surely should be able to recover 110 the whole of its prepayments. In the case of partial performance, the buyer should be able to obtain at least a partial return of prepayments.61 However, if the buyer has not received any benefit from that performance, then it should be able to recover a full refund. It would help settle matters if the contract contained a provision stating if either party benefitted from the contract before termination, then the party shall pay to the other party a sum equivalent to the benefit received. Article 31 of the Chinese Supreme Court’s ‘Interpretation on Issues Applicable to 111 Sales Contracts’ states: ‘Where one party to a sales contract obtains benefits due to the breach of contract by the other party, if the latter makes claim for deduction of such benefits from the amount of compensation for losses, the people's court shall support such claims.’62 Should contractual expenditures be recoverable? The Common Law approach would see if there was some enrichment transferred from one party to the other. If so, the enriched party should pay for the benefit received.63 This has been framed as either a contractual claim or a claim in restitution (unjust enrichment) claim. However, labeling the damages as restitution is nonsensical since there is no injustice in the case where performance is excused. See Chapter 18 on ‘Damages’.

V. Force Majeure and Hardship Case Study: Coronavirus Pandemic Professors Berger and Behn have noted that international force majeure has been 112 detached from national doctrines of force majeure (impossibility) and has become part of transnational or customary international law. Hardship is not has firmly embedded in transnational law because it is not overtly recognized in most Common Law countries. Nevertheless, hardship has evolved at the international level as a recognized principle: At the transnational level, it has often been argued that the hardship principle is far less elaborated, established and acknowledged than the force majeure doctrine and that it cannot yet be said that there is a definitive hardship doctrine in the transnational context. It is therefore argued that hardship, unlike force majeure, does 61 Jaffey, ‘Restitutionary Claims arising on Contractual Termination’ in Schrage (ed), Unjust Enrichment and the Law of Contract (Kluwer Law International Law 2001) pp. 243, 245. 62 The Interpretation of the Supreme People's Court on Issues Concerning the Application of Law for the Trial of Cases of Disputes over Sales Contracts, adopted at the 1545 th session of the Judicial Committee of the Supreme People's Court on March 31, 2012, is hereby issued and shall come into force on July 1, 2012. 63 See Jaffey, ‘Restitutionary Remedies in the Contractual Context’ (2013) 76 MLR 429.

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not constitute a transnational legal principle. However, for a number of reasons, the restrictive view of English law (and most other Common Law jurisdictions) on hardship should be regarded as a “singular rule”, which should not prevent the recognition of hardship as a general contract principle.64 113

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They further note that ‘transnational business law has developed a unified approach towards both doctrines, which is also reflected in the myriad of force majeure and hardship clauses to be found in international commercial contracts,’ and therefore, transnational contract law has become ‘disconnected’ from the nuances of national contract laws. Much like the 1956 Suez Canal Crisis, the 2020 COVID-19 pandemic provides a test case for the application of the force majeure and hardship doctrines. Given its worldwide effects of closing down national economies there is a strong argument that it can be characterized as a global force majeure event. As such, most countries and courts will likely recognize it as supporting claims of force majeure and hardship. Given the pandemic’s disruptive effect on the world economy, like the Suez Crisis, it will produce a decade or so of litigation and arbitration. The designation of the pandemic as a global force majeure event is supported by a number of facts. First, the World Health Organization declared it a public health emergency of international concern. Second, it satisfies the core criteria for claims of force majeure-hardship: (1) although technically foreseeable, it is not an event that parties would have taken into account in entering into pre-pandemic contracts, (2) it is certainly something beyond the control of the parties, and (3) it is not an event that a party would be expected to overcome (undue burden). Three, as a recognized force majeure event (natural disasters, port strikes, and so forth), “pandemics” have not previously been considered as a specific category of force majeure events. However, given the nature of the COVID-19 pandemic there are strong arguments that the occurrence is covered under the recognized events of Acts of God and government authority. A virus originates in nature and could be recognized by courts as an Act of God. An even stronger argument is that contracting parties were unable to perform due to government intervention in shutting down their economies. Some countries have declared the coronavirus outbreak a force majeure event. The Indian Ministry of Finance provided in an office memorandum of 19 February 2020 directing all ministries to treat disruptions of the supply chain due to the outbreak as cases of natural calamity, covered in force majeure clause. The China Council for The Promotion of International Trade (CCPIT) issues thousands of force majeure certificates in the first quarter of 2020. Finally, as discussed above, the ICC’s 2020 Model Force Majeure Clause inserted plagues and epidemics as listed force majeure events. A side note is the interplay between force majeure clauses and business interruption or supply chain insurance. Does this type of insurance cover business interruption due to COVID-19? On the surface, government ordered business closures would seem to be covered. However, most business interruption insurance include a pathogen exclusion or require the insured to purchase an endorsement/rider to specifically get coverage. Again, even with the exclusion, the fact that the interruption was due to governmental actions is a strong argument for coverage.

64 Berger & Behn, ‘Force Majeure and Hardship in the Age of Corona: A Historical and Comparative Study,’ 6 McGill Journal of Dispute Resolution (forthcoming) (2020).

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G. Illustrations I. Just-in-Time Contracting Because of the costs of buying large quantities of raw materials and component 119 parts, including the costs of importing and storage, many companies have installed a just-in-time purchasing system where goods must be delivered on a timely basis in order to keep production on line. The seller is required to supply goods ‘in exactly the quantity needed and sending them to where they are needed, when they are needed.’65 In such a transactional relationship the force majeure and hardship clauses, as well as limitation of liability and limitation of remedy clauses take on added importance. Under just-in-time contracting, failure to deliver on time could cause substantial consequential damages such as a production shutdown, downstream breaches by the just-in-time buyer, loss profits, and loss of reputation. Also, because of the shorter time frame between order and use of the goods the seller is unable to supply efficient length of notice of an obstacle in order for the buyer to limit its damages. Under such a scenario, the seller would want to tailor force majeure and hardship clauses, as well as other provisions, to protect itself from such damages for delayed performance. The force majeure and hardship clauses should be broader or more detailed than one for an ordinary sales contract. In the end, the parties to a just-in-time contract should expressly deal with the 120 issue of the consequences of breach, whether based on excuse or not. For example, the seller may want to require that the buyer maintain a reasonable amount of inventory to limit the amount of damages in case of a short-term delay of delivery. The amount of inventory could be based on providing a reasonable time to obtain substituted goods in the ordinary course of business. A variant or additional type of protection is found in the ‘Delayed Performance Clause’ (see end of this Chapter).

II. Strike or Quarantine A strike or quarantine prevents the seller from shipping goods located at the port 121 subject to the strike or quarantine. Can the seller claim an excuse for delayed or nondelivery? The answer seems to be clear that this sort of extraordinary event is an excuse for liability for breach. Even under restrictive versions ‘of acts of God’ the intervention of a government authority or a dock strike are considered to be force majeure acts. However, under UCC § 2-614(a) the party is not relieved from liability if there is a commercially reasonable substitute available.

III. Goods in Receivership In the case, where before a seller can ship contracted goods to the buyer, the goods 122 are placed under the control of a receiver on behalf of the seller’s creditors can the seller claim an excuse? Is the seller excused for non-delivery of the goods? According to the American Restatement (§ 261, Illustration 4), the seller remains liable for breach of contract.

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IV. Changed Circumstances before Offer and Acceptance 123

Changed Circumstances between Offer and Acceptance: This Chapter focuses on excuse from contractual liability due to a change of circumstances after the conclusion of the contract. A tangential issue is whether a change of circumstances subsequent to an offer, but prior to an acceptance, results in an implied revocation of the offer? This is an unsettled question, especially in the Common Law. Barring a rejection or revocation, an offer remains open for a reasonable period of time before it lapses or self-terminates. The determination of a reasonable period of time is a contextual exercise. Thus, it is for the courts to determine given the context (prior dealings, trade usage, type of good) what constitutes a reasonable period of time on a case-by-case basis. But, this is an ‘internal’ analysis confined to the particulars of the given offer situation. Generally, what happens external to giving of an offer (such as, a market change or a change in the costs of a product input) is immaterial to the court’s decision. The courts have less sympathy for a party who had the power to expressly revoke the offer and failed to do so. However, a stronger argument may be made for relief in the situation of a ‘firm offer’ where express revocation is barred. See ‘Mistake’ in Chapter 26 on ‘Defenses'.

V. Suez Canal Closure Is a seller or shipping company excused if goods are prevented from being shipped through the standard route of transit by a closure of the Suez Canal due to a war between Egypt and Israel? One view is that they are not entitled to an excuse since the closure was foreseeable because the Canal was closed ten years earlier by a similar war.66 A stronger argument is that war and the closure of the Canal were such extraordinary events and that an excuse should be granted. That said, war risk insurance is readily available to shippers and shipping companies making the argument for non-foreseeability more difficult. The courts struggled with consistency in applying the criteria for excuse resulting in contradictory cases. A related issue presented in the Suez Canal cases, namely, whether shipping companies faced with the Canal closure could re-coup additional freight charges for taking a more costly alternative sea route? A number of courts held that the additional costs were not an undue burden to justify a reallocation of the risk to the shipper. 125 The common fact pattern in this litany of cases included the recognition that transit through the Canal was the standard and most economical acceptable transit route. This was the route contemplated by the parties. Nonetheless, there was an alternative, albeit more costly route. Many cases held that economic hardship as presented in this situation was not sufficient to sustain a claim of excuse. 124

VI. Government Permission or Intervention 126

UNIDROIT Principles Article 6.1.14: Where the law of a State requires governmental permission, such as a validated export license, affecting the validity of the contract or its performance and neither that law nor the circumstances indicate otherwise: (a) if only one party has a place of business in that State, that party shall take the measures necessary to obtain permission, (b) in any other case the party whose performance incorporates the period of time for obtaining permission shall be obligated to gain the 66

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permission or approval. UNIDROIT Principles Article 6.1.16(1) states that ‘if, notwithstanding the fact that the party responsible has taken all measures required, permission is neither granted or refused within an agreed period or, where no period has been agreed, within a reasonable time from the conclusion of the contract, either party is entitled to terminate the contract.’ See, ‘Governmental Approval Clause’ at the end of this Chapter. Example: A utility breaches a contract to buy electricity from a co-generation plant 127 asserting that it could no longer purchase the electricity because the plant had failed to comply with new regulations that required the plant to register with the State’s electric transmission grid. The court held that the utility was excused from liability due to ‘impracticability, impossibility and/or frustration of purpose (failure of sell due to new regulations).’67 It is not uncommon for an American court to apply all three of the excuse doctrines instead of choosing to apply only one of them. In one case, a court held that knowledge that the contract would be in violation of a 128 government regulation prevented that party from claiming force majeure because of that regulation. The contract was for the sale of chemical grade alumina products. The court held that the seller was not excused from performing under the contract because the seller was fully aware at the time of contracting that the production of the type alumina required by the contract violated environmental regulations.68

VII. Long-Term and Relational Contracts: Supply Contracts and Distributorships Contracts ‘operate predominantly within relational contexts, in which parties relate 129 to each other not just as promisor and promisee but also as actors within a relationship, and a relationship comprising of norms capable of having the effect of considerably softening, to put it loosely, the apparent firmness of promissory obligations … and, more importantly, they govern, and significantly limit, the power of the promisee over the promisor.’69 Example: In a long-term transit contract, a railroad claimed a force majeure defense 130 because its third-party customer had filed for bankruptcy. The shipment of coal by the railroad was premised upon returning with a load of iron ore. It is the purchaser of the iron ore for the return trip that had gone bankrupt. The other party claimed that it was not promptly notified by the railroad since no notification was provided when the third-party purchaser filed for bankruptcy; notice was not provided until the actual closure of its plant. The court noted that: ‘force majeure clauses were used by contracting parties to contract around the impossibility doctrine, by specifying the failures that would excuse performance.’70 Interestingly, the force majeure provision allowed the railroad to increase the freight charges in the event that the train returned empty. See Chapters 27 (‘Agency and Distribution Agreements’) and 28 (‘Long-Term Contracts: Installment and Supply Contracts’).

B.P. Chemicals, Inc. v AEP Texas Cent. Co., 198 S.W.3 d 449 (Tex. App. 2006). Sherwin Alumina L.P. v AluChem, Inc., 512 F.Supp.2 d 957, 972–73 (S.D. Tex. 2007). 69 Kimel, ‘Promise, Contract, Personal Autonomy and Freedom to Change One’s Mind’ (2013) Oxford Research Paper No. 19/ 2013, available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2237853. 70 Wisconsin Electric Power Co. v Union Pacific R. Co., 557 F.3 d 504, 505–06 (Cal. 2009). 67

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VIII. Hardship in Arbitration 131

As a general observation, the strength of the principles of fairness and good faith are more prevalent in arbitral proceedings than in judicial proceedings. International customary law recognizes pacta sunt servanda (bindingness of contractual obligations) and its counterpoise, rebus sic stantibus (assumption that contract is based upon conditions existing at the conclusion of the contract). Under the latter principle, it can be argued that customary international law requires parties to renegotiate if the conditions upon which the contract was based have substantially changed.71 This is due to the fact that arbitrators have more discretion in forming their decisions than do judges who must follow the dictates of law. Arbitrators often feel less restricted by hard law and are more amenable to using international customary law and soft law instruments in rendering their decisions.72 This ‘disregard’ of law is recognized by the ability of the contracting parties to request a decision based upon fairness, justice, and compromise through amiables compositeur or ex aequo et bono (‘according to the right or good’ or ‘from equity and conscience’).

IX. Relationship between CISG Article 79 and Article 6 132

If the parties to a contract incorporate a force majeure clause, CISG Article 79 should not apply, because CISG Article 6 provides that the parties’ own agreement preempts other provisions of the CISG. The problem is that standard force majeure clauses, widely used in international sale contracts, mimic the criteria found in many excuse doctrines such as, foreseeability, beyond control, and undue burden. This was addressed in a German case, where the court held that the force majeure clause was equivalent in meaning to CISG Article 79.73 Since the clause had no broader scope than CISG Article 79 it did not preempt the application of CISG Article 79. The unanswered question is what if the force majeure clause is narrower in scope than CISG Article 79. It would seem that CISG Article 79, under CISG Article 6, would have to give way to the express contract term. However, it is hard to imagine a force majeure clause more restrictive than CISG Article 79.

X. Is Force Majeure Narrower in the International Context? 133

An argument can be made for an affirmative answer because international transactions are inherently riskier (e.g., currency repatriation restrictions or fluctuations) and, therefore, more types of adverse events may be deemed to be foreseeable. On the other hand, there is more variety and volatility of risks in transborder transactions and, therefore, a higher likelihood of unexpected events occurring.

71 See Momberg Uribe, ‘The Duty to Renegotiate in International Sales Contracts in Case of Hardship’ (2011) ERPL 119. 72 See DiMatteo, ‘Principle of Fair and Equitable Decision-making in International Contract Arbitration and its Affinity to International Soft Law’ (2013) 1 Chinese J Comp L 1. 73 OLG Hamburg 28 February 1997, available at http://cisgw3.law.pace.edu/cases/970228g1.html.

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XI. Related Provisions of Contract Terms The best way to deal with the area of contractual excuse is to incorporate a cus- 134 tomized force majeure clause into a contract, which expands the list of excusable events beyond those recognize by law or which sets criteria or measures for determining when an event rises to the level of excuse. The force majeure clause may incorporate hardship criteria or the contract may include a separate hardship provision. Other clauses that should be written in conjunction and cross-referenced with the force majeure and hardship clauses include: government approval, price escalation, just-in-time, default and termination, and renegotiation clauses.

XII. Long-Term Contracting The likelihood of foreseeable and unforeseeable adverse events occurring increases 135 the longer the term of the contract. This is the case of long-term supply contracts. Parties will generally protect themselves from the particular risks of long-term contracts, by allowing adjustments to the contract in the event of material adverse occurrences. For example, price escalation clauses protect against market price or cost increases over the duration of the contract. However, a cost input may be overlooked, a clause poorly written, or subject to multiple interpretations. Therefore, more general or umbrella clauses should be inserted into the contract along with the more particularized clauses. One example would be a general renegotiation clause.

XIII. Force Majeure Relating to Non-Performance or Partial Performance versus Delayed Performance One type of case involves failure of a source of supply. The source of supply may be 136 internal or external to the non-performing party. An example of the former is the sale by a farmer of a fixed amount of agricultural products. Unfortunately, due to weather conditions his fields fail to produce the required amount. The farmer is unlikely to obtain an excuse because the farmer could have negotiated a provision that the goods were to be produced by certain fields and that it would not be liable for any unexpected shortages produced by those fields. Of course, local trade usage may deal with the issue of the lack of productivity from the seller’s land. The CISG rules impact these arguments. In the area of trade usage, CISG Article 9 requires that the usage be one that is recognized internationally. In this case, the seller would have to provide evidence that the usage is an internationally recognized usage in that trade or industry. Also, the seller-farmer may argue that the parties’ contemplated that the products would come from specific lands of the seller. CISG Article 11 allows the introduction of negotiation evidence to show that the products being sold were to specifically come from certain lands. However, under American common and sales laws, such evidence may be barred by the parol evidence rule. The more problematic cases involve shortages linked to third-party suppliers. In one 137 case, a truck buyer placed an order with the seller.74 The seller was unable to deliver the truck because its manufacturer was unable to produce it due to shortages created by sub-suppliers. The court held that the failure to manufacture the truck was foreseeable because the seller had incorporated an ‘escape clause’ (making seller’s obligation 74

Barbarossa & Sons, Inc. v Iten Chevrolet, Inc., 265 N.W.2nd 655 (Min 1978).

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contingent upon its supplier’s delivery) in other contracts (but had failed to do so in this contract).

H. Cross References & Additional Commentary As noted earlier, the issue of excuse becomes of heightened concern in long-term contracts. See Chapter 28 on ‘Installment and Long-Term Contracts, as well as Chapter 27’s coverage of Agency and Distribution Contracts.’ See also, Chapter 17 on ‘Performance and Breach of Contract.’

I. Practitioner Tips 138

The international transactional legal practitioner is faced with an immense array of choices when confronting the law applicable to contracts. This ‘information overload’ problem is often dealt with by simply choosing the law of the practitioner’s country.75 Of course, this is an unlikely choice in cases where the other party has superior bargaining power. Furthermore, selection of a given national law does not insure it will be applied or interpreted by a foreign court in the way that the practitioner is accustomed to in his home country. For example, certain principles or rules in one national law may be considered against public policy and unenforceable under another national law. Additionally, most international disputes are resolved through international commercial arbitration where arbitrators demonstrate significant discretion and flexibility in applying hard (national) laws, especially if they deem that a strict application of the law will result in an unjust or inequitable outcome. This is the case when an arbitral panel is faced with claims of force majeure or hardship. It is important for the international legal practitioner to understand the variances among national laws and the existence of international hard and soft law alternatives, preferably through the selection of the CISG (adopted by eighty plus countries) as choice of law. However, in the area of excuse, the CISG does not deal directly with the issue of hardship.

I. Drafting of Contract Clauses The ultimate ‘tip’ is to draft custom force majeure, hardship, and other risk allocation clauses to protect your clients’ interests. In international transactions, the force majeure and hardship clauses, as well as the arbitration clause, should be well thought out, negotiated if necessary and customized to the particularities of the parties, types of goods, and the transaction. Failure to do so is unfortunate since numerous disputes would be prevented if more effort were afforded in the drafting of these clauses. Instead what is often seen is the insertion of boilerplate force majeure clauses taken from other contracts or by use of standardized forms. 140 In addition, well-written sales contracts should provide the consequences for defaults, whether non-performance, delayed performance, failure to accept delivery, or wrongful rejection of the goods, and for excused breach. The parties have the ability to agree as to what types of remedies are available for different types of breaches, as well as which types of breaches give a party the right to terminate the contract. 139

75 Ramberg, ‘Problems Legal Practitioners Face in Finding the Law Relating to the CISG – Hardship, Defective Goods and Standard Terms’ (2012) Nederlands Tijdschrift voor Handelsrecht 89.

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II. Force Majeure Clause Standard Force Majeure Events for Delayed Performance or Non-Performance in- 141 clude: –

Act of God, public enemy, civil war, insurrections, riot, fire, flood, explosion, earthquake, serious accident, quarantine or import restrictions, Act of government, government authority, or regulations, Strike of labor dispute causing cessation, delay, or interruption of production, Inability, after due diligence and timely effort, to procure necessary materials, equipment, supplies, or component parts, Damage, destruction, or loss of goods; necessary materials for production of goods; impediment to delivery of goods; due to adverse weather conditions, Any cause that prevents or delays performance that is beyond the control of the seller.

– – – – –

UNIDROIT Principles Article 4.4: ‘Terms and expressions shall be interpreted in light of the whole contract or statement in which they appear.’

III. Moving Beyond the Standard Force Majeure Clause Beyond the normal force majeure events of natural disasters, dock or port strikes, and 142 government intervention a clause may provide additional protections for the seller such as: ‘Seller shall not be held responsible for any failure of performance due to the lack of or inability to obtain raw materials, labor, fuel, electrical power, water or supplies, or any other necessary input shortages, contingency or circumstances not subject to the reasonable control of seller, which causes delays or hinders the manufacture or delivery of goods. Seller shall determine in good faith the extent to which it can reasonably control a cause, contingency, or circumstance that affects the performance of its obligations.’

1. Uniform Customs & Practices for Documentary Credit Transactions (Force Majeure) UCP 600, Article 36 – Force Majeure A bank assumes no liability or responsibility for the consequences arising out of the interruption of its business by acts of God, riots, civil commotions, insurrections, wars, acts of terrorism, or by any strikes or lockouts or any other causes beyond its control. A bank will not, upon resumption of its business, honour or negotiate under a credit that expired during such interruption of its business.

2. International Chamber of Commerce (Force Majeure) For a starting point, the model force majeure clause of the International Chamber of 143 Commerce (ICC) will be explored and used as a benchmark.76 The longstanding 2003 Model Clause was updated in March 2020. It provides the following language in its ‘long from clause.’ The ICC clause is meant to be non-national meaning its language is meant to be autonomous. It is offered in short form and long form versions. Needless to say, the long form is more detailed and likely to diminish the risk of misunderstanding. It can be included in the contract in whole or incorporated by reference, much like INCOTERMS 2020 and UCP rules are used.

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Chapter 22 Excuse: Force Majeure and Hardship ICC Force Majeure – Definition (Paragraph 1) “Force Majeure” means the occurrence of an event or circumstance (“Force Majeure Event”) that prevents or impedes a party from performing one or more of its contractual obligations under the contract, if and to the extent that the party affected by the impediment (“the Affected Party”) proves: a) that such impediment is beyond its reasonable control; and b) that it could not reasonably have been foreseen at the time of the conclusion of the contract; and c) that the effects of the impediment could not reasonably have been avoided or overcome by the Affected Party. ICC Force Majeure – Presumed Force Majeure Events (Paragraph 3) The Presumed Force Majeure Events commonly qualify as Force Majeure. It is therefore presumed that in the presence of one or more of these events the conditions of Force Majeure are fulfilled, and the Affected Party need not prove the conditions (a) and (b) of paragraph 1 of this Clause (i.e. that the event was out of its control and unforeseeable), leaving to the other party the burden of proving the contrary. The party invoking Force Majeure must in any case prove the existence of condition (c), i.e. that the effects of the impediment could not reasonably have been avoided or overcome. a) war (whether declared or not), hostilities, invasion, act of foreign enemies, extensive military mobilisation; b) civil war, riot, rebellion and revolution, military or usurped power, insurrection, act of terrorism, sabotage or piracy; c) currency and trade restriction, embargo, sanction; d) act of authority whether lawful or unlawful, compliance with any law or governmental order, expropriation, seizure of works, requisition, nationalisation; e) plague, epidemic, natural disaster or extreme natural event; f) explosion, fire, destruction of equipment, prolonged break-down of transport, telecommunication, information system or energy; g) general labour disturbance such as boycott, strike and lock-out, go-slow, occupation of factories and premises.

The key concept embedded in this Paragraph is the presumption of the listed items as force majeure events. This essentially shifts the burden of proof from the party claiming protection to the non-breaching party. 145 The list provided here adds some additional events not found in the 2003 version including: In the area of ‘natural disasters’ it excluded the laundry list from the 2003 version (violent storms, cyclones, earthquakes, tidal waves, floods, destruction by lightening). It simply states, ‘natural disaster or extreme natural event, but specifically notes ‘plagues and epidemics.’ Interestingly, in the area of labour disturbances the 2020 version drops this language found in the 2003 version: ‘which occur in the enterprise of the party seeking relief. This seems to narrow excusable events to external work stoppages or strikes and not internal stoppages or strikes. A lawyer should customize this list for the particular type of business transaction, industry of the parties, and countries of the parties. 144

Temporary impediment (Paragraph 6) Where the effect of the impediment or event invoked is temporary, the consequences set out under paragraph 5 above shall apply only as long as the impediment invoked prevents performance by the Affected Party of its contractual obligations. The Affected Party must notify the other party as soon as the impediment ceases to impede performance of its contractual obligations. Contract Termination (Paragraph 8) Where the duration of the impediment invoked has the effect of substantially depriving the contracting parties of what they were reasonably entitled to expect under the contract, either party has the right to terminate the contract by notification within a reasonable period to the other party. Unless otherwise agreed, the parties expressly agree that the contract may be terminated by either party if the duration of the impediment exceeds 120 days.

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This issue of whether an event works a suspension or termination of the contract is 146 covered by Paragraphs 6 and 8. First, the event itself may require termination where it is regarded as a permanent obstacle. However, when the event or impediment is considered temporary, such as a port closure or dockworkers strike, then suspension is the preferred remedy. Again, if a suspension substantially deprives a party of what was expected, then that party has the right to terminate. Importantly, Paragraph 8 provides a bright line rule that any such suspension is subject to termination by either party after the expiration of 120 days. Unjust Enrichment (Paragraph 9) Where either contracting party has, by reason of anything done by another contracting party in the performance of the contract, derived a benefit before the termination of the contract, the party deriving such a benefit shall pay to the other party a sum of money equivalent to the value of such benefit.

Paragraph 9 expressly states that unjustment enrichment is an ancillary remedy to 147 the termination of the contract. Both parties are required to reimburse each other for benefits received through the part performance of the contract. Notification (Paragraph 4) The Affected Party shall give notice of the event without delay to the other party. (Paragraph 5) If notice thereof is not given without delay, the relief is effective from the time at which notice thereof reaches the other party. The other party may suspend the performance of its obligations, if applicable, from the date of the notice

The importance of notification, and the profound consequences of failing to give 148 notice, is provided in Paragraphs 4 and 5. The parties may want flexibility provided by suspending the contract for a ‘reasonable 149 time’, especially in long-term or relational contracts, but the determination of reasonableness in the future is a recipe for disputes, arbitration, and litigation. Therefore, the drafting attorney should attempt to provide a higher degree of specificity when plausible. The answer to most reasonableness questions resides in the parties themselves. The attorney need not go any farther than to ask what period of time the client would consider to be an unreasonable delay?

3. Other Examples of Force Majeure Clauses Example 1 Should Sellers be prevented from loading the goods on board Buyers’ ship or should 150 buyers be prevented from taking delivery by reason of fire, strikes, lockouts, riots, civil commotion or any other cause comprehended in the term force majeure at the ports of loading, or elsewhere preventing transport of the goods to such ports, the contract delivery period shall be extended by 21 days beyond the termination of the force majeure event. Should such cause exist for a period of 60 days beyond the contract delivery period, the contract or any unfulfilled part so affected shall be cancelled. The party invoking the clause shall advice the other with due dispatch. The party claiming force majeure must produce proof to justify their claim if required.

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Example 2 Seller shall not be responsible for delay in shipment of the goods or in any part thereof occasioned by any Act of God, strike, lockout, riot or civil commotion, workmen strike or work stoppage, breakdown of machinery, fire, or unforeseeable and unavoidable impediment to navigation, or any cause comprehended in the term ‘force majeure.’ If delay in shipment is likely to occur for any of the above reasons, the Seller shall serve notice on Buyers within 7 consecutive days of the occurrence, or not less than 21 consecutive days before the commencement of the contract period, whichever is later. The notice shall state the reason(s) for the anticipated delay. 152 If after serving such notice an extension to the shipping period is required, then the Seller shall serve a further notice not later than the last day of the contract period of shipment stating the port or ports of loading from which the goods were intended to be shipped, and shipment that the contract shall be limited to the port or ports so nominated. If shipment is delayed for more than 30 consecutive days, Buyer shall have the option of cancelling the delayed portion of the contract, such option to be exercised by Buyer serving notice to be received by Sellers not later than the first business day after the additional 30 consecutive days. If Buyer does not exercise this option, such delayed portion shall be automatically extended for a further period of 30 consecutive days. If shipment under this clause be prevented during the further 30 consecutive days extension, the contract shall be considered void. Buyer shall have no claim against Sellers for delay or non-shipment under this clause, provided that Seller shall have supplied to Buyer, if required, satisfactory evidence justifying the delay or non-fulfillment. 77 151

4. Exchange Rate Fluctuations In the event of any force majeure event affecting the buyer’s ability to pay the purchase price, the buyer shall be responsible for compensating the seller for any damages suffered due to negative effects in the exchange rate of the currency of payment with the currency of the seller’s country, occasioned from the date of the force majeure event.78

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Note that this provision does not make a currency fluctuation a force majeure event, but is merely a remedial provision relating to claims for excuse. However, the imposition of exchange rate controls may be considered a force majeure event.79 It is important to note that protection from major currency fluctuations is best ensured by an express provision in the contract dealing with such an event or a hardship clause that expressly states that a major currency fluctuation is grounds for a claim of hardship. The question becomes what is a major fluctuation? The answer to this question should be clearly defined in the contract. In a long-term supply contract, such a definition could be incorporated into a price escalation clause.

IV. Hardship Clause 154

As well as drafting a custom, party-focused and trade-focused force majeure clause, a hardship clause, if carefully drafted, provides greater certainty to the parties’ obligations to perform. Such clauses are common in long-term and in international contracts, but should be considered for all types of sales contracts. Unlike force majeure clauses, 77 The Grain and Feed Trade Association, Contract No. 100 (Contract for Shipment of Feeding Stuffs in Bulk), effective April 2012. 78 Klotz, International Sales Agreements (2nd edn., Wolters Kluwer 2008) p. 226. 79 Id.

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which give a right to terminate the contract, hardship clauses often seek to maintain the contract through adjustment when supervening events have severely disrupted the contractual equilibrium. 155

Sample Clause If at any time, from time to time, during the contract period there has been any substantial change in the economic circumstances relating to this Agreement and, notwithstanding the effect of the other relieving or adjusting provisions of this Agreement, either party feels that such change is causing it to suffer substantial economic hardship then the parties, at the request of either party, shall meet together to consider what adjustments in the prices are justified in the circumstances in fairness to the parties to offset or alleviate the hardship caused by such change. If the parties shall not within ninety (90) days after such request of renegotiation have reached agreement on the adjustments in the said prices the matter may be referred by either party to mediation and, subsequently, if necessary, to arbitration as provided in the mediation-arbitration clause of this Agreement. Any price adjustment shall be effective from six months from the date of the initial submission to mediation.80 Alternative: if no agreement is reached within … days after the request for renegotiation, either party may refer the matter to mediation as provided in the mediation clause of this agreement. In the event that mediation is unsuccessful after a further ninety days, then either party on sixty days written notice may terminate the contract.

Hardship clauses, with settlement procedures involving mediation, conciliation, and 156 arbitration, are especially important in countries, such as the Common Law ones, that do not recognize a courts power to adjust or void contracts based upon mere hardship or do so only in rare cases.

1. ICC Hardship Clause 2003 Where a party to a contract proves that:

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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 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.

2. Questions to be asked in Drafting Force Majeure and Hardship Clauses – – – – –

What events should be considered grounds for termination or adjustment in the 158 particular trade or industry of the contracting parties? What would the parties consider to be extraordinary events? What are the consequences or remedies that should be made available in case of impossibility or hardship? Should force majeure include subjective impossibility – changes in circumstances internal to one of the parties? At what point does a prolonged suspension give the parties the right to avoid or terminate the contract?

80 See Superior Overseas Development Corp. v British Gas Corp. [1982] Lloyd’s LR 262, as quoted in McKendrick, ‘The Regulation of Long-Term Contracts in English Law’ in Beatson & Friedmann, Good Faith and Fault in Contract Law (OUP 2001) pp. 327–28.

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How does ‘beyond control’ relate to the implied contractual allocation of risk? How do the force majeure and hardship clauses relate to other ‘adjustment-type’ clauses in the contract?

V. Related Clauses 159

Price Escalation Clause There are numerous provisions that can be used to adjust the price in long-term supply contracts such as ‘broad brand’ escalator and the cost-plus provisions. The former type allows for regular price changes based upon objective measures and verifiable standards. The later clause is subject to abuse since all the seller costs are covered providing a lesser incentive to perform efficiently. It is important that the clause require the buyer to clearly provide for verification of cost increases, when the cost changes can be claimed, and protection from cost increases due to seller waste and inefficiency.

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Default Clause Grounds for default and termination of contract include: (1) Non-payment, (2) Failure of material condition, breach of contract, if breach continues beyond … days after reasonable notice that party reasonably believes a breach has occurred and if failure cannot reasonably be remedied within such a period, (3) Failure to obtain necessary authorizations, licensees, and government approvals, (4) Insolvency (based upon applicable law or failure to pay debts as they fall due), (5) Bankruptcy (filing of a petition, appointment of receiver or trustee), (6) Unlawfulness (it becomes unlawful for seller to produce or export goods, or buyer to import goods), (7) Suspension of business, (8) Buyer fails to accept delivery, and (9) Material Adverse Change.

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Excusable Delay of Delivery In the event of an excusable delay, not the result of gross negligence or willful conduct, seller shall not be liable for any loses, including lost profits or expenses related to the delay. If the delay continues beyond … days after Scheduled Delivery Date, then either party may terminate the contract by giving … days written notice.

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Government Approval Clause This clause acts as a force majeure-like provision that makes the obtaining of a government permit, license, registration, or approval a condition precedent to contractual liability. This clause is often found in intellectual property transfer or licensing contracts, as well as sale of certain types of goods. The simplest form of this clause would state: ‘Seller shall obtain all necessary permits, licenses, or approvals to export the goods; Buyer shall obtain all necessary permits, licenses, or approvals to import the goods. The contract is not fully executed until all such necessary permits, licenses, and government approvals have been obtained.’81

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Indemnity Clause An example would be when the contracting party agrees to hold harmless (protect from third-party claims) one of the parties for non-conforming goods, such as those that incorporate a design or manufacturing defect.

81 See Fox, International Commercial Agreements: A Primer on Drafting, Negotiating and Resolving Disputes (2nd edn., Wolters Kluwer 1992) p. 145.

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Indexation Clauses These types of clauses are generally found in long-term supply contracts. They can be used independently or in combination with open price and unilateral price determination clauses. Such clauses respond to changes in inflation and currency rate fluctuations. They can provide a mechanism to adjust the purchase price based upon the purchasing power of a given currency. For example, they could adjust the price based upon the most competitive terms offered by a competitor (‘competitive offer clause’) or the terms offered to other purchasers (‘most-favored customer clause’).

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Intervener Clause These provisions are often found in long-term supply contracts and enable the contracting parties to use broader, more flexible terms in their contract by having disputes due to changed circumstances settled by a third-party while keeping the parties bound to the contract. It also has the benefit of incentivizing the parties to negotiate an adjustment to the contract (due to a hardship) in order to avoid the expense and time involved in going through the third-party process. The ICC has drafted two model intervener clauses that refer the parties to the ‘Standing Committee for the Regulation of Contractual Relations’ in cases of disagreement.

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Renegotiation Clause A renegotiation clause found in long-term supply contracts aim at maintaining contract equilibrium (parties’ reasonable expectations at time of contracting) in order to preserve the contractual relationship. Such clauses provide the flexibility needed to maintain healthy, long-term contractual relationships. They differ from other types of adjustment provisions that are tied to some external measurement or index in that they can be used at any time during the course of the contract and for any of the terms in the contract. However because of their broad application, they may be subject to abuse by one of the parties if no limitations are placed on the right to demand renegotiation. Thus, the parties may want to restrict the clause to certain terms in the contract and for only extraordinary types of change. In comparing the renegotiation clause to force majeure clauses, the renegotiation clause looks to preserve the contact in response to change of circumstances, while force majeure clauses usually result in the termination of the contract due to a change that is permanent, prevents performance of the contract, or relates to a fundamental purpose of the contract. A hardship clause may serve a similar purpose as the renegotiation clause if it requires the parties to negotiate an adjustment.82

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Take or Pay Clause Requires the purchaser to take or pay for a fixed amount of quantities on a periodic basis. Thus, the risk of market changes is shifted to the purchaser.

J. Additional Sources Berg, ‘The detailed drafting of a force majeure clause’ in McKendrick (ed), Force Majeure and Frustration of Contract, 63 (Lloyd's of London Press 2nd ed. 1995); Berger & Behn, ‘Force Majeure and Hardship in the Age of Corona: A Historical and Comparative Study’ (2020) 6 McGill J. Dispute Resolution; Berger, ‘Renegotiation and Adaptation of International Investment Contracts: the Role of Contracts Drafters and Arbitration’ (2003) 36 Vanderbilt J. Transnational L. 1347; Bortolotti & Ufot (eds), Hardship and Force Majeure in International Commercial Contracts (ICC 2018); Bridge, The International Law of Sales (OUP 2013); Bruner, Force Majeure and Hardship under General Contract Principles: Exemption for NonPerformance in International Arbitration (Kluwer Law International 2009); Dawson, ‘Judicial Revision of Frustrated Contracts: The United States,’ (1984) 64 Boston University L. Rev. 1; Dawson, ‘Judicial Revision 82 Russi, ‘Chronicles of a Failure: From a Renegotiation Clause to Arbitration of Transnational Contracts’ (2008) Bocconi Legal Papers, ILSU Working Paper No. 2008-11/EN, available at bocconilegalpapers.org.

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Chapter 22 Excuse: Force Majeure and Hardship of Frustrated Contracts: Germany,’ (1983) 63 Boston University L. Rev. 1039; DiMatteo, ‘Contractual Excuse in International Commercial Contracts: CISG and Beyond’, (2014) Pace Int’l L Rev (Special Issue); DiMatteo (ed), International Contracting: Law and Practice (Wolters Kluwer 2013); Farnsworth, Farnsworth on Contracts (3rd edn., 2004), 3 volumes; Flechtner, ‘The Exemption Provisions of the Sales Convention, Including Comments on the ‘Hardship’ Doctrine and the 19 June 2009 Decision of the Belgian Cassation Court’ (2010) 59 Belgrade L Rev 84; Flechtner, Brand & Walter, Drafting Contracts (OUP 2007); Fontaine, ‘Etude de groups de travail contrats internationaux: des causes de forces majeures’ (1979) 5 DPCI 469; Grigoleit & Hondius (eds), Unexpected Circumstances in European Contract Law (Cambridge University Press 2011); Guiomard, ‘La grippe, les épidémies et la force majeure en dix arrêts’, Dalloz Actualité (March 4, 2020); Gillette, ‘Commercial Rationality and the Duty to Adjust Long-Term Contracts’ (1985) 69 Minnesota L Rev 521; Hillman, ‘Court Adjustment of Long-Term Contracts: An Analysis under Modern Contract Law’ [1987] Duke Law Journal 1; Hillman, ‘An Analysis of the Cessation of Contractual Relations’ (1983) 68 Cornell Law Review 617; ICC, Force Majeure and Hardship Clauses (‘Long Form‘) (March 2020), https://iccwbo.org/content/uploads/sites/3/2020/03/icc-forcemajeure -hardship-clauses-march2020.pdf; Konarski, ‘Force Majeure and Hardship Clauses in International Contractual Practice’ (2003) 4 International Business LJ 405; Letterman, UNIDROIT’s Rules in Practice (Kluwer Law International 2001); Lutzi, ‘Introducing Imprévision into French Contract Law – A Paradigm Shift’ in Comparative Perspective, in Jansen & Stijns (eds), The French Contract Law Reform: A Source of Inspiration? (Intersentia 2016); Macneil, ‘Contracts: Adjustment of Long-Term Economic Relations under Classical, Neoclassical, and Relational Contract Law’ (1978) 72 Northwestern University Law Review 854; Kim, Mistakes, ‘Changed Circumstances and Intent’ (2008) 56 University of Kansas Law Review 473; Lorfing, ‘L’article 1195 du Code Civil français ou law pour imprévision en droit privé français à law lumière du droit comparé’, Revue De Droit Des Affaires Internationales 449 (2018); McLauchlan & Bigwood, ‘Lapse of offers due to changed circumstances: A contract conversion’ (2011) 27 (3) Journal of Contract Law 222; Pédamon & Chuah, Hardship in Transnational Commercial Contracts: A Critique of Legal, Judicial and Contractual Remedies (Legal Publishers 2013); Reader III, ‘Court-Imposed Modifications: Supplementing the All-or-Nothing Approach to Discharge Cases,’ (1983) 44 Ohio State Law Journal 1079; Schmitthoff, ‘Hardship Clauses’ [1980] The Journal of Business Law 84; Schulze & Zoll (eds), The Law of Obligations in Europe: A New Wave of Codifications (Sellier 2013); Sherwin, ‘Law and Equity in Contract Enforcement’ (1991) 50 Maryland Law Review 253; Speidel, ‘Court-Imposed Price Adjustments under Long-Term Supply Contract’ (1981) 72 Northwestern University Law Review 369; Summers, ‘General Equitable Principles under Section 1–103 of the Uniform Commercial Code’, (1978) 72 Northwestern University Law Review 906; Triantis, ‘Contractual Allocations of Unknown Risks: A Critique of the Doctrine of Commercial Impracticability’ (1992) 42 University of Toronto Law Journal 450; Twigg-Flesner, ‘A Comparative Perspective on Commercial Contracts and the Impact of COVID-19: Change of Circumstances, Force Majeure or What?’ in Pistor (ed), Law in the Time of COVID-19 (Columbia Law School 2020); Wladis, ‘Impracticability as Risk Allocation: The Effect of Changed Circumstances upon Contract Obligations for the Sale of Goods’ (1988) 22 Georgia Law Review 503.

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CHAPTER 23 CONTRACT INTERPRETATION AND MERGER CLAUSES Lisa Spagnolo and Larry A. DiMatteo Part 1:

Contract Interpretation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1

A. Topics Covered . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B. Introductory Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C. Statement of Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . D. International Sales Transaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . E. Sampling of Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. CISG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. CISG Advisory Council Opinions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. CISG Advisory Council Opinion No. 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. CISG Advisory Council Opinion No. 13 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. UNIDROIT Principles of International Commercial Contracts . . . . . . . . . . . . . . IV. Principles of European Contract Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. German Bürgerliches Gesetzbuch . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI. French Code Civil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VII. Spanish Código Civil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VIII. American Uniform Commercial Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IX. United Kingdom Sale of Goods Act 1979 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . X. American Restatement (Second) of Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XI. Chinese Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F. Commentary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Standard of Intent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Structure for Determining Intent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Reasonableness Standard . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Party Control over Rules of Interpretation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Designations of Importance of Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Ability to Modify Interpretive Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. Controlling Evidence of Intent: Entire Agreement and No Oral Modification Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Description of Default Rules, Principles & Presumptions . . . . . . . . . . . . . . . . . . . . 1. Identification of Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Standard Terms Incorporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Meaning of Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Principles or Maxims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Plain Meaning versus Purposive and Commercially Sensible approaches . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Contra Proferentem . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d) Negotiated versus Standard Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . e) Contract as a Whole . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . f) Contractual Effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . g) Linguistic Discrepancies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . h) Specific versus General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i) Presumptions of Syntax: expressio unius and ejusdem generis . . . . . . . . . . . j) Handwritten versus Printed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . k) Good Faith . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Stages of Interpretation and Construction Aids: Evidence of Intent . . . . . . . . . . 1. Identification of Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Parol Evidence Rule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Evidence of Written versus Oral Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Evidence of Prior Negotiations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d) Evidence of Practices and Usages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Meaning of Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Standard of Intent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Evidence of Surrounding Circumstances, Context, Plain Meaning, and Parol Evidence Rule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 2 6 8 10 11 12 12 13 14 15 16 17 18 19 20 21 22 23 26 39 50 52 53 54 55

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Chapter 23 Contract Interpretation and Merger Clauses c) Evidence of Written versus Oral Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d) Evidence of Prior Negotiations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . e) Evidence of Subsequent Conduct . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . f) Evidence of Practices and Usages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . g) Ordering between interpretive rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. Supplementation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI. Critique of Structures Used in Uniform Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Overall Structure of Rules on Contractual Interpretation . . . . . . . . . . . . . . . . . 2. Expansive List of Interpretive Principles or Maxims . . . . . . . . . . . . . . . . . . . . . . G. Illustrations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Meaning and Legal Effect; Validity and Invalidity . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Trade Usage versus Literal Meaning . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Sliding Scale Rates and Commissions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Warranties and Notice of Non-Conformity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. Integrated Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI. Additional Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . H. Practitioner Tips & Contract Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Entire Agreement or Merger Clause . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. No Oral Modification Clause . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Cross References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . J. Additional Sources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Part 2:

Merger Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 185

A. Topics Covered . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B. Introductory Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C. Statement of Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . D. International Sales Transaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . E. Sampling of Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. CISG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. CISG Advisory Council Opinion No. 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. UNIDROIT Principles of International Commercial Contracts . . . . . . . . . . . . . . IV. Principles of European Contract Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. Common European Sales Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI. German Bürgerliches Gesetzbuch . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VII. French Code Civil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VIII. Spanish Código Civil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IX. United Kingdom Sale of Goods Act 1979 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . X. American Uniform Commercial Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XI. American Restatement (Second) of Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XII. Chinese Contract Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F. Commentary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Civil Law and ‘Agreement in Fact’ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Common Law and Sanctity of Written Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Convergence of Civil and Common Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Extent of Exclusion Provided by Merger Clause . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. Contextual Interpretation and the Ordering of Evidence . . . . . . . . . . . . . . . . . . . . . VI. Scope of Merger Clause . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VII. Merger Clause as a Standard Term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VIII. Merger Clause and Arbitration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IX. CISG and Merger Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . X. Nonreliance Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . G. Illustrations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . H. Cross References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Practitioner Tips & Contract Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Choice of Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Commercial Practice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Narrow and Broad Merger Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Enhancing the Enforceability of a Merger Clause . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. Order of Preference Clause and Incorporation by Reference . . . . . . . . . . . . . . . . . VI. Sample Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VII. Nonreliance Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . J. Additional Sources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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B. Introductory Note

This Chapter deals in its first part with the interpretation of contracts (by Lisa Spagnolo) and in its second part with merger clauses (by Larry A. DiMatteo).

Part 1: Contract Interpretation A. Topics Covered This Chapter covers the very broad area of the interpretation of commercial con- 1 tracts. The principles of contractual interpretation are essentially methodological: how are the rights and obligations arising from the contractual relationship to be ascertained? This Chapter briefly touches upon the process of identifying the terms of a contract (single document, multiple documents, oral representations, incorporation by reference), before examining the process of attaching meaning to contractual terms, and gap-filling (supplementation). A separate Part is dedicated to merger clauses (that is, entire agreement or final integration), which are found in almost all written contracts. The purpose and scope of the nonreliance clause will also be discussed.

B. Introductory Note Interpretation of contracts remains a controversial and often disputed area of contract law, as much now as in 1918 when Holmes wrote ‘A word is not a crystal, transparent and unchanged; it is the skin of a living thought and may vary greatly in color and content according to the circumstances and the time in which it is used.’1 The fundamental questions giving rise to principles of contractual interpretation can be broken down into three core issues: identification, meaning, and supplementation. Identification includes rules which seek to ascertain which promises form the content of the contract, and what evidence is permissible in establishing content. After identification of terms, the next step in interpretation is to ascertain the meaning of contractual terms. Numerous principles have been employed to discern the intended meaning of a contract. For example, Melvin Eisenberg summarized an insight into the central principles of interpretation under modern contract law, using the American Restatement (Second) of Contract as a benchmark. First, if the contracting parties attach different subjective meanings to the words of their contract, then the most reasonable prevails. Second, if the parties subjectively attach different meanings to an expression and the two meanings are equally reasonable, neither prevails (no manifestation of mutual assent). Third, if the parties subjectively attach the same meaning to an expression, that meaning prevails even if unreasonable. Fourth, if a contracting party knew the meaning attached by the other party, then that other party’s meaning attaches to the contract.2 If the parties have not affixed a meaning to a term in the contract, either consciously (open term) or unknowingly (gap), then courts use gap-filling rules, through the process of supplementation. It is sometimes very difficult to differentiate the supplementation

Towne v Eisner, 245 U.S. 418, 425 (1918). Eisenberg, ‘Expression Rules on Contract Law and Problems of Offer and Acceptance’ (1994) 82 California L Rev 1127, 1131–33. 1 2

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2

3

4

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process from other forms of interpretation,3 so questions as to what extent, under what circumstances and how a court might fill in gaps to supplement contractual terms are briefly discussed in this Chapter in section V. See also, Chapter 8 on ‘Formation of Contract’, Chapter 10 on ‘Trade Terms and INCOTERMS’, Chapter 12 on ‘Delivery of Goods’, Chapter 13 on ‘Delivery of Documents’, Chapter 14 on ‘Conformity of Goods’, and Chapter 30 on ‘Choice of Law’.

C. Statement of Issues The following key issues relating to the interpretation will be addressed:

6

– – – – – – – 7

The policy behind interpretive rules and the influence of contractual context; The standard of intent required by interpretive rules; How and to what extent parties can control interpretive rules; Default rules, principles and presumptions in interpretation; The stages of interpretation and permissible aids to construction at each stage; Supplementation; and A critique of the form, substance and structure of interpretive rules in uniform laws.

Some jurisdictions draw a distinction between ‘interpretation’ and ‘construction’ of contracts. This was the case historically in English law, and in the US where the ‘interpretation’ relates to the ‘ascertainment of … meaning’,4 while ‘construction’ includes ‘matters of policy’,5 or legal effect.6 In this Chapter, the terms are used interchangeably.

D. International Sales Transaction Interpretation of contract is obviously a critical issue for practitioners dealing with international sales. Indeed, it has been said that the importance of interpretation of contracts cannot be overstated.7 Changes in approaches and influences present many challenges for practising lawyers, as do the real and perceived differences between interpretive rules and methods employed by different jurisdictions. Lawyers advising in relation to international sales need a heightened awareness of the potential for the issues discussed in this Chapter to impact upon the form and shape of their client’s rights and obligations. 9 Classic areas of difficulty include the operation of the parol evidence rule; differences in admissibility of evidence of intent (prior negotiations and subsequent conduct); and the varying degrees to which good faith plays a role in contractual interpretation. In this Chapter, a comparative overview is used to reveal important differences with which the lawyer dealing with international transactions must contend. 8

3 Schwenzer, Hachem & Kee, Global Sales and Contract Law (OUP 2012) p. 292 [26.03] (Schwenzer, Hachem & Kee). 4 Restatement (Second) of Contracts § 200 (1981) (Reporter’s Note distinguishing ‘interpretation’ from ‘construction’) (hereinafter, American Restatement). 5 Carter, The Construction of Commercial Contracts (Hart 2013) [1.05]. 6 American Restatement § 200, Reporter’s Note. 7 Vogenauer, in Vogenauer & Kleinheisterkamp (eds), Commentary on the PICC of International Commercial Contracts (2nd edn, OUP 2015) Introduction to Chapter 4 [2].

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E. Sampling of Laws

E. Sampling of Laws There exists a great deal of commonality across uniform laws in the area of contract 10 interpretation, but also points of divergence. The following comparison of a sample of laws and rules will be used to draw out the differences. Towards the end of the Chapter, an analysis will be undertaken to determine whether the CISG contains adequate interpretive rules.

I. CISG 11

Article 7(1) In the interpretation of this Convention, regard is to be had to its international character and to the need to promote uniformity in its application and the observance of good faith in international trade. Article 8 (1) For the purposes of this Convention statements made by and other conduct of a party are to be interpreted according to his intent where the other party knew or could not have been unaware what that intent was. (2) If the preceding paragraph is not applicable, statements made by and other conduct of a party are to be interpreted according to the understanding that a reasonable person of the same kind as the other party would have had in the same circumstances. (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. Article 9 (1) The parties are bound by any usage to which they have agreed and by any practices, which they have established between themselves. (2) 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. Article 11 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. Article 19 (1) A reply to an offer which purports to be an acceptance but contains additions, limitations or other modifications is a rejection of the offer and constitutes a counter-offer. (2) However, a reply to an offer which purports to be an acceptance but contains additional or different terms which do not materially alter the terms of the offer constitutes an acceptance, unless the offeror, without undue delay, objects orally to the discrepancy or dispatches a notice to that effect. If he does not so object, the terms of the contract are the terms of the offer with the modifications contained in the acceptance. (3) Additional or different terms relating, among other things, to the price, payment, quality and quantity of the goods, place and time of delivery, extent of one party’s liability to the other or the settlement of disputes are considered to alter the terms of the offer materially.

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II. CISG Advisory Council Opinions 1. CISG Advisory Council Opinion No. 3 12 § 1 The Parol Evidence Rule has not been incorporated into the CISG. The CISG governs the role and weight to be ascribed to contractual writing. §2 In some common law jurisdictions, the Plain Meaning Rule prevents a court from considering evidence outside a seemingly unambiguous writing for purposes of contractual interpretation. The Plain Meaning Rule does not apply under the CISG. §3 A Merger Clause, also referred to as an Entire Agreement Clause, when in a contract governed by the CISG, derogates from norms of interpretation and evidence contained in the CISG. The effect may be to prevent a party from relying on evidence of statements or agreements not contained in the writing. Moreover, if the parties so intend, a Merger Clause may bar evidence of trade usages. However, in determining the effect of such a Merger Clause, the parties' statements and negotiations, as well as all other relevant circumstances shall be taken into account.

2. CISG Advisory Council Opinion No. 13 13 § 8 Where there is a conflict between negotiated terms and standard terms in the contract, the negotiated terms override the standard terms. §9 If the meaning of a standard term provided by one party remains ambiguous despite interpretation the meaning more favourable to the other party shall prevail.

III. UNIDROIT Principles of International Commercial Contracts 14 Article 1.7 (1) Each party must act in accordance with good faith and fair dealing in international trade. (2) The parties may not exclude or limit this duty. Article 2.1.17 A contract in writing which contains a clause indicating that the writing completely embodies the terms on which the parties have agreed cannot be contradicted or supplemented by evidence of prior statements or agreements. However, such statements or agreements may be used to interpret the writing. Article 2.1.18 A contract in writing, which contains a clause requiring any modification or termination by agreement to be in a particular form may not be otherwise modified or terminated. However, a party may be precluded by its conduct from asserting such a clause to the extent that the other party has acted in reliance on that conduct. Article 2.1.19 (1) Where one party or both parties use standard terms in concluding a contract, the general rules on formation apply, subject to Articles. (2) Standard terms are provisions which are prepared in advance for general and repeated use by one party and which are actually used without negotiation with the other party. Article 2.1.21 In case of conflict between a standard term and a term which is not a standard term the latter prevails.

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E. Sampling of Laws Article 4.1 (1) A contract shall be interpreted according to the common intention of the parties. (2) If such an intention cannot be established, the contract shall be interpreted according to the meaning that reasonable persons of the same kind as the parties would give to it in the same circumstances. Article 4.2 (1) The statements and other conduct of a party shall be interpreted according to that party's intention if the other party knew or could not have been unaware of that intention. (2) If the preceding paragraph is not applicable, such statements and other conduct shall be interpreted according to the meaning that a reasonable person of the same kind as the other party would give to it in the same circumstances. Article 4.3 In applying Articles 4.1 and 4.2, regard shall be had to all the circumstances, including (a) preliminary negotiations between the parties; (b) practices which the parties have established between themselves; (c) the conduct of the parties subsequent to the conclusion of the contract; (d) the nature and purpose of the contract; (e) the meaning commonly given to terms and expressions in the trade concerned; (f) usages. Article 4.4 Terms and expressions shall be interpreted in the light of the whole contract or statement in which they appear. Article 4.4, Comment 2 In principle there is no hierarchy among contract terms, in the sense that their respective importance for the interpretation of the remaining part of the contract is the same regardless of the order in which they appear. There are, however, exceptions to this rule. Secondly, it goes without saying that, in cases of conflict, provisions of a specific character prevail over provisions laying down more general rules. Article 4.5 Contract terms shall be interpreted so as to give effect to all the terms rather than to deprive some of them of effect. Article 4.6 If contract terms supplied by one party are unclear, an interpretation against that party is preferred. Article 4.7 Where a contract is drawn up in two or more language versions which are equally authoritative there is, in case of discrepancy between the versions, a preference for the interpretation according to a version in which the contract was originally drawn up. Article 4.8 (1) Where the parties to a contract have not agreed with respect to a term which is important for a determination of their rights and duties, a term which is appropriate in the circumstances shall be supplied. (2) In determining what is an appropriate term regard shall be had, among other factors, to: (a) the intention of the parties; (b) the nature and purpose of the contract; (c) good faith and fair dealing; (d) reasonableness.

IV. Principles of European Contract Law 15

Article 1:105 (1) The parties are bound by any usage to which they have agreed and by any practice they have established between themselves.

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Chapter 23 Contract Interpretation and Merger Clauses (2) The parties are bound by a usage, which would be considered generally applicable by persons in the same situation as the parties, except where the application of such usage would be unreasonable. Article 1:302 Under these Principles reasonableness is to be judged by what persons acting in good faith and in the same situation as the parties would consider to be reasonable. In particular, in assessing what is reasonable the nature and purpose of the contract, the circumstances of the case, and the usages and practices of the trades or professions involved should be taken into account. Article 2:105 (1) If a written contract contains an individually negotiated clause stating that the writing embodies all the terms of the contract (a merger clause), any prior statements, undertakings or agreements, which are not embodied in the writing do not form part of the contract. (2) If the merger clause is not individually negotiated it will only establish a presumption that the parties intended that their prior statements, undertakings or agreements were not to form part of the contract. This rule may not be excluded or restricted. (3) The parties' prior statements may be used to interpret the contract. This rule may not be excluded or restricted except by an individually negotiated clause. Article 2:106 (1) A clause in a written contract requiring any modification or ending by agreement to be made in writing establishes only a presumption that an agreement to modify or end the contract is not intended to be legally binding unless it is in writing. (2) A party may by its statements or conduct be precluded from asserting such a clause to the extent that the other party has reasonably relied on them. Article 2:209 (1) If the parties have reached agreement except that the offer and acceptance refer to conflicting general conditions of contract, a contract is nonetheless formed. The general conditions form part of the contract to the extent that they are common in substance. (2) However, no contract is formed if one party: (a) has indicated in advance, explicitly, and not by way of general conditions, that it does not intend to be bound by a contract on the basis of paragraph (1); or (b) without delay, informs the other party that it does not intend to be bound by such contract. (3) General conditions of contract are terms which have been formulated in advance for an indefinite number of contracts of a certain nature, and which have not been individually negotiated between the parties. Article 5:102 In interpreting the contract, regard shall be had, in particular, to: (a) the circumstances in which it was concluded, including the preliminary negotiations; (b) the conduct of the parties, even subsequent to the conclusion of the contract; (c) the nature and purpose of the contract; (d) the interpretation which has already been given to similar clauses by the parties and the practices they have established between themselves; (e) the meaning commonly given to terms and expressions in the branch of activity concerned and the interpretation similar clauses may already have received; (f) usages; and (g) good faith and fair dealing. Article 5:103 Where there is doubt about the meaning of a contract term not individually negotiated, an interpretation of the term against the party who supplied it is to be preferred. Article 5:104 Terms which have been individually negotiated take preference over those which are not. Article 5:105 Terms are interpreted in the light of the whole contract in which they appear.

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E. Sampling of Laws Article 5:106 An interpretation which renders the terms of the contract lawful, or effective, is to be preferred to one which would not. Article 6:101 (1) A statement made by one party before or when the contract is concluded is to be treated as giving rise to a contractual obligation if that is how the other party reasonably understood it in the circumstances, taking into account: (a) the apparent importance of the statement to the other party; (b) whether the party was making the statement in the course of business; and (c) the relative expertise of the parties. (2) If one of the parties is a professional supplier who gives information about the quality or use of services or goods or other property when marketing or advertising them or otherwise before the contract for them is concluded, the statement is to be treated as giving rise to a contractual obligation unless it is shown that the other party knew or could not have been unaware that the statement was incorrect. (3) Such information and other undertakings given by a person advertising or marketing services, goods or other property for the professional supplier, or by a person in earlier links of the business chain, are to be treated as giving rise to a contractual obligation on the part of the professional supplier unless it did not know and had no reason to know of the information or undertaking’. Article 6:102 In addition to the express terms, a contract may contain implied terms, which stem from: (a) the intention of the parties, (b) the nature and purpose of the contract, and (c) good faith and fair dealing. Article 6:105 Where the price or any other contractual term is to be determined by one party whose determination is grossly unreasonable, then notwithstanding any provision to the contrary, a reasonable price or other term shall be substituted. Article 6:106 (1) Where the price or any other contractual term is to be determined by a third person, and it cannot or will not do so, the parties are presumed to have empowered the court to appoint another person to determine it. (2) If a price or other term fixed by a third person is grossly unreasonable, a reasonable price or term shall be substituted. Article 6:107 Where the price or any other contractual term is to be determined by reference to a factor which does not exist or has ceased to exist or to be accessible, the nearest equivalent factor shall be substituted.

V. German Bürgerliches Gesetzbuch 16

§ 133 Interpretation of a declaration of intent When a declaration of intent is interpreted, it is necessary to ascertain the true intention rather than adhering to the literal meaning of the declaration. § 150 Late acceptance and acceptance with amended terms (1) The late acceptance of an offer is considered as a new offer. (2) An acceptance under extensions, restrictions or other alterations is considered rejection associated with a new offer. § 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.

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Chapter 23 Contract Interpretation and Merger Clauses § 157 Interpretation of contracts Contracts are to be interpreted as required by good faith, taking customary practice into consideration. § 242 Performance in good faith An obligor has a duty to perform according to the requirements of good faith, taking customary practice into consideration. § 305 b Priority of individually agreed terms Individually agreed terms take priority over standard business terms. § 305 c Surprising and ambiguous clauses (1) Provisions in standard business terms, which in the circumstances, in particular with regard to the outward appearance of the contract, are so unusual that the other party to the contract with the user need not expect to encounter them, do not form part of the contract. (2) Any doubts in the interpretation of standard business terms are resolved against the user. § 307 Test of reasonableness of contents (1) Provisions in standard business terms are ineffective if, contrary to the requirement of good faith, they unreasonably disadvantage the other party to the contract with the user. An unreasonable disadvantage may also arise from the provision not being clear and comprehensible. (2) An unreasonable disadvantage is, in case of doubt, to be assumed to exist if a provision 1. is not compatible with essential principles of the statutory provision from which it deviates, or 2. limits essential rights or duties inherent in the nature of the contract to such an extent that attainment of the purpose of the contract is jeopardised.

VI. French Code Civil8 17 Article 1104 Contracts must be negotiated, formed and performed in good faith. This provision is a matter of public policy. Article 1110 A bespoke contract is one whose stipulations are freely negotiated by the parties. A standard form contract is one whose general conditions are determined in advance by one of the parties without negotiation. Article 1119 General conditions put forward by one party have no effect on the other party unless they have been brought to the latter’s attention and that party has accepted them. In case of inconsistency between general conditions relied on by each of the parties, incompatible clauses have no effect. In case of inconsistency between general conditions and special conditions, the latter prevail over the former. Article 1163 An obligation has as its subject-matter a present or future act of performance. The latter must be possible and determined or capable of being determined. An act of performance is capable of being determined where it can be deduced from the contract or by reference to usage or the previous dealings of the parties, without the need for further agreement. Article 1164 In framework contracts it may be agreed that the price will be fixed unilaterally by one of the parties, subject to the requirement that the latter must provide the reason for the amount if it is challenged. In the case of an abuse in the fixing of a price, a court may hear a claim for damages and, in an appropriate case, for the termination of the contract. 8 French Code Civil created by Ordonnance no 2016-131 (10 February 2016) translation by John Cartwright and Bénédicte Fauvarque-Cosson .

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E. Sampling of Laws Article 1165 In contracts for the supply of services, in the absence of an agreement by the parties in advance of their performance, the price may be fixed by the creditor, subject to the latter’s providing a reason for its amount if it is challenged. In the case of abuse in the fixing of the price, the court may hear a claim for damages. Article 1166 Where the quality of the act of performance is not determined or capable of being determined under the contract, the debtor must offer an act of performance of a quality which conforms to the legitimate expectations of the parties taking into account its nature, usual practices and the amount of what is agreed in return. Article 1167 Where the price or any other element of a contract is to be determined by reference to an index which does not exist or has ceased to exist or to be available, the index is replaced by the index which is most closely related to it. Article 1168 In synallagmatic contracts, a lack of equivalence in the acts of performance of the parties is not a ground of nullity of the contract, unless legislation provides otherwise. Article 1169 An onerous contract is a nullity where, at the moment of its formation, what is agreed in return for the benefit of the person undertaking an obligation is illusory or derisory. Article 1170 Any contract term which deprives a debtor’s essential obligation of its substance is deemed not written. Article 1188 A contract is to be interpreted according to the common intention of the parties rather than stopping at the literal meaning of its terms. Where this intention cannot be discerned, a contract is to be interpreted in the sense which a reasonable person placed in the same situation would give to it. Article 1189 All the terms of a contract are to be interpreted in relation to each other, giving to each the meaning which respects the consistency of the contract as a whole. Where, according to the common intention of the parties, several contracts contribute to one and the same operation, they are to be interpreted by reference to this operation. Article 1190 In case of ambiguity, a bespoke contract is interpreted against the creditor and in favour of the debtor, and a standard-form contract is interpreted against the person who put it forward. Article 1191 Where a contract term is capable of bearing two meanings, the one which gives it some effect is to be preferred to the one which makes it produce no effect. Article 1192 Clear and unambiguous terms are not subject to interpretation as doing so risks their distortion. Article 1194 Contracts create obligations not merely in relation to what they expressly provide, but also to all the consequences which are given to them by equity, usage or legislation. Article 1361 Evidence in writing may be supplemented by an admission in court, by a decisive oath, or by a beginning of proof by writing which is corroborated by another means of proof. Article 1591 The sale price must be determined and designated by the parties.

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Chapter 23 Contract Interpretation and Merger Clauses Article 1592 It can however be left to the estimate of a third party; if the third party is unwilling or unable to make the estimate, there is no point of sale, unless estimated by another third party. Article 1602 The seller is required to explain clearly what he is obliged to do. Any obscure or ambiguous pact is interpreted against the seller. Article 1608 The costs of delivery are borne by the seller, and those of removal borne by the buyer, unless there has been a contrary stipulation. Article 1609 The delivery must be made at the place where, at the time of the sale, the object of sale was located, if not otherwise agreed. Article 1651 If nothing has been settled in this regard at the time of the sale, the buyer must pay at the place and at the time when the delivery must take place.

VII. Spanish Código Civil 18 Article 1281 If the terms of a contract are clear and do not leave any doubt as to the intention of the contracting parties, they shall abide by the literal meaning of its clauses. If the words seem contrary to the evident intention of the contracting parties, the latter shall prevail over the former. Article 1282 In order to judge the intention of the contracting parties, their acts at the time of and subsequently to the contract shall be mainly taken into account. Article 1284 If any clause of the contract should admit several meanings, it must be understood to have the meaning most suitable for it to be effective. Article 1285 Clauses in contracts must be interpreted in connection with each other, attributing to any doubtful clauses the meaning resulting from the whole. Article 1286 Words, which may have different meanings shall be understood in the meaning which is most in accordance with the nature and subject matter of the agreement. Article 1287 Uses or customs of the country shall be taken into account to interpret any ambiguities in contracts, standing in for the omission of clauses, which are usually set forth therein. Article 1288 The interpretation of obscure clauses in the contract must not favour the party who caused the obscurity.

VIII. American Uniform Commercial Code 19 § 1-205 (1) A course of dealing is a sequence of previous conduct between the parties to a particular transaction which is fairly to be regarded as establishing a common basis of understanding for interpreting their expressions and other conduct.

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E. Sampling of Laws (2) A usage of trade is any practice or method of dealing having such regularity of observance in a place, vocation or trade as to justify an expectation that it will be observed with respect to the transaction in question. … § 1-304 Every contract or duty within the Uniform Commercial Code imposes an obligation of good faith in its performance and enforcement. § 2-103 (1) In this Article unless the context otherwise requires: (b) “Good faith” in the case of a merchant means honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade. § 2-202 Terms with respect to which the confirmatory memoranda of the parties agree or which are otherwise set forth in a writing intended by the parties as a final expression of their agreement with respect to such terms as are included therein may not be contradicted by evidence of any prior agreement or of a contemporaneous oral agreement but may be explained or supplemented: (a) by course of dealing or usage of trade (Section 1-205) or by course of performance (Section 2-208); and (b) by evidence of consistent additional terms unless the court finds the writing to have been intended also as a complete and exclusive statement of the terms of the agreement. § 2-207 (1) A definite and seasonable expression of acceptance or a written confirmation which is sent within a reasonable time operates as an acceptance even though it states terms additional to or different from those offered or agreed upon, unless acceptance is expressly made conditional on assent to the additional or different terms. (2) The additional terms are to be construed as proposals for addition to the contract. Between merchants such terms become part of the contract unless: (a) the offer expressly limits acceptance to the terms of the offer; (b) they materially alter it; or (c) notification of objection to them has already been given or is given within a reasonable time after notice of them is received. (3) Conduct by both parties which recognizes the existence of a contract is sufficient to establish a contract for sale although the writings of the parties do not otherwise establish a contract. In such case the terms of the particular contract consist of those terms on which the writings of the parties agree, together with any supplementary terms incorporated under any other provisions of this Act. § 2-208 (1) Where the contract for sale involves repeated occasions for performance by either party with knowledge of the nature of the performance and opportunity for objection to it by the other, any course of performance accepted or acquiesced in without objection shall be relevant to determine the meaning of the agreement. (2) The express terms of the agreement and any such course of performance, as well as any course of dealing and usage of trade, shall be construed whenever reasonable as consistent with each other; but when such construction is unreasonable, express terms shall control course of performance and course of performance shall control both course of dealing and usage of trade. ... (3) Subject to the provisions of the next section on modification and waiver, such course of performance shall be relevant to show a waiver or modification of any term inconsistent with such course of performance.

IX. United Kingdom Sale of Goods Act 1979 20

Section 55(1) Where a right, duty or liability would arise under a contract of sale of goods by implication of law, it may (subject to the Unfair Contract Terms Act 1977) be negatived or varied by express agreement, or by the course of dealing between the parties, or by such usage as binds both parties to the contract.

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X. American Restatement (Second) of Contracts 21 § 5 Both language and conduct are to be understood in the light of the circumstances, including course of dealing or usage of trade or course of performance. § 20 (1) There is no manifestation of mutual assent to an exchange if the parties attach materially different meanings to their manifestations and (a) neither party knows or has reason to know the meaning attached by the other; or (b) each party knows or each party has reason to know the meaning attached by the other. (2) The manifestations of the parties are operative in accordance with the meaning attached to them by one of the parties if (a) that party does not know of any different meaning attached by the other, and the other knows the meaning attached by the first party; or (b) that party has no reason to know of any different meaning attached by the other, and the other has reason to know the meaning attached by the first party. § 201 (1) Where the parties have attached the same meaning to a promise or agreement or a term thereof, it is interpreted in accordance with that meaning. (2) Where the parties have attached different meanings to a promise or agreement or a term thereof, it is interpreted in accordance with the meaning attached by one of them if at the time the agreement was made (a) that party did not know of any different meaning attached by the other, and the other knew the meaning attached by the first party; (b) that party had no reason to know of any different meaning attached by the other, and the other had reason to know the meaning attached by the first party. (3) Except as stated in this Section, neither party is bound by the meaning attached by the other, even though the result may be a failure of mutual assent. § 202 (1) Words and other conduct are interpreted in the light of all the circumstances, and if the principal purpose of the parties is ascertainable it is given great weight. (2) A writing is interpreted as a whole, and all writings that are part of the same transaction are interpreted together. (3) Unless a different intention is manifested, (a) where language has a generally prevailing meaning, it is interpreted in accordance with that meaning; (b) technical terms and words of art are given their technical meaning when used in a transaction within their technical field. (4) Where an agreement involves repeated occasions for performance by either party with knowledge of the nature of the performance and opportunity for objection to it by the other, any course of performance accepted or acquiesced in without objection is given great weight in the interpretation of the agreement. (5) Wherever reasonable, the manifestations of intention of the parties to a promise or agreement are interpreted as consistent with each other and with any relevant course of performance, course of dealing, or usage of trade. § 203 In the interpretation of a promise or agreement or a term thereof, the following standards of preference are generally applicable: (a) an interpretation which gives a reasonable, lawful, and effective meaning to all the terms is preferred to an interpretation which leaves a part unreasonable, unlawful, or of no effect; (b) express terms are given greater weight than course of performance, course of dealing, and usage of trade, course of performance is given greater weight than course of dealing or usage of trade, and course of dealing is given greater weight than usage of trade; (c) specific terms and exact terms are given greater weight than general language;

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E. Sampling of Laws (d) separately negotiated or added terms are given greater weight than standardized terms or other terms not separately negotiated. § 204 When the parties to a bargain sufficiently defined to be a contract have not agreed with respect to a term which is essential to a determination of their rights and duties, a term which is reasonable in the circumstances is supplied by the court. § 205 Every contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement. § 206 In choosing among the reasonable meanings of a promise or agreement or a term thereof, that meaning is generally preferred which operates against the party who supplies the words or from whom a writing otherwise proceeds. § 207 In choosing among the reasonable meanings of a promise or agreement or a term thereof, a meaning that serves the public interest is generally preferred. § 210 (1) A completely integrated agreement is an integrated agreement adopted by the parties as a complete and exclusive statement of the terms of the agreement. (2) A partially integrated agreement is an integrated agreement other than a completely integrated agreement. (3) Whether an agreement is completely or partially integrated is to be determined by the court as a question preliminary to determination of a question of interpretation or to application of the parol evidence rule. § 212(1) The interpretation of an integrated agreement is directed to the meaning of the terms of the writing or writings in the light of the circumstances, in accordance with the rules stated in this Chapter. § 214 Agreements and negotiations prior to or contemporaneous with the adoption of a writing are admissible in evidence to establish (a) that the writing is or is not an integrated agreement; (b) that the integrated agreement, if any, is completely or partially integrated; (c) the meaning of the writing, whether or not integrated; (d) illegality, fraud, duress, mistake, lack of consideration, or other invalidating cause; (e) ground for granting or denying rescission, reformation, specific performance ... § 215 Except as stated in the preceding Section, where there is a binding agreement, either completely or partially integrated, evidence of prior or contemporaneous agreements or negotiations is not admissible in evidence to contradict a term of the writing. § 216(1) Evidence of a consistent additional term is admissible to supplement an integrated agreement unless the court finds that the agreement was completely integrated. § 220 (1) An agreement is interpreted in accordance with a relevant usage if each party knew or had reason to know of the usage and neither party knew or had reason to know that the meaning attached by the other was inconsistent with the usage. (2) When the meaning attached by one party accorded with a relevant usage and the other knew or had reason to know of the usage, the other is treated as having known or had reason to know the meaning attached by the first party.

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Chapter 23 Contract Interpretation and Merger Clauses § 221 An agreement is supplemented or qualified by a reasonable usage with respect to agreements of the same type if … neither party knows or has reason to know that the other party has an intention inconsistent with the usage. § 222(3) Unless otherwise agreed, a usage of trade in the vocation or trade in which the parties are engaged or a usage of trade of which they know or have reason to know gives meaning to or supplements or qualifies their agreement. § 223(2) Unless otherwise agreed, a course of dealing between the parties gives meaning to or supplements or qualifies their agreement.

XI. Chinese Law9 22 Article 6 All civil subjects engaging in civil activities shall observe the principle of fairness to determine reasonably the rights and obligations of all parties concerned. Article 7 All civil subjects engaging in civil activities shall observe the principle of good faith, adhere to honesty and keep their commitments. Article 142 The meaning of an expression of intent that is made to a certain party shall be interpreted according to the literal meaning of words used and in combination with the relevant articles, nature and purpose of the act, usual practices, and the principle of good faith. In the interpretation of an expression of intent that is made not to a specific party, the real intention of an actor shall be sought rather than the literal meaning of words used and also by considering relevant articles, nature and purpose of the act, usual practices, and the principle of good faith. Article 466 Where a dispute arises between the parties as to the understanding of any clause of the contract, the meaning of that clause shall be determined in accordance with the provisions of paragraph 1 of Article 142 of this Law. Where a contract is concluded in two or more languages and it is agreed that all versions are equally authentic, it shall be presumed that the words and sentences used in all versions have the same meaning. In case that the words used in different versions are inconsistent, they shall be interpreted according to the nature and purpose of the contract as well as the principle of good faith. Article 467 The provisions of General Principles of the Part shall apply to contracts which are not expressly provided in this Part or in other laws, and, mutatis mutandis, to those most similar contracts under typical contracts in the Part or in other laws. Article 496 Standard terms are clauses which are prepared in advance by one party and which are not negotiated with the other party when the contract is concluded. … Article 498 If a dispute over the understanding of a standard term occurs, the term shall be interpreted in accordance with general understanding. Where there are two or more kinds of interpretation, the interpretation unfavorable to the party supplying the standard terms shall prevail. Where a standard term is inconsistent with a non- standard term, the latter shall prevail.

9 Civil Code of the People’s Republic of China (16 December 2019) (CCC) (effective 1 January 2021). Per Article 1260 of the draft Chinese Civil Code, enactment repeals the Contract Law of the People's Republic of China, and the General Principles of Civil Law of the People's Republic of China.

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E. Sampling of Laws Article 509 The parties shall fully perform their respective obligations in accordance with the terms of their agreement. The parties shall observe the principle of good faith and act in accordance with the nature and purpose of the contract and trade practices. … The parties shall avoid wasting resources, polluting the environment and damaging the ecology during the performance of the contract. Article 510 Where, after a contract becomes effective, there is no agreement in the contract between the parties on such contents as quality, price or remuneration, or place of performance, or such agreement is unclear, the parties may agree upon supplementary terms through consultation; if no such supplementary terms can be reached, such terms shall be determined in accordance with the relevant terms of the contract, the nature of the contract, the purpose of the contract, or the trade practices. Article 511 Where the relevant terms of a contract are unclear, and cannot be determined in accordance with the provisions of the preceding article, the following provisions shall apply: (I) if quality requirements are unclear, the contract shall be performed in accordance with the mandatory national standards; if there are no mandatory national standards, the contract shall be performed in accordance with the recommended national standards; if there are no recommended national standards, the contract shall be performed in accordance with the industrial standards; if there are no national standards or industrial standards, the contract shall be performed in accordance with the usual standards or specific standards that conform to the purpose of the contract. (II) if the price or remuneration is unclear, the market price of the place of performance at the time of conclusion shall apply; if the government-fixed price or government-directed price shall be followed in accordance with the law, the relevant provisions shall apply; (III) if the place of performance is unclear, and the payment is money, the performance shall be effected at the place where the payee is located; … for any other subject matter, the performance shall be effected at the place of location of the party fulfilling the obligations; (IV) if the time of performance is unclear, the obligor or the obligee may at any time request performance, provided that the other party shall be given the time required for preparation; (V) if the method of performance is unclear, performance shall be rendered in a manner which is conducive to realizing the purpose of the contract; (VI) if the party responsible for the expenses for performance is unclear, the expenses shall be borne by the party fulfilling the obligations; if the expenses for performance are increased due to reasons attributable to the obligee, the increased expenses shall be borne by the obligee. Article 544 Where an agreement by the parties on the contents of a modification is ambiguous, the contract shall be presumed as not having been modified. Article 602 Where there is no agreement in the contract between the parties on the time limit to deliver the subject matter or such agreement is unclear, the provisions of Article 510 and Item 4 of Article 511 of the Law shall apply. Article 603 The seller shall deliver the subject matter at the agreed location. Where there is no agreement between the parties as to the place to deliver the subject matter or such agreement is not clear, nor can it be determined according to the provisions of Article 510 of this Law, the following provisions shall be applied: (I) if the subject matter needs carriage, the seller shall deliver the subject matter to the first carrier so as to hand it over to the buyer; (II) in case the subject matter does not need carriage, and the seller and buyer know the place of the subject matter when concluding the contract, the seller shall deliver the subject matter at such place; if the place is unknown, the subject matter shall be delivered at the business place of the seller when concluding the contract.

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Chapter 23 Contract Interpretation and Merger Clauses Article 616 Where the quality requirements for the subject matter is not agreed between parties or such agreement is not clear, nor can it be determined according to the provisions of Article 510 of this Law, the provisions of Item 1 of Article 511 of this Law shall be applied. Article 622 If the inspection period agreed by the parties is too short, and according to the nature of the subject matter and transaction practices, it is difficult for the buyer to complete the inspection in the inspection period, such period shall only be deemed as the period for the buyer to raise objections to the external defects. If the agreed inspection period or the quality guarantee period is shorter than that provided for by laws or administrative regulations, the latter shall prevail. Article 627 The purchaser shall make all payments at the agreed place of delivery. Where there has been no agreement, or no clear agreement, on the place for payment, and the place for payment cannot be determined by reference to the provisions of Article 510 of this Law, the purchaser shall make the payment at the seller's place of business; however, if there has been agreement that payment shall be conditional upon delivery of the subject matter or the document for the collection of the subject matter, payment shall be at the place where the subject matter or the document for the collection of the subject matter is delivered. Article 628 The purchaser shall make all payments at the agreed time of payment. Where the time for payment is not agreed or the agreement is not clear, nor can it be determined in accordance with the provisions of Article 510 of the Law, the buyer shall make payment at the same time it receives the subject matter or the document for taking delivery thereof.

F. Commentary Like most areas of law, contractual interpretation involves a balancing of competing policy considerations. The main trade-off is between the need to promote efficiency on the one hand, and fairness on the other. The former policy advances the formalistic application of bright line or hard rules in order to ensure certainty and predictability of contract. The fairness policy encourages observance of societal standards within contractual behavior, not simply compliance with the bare letter of contractual terms. 24 The parol evidence rule (discussed below), which gives written terms priority over oral statements and other written evidence, involves such a trade-off. It encourages increases in ex ante expenditures on the drafting of clear and detailed written contracts, and provides ex post savings by barring oral and other evidence that contradicts the written contract. However, in addition to the increase in drafting costs, the price paid is a loss of fairness in those situations where the parties have reached oral agreement, but the written terms fail to fully reflect the agreement (contradictory and omitted terms). To a limited extent, systems with the parol evidence rule may seek to counter this unfairness to a limited degree by concepts of rectification or estoppel. 25 Despite the difference in theories among legal systems, in most systems, application of interpretive rules will be affected by the contractual context. Thus rules of interpretation and their application in relation to commercial contracts are likely to be quite different than in the context of consumer contracts, where rules are more focused on protecting the presumptively weaker consumer. In international settings, a degree of flexibility in interpretation may be required to account for the fact that parties may come from different legal and cultural backgrounds. 23

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I. Standard of Intent The intent of the contracting parties is the universal core of contract interpretation. Rules of interpretation relate in some way back to the question of intent, with some rules tempering intent to accord with socially acceptable standards of behaviour, while other rules adopt more abstract measures of intent. In order to understand rules of interpretation, various theories of intent have been posed. However, the theories are mostly just that: in practice, often very little turns on the prevailing theory adopted by the particular legal system in question. Under the Common Law’s traditional ‘objective’ test of intent, the actual subjective intent of the parties is not considered relevant. Instead, the law applies the mythical ‘reasonable person’ to determine the hypothetical contractual intent: what would a reasonable person have understood the words or conduct of the parties to mean? The strictest version of the Common Law objective approach to intent perhaps exists in Australia, where ‘the law is concerned, not with the real intentions of the parties, but with the outward manifestations of those intentions,’10 and that ‘it is not the subjective beliefs or understandings of the parties about their rights and liabilities that govern their contractual relations. What matters is what each party by words and conduct would have led a reasonable person in the position of the other party to believe.’11 Strict adherence to the objective approach has led to the bizarre situation in which a contract is attributed with a meaning that neither party anticipated or intended.12 The objective approach does not preclude the availability of an action for rectification in equity where, due to mistake, the written contract fails to reflect the ‘true agreement’. 13 This really arises from a determination that the objective intent is not reflected within a written document, and therefore the better view is that this is not an exception at all. Another possible avenue of redress may arise through estoppel, if the assumed agreement has been relied upon by the other party to their detriment. Another possible ‘exception’ to the objective approach is when an addressee knows a person’s subjective intent. Even within a Common Law system that strictly adheres to the ‘hypothetical’ objective person test, the addressee may not necessarily be able to rely on an interpretation based upon objective intent in certain situations, where both parties knew the subjective intent of the words used, which would differ from that of a reasonable onlooker. By its nature, such situations are rare, involve obvious enormous evidentiary difficulties, and thus are scarce in the case law.14 For example, an addressee may know that the speaker is playing a practical joke, due to a shared history of the same joke. Alternatively, parties might use certain words in a manner that differs from how such words are normally understood – almost as code words or a so-called ‘private dictionary’.15 A court might in these limited circumstances give effect to the commonly 10 Taylor v Johnson (1983) 151 CLR 422, 428; Wendell Holmes, Jr., ‘Lecture IX: Contract III – Void and Voidable’ in The Common Law (1881) p. 324; Perillo, ‘The Origins of the of the Objective Theory of Contract Formation and Interpretation’ (2000) 69 Fordham L Rev 427. 11 Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165. 12 Brambles Holdings Ltd v Bathurst Ltd v Bathurst City Council (2001) 53 NSWLR 153. 13 Downie v Lockwood [1965] VR 257; Braund v Mutual Life and Citizens' Assurance Co. Ltd [1926] NZLR 529. 14 See Air Great Lakes Pty Ltd v K S Easter (Holdings) Pty Ltd (1985) 2 NSWLR 309, 337–39. Contra Lucy v Zehmer, 196 Ca. 493, 84 S.E.2 d 516 (the fact that the sellers considered the sale of land a joke did not prevent an order for specific performance). 15 Karen Oltmann v Scarsdale Shipping Co Ltd [1976] 2 Lloyd’s Rep 708, 712 (‘the Karen Oltmann’); Proforce Recruit Ltd v The Rugby Group Ltd [2006] EWCA Civ 69, [30], [50]–[51], [57]; Greig and Davis, The Law of Contract (Law Book, 1987) p 430.

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intended meaning of the words, for example, if there is evidence that the parties used the word ‘buy’ to mean ‘sell’. However, this limited exception to the reasonable person’s understanding under the objective approach has been rejected in New Zealand, and doubted in English law.16 30 Within the supposed objective approaches, varying degrees of background knowledge are attributed to the hypothetical reasonable person, in order to determine the question as to what the addressee ‘knows’. The American Restatement’s (Chapter 9) interpretive rules define knowledge as what a party ‘knows or has reason to know’ (emphasis added).17 If the hypothetical reasonable person is attributed with background information sufficient to allow them to appreciate the parties’ actual common intention (or code or joke), then the supposedly objective test is in reality imbued with a certain amount of subjective understanding. The commonly understood code words or joke are simply circumstances known to all parties. It follows that any reasonable person truly standing in the shoes of the addressee would objectively assess the intent of the speaker accordingly, in a manner that brings the objective test far closer to that of so-called subjective or actual common intent of the parties. 31 This brings us to actual intent. Given the hypothetical test of the understanding of a reasonable person, the extent to which the actual intent of the parties is considered of any relevance also varies amongst Common Law countries. Some New Zealand courts have acknowledged that the hypothetical objective test is merely a substitute for the actual common intent of the parties, and in the rare situation where strong evidence of actual common intent exists, it should prevail.18 In the US, it is acknowledged that the shared mutual understanding of the parties prevails, provided that their mutual intent is manifested.19 By contrast, in Australia and England, even when strong evidence of actual mutual intent exists, it must be disregarded in favour of the “presumed intent” that a reasonable person would discern.20 32 Moreover, the type of evidence by which the relevant intent can be established also differs from one Common Law jurisdiction to another. In the USA, contractual meaning can be established by extrinsic evidence including statements of intent during negotiations and subsequent statements and conduct.21 This is also true of Canada, which likewise accepts evidence of negotiations and subsequent conduct where there

16 Chartbrook Ltd v Persimmon Homes Ltd [2009] 1 AC 1101, [45]-[47] (Lord Hoffmann doubting this principle); Benjamin Developments Ltd v Robt Jones (Pacific) Ltd [1994] 3 NZLR 189, 207, Gallen J (rejecting the notion that words not ordinarily capable of bearing such meaning should be interpreted in accordance with the mutual subjective intent of contracting parties on the basis this would be unfair to third parties). For further discussion, see McLauchlan, ‘Contract Formation, Contract Interpretation, and Subsequent Conduct’ (2006) 25 University of Queensland Law Journal 77, 104; Nicholls, ‘My Kingdom for a Horse: The Meaning of Words’ (2005) 121 Law Quarterly Review 577, 587. 17 American Restatement § 20 Comment b, and § 201(2). 18 Gibbons Holdings Ltd v Wholesale Distributors Ltd [2008] 1 NZLR 277, 283, 288, 294, 298–299, 304–305 (conceding the aim of interpretation is to discern actual mutual intent, for which the objective approach acts as substitute in the absence of clear evidence of mutual intent); Firm PI 1 Ltd v Zurich Australian Insurance Ltd [2015] 1 NZLR 432, 453; Vector Gas Ltd v Bay of Plenty Energy Ltd [2010] 2 NZLR 444 (reiterating that the objective approach remains the predominant means of interpretation). 19 American Restatement § 201(1), and Comment c. 20 Chartbrook Ltd v Persimmon Homes Ltd [2009] 1 AC 1101, [14]; Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337, 352-353; Pacific Carriers v BNP Paribas (2004) 218 CLR 451. 21 UCC § 202(4) (subsequent conduct, where repeated performance is required, and performance is accepted or acquiesced without objection) & § 2-208(3) (subsequent conduct); American Restatement § 212, Comment b and c; § 214 Comment b; Sierra Club v Virginia Electric & Power Company, 903 F.3 d 403, 414 (2018); Sunday’s Child, LLC v Irongate AZREP BW LLC, 327 F.Supp.3 d 1322, 1340 (2018).

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is ambiguity.22 By contrast, in England and Australia, evidence from negotiations is not permitted for the purpose of ascertaining meaning, with rare exceptions, 23 and evidence of subsequent conduct is not permitted for this purpose.24 Yet the statement of Lord Hoffmann in ICS v Bromwich provides a broader approach than Australia’s in relation to background knowledge in interpretation, for it allows evidence of surrounding circumstances to contradict and override contractual words, rather than merely guide constructional choice between meanings.25 Again, these differences point to a continuum of Common Law objective approaches 33 to meaning, with Australia at the strictest end, the USA and Canada at the moderate end, and between them, England (on the stricter side) and New Zealand (toward the moderate side). On the other hand, the civilian approach to contractual intent was originally based on 34 ‘will theory’, meaning that subjective or ‘true intent’ is favoured.26 This has led to an emphasis on actual mutual intent, rather than the literal meaning of words. Some codes provide that the parties’ common intent must be upheld, but also separately provide that a literal approach be taken when ‘strict interpretation is expressly established’ by a ‘legal or conventional provision’: Argentinian Código Civil y Comercial, Articles 1061 and 1062.27 Other codes expressly state that the parties’ true intention prevails over literal meaning. For example, the German BGB § 133 states that ‘when a declaration of intent is interpreted, it is necessary to ascertain the true intention rather than adhering to the literal meaning of the declaration.’28 Article 1281 of the Spanish Código Civil states that the evident intention of the parties prevails if ‘the words seem contrary.’ The French Code Civil Article 1188 states that a ‘contract is to be interpreted according to the common intention of the parties rather than stopping at the literal meaning of its terms’. 29 However, it is important to note that, in evidentiary terms, reliance is placed upon evidence of outward manifestations of subjective intent by the parties, rather than one party’s internal or hidden meaning. As discussed in section IV.2 below, contrary to some Common Law jurisdictions, civil jurisdictions permit and frequently require consideration of evidence of preliminary negotiations and subsequent conduct in establishing these outward manifestations. Ultimately, this measure of supposedly subjective intent as outwardly manifested 35 correlates with the moderate version of the so-called objective test, whereby the understanding of intention is ascertained in light of background knowledge known to both 22 Re Canadian National Railways and Canadian Pacific Ltd (1978) 95 DLR (3 d) 242, [9], [81]–[83]; Erewon Exploration Ltd v Northstar Energy Corporation (1993) 108 DLR (4 th) 709, [101]–[103]; Montreal Trust Co of Canada v Birmingham Lodge Ltd (1995) 125 DLR (4th) 193. American Restatement § 202(4). 23 Arnold v Britton [2015] UKSC 36; Codelfa Construction v State Rail (1982) 149 CLR 337, 352-353 (the exception being to evidence that a term with the meaning now alleged by one party was rejected by that same party during negotiations). 24 Agricultural and Rural Finance Pty Ltd v Gardiner (2008) 238 CLR 570, 582, 625; Maggs v Marsh [2006] EWCA Civ 1058. 25 However, prior to 1970, English and Australian courts permitted such evidence: James Miller & Partners Ltd v Whitworth Street (Manchester) Ltd [1970] AC 583, 603; L Schuler AG v Wickman Machine Tool Sales Ltd [1974] AC 235, 269; Prenn v Simmonds [1971] 1 WLR 1381, 1385; Charles, ‘Interpretation of Ambiguous Contracts by Reference to Subsequent Conduct’ (1991) 4 Journal of Contract Law 16, 22. 26 See French Code Civil Article 1101 which states ‘[a] contract is a concordance of wills of two or more persons’. 27 Código Civil y Comercial del la Nación of Argentina (effective 1 August 2015, repealing the earlier Civil Code), translation by Romañach. Note that the literal approach does not apply to contracts of adhesion or consumer contracts). 28 German BGB § 133. 29 French Code Civil Article 1188.

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parties, failing evidence of a common mutual intent. Thus, the two rest on the same building blocks, and often lead to the same result, despite the difference in theoretical underpinning.30 36 There are additional signs of a trend toward convergence. Just as some Common Law jurisdictions recognize that evidence of the parties’ mutual understanding prevails over the understanding of a reasonable person, some Civil Law countries have moved towards a more objective approach, by employing the perspective of a third party. The French Code Civil in Article 1188 now requires that the contract be ‘interpreted in the sense which a reasonable person placed in the same situation would give to it’ in situations where the common intention cannot be discerned, an approach reinforced by Article 1192 which precludes clear and precise words from being ‘interpreted’. This trend is also found in the Middle East, where the reasonable third person test is grounded in the principle of good faith.31 Likewise, in Chinese law on interpretation of intention, the CCC Article 142 retains a ‘real intention’ test for statements to the public at large, but discards the ‘real intention’ test where statements are directed toward specific parties, in favour of a more nuanced test of intention, which takes into account literal meaning, nature and purpose of the act, usual practices, and principles of good faith. 37 Together, all of these factors mean that, as indicated earlier, there is frequently little difference in outcomes flowing from so-called subjective or objective approaches, especially in the commercial context. Therefore, the blended technique favoured by most international instruments is a natural choice, and tends to work well. This blended approach was first seen in the CISG, which establishes a subjective test in CISG Article 8(1), using a moderate objective test as the default approach: Article 8 (1) For the purposes of this Convention statements made by and other conduct of a party are to be interpreted according to his intent where the other party knew or could not have been unaware what that intent was. (2) If the preceding paragraph is not applicable, statements made by and other conduct of a party are to be interpreted according to the understanding that a reasonable person of the same kind as the other party would have had in the same circumstances.

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The vast majority of CISG cases demonstrate that the objective approach in CISG Article 8(2) normally prevails in court. The use of the phrases ‘knew’ or ‘could not have been unaware’ formulation presents a significant evidentiary hurdle to the use of subjective intent in CISG Article 8(1).

1. Structure for Determining Intent 39

In the PICC, the test for determining intent appears in two parts, Articles 4.1 and 4.2: Article 4.1: Intention of the Parties (1) A contract shall be interpreted according to the common intention of the parties. (2) If such an intention cannot be established, the contract shall be interpreted according to the meaning that reasonable persons of the same kind as the parties would give to it in the same circumstances. Article 4.2: Interpretation of Statements and Other Conduct (1) The statements and other conduct of a party shall be interpreted according to that party's intention if the other party knew or could not have been unaware of that intention.

30 Accord Vogenauer ‘Interpretation of Contracts: Concluding Comparative Observations’ in A Burrows and E Peel (eds), Contract Terms (Oxford University Press, 2007) § 3. 31 Egyptian Civil Code Article 148; UAE Civil Code Article 246; Qatari Civil Code Article 172; Kuwaiti Civil Code Art 197. See further Schwenzer, Hachem, and Kee (n 3) [26.12].

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PICC Article 4.1 deals with intent in the ‘contract as a whole’,32 while PICC Article 4.2 deal with interpretation of ‘words and conduct’. The wisdom of this division is debatable. The first problem is repetition. The ‘objective test’ in PICC Article 4.1(2) is replicated in PICC Article 4.2(2). Further, when one considers the fact that parties can only manifest their intent regarding the whole contract by means of words or conduct, it seems that a single provision on intent could cover both words and conduct and the whole contract. Comments to the PICC mention that PICC Article 4.2 is most useful in formation, notice of defects, avoidance or termination. Yet all involve communication through words or conduct of parties. The same result is achieved in the CISG Article 8 without such division,33 since the subjective and objective tests there are both directed to the interpretation of parties’ words and conduct, irrespective of whether they relate to formation, avoidance or termination. The division might be justifiable on the basis of differences in the tests of intention found under each provision. Yet the tests in PICC Articles 4.1 and 4.2 are highly similar,34 and in practice, have similar effect. They might each capture the use of jokes or code words with private meanings. Sensibly, the PICC Commentary points out, ‘the practical importance of [the common intent test in Art 4.1(1)] should not be over-estimated, firstly because parties to commercial transactions are unlikely to use language in a sense entirely different from that usually attached to it, and secondly because even if this were to be the case it would be extremely difficult ... to prove that a particular meaning ... was in fact shared by the other party.’35 This highlights the fact that common actual intention is unlikely and difficult in an evidentiary sense, but the same could be said of PICC Art 4.2(1) which upholds a subjective intent held by one party of which the other knew or could not have been unaware. Arguably, both could be condensed into one unitary provision. In other respects, PICC Article 4 PICC follows the same format as CISG Article 8: the structure of a carefully limited subjective test, followed by a default objective test in both PICC Articles 4.1(2) and 4.2(2). Like CISG Article 8(2), the PICC’s reasonable person stands in the shoes of the addressee, and is therefore attributed with the addressee’s knowledge and background. Thus, the relevant understanding is one that ‘could reasonably be expected of persons with, for example, the same linguistic knowledge, technical skill, or business experience as the parties’ rather than some ‘general and abstract criterion of reasonableness’.36 For standard terms, the PICC Commentary warns that the tests in PICC Article 4.2 might not be suitable, and that they should be interpreted ‘primarily in accordance with the reasonable expectations of their average users irrespective of the actual understanding which either of the parties to the contract concerned, or reasonable persons of the same kind as the parties, might have had.’37 This directs courts away from both the 32

[1].

UNIDROIT Principles of International Commercial Contracts 2016 (PICC) Article 4.2 Comments

33 Stanivukovic, ‘Interpretation of the Contract’ in Felemegas (ed), An International Approach to the Interpretation of the UN Convention on Contracts for the International Sale of Goods (1989) as Uniform Sales Law (CUP 2007) pp. 272, 273. 34 See Vogenauer (n 7) Introduction to PICC Article 4 [5] (the PICC Article 4.1 test is slightly modified in PICC Article 4.2). 35 PICC Article 4.1 Comments [1]. 36 PICC Article 4.1 Comments [2]. 37 PICC Article 4.1 Comments [4].

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usual subjective and objective tests when dealing with standard terms, to what might be characterized as a strictly hypothetical ‘average user’ test, devoid of attribution of characteristics or knowledge. 44 The PECL sets out an even more complex structure: Article 2:102: Intention The intention of a party to be legally bound by contract is to be determined from the party's statements or conduct as they were reasonably understood by the other party Article 5:101: General Rules of Interpretation (1) A contract is to be interpreted according to the common intention of the parties even if this differs from the literal meaning of the words. (2) If it is established that one party intended the contract to have a particular meaning, and at the time of the conclusion of the contract the other party could not have been unaware of the first party's intention, the contract is to be interpreted in the way intended by the first party. (3) If an intention cannot be established according to (1) or (2), the contract is to be interpreted according to the meaning that reasonable persons of the same kind as the parties would give to it in the same circumstances.

Unlike the CISG or PICC, the PECL provides for a general test of intent in PECL Article 5:101, and a separate test for ‘intent to be bound’ for contractual formation in PECL Article 2:102. PECL Article 5:101 provides a general test for interpretation of contracts, encompassing subjective and objective elements. PECL Article 2:102, which deals only with intent to be bound, provides an exclusively objective test for formation purposes. The only merit in this separation is that it facilitates the absence of any subjective element in formation, as opposed to interpretation. In the few circumstances in which the high bar for subjective intent might be met, one wonders why it should not be taken into account in formation, as well as interpretation. 46 The general test of intent in PECL Article 5:101 does not extend to interpretation of words or conduct more generally, but perhaps unwisely, confines itself to the meaning of the contract. This is in contrast to CISG Article 8 which applies to statements and conduct of parties generally. Arguably, PECL Article 5:101, therefore fails to capture notices given by the parties pursuant to the contract. 47 The overall approach in PECL Article 5:101 is different but familiar. PECL Article 5:101 employs three tiers, rather than the two tiers within CISG Article 8 and PICC Articles 4.1 and 4.2. The three tiered approach in PECL Article 5:101 requires terms be interpreted in accordance with (1) ‘common intention’ irrespective of literal meaning, thereby favouring a subjective but clearly mutual intent; (2) a subjective test where ‘the other party could not have been unaware’ of the other’s subjective intent; and (3) an objective test, which requires a contract must be given the ‘meaning that reasonable persons of the same kind would give to it in the same circumstances.’38 The ‘common intention’ tier mirrors PICC Article 4.1(1), and the overall pattern of a subjective test followed by a default objective test of both the CISG and PICC. 48 PECL Article 5:101(2) and (3) are similar to PICC Article 4.2(1) and (2) in that they borrow wording from CISG Article 8(1) and (2). However, unlike the PICC, PECL drafters omitted from the subjective test the circumstance where the addressee actually ‘knew’ of the other’s true intent. The PECL is thus more economical and elegant than the PICC, which follows more closely the unfortunate CISG text. Presumably, if one ‘knows’, then one ‘could not have been unaware’, although it may be prudent to include actual knowledge, at least for the sake of clarity, especially in translation. 45

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Conversely, the PECL subjective test in PECL Article 5:101(2) is more precise con- 49 cerning the time at which the other party could not have been unaware, carefully specifying that this must be ‘at the time of the conclusion of the contract’. This expressly pinpoints the timing of the requisite knowledge of the other’s intent, something that the PICC and CISG do not make explicit, although the PICC Commentary does mention that the intention must be shared ‘at the time of the conclusion of the contract.’ 39 Omission of timing in CISG Article 8(1) is necessary, since it is not confined to formation, but instead applies to all statements including post-contractual conduct.

2. Reasonableness Standard Some international instruments have adopted a general ‘reasonableness’ standard 50 which stands outside the provisions that deal with interpretation. In regard to attribution of knowledge and background of the addressee to the reasonable person, a general standard of reasonableness could perhaps encourage a more abstract approach to what a reasonable person would understand. Thus PECL Article 1:302 requires ‘reasonableness’ to be ‘judged by what persons 51 acting in good faith and in the same situation as the parties would consider to be reasonable.’ It further states that ‘in particular, in assessing what is reasonable the nature and purpose of the contract, the circumstances of the case, and the usages and practices of the trades or professions involved should be taken into account.’

II. Party Control over Rules of Interpretation Despite the overarching principle of freedom of contract, the interpretive role of 52 courts is not overridden by party choices regarding rules of construction to be applied to their contracts. This makes sense, given that by the time the matter reaches court, the meaning of the contract, and possibly its self-contained rules of interpretation, are often in dispute. The role of the court will be, in light of all of the permissible evidence before it, including the provisions in the contract which attempt to control interpretation, to determine what the parties’ intent was, pursuant to the applicable test of intent. Moreover, the parties’ ability to influence interpretation of the terms of their contract is subject to limitations based on rules of law and public policy.40

1. Definitions One of the most common methods by which parties attempt to control the interpre- 53 tation of their contract is by providing definitions. As mentioned above, the underlying aim of contract interpretation is to determine the intent of the parties, whether through application of an objective or subjective test. Therefore, a definitions section can help clarify what the parties intended (or what a reasonable person would conclude they intended) by the use of particular words or phrases. However, the definition provided in the written document will only be one indication of party intent, and there may be other competing indications, either within the written document itself, or in other documents, or through the parties’ own words or conduct during negotiations and in performing the contract. Thus, ultimately the rules relating to the manner in which these definitions are construed, the permissibility of other indications of intent, and whether written documents are accorded greater weight over alternative types of evidence (discussed 39 40

PICC Article 4.1 Comments [1]. See American Restatement § 5, Reporter’s Note, Comments a and b.

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below), will remain vital determinants of the parties’ attempts to control interpretation via definitions. Nonetheless, provision of definitions in a written contract is a useful tool in providing clarity to the agreement.

2. Designations of Importance of Obligations 54

The potential to designate a contractual obligation as being of particular importance is utilized by many contracting parties. Contracts may state that a particular obligation is ‘of the essence’ or ‘essential’ or that a particular term is a ‘condition of the contract’. Alternatively, parties might state that a breach of a specified obligation is to be considered a ‘material’ or ‘fundamental breach’.41 In each instance, the words used attempt to influence the likelihood that a court will regard a breach of that term as grounds for termination. How obligations are worded are indications of the manner in which the parties regarded the terms at the time of contracting, and are highly relevant to a court’s determination, although not dispositive.

3. Ability to Modify Interpretive Rules This is an altogether more difficult matter. Whilst parties may take it upon themselves to try to elucidate their mutual intent through indications in the contract regarding what is meant by particular words, or how important a certain term is to them, it is quite another thing to direct the court as to the rules of interpretation it should or should not apply. In many cases, parties can influence the methodology applied by the court, simply by selecting a governing law containing their preferred method of interpretation. However, it would presumably be beyond the power of parties to state, for example, that the doctrine of stare decisis or precedent is not to be used by the court.42 Likewise, where the law of England is chosen, parties could suggest by appropriate words that they intend a certain term of the contract to be a condition rather than an intermediate term or warranty, but the method by which a court will determine whether to classify terms as conditions, intermediate terms or warranties remains a question of law beyond the parties’ sphere of influence. In other words, they can hope to influence the outcome of the legal rule, but cannot dictate the rule itself. By contrast, arbitration gives parties a greater level of control over procedural choices, provided parties can reach agreement. 56 Commonly accepted clauses that may influence the courts’ interpretation include clauses which indicate the hierarchy of terms in relation to one another. The PICC Comments acknowledge that while there is generally no hierarchy between contractual terms, parties may by agreement establish such a hierarchy amongst the different clauses or parts of their contract. This frequently occurs in relation to legal, economic and technical aspects in highly complex agreements comprised of numerous documents. 43 55

4. Controlling Evidence of Intent: Entire Agreement and No Oral Modification Clauses 57

Parties often try to control the evidence to which a court may use in determining the content of their contract. The two common examples are the ‘Entire Agreement’ 41 Jacob & Youngs v Kent, 230 N. Y. 239, 129 N. E. 889 (1921), Cardozo CJ (express terms could not override the substantial performance doctrine). See also Hoosier Energy v Amoco, 347 F. 2 d 1310 (7 th Cir. 1994); Commonwealth Edison Co. v. Elston Ave. Props., LLC, 76 N.E.3 d 761 (Ill. App. Ct. 2017). 42 Arbitration gives parties a greater level of control over procedural choices. 43 PICC Article 4.4 Comment 2.

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or ‘Merger’ clause and ‘No Oral Modification’ (NOM) clause. An Entire Agreement or Merger clause is a clause which indicates that the parties acknowledge or agree that the contractual terms of the written contract comprise their entire agreement, and that any prior oral or written statements do not form part of the contractual terms. Again, this type of clause will only take effect to the extent permitted by the applicable law, and is often ineffective at the domestic level. Doctrines relating to estoppel or good faith may circumvent the effectiveness of such clauses in precluding earlier statements from being upheld as contractual terms. Furthermore, an Entire Agreement clause might be ineffective to prevent a claim being made on non-contractual grounds, such as negligent misrepresentation, delict, or statutory breaches, such as misleading or deceptive conduct.44 Merger clauses are not mentioned in the CISG. The CISG Advisory Council takes 58 the view that they can be effective to exclude extrinsic evidence for the purpose of interpretation, but only if a clear intent to exclude first arises from the clause and all other relevant evidence.45 Merger clauses are dealt with in PICC Article 2.1.17.46 It supports the enforceability of merger clauses and the exclusion of evidence of prior statements or agreements to supplement or contradict the written contract, but preserves the ability to use such evidence to interpret the meaning of the written document, when the meaning of terms is unclear. Notably, subsequent statements and informal agreements are not precluded from forming part of the contract under the PICC, unless the parties expressly prohibit their use.47 The PECL Article 2:105 follows a similar formula to the PICC, whereby prior statements cannot form terms of the contract if a merger clause is used, but can continue to be used to interpret the meaning of written terms. The PECL does not expressly mention any limitation on contradicting the written terms. Another difference is the addition of an exception where a party has ‘reasonably relied’ on the prior statement.48 For a full discussion on merger clauses, see Part 2 (below). No oral modification (NOM) clauses attempt to preclude post-formation promises 59 from being effective in altering the written contractual terms unless they are agreed in writing. These too are subject to construction in the manner determined by the applicable law, and like merger clauses, are frequently not upheld by domestic courts. In particular, oral evidence may be allowed to determine the intended effect of the NOM clause. This is likely in the case of CISG Article 29, since CISG Article 8(3) would allow the use of oral evidence to determine whether the parties actually intended to modify the default rule (no writing required) by inserting the NOM clause.49 PICC Article 2.1.18 and PECL Article 2:106(1) also support the use of NOM clauses to render ineffective any non-written modification or termination, but like CISG Article 29(2), both create an exception precluding parties from asserting a NOM clause where they have conducted themselves in a contrary manner and the other party has relied on that

44 For example, s 18 Australian Consumer Law, Schedule 2, Australian Competition and Consumer Act 2010 (Cth). See Part 2 below for more on merger clauses. 45 CISG-AC Opinion No. 3, ‘Parol Evidence Rule, Plain Meaning Rule, Contractual Merger Clause and the CISG’, 23 October 2004, Rapporteur: Prof. Richard Hyland, § 3, Comments [4.6]. 46 PICC Article 2.1.17. Merger clauses are also mentioned in PICC Article 4.3, Comment 3 in passing, since they affect the relevance of preliminary negotiations which is otherwise listed as an interpretative aid by that provision. 47 PICC Article 2.1.17, Comment & Article 2.1.18. 48 PECL Article 2:105(4) states ‘A party may by its statements or conduct be precluded from asserting a merger clause to the extent that the other party has reasonably relied on them.’. 49 See Perales Viscasillas, ‘Modification and Termination of the Contract (Art. 29 CISG)’ (2005–2006) 25 J L & Com 167, 179.

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conduct. The Common Law also recognizes estoppel and waiver may preclude reliance on an express provision of a contract.

III. Description of Default Rules, Principles & Presumptions 60

In every system of law, default rules of interpretation play a crucial role. This section outlines some of the more fundamental issues and various approaches taken in domestic and international contract law.

1. Identification of Terms 61

The process of identifying terms is inherently shaped by rules on formation of contract. Thus the content of the contract depends on formation rules, including rules relating to the ‘battle of forms’: see Chapter 8 on ‘Formation of Contract.’ The requirement of a ‘mirror image’ acceptance, not deviating in any way from the terms of the offer, is steeped in Common Law tradition. On its face, the CISG appears to adopt a modified mirror image ‘last shot’ approach to formation, by requiring acceptance with mere non-material additions or alterations to the offer (presumptive materiality is broadly defined CISG Article 19(3)).50 However, in cases of conflicting terms, some courts have adopted a ‘knock out’ doctrine where parties have performed.

2. Standard Terms Incorporation 62

As noted above, despite the CISG’s traditional structure appearing to support the ‘last shot rule’ in which the terms of the final offer control, a large number of commentators and some cases support a ‘knock out’ approach in cases where parties have performed after an exchange of conflicting standard terms, resulting in a contract on the basis of those standard terms which are common in substance, unless parties have expressed a prior contrary intent.51 The CISG Advisory Council has endorsed this view.52 Versions of the knock out rule are recognized in German, French and US law.53 PICC Article 2.1.22 endorses the knock out approach: Article 2.1.22 Where both parties use standard terms and reach agreement except on those terms, a contract is concluded on the basis of the agreed terms and of any standard terms which are common in substance unless one party clearly indicates in advance, or later and without undue delay informs the other party, that it does not intend to be bound by such a contract.

50 Schroeter, in Schwenzer (ed), Commentary on the UN Convention on the International Sale of Goods (CISG) (4th edn, OUP 2016) CISG Article 19 [15]. 51 Cour de cassation, Cass civ 1er, 16 July 1998 http://www.cisg.law.pace.edu/cisg/wais/db/cases2/ 980716f1.html; Norfolk Southern Railway Company v Power Source Supply, Inc, US District Court (WD Pa), 25 Jul. 2008, http://www.cisg.law.pace.edu/cisg/wais/db/cases2/080725u1.html; ICC Award No 8611, 23 January 1997, http://www.cisg.law.pace.edu/cisg/wais/db/cases2/978611i1.html; BGH [Federal Supreme Court], Germany, 9 January 2002, CISG-online 651; Huber & Mullis, The CISG: A New Textbook for Students and Practitioners (Sellier 2007) p. 94. 52 CISG-AC Opinion No. 13, ‘Inclusion of Standard Terms under the CISG’ (Rapporteur: Prof. Sieg Eiselen) § 10. 53 Although the German BGB § 150(2) provides for a mirror image rule, since the 1970 s the Federal Supreme Court has followed the ‘knock out’ doctrine: BGH [Federal Supreme Court], Germany (1985) NJW 1389; BGH (1991) BB 1732; Wildner, ‘Art. 19 CISG: The German Approach to the Battle of the Forms in International Contract Law’ (2008) 20 Pace Int’l L Rev 1, 10. See also French Civil Code Article 1119; Uniform Commercial Code (‘UCC’) § 2-207.

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PECL Article 2:209 also follows the knock out rule. A binding contract will thus come 63 into effect despite conflicting standard terms, provided parties have not expressly stated otherwise. The knock out approach facilitates a more commercially sound result, likely to align with what the parties would have collectively intended. Additionally, it should be noted that some laws such as the German BGB § 305 c deem as not incorporated any surprising clauses in standard terms. See further Chapter 9 on ‘Incorporation of Standard Terms.’

3. Meaning of Terms a) Principles or Maxims This part reviews a series of general principles or maxims that are commonly utilized 64 in the interpretation of contracts. In some situations more than one such principle or maxim will apply. b) Plain Meaning versus Purposive and Commercially Sensible approaches Whether words used are given their ‘natural’ or ‘plain’ meaning, or whether instead the court should look to the purpose behind the words is an artificial question. Both tests aim to ascertain intention; thus they should inform each other. Many Civil Law jurisdictions favour a purposive approach over the ‘plain meaning rule’. The French Code Civil Article 1188 requires courts uphold the parties’ common intention rather than merely ‘stopping at the literal meaning of the terms’; the Spanish Código Civil Article 1281 states that the evident intention of parties prevails over any literal meaning of the words.54 The CCC Article 142 on the other hand seeks a balance, requiring interpretation in accordance with literal meaning, in combination with the nature and purpose of the contract, usual practices and good faith, under Chinese law.55 Some Civil Law jurisdictions require that where the literal or plain meaning of words is ‘clear’, the courts’ ‘function is to interpret the contract as written according to its literal meaning.’56 This rule is found in Germany, Egypt, Saudi Arabia, Belarus and the Philippines.57 Likewise now in France, unless there is evidence of mutual intention, terms that are ‘clear and unambiguous’ are ‘not subject to interpretation’ to avoid their distortion.58 The plain meaning rule still applies in Common Law, where it can operate to bar resort to extrinsic evidence to interpret the language of the contract. 59 However, the contextual interpretation approach advanced by the UCC and American Restatement has encouraged a more open approach to the use of extrinsic evidence.60 Thus, while a plain meaning approach is still evident within the American Restatement § 201 Comment a and § 202(3), it is subject to the manifestation of contrary intent, and an emphasis on context common to both parties; see § 201 Comment b, encompassing a purposive apSee also Spanish Código Civil Article 1286. For statements directed at specific parties, rather than statements to the public. 56 Schwenzer, Hachem, and Kee (n 3) [26.14]. 57 Philippines Civil Code Article 1370. See also id. at [26.14] n 29 (citing provisions and decisions of numerous jurisdictions). 58 French Code Civil Article 1192. 59 CISG-AC Opinion No. 3, Comments [1.3], [3.1]; Farnsworth, Contracts (3 rd edn, Aspen, 2004) § 7.12, 476. See, e.g., WWW Associates, Inc. v Giancontieri, 566 NE 2 d 639 (1990). 60 Pacific Gas v G.W. Thomas Drayage Co., 442 P.2 d 641 (Cal. 1968). It should be noted that the literal approach can be circumvented, since ambiguity is usually easily found on the facts, even where it is held to be a prerequisite under a plain meaning rule. See, e.g., Nanakuli Paving & Rock Co v Shell Oil Co., 664 F.2 d 772 (9th Cir. 1981). 54

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proach which looks to the circumstances (§ 202(1)), parties’ subsequent conduct, past practices, and trade usages: §§ 202(4), (5), and UCC §§ 2-202 which makes it clear that ambiguity is not a precondition to evidence of statements of intent from negotiations for the purpose of determining whether words are ambiguous: American Restatement § 214 Comment b. The English Common Law purports to favour literal interpretation,61 but does not go so far as to preclude admission of extrinsic evidence in all cases. In ICS v West Bromwich, Lord Hoffmann refers to the ‘natural and ordinary meaning’ as a principle of interpretation, from which courts must depart in situations where ‘something has gone wrong with the language’ such that the words used do not express accurately what the parties had intended to say.62 Likewise, Lord Steyn, in Westminster City Council v National Asylum Support, states: ‘that the context must always be identified and considered before the process of construction... It is therefore wrong to say that the court may only resort to evidence of the contextual scene when an ambiguity has arisen’.63 This position holds that there is no prerequisite of ambiguity before departing from the plain meaning of words to consider their meaning in light of their factual background.64 As Lord Steyn remarked, there has been a ‘shift ... from a literalist to a purposive approach to the construction of statutes’ and a parallel ‘movement from a strict or literal method of construction of commercial contracts towards an approach favouring a commercially sensible construction.’65 Thus, despite a plain meaning or literal approach, most Common Law jurisdictions permit (varying types of) extrinsic evidence to not only resolve the meaning of words, but as part of the broader contextual inquiry as to whether words have a plain meaning, or whether the language is ambiguous. This is true in the US, England and New Zealand, where courts may look at the background evidence before determining the clarity of contract language, but not in Australia. In summary, most Common Law countries have slowly evolved away from a narrow plain meaning rule. To the contrary, the Australian High Court still steadfastly insists that the ordinary and natural meaning of words prevails where no prima facie ambiguity exists on the face of the contractual words themselves, even where this produces an uncommercial or unreasonable result.66 While criticized, the ‘plain meaning rule’ is a useful initial step in the interpretive process, but most common and civilian systems recognize that the literal meaning will often need to be tempered by the meaning that would be attached to them by a reasonable commercial person. This is so in English, Italian, Spanish, Argentinian, Mexican, Philippines and French law, where the object or purpose of the contract will influence its interpretation,67 or where courts favour a commercially reasonable interpretation

See North Eastern Railway Co. v Lord Hastings [1900] AC 260. Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896, 912–13. 63 Westminster City Council v National Asylum Support Service [2002] 1 WLR 2956, [5]; Ansley v Prospectus Nominees Unlimited [2004] 2 NZLR 590, [36]. 64 See further McLauchlan, ‘Contract Interpretation: What Is It About?’ (2009) 31 Sydney L Rev. 5, 7. 65 Deutsche Genossenschaftsbank v Burnhope [1995] 1 WLR 1580, 1589 (Steyn LJ dissenting). 66 Darlington Futures Ltd v Delco Australia Pty Ltd (1986) 161 CLR 500; Australian Broadcasting Commission v Australasian Performing Right Association (1973) 129 CLR 99. 67 Under the old French Code Civil, Article 1158, the French Cour de cassation has held commercial contracts must be interpreted in light of their commercial context: Cour de cassation, Chambre Civ. 1, 4 January 2005, No. 00-20.136. Requiring a purposive approach in interpretation on contractual words (that is, regard for the nature and object of the contract), see Italian Codice Civile Article 1369; Spanish Código Civil Article 1286; Argentinian Código Civil y Comercial Article 1065(c); Mexican Código Civil Article 1855; Philippines Civil Code Article 1375. 61

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over the literal meaning,68 although Australia still upholds a prerequisite of prima facie ambiguity.69 The plain meaning rule is rejected in the PICC, PECL, and the CISG. There is no 73 requirement under any of these instruments that an ambiguity be identified before recourse to extrinsic evidence for the purposes of ascertaining meaning. The PICC and PECL all expressly direct attention to the purpose of the contract in interpretation. Each of them list ‘the nature and purpose of the contract’ amongst relevant circumstances to be taken into account.70 Furthermore, the ‘reasonableness’ standard is employed as a tool for interpretation under uniform law,71 indirectly promoting a commercially reasonable approach to contract interpretation. The CISG does not expressly deal with the issue. However, the plain meaning rule 74 is inapplicable, since it ‘would impede one of the basic goals of contract interpretation under the CISG, which is to focus on the parties’ actual intent.’72 The CISG directs courts to take into account extrinsic evidence without the need for ambiguity in determining the meaning of terms.73 CISG Article 8(3) requires all circumstances, including prior negotiations, to be taken into account in determining parties’ intent pursuant to CISG Article 8(3), as does PICC Article 4.3. c) Contra Proferentem This default rule of interpretation ‘against the writer’ appears in many legal systems. 75 In Civil Law systems, the notion of contra proferentem derives from the Roman law favor debitoris principle,74 and is often associated with the principle of good faith. The CCC Article 498 incorporates the rule into Chinese law in relation to standard 76 term clauses, where ‘the interpretation unfavorable to the party supplying the standard terms shall prevail’.75 In the Italian Codice Civile Article 1370, the contra proferentem rule likewise applies to standard terms. By contrast, a contra proferentem approach applies to all ambiguous terms rather than merely standard terms in Spain and the Philippines.76 In France and Germany,77 the contra proferentem rule applies to standard term contracts, as a rule of last resort: BGB § 305c(2); French Code Civil § 1190. 78 However, French provisions extend rule to non-standard contracts. French Code Civil Article 1190 provides ambiguous terms in negotiated contracts are to be ‘interpreted against the cred68 See ICS v West Bromwich [1998] 1 WLR 896, 912–13, Lord Hoffmann, (at point (5)); Reardon Smith Line Ltd v Hansen-Tangen [1976] 1 WLR 989; [1976] 3 All ER 570; Brambles v Bathurst City Council [2001] NSWCA 61; Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 (parties’ understanding of when blasting works were lawful was relevant). 69 See, e.g., Australian Broadcasting Commission v Australasian Performing Right Association (1973) 129 CLR 99. 70 PICC Article 4.3(d); PECL Article 5:102(c). 71 See for example, CISG Article 8(2). See also general ‘reasonableness’ standards in more recent international instruments, such as PECL 1:302 (discussed above). 72 CISG-AC Opinion No. 3, Comment [3.2]. 73 CISG Article 8(3). See Schmidt-Kessel, in Schwenzer (ed), Commentary on the UN Convention on the International Sale of Goods (CISG) (4th edn, OUP 2016) CISG Article 8 [18]. 74 Schwenzer, Hachem, and Kee (n 3) [26.62]. 75 Draft Chinese Civil Code Article 498. 76 Spanish Código Civil Article 1288; Philippines Civil Code Article 1377. 77 Until 1931, the contra proferentem rule was applied in Germany to all contracts rather than only standard terms: Vogenauer, (n 30), pp 149-150. 78 Presumably Article 1190 will be interpreted similarly to the old French Civil Code Article 1162. Note that in Germany (from 1996), the contra proferentem rule extends to single use consumer contractual terms: German BGB § 310(3); Vogenauer (n 30) pp 149-150.

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itor’, and in all sales contracts (standard or negotiated), French Code Civil Article 1602 provides that ‘[a]ny obscure or ambiguous pact is interpreted against the seller’. In Common Law the contra proferentem rule exists79 and is sometimes relied upon in the interpretation of exclusion of liability clauses.80 A strictissimi version of the rule applies to interpretation of guarantees in favour of the surety.81 However, in Australia and England, provided there is ambiguity, the rule can be applied under ordinary principles of interpretation, and is not necessarily confined to standard terms. 82 This is also true of the American Restatement which provides that when faced with multiple reasonable meanings, the preferred meaning is generally the one ‘which operates against the party who supplies the words’.83 The approach under the CISG preferred by the CISG Advisory Council is that the principle of contra proferentem can be applied in relation to standard terms,84 although some scholars maintain its application is not confined to standard terms.85 Likewise, PECL Article 5:103 states that: ‘Where there is doubt about the meaning of a contract term not individually negotiated, an interpretation of the term against the party who supplied it is to be preferred.’ The PICC Article 4.6 broadens application of the contra proferentem rule beyond standard terms, and provides that whenever terms are unclear, interpretation against the party supplying them is preferred. This is the case irrespective of whether the party supplying terms actually drafted them, or simply used terms prepared by others. The Comments to PICC Article 4.6 make it clear that the party that ‘bears the risk of possible lack of clarity’ should be the party supplying the term.86 Based upon the above review of approaches across domestic and international systems, there is no significant reason to confine the notion of contra proferentem to standard terms alone. The main function of the principle is to resolve ambiguity where other interpretive mechanisms have failed to do so. The principle of contra proferentem places the burden upon the party best able to prevent that risk. This is useful for both negotiated and standard terms, and in all types of contracts. The main limitation on its use for non-standard terms will be a practical one; the ascertainment of which party ‘supplied’ the term – a matter which will often be unclear where clauses have been carefully negotiated. d) Negotiated versus Standard Terms

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The widespread approach is for non-standard (negotiated) clauses to prevail against inconsistent standard (non-negotiated) clauses. This is a general rule of ordering the priority of terms, built on the sensible notion that parties’ intentions are more likely to be Lancashire County Council v Municipal Mutual Insurance Ltd [1997] QB 897. See Photo Production Ltd v Securicor Transport Ltd [1980] AC 827, 847 (used as last resort); Static Control Components (Europe) Ltd v Egan [2004] EWCA Civ 392 (same). 81 Andar Transport Pty Ltd v Brambles Ltd [2004] HCA 28; 217 CLR 424. 82 Persimmon Homes Ltd v Ove Arup and Partners Ltd [2017] EWCA Civ 373; Arnold v Britton [2015] UKSC 36; Western Australian Bank v Royal Insurance Co. (1908) 5 CLR 533; TNT (Melbourne) Pty Ltd v May & Baker (Australia) Pty Ltd (1966) 115 CLR 353. See McKendrick (ed), Goode on Commercial Law (4th edn, Penguin 2010) p. 107. 83 American Restatement § 206. 84 CISG-AC Opinion No. 13, § 9; BGH [Federal Supreme Court], Germany, 28 May 2014, CISG-online 2513 [21]. 85 See Schmidt-Kessel (n 73) CISG Article 8 [49]-[50] & [68]; Brunner, Hurni & Kissling in Brunner & Gottlieb (eds), Commentary on the UN Sales Law (CISG) (Wolters Kluwer 2019) CISG Article 8 [10] & [21]. See also BGH [Federal Supreme Court], Germany, 28 May 2014, CISG-online 2513, § 3. 86 PICC Article 4.6 Comment. 79

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accurately reflected in terms which they discussed or negotiated. In Chinese law, the CCC Article 498 provides that when ‘a standard term is inconsistent with a non-standard clause, the latter shall prevail’. The same result flows from the German BGB § 305 b, the French Code Civil Article 1119, and the American Restatement § 203(d), which ensure individually negotiated terms prevail over standard terms. The CISG does not contain specific guidance on standard terms, however, Rule 8 of the CISG Advisory Council Opinion No. 13 takes the view that ‘where there is a conflict between negotiated terms and standard terms ... the negotiated terms override the standard terms’.87 PECL Article 5:104 states that ‘terms which have been individually negotiated take preference over those which are not’. In the same vein, the rule that non-standard terms prevail over standard terms in PICC 2.1.21 applies ‘in case of conflict’ between the two. Comments to PICC Article 2.1.21 explain the rationale for the rule: ‘standard terms are by definition prepared in advance … without their content being discussed by the parties [thus it] is therefore logical that [specifically negotiated] provisions will prevail over conflicting ... standard terms since they are more likely to reflect the intention of the parties’. Within the PICC, as in the CISG, the matter is treated as one of formation. 88 There is potential for confusion in differentiating between standard and negotiated terms, such as when the parties negotiate selections of clauses from amongst many sets of standard terms. Standard terms may be drafted by a trade or professional body for use in a particular industry, but modified by negotiation between the parties. The CISG Advisory Council wisely draws no distinction between these various gradients of ‘standard’ terms, but instead refers with approval the sole definition in the PICC Article 2.1.19, in Comment 2, which highlights the ‘key characteristic’ of standard terms as ‘the fact that they are not negotiated between the parties’,89 but instead are ‘drafted in advance for general and repeated use’.90 A simple rule allowing negotiated rules to prevail over standard rules to the extent they are inconsistent affords a suitable guideline, and leaves the gradations of ‘negotiated vs standard’ to the courts to develop, to reflect current practices in contracting. Methods of formation are evolving alongside the evolution of websites, automated to semi-automated processes and ‘smart contracts’ as tools of contractual formation. As these developments continue, complex legal classifications will cause more problems than they resolve. However, an express rule prioritizing negotiated terms over standard terms is a useful default interpretive principle. Should parties prefer a different ordering, they may insert a clause which expressly orders priority between terms and various parts of the contract.

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e) Contract as a Whole The requirement that the whole contract should be considered when interpreting 86 particular terms finds wide support across domestic law and harmonized instruments. This rule is expressed, for example, in the American Restatement § 202(2), Spanish Código Civil Article 1285, Argentinian Código Civil y Comercial Article 1064, Mexican Código Civil Article 1854, and by the French Code Civil Article 1189 which states that ‘[A]ll the terms of an contract are to be interpreted in relation to each other, giving to

See also Brunner, Hurni & Kissling (n 85) CISG Article 8 [10]. Schwenzer, Hachem and Kee (n 3) [26.17]. 89 CISG-AC Opinion No. 13, Comments [5]–[6]. 90 PICC Article 2.1.19, Comment [2]. 87

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each the meaning which respects the consistency of the contract as a whole’.91 In fact, French Code Civil Article 1189 requires reference to other parts of the same contract, but also expansively requires regard to be had to other contracts which contribute to the same operation.92 PICC Article 4.4 provides that ‘terms and expressions shall be interpreted in the light of the whole contract or statement in which they appear.’ Almost identical wording appears in PECL Article 5:105, which states that ‘terms are to be interpreted in the light of the whole contract in which they appear.’ The principle is not explicit in the CISG, but would be part of the surrounding circumstances to be taken into account per CISG Article 8(3) as the context within which the understanding of a reasonable person in CISG Article 8(2) would arise.93 87 However, as a useful reminder of the importance of contextual considerations, it is a useful addition to any list of guiding principles. f) Contractual Effect Another widespread canon of interpretation is the principle of ‘favor negotii’, which involves avoidance of interpretations which render agreements or terms nugatory. Thus, where a clause is capable of bearing more than one meaning, the meaning which breathes life into a clause by giving it effect should be preferred to one which renders it meaningless. The fundamental presumption is that parties intended their terms to have an effect, otherwise they would not have agreed to them. 89 An interpretation that renders the contract or clause valid rather than invalid is prioritized under a preservation principle in most laws, for example, the French Code Civil Article 1191; Italian Codice Civile Article 1367; Spanish Código Civil Article 1284; Argentinian Código Civil y Comercial Article 1066; Mexican Código Civil Article 1853 (‘If any contractual provision allows multiple meanings, it is to be understood so as to produce effect’); Philippines Civil Code Article 1373, and the American Restatement § 203(a). The principle is also upheld by courts in Germany,94 Switzerland, and is recognized in Estonian, Dutch, Turkish, Vietnamese, and Chilean law.95 This rule of construction is ‘similar but not the same as favor negotii’, whereby ‘when it is possible to apply several laws, the law which leads to contractual validity is to be preferred’.96 90 The Comments to PICC Article 4.5 observe that ‘it is to be expected that when drafting their contract parties do not use words to no purpose.’ Thus, PICC Article 4.5 provides that ‘[c]ontract terms shall be interpreted so as to give effect to all the terms rather than to deprive some of them of effect.’ PECL Article 5:106 extends this further, by stating that an interpretation which renders the terms ‘lawful, or effective’ is to be preferred. The CISG does not contain a comprehensive list of interpretive guidelines, but such a principle would naturally arise from the understanding of a reasonable person through CISG Article 8(2).97 88

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See also, Lord Hoffmann’s fourth principle in the case of ICS v West Bromwich [1998] 1 WLR 896,

French Civil Code Article 1189 (where this accords with the parties’ common intention). BGH [Federal Supreme Court], Germany, 3 April 1996, CISG-online 135; Mankowski in Mankowski (ed), Commercial Law (Beck/Hart/Nomos 2019) CISG Article 8 [19]; Brunner, Hurni & Kissling (n 85) CISG Article 8 [14]. 94 BGH [Federal Supreme Court], Germany, 18 May 1998, NJW (1998) 2966. 95 Schwenzer, Hachem, and Kee (n 3) [26.59] n 101 (citing provisions and cases from these and other jurisdictions). 96 Id. [26.55]–[26.59]. 97 Tribunal of International Court of Arbitration, Russian Chamber of Commerce & Industry, 27 May 2005, CISG-online 1456; Schmidt-Kessel (n 73) CISG Article 8 [30], [51]; Zuppi in Kröll, Mistelis & 92

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g) Linguistic Discrepancies Drafting a contract between parties from different home languages or drafting con- 91 tracts in multiple languages may lead to linguistic discrepancies. This is an issue with which international instruments in particular have had to deal. The Comments to the PICC Article 4.7 note that parties may of course nominate which is the authoritative version.98 The CISG’s lack of a comprehensive set of rules of interpretation provides insufficient guidance on this point. However, the CISG Advisory Council suggests that standard terms written in a language that the other party could not be expected to understand should not be incorporated into the contract.99 Given the inevitable difficulty of language differences in the context of international transactions, it is preferable that an international contract law should include an express list of general (default) interpretive principles, including one dealing with language discrepancies. Domestic systems sometimes contain a rule relating to language, but these generally 92 give priority to the local language. For example, in Turkey, a mandatory law allows international contracts to be written in a foreign language, but requires a Turkish version, which will prevail in case of inconsistency.100 Chinese law provides that a purposive approach should be taken to resolve inconsistencies between different language versions of the contract, in addition to reference to the principle of good faith.101 Parties doing business internationally should always check to confirm any national or region-specific language requirements. h) Specific versus General At the domestic level there exists a general rule of construction applicable to contrac- 93 tual and statutory interpretation to the effect that specific clauses prevail over general clauses. The American Restatement § 203(c) states that in interpretation, ‘specific terms and exact terms are given greater weight than general language.’ However, the principle is not often expressly enunciated within harmonized laws. 94 One exception is found in PICC Article 4.4 Comment 2, which states that, although there is no hierarchy among contractual terms in principle, an exception exists whereby ‘in cases of conflict, provisions of a specific character prevail over provisions laying down more general rules’. This rule can be seen as a manifestation of the notion that contracts should be read as a whole, because it requires the characterization of clauses as relatively general or specific by comparison with one another. i) Presumptions of Syntax: expressio unius and ejusdem generis There are longstanding Latin maxims of interpretation that courts continue to use. 95 The ancient rule of expressio unius personae rei est exclusio alterius is sometimes used Viscasillas (eds), UN Convention on Contracts for the International Sale of Goods: A Commentary (2018 Beck/Hart/Nomos) CISG Article 8 [29]; Brunner, Hurni & Kissling (n 85) CISG Article 8 [21]. 98 See also, PECL Article 5:107. 99 CISG-AC Opinion No. 13, § 5, Comments [5.2]. 100 Law No. 805 on Mandatory Use of the Turkish Language for Corporations, upheld in X v Y, Court of Cassation, 11th Civil Law Chamber, File No. 2016/5836, K. 2017/4720, dated 26/09/2017. See Kirkman Gucuk and Talaz, ‘Turkey’s Court of Cassation Refuses to Enforce an Arbitration Clause in English Based on a Turkish Language Requirement’, Kluwer Arbitration Blog, 29 September 2018. For electronic contracts for property or services, Article 1127-1 of the new French Code Civil requires that the offer must specify the language offered for the conclusion of the contract, which ‘must include the French language’, although it does not provide that the French version prevails in the event of inconsistencies. 101 Draft Chinese Civil Code Article 466.

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as an interpretive maxim in both contract and statutory interpretation. It refers to the notion that to expressly include mention of one person or thing is to implicitly exclude other persons or things. The rule appears for the most part self-evident, and has been referred to at the domestic level in jurisdictions including England.102 However, the maxim is potentially ‘dangerous’, and prone to misapplication beyond its limits.103 96 Pursuant to another Latin maxim of ejusdem generis, where references to specific persons or things are followed by reference to a general category to which they belong (genus), the general category must be confined to include only persons or things of ‘the same kind’ as the preceding specific examples. Problematically, it is often difficult to determine whether the description of the general category permits the rule to be applied. An acceptable genus might be broad (‘and others’), but if too descriptive (‘houses’), application of the maxim will not be appropriate, given the absence of ‘genus’. Another problem arises when there are too few specific examples to enable determination of the common characteristics by which to identify the limiting genus, or, conversely, too many specific examples, making identification of any common characteristics almost impossible. The ejusdem generis maxim is rarely applied to commercial contracts today. 97 These maxims are ‘syntactical presumptions’, and have, somewhat accurately, been described as ‘trite’, since they simply state the obvious in a ‘disguised’ manner. They may provide some guidance as heuristic devices for judges, but their application is often problematic and produces uncertainty in contractual interpretation. Given their rare and questionable utility for commercial contracts, these concepts are better subsumed into the category of general contextual interpretive principles. j) Handwritten versus Printed 98

There is longstanding English and Australian case law giving preference to any term that is handwritten over contrary printed terms. 104 Comment f to American Restatement § 203 states: ‘It is sometimes said generally that handwritten terms control typewritten terms, and typewritten control printed’ (standard form terms). This rule would seem to be simply a matter of ‘common sense’,105 and is merely an extension of the maxims concerning ‘Negotiated vs Standard Terms’ and ‘Specific versus General’ discussed at (d) and (h) above. k) Good Faith

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The role of good faith as an interpretive aid in the CISG is disputed. While some commentators are of the view that good faith is a general principle of the CISG and thus can play a part in gap filling,106 this view has to contend with the legislative history.107 The better view seems to be that good faith is not a general duty imposed upon parties, and although the CISG must be interpreted in good faith per CISG Article 7(1),108 this does not directly impose positive duties upon the parties, although it might Carter (n 5) [4-48]. Beaufort Developments (NI) v Gilbert-Ash NI Ltd [1999] 1 AC 266, 275 (Lord Hoffmann). 104 Ryan v Ferguson (1909) 8 CLR 731. 105 Houtimport BC v Agrosin Private Ltd (The Starsin) [2004] 1 AC 715, 737. 106 Comparing various views relating to the role of good faith in the CISG see: Spagnolo, ‘Opening Pandora’s Box: Good Faith & Precontractual Liability in the CISG’ (2007) 21(2) Temple Int’l & Comp LJ 261, 274 et seq.; Bridge, The International Sale of Goods (3rd edn, OUP 2013) p. 509 (good faith as a general principle); Brunner & Wagner in Brunner & Gottlieb (eds), Commentary on the UN Sales Law (CISG) (Wolters Kluwer 2019) CISG Article 7 [5] (similar). 107 Spagnolo, CISG Exclusion and Legal Efficiency (Kluwer 2014) pp. 231–34. 108 CISG Article 7(1). 102 103

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indirectly inform the shape of duties arising under the CISG by virtue of its effect on interpretation of its provisions.109 That said, the principle of good faith continues to play a role in the interpretation of contracts, not least of all through general principles of reasonableness, duties of co-operation and communication, and prohibition against inconsistent conduct (venire contra factum proprium).110 The role of good faith in the PICC is much broader, reflecting strong Civil Law 100 influences. PICC Article 1.7 directly imposes a duty of good faith on parties, and ensures that this cannot be excluded: Article 1.7 (1) Each party must act in accordance with good faith and fair dealing in international trade. (2) The parties may not exclude or limit this duty.

There are numerous other rules in the PICC that also refer to good faith, thus the 101 principle of good faith can be said to permeate the text.111 The Comments elaborate that good faith in the PICC includes a prohibition on abuse of rights, including acting in a manner that is malicious or disproportionate in the exercise of rights.112 Good faith also is a general principle found in PECL Article 5:102(g). In interpretation of contracts, PECL specifies that regard may be given to good faith and fair dealing. Good faith also appears within the broad reasonableness standard in PECL, found in PECL Article 1:302. Space does not permit a full discussion of comparative good faith, so a brief overview 102 must suffice. The German BGB’s § 242 on good faith is recognized as an overarching doctrinal norm of Treu und Glauben. It imposes a duty of good faith and permeates the interpretation of the law and by extension contract interpretation. Additionally, BGB § 157 requires more specifically that ‘contracts are to be interpreted as required by good faith, taking customary practice into consideration,’ and any unreasonably disadvantageous standard terms are rendered ineffective by BGB § 307. Danish law contains the similar notion of god tro’s begrebet, expressing the notion that the law will protect no one acting in bad faith.113 The Italian Codice Civile Article 1366 provides that contracts must be interpreted in accordance with good faith, and Article 1375 requires performance in good faith. In jurisdictions where Sharia law prevails, good faith in the sense of morality and good conduct is of utmost importance.114 In addition to general principles in Chinese law of good faith and fairness applicable 103 to all civil acts,115 the CCC Articles 500 & 501 create liability for specific violations of good faith including during negotiations. CCC Article 509 creates a duty of good faith in contractual performance. Moreover, principles of good faith play a role in interpretation of meaning. For example, CCC Article 142 requires that ‘and expression of intent … Schmidt-Kessel (n 61) CISG Article 8 [31]. Schwenzer & Hachem in Schwenzer (ed), Commentary on the UN Convention on the International Sale of Goods (CISG) CISG Article 7 [32]; Brunner & Wagner (n 106) CISG Article 7 [5]; Brunner, Hurni & Kissling (n 85) CISG Article 8 [4]; Arbitration Tribunal of the Austrian Federal Chamber of Commerce (Vienna), 15 June 1994. But see OLG Karlsruhe, 25 June 1997, CISG-online 263. 111 The following Articles either directly or indirectly impose duties of good faith in the PICC: Articles 1.9(2), 2.1.4(2)(b), 2.1.15, 2.1.16, 2.1.18, 2.1.20, 2.2.4(2), 2.2.5(2), 2.2.7, 2.2.10; 3.2.2, 3.2.5, 3.2.7, 4.1(2), 4.2(2), 4.6, 4.8; 5.1.2, 5.1.3; 5.2.5; 5.3.3, 5.3.4; 6.1.3, 6.1.5, 6.1.16(2), 6.1.17(1), 6.2.3(3)(4), 7.1.2, 7.1.6, 7.1.7, 7.2.2(b)(c) 7.4.8, 7.4.13, 9.1.3, 9.1.4 & 9.1.10(1). 112 PICC Article 1.7, Comment 2. 113 See FONA-Dom UfR n1985.877 H (Danish Supreme Court), commentary in UfR 1986B43 (translation by Andersen). 114 Egyptian Civil Code Article 148; UAE Civil Code Article 246; Qatari Civil Code Article 172; Kuwaiti Civil Code Art 197. 115 Draft Chinese Civil Code Articles 6 & 7. 109

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shall be interpreted according to the literal meaning of words used and in combination with [inter alia] the principle of good faith’. The new French Code Civil Article 1104 now mandatorily extends good faith beyond performance to formation and negotiation, and also creates specific duties of good faith for negotiations and other matters, 116 but does not expressly include good faith amongst interpretive principles. The impact of good faith in civilian systems is important and far reaching, and in interpreting statements and contracts: ‘the meaning attributed to it must be one which has been discovered in good faith.’117 However, even in Common Law countries, legislative provisions on good faith can be found. The UCC contains numerous references to good faith, in part due to the absence of a federal Common Law.118 UCC § 2-103 defines good faith in commercial contracts as ‘honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade’119 and § 1-304 states that: ‘Every contract or duty within the UCC imposes an obligation of good faith in its performance and enforcement.’ See also American Restatement § 205. The Canadian Supreme Court has upheld a general duty of honesty in performance, and stated that good faith is a general “organising principle” of the Canadian Common Law of contract.120 While most other Common Law jurisdictions do not recognize a general duty of good faith,121 numerous specific doctrines import notions of good faith in specific circumstances, such as equitable estoppel, fiduciary duties, disclosure duties in insurance contracts, and discretionary bases for refusal of equitable remedies of injunction and specific performance.122 Nonetheless, in recent times within England and Australia, the manner in which legal rights are exercised is increasingly being recognized as constrained by good faith, especially in long-term contractual relationships such as distributorship and franchise arrangements.123 Moreover, contrary to their prior stance, Australian and English courts have now upheld express terms requiring good faith negotiations,124 and are increasingly inclined to gap-fill by implying terms of good faith in performance and exercise of contractual powers and discretions.125 Furthermore, duties of good faith have been imposed by legislation. Under the English Consumer Rights Act 2015 section 62, unfair terms in consumer contracts will French Civil Code Articles 1112, 1112-1 & 1112-2. Schwenzer, Hachem, and Kee (n 2) [26.26]. 118 Bridge, ‘Good Faith, the Common Law, and the CISG’ (2017) 22 Uniform Law Review 98 at 108. 119 See also, UCC § 2-306 (regarding output). See Burton, ‘Good Faith in Articles 1 and 2 of the U.C.C.: The Practice View’ (1994) 35 William & Mary L Rev 1533. 120 Bhasin v Hrynew [2014] 3 SCR 494 at 533, 541. 121 Walford v Miles [1992] AC 128. 122 See Zimmermann & Whittaker, Good faith in European Contract Law (CUP 2000); Mason, ‘Contract, Good Faith and Equitable Standards in Fair Dealing’ (2000) 116 LQR 69; Farnsworth, ‘Good Faith Performance and Commercial Reasonableness under the UCC’ (1963) 30 U Chi L Rev 666. 123 See Burger King Corporation v Hungry Jack’s Pty Ltd (2001) 69 NSWLR 558 496; Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234; Garry Rogers Motors (Aust) Pty Ltd v Subaru (Aust) Pty Ltd [1999] FCA 903; Yam Seng Pte Ltd v International Trade Corporation Ltd [2013] 1 Lloyd’s Rep 526 (upholding an implied in fact duty of good faith in a long term distribution agreement); British Telecommunications plc v Telefónica O2 UK Ltd [2014] UKSC 42 at [37]; Compass Group UK and Ireland Ltd v Mid Essex Hospital Services NHS Trust [2013] EWCA Civ 200 at [82]–[83], [91]–[92]. See Bridge (n 118) p 106. In Australia, see Competition and Consumer (Industry Codes – Franchising) Regulation 2014 (Cth) Div 3 (general duty of good faith). 124 Petromec Inc v Petroleo Brasileiro SA Petrobras (No 3) [2005] EWCA Civ 891 at [115]–[121]; United Group Rail Services Ltd v Rail Corporation of New South Wales (2009) 74 NSWLR 618. 125 See above (n 123). The Australian High Court has not yet considered the question, except to confirm implied duties of cooperation in all contracts: Secured Income Real Estate (Aust) Ltd v St Martins Investments Pty Ltd (1979) 144 CLR 596; Commonwealth Bank of Australia v Barker (2014) 253 CLR 169. 116

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not bind consumers. Pursuant to section 62(6), a term will be unfair if, contrary to good faith, it causes a significant imbalance between the parties, and detriment to the consumer. More boldly, in Australia, even in commercial contracts, ‘unconscionable conduct’ is prohibited by section 21 of the Australian Consumer Law, which relates not only to procedural unfairness in contract formation, but also unfairness in the substantive content of terms: section 22 Australian Consumer Law. Good faith is explicitly listed amongst criteria to be weighed in determining unconscionability.126 This imports ‘community standards of good conduct’ as an overarching requirement in trade and commerce.127 Additionally, section 23 of the Australian Consumer Law renders void any unfair terms in standard terms, in both consumer and small business contracts. Ultimately, in contract law, even without the recent legislative changes, the broad 108 consensus is that civil and Common Law often reach similar outcomes despite their different approaches to good faith.128 Were CISG Article 7(1) proposed today, it would probably pass almost without controversy, in contrast to the fierce debates and divisions at the time. Common Law jurisdictions have become more accepting of some form of good faith at the domestic level, sometimes in the guise of ‘unconscionability’, ‘unfairness’ or application of commercial reasonableness standards or other interpretive mechanisms. However, in international commercial practice, good faith is more widely accepted.

IV. Stages of Interpretation and Construction Aids: Evidence of Intent The stage of contractual interpretation – identification of terms, meaning of terms, 109 or supplementation of terms – affects which types of evidence are admissible and which exclusionary rules apply.

1. Identification of Terms In discerning the content of the contract itself, a question arises within some legal 110 systems as to which evidence is permitted in order to determine the question as to which promises form part of the contract. In the Common Law, exclusionary rules may prevent access to certain types of contextual evidence.129 a) Parol Evidence Rule A contract cannot be interpreted until its content is ascertained. The process of 111 identifying contractual terms is affected by the Common Law parol evidence rule, which differs from one jurisdiction to the next. In the context of identification of terms, the parol evidence rule gives rise to a presumption that, if the parties intended a written agreement to be a complete record of their contractual terms, then external or extrinsic forms of evidence become irrelevant to the process of identification of contractual terms. The parol evidence rule normally arises through case law, but is sometimes made explicit in statutory form. See, for example, section 92 of the Evidence Act 1872 (India) which restricts use of oral or written evidence that is extrinsic to the written contractual

Australian Consumer Law, Schedule 2, s 22(1)(l), Competition and Consumer Act 2010 (Cth). Australian Securities and Investment Commission v Kobelt [2019] HCA 18, at [234]. 128 Schwenzer, Hachem, and Kee (n 2) [26.27]. 129 Carter (n 5) [1.09], [1.12], and [1.21]. 126

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terms in order to contradict, vary, add or subtract from its terms. See also Evidence Act 1997 (Singapore) sections 94–101. It is important to recall that the rule does not apply to contracts that are partly oral and partly written, but only to those contracts that appear to be intended to be wholly in writing. Parties can attempt to ensure that their written contract is viewed as a final integration of their agreement by inclusion of a merger clause. The preliminary question is whether the document is ‘integrated’, that is, whether or not the parties in fact intended the written document to contain their entire agreement. As the English Law Commission stated, if parties intended the contract to be integrated within the written document then extrinsic evidence ‘will be inadmissible (because it is irrelevant)’.130 Where applicable, the parol evidence rule precludes written or oral evidence from being adduced ‘if it is tendered only for the purpose of adding to, varying, subtracting from or contradicting the express terms.’131 What follows is an interesting question. Should extrinsic evidence be admissible for determining the preliminary question of integration? Two approaches exist: the strict approach, which views the written contract on its face as determinative, without reference to any other evidence; and the flexible or permissive approach, which allows extrinsic evidence of the parties’ intent to be considered in making the determination, thereby presumably leading to a conclusion that is more likely to reflect the intent of the parties. The permissive approach, of course, renders the rule ‘a circular statement’ in relation to the identification of terms.132 This highlights the underlying problem with the parol evidence rule. Ultimately it is difficult to resist the persuasiveness of Professor Corbin’s observation that a ‘writing cannot prove its own completeness and accuracy’.133 There are a number of exceptions to the parol evidence rule. For example, UCC § 2-202 precludes evidence of contradictory terms, but not evidence of supplementary terms, unless the written contract states that it is ‘a final expression of their agreement’, by including an entire agreement clause. Evidence beyond the written contract (extrinsic evidence) is also allowed to establish terms of a collateral contract, since the evidence will not thereby add terms to the main contract, but instead establish terms of an independent collateral contract. Collateral contracts are permitted in English and Australian Common Law and by the American Restatement § 216 (comment c), but cannot vary or contradict the terms of the primary contract.134 The doctrine of promissory estoppel provides a broader ‘exception’ since it may allow parties to introduce evidence contradicting the written terms.135 Extrinsic evidence may also be introduced when a party is seeking exercise of the court’s equitable power of rectification of an error in the written agreement; to demonstrate absence of intention to create legally binding relations; for the purpose of establishing the contract was subject to a condition precedent; in limited circumstances, to show the real consideration for the contract; and for the purpose of establishing gap-filling by implied terms. This Civil Law takes a more liberal approach to the admission of extrinsic evidence, whereby courts are not constrained from considering such evidence beyond the written terms. To the contrary, civil codes frequently emphasize the need to look to the parties’ Law Commission, The Law of Contract, The Parol Evidence Rule (Cmnd 9700, 1986) [2.7]. Law Commission, id. [2.7]. 132 Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165; State Rail Authority of New South Wales v Health Outdoor Pty Ltd (1986) 7 NSWLR 170. 133 Corbin, ‘The Parol Evidence Rule’ (1944) 53 Yale LJ 603, 630. 134 See Hoyt’s Pty Ltd v Spencer (1919) 27 CLR 133. But see City and Westminster Properties (1934) Ltd v Mudd [1959] 1 Ch 129. 135 State Rail v Health Outdoor (1986) 7 NSWLR 170, 193 (only upon clear and convincing proof of estoppel). 130

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‘common intent’ rather than written or formal words to the contrary. The Spanish Código Civil Article 1281 which provide that ‘if the words seem contrary to the evident intention of the contracting parties, the latter shall prevail over the former.’ See also Philippines Civil Code Article 1370 and Mexican Código Civil Article 1851. Indeed, as discussed below, some civil codes draw specific attention to certain forms of evidence as important in interpretation, including for identification of terms. Uniform law has generally followed the civilian approach by taking a broad approach 117 to the evidence which may be brought to bear on the question of the identification of contractual terms. The parol evidence rule has been banished from the harmonized legal mindset. In determining intent, CISG Articles 8(3) and 11 make it clear that form should play no part in contract formation, and no parol evidence rule is recognized to preclude the use of extrinsic evidence. This was confirmed by the CISG Advisory Council Opinion No. 3 in Rule 1. b) Evidence of Written versus Oral Terms Nonetheless, some civil systems accord special weight to written terms, even in the 118 absence of a parol evidence rule. In Japanese law, no parol evidence rule exists, yet ‘Japanese law presumes that a contractual writing is accurate and complete. An authentic contractual writing has the evidentiary value of showing that a contract was concluded as written therein.’136 A rebuttable presumption that a written contract forms exclusive evidence of the agreement exists in the Nordic legal systems.137 Nonetheless, such requirements and presumptions do not approach the stringency of a parol evidence rule. The presumption created under these rules is rebuttable, whereas the parol evidence rule operates to preclude evidence. c) Evidence of Prior Negotiations Where the contract is not fully integrated in writing, the parol evidence rule does not 119 apply, and evidence from negotiations is admissible to identify a term of the contract at Common Law.138 Such evidence is permitted within Civil Law, since it affords evidence of mutual intent. Evidence of preliminary negotiations is prima facie admissible in identifying contrac- 120 tual terms under harmonized law. The CISG Article 8(3) lists ‘the negotiations’ amongst circumstances relevant to determining party intent. Similarly, in the PICC, Article 4.3(a) includes ‘preliminary negotiations’ as a relevant factor. PECL Article 5:102(a) also refers to ‘preliminary negotiations’ as an aid to interpretation, and PECL Article 6:101 goes so far as to attempt to prescribe whether pre-contractual statements form part of the contract, by maintaining that statements made by one party are identified as part of the contract if reasonably understood as a contractual obligation given their apparent importance to the other party, whether the statement was made in the course of business, and taking into account the parties’ relative expertise. Moreover, PECL Article 6:101(2)–(3) states that information given by professional suppliers about quality or use

136 CISG-AC Opinion No. 3, n 21 referring to Ito, Minjisoshoho [Law of Civil Procedure] 266 (3 d edn, 2004) p. 266. 137 Schwenzer, Hachem, and Kee (n 3) [26.50]. 138 Carter (n 5) [8-24]. Note that even where the parol evidence rule is inapplicable, some Common Law jurisdictions still preclude incorporation of promissory statements as terms of the contract if they contradict express written terms: for example, see in Australia Mainieri v Cirillo [2014] 47 VR 127, [22]-[23].

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of goods or services in advertising are also treated as contractual obligations unless the supplier ‘did not know and had no reason to know of the information or undertaking’. 121 Unfortunately, in applying uniform law, some national courts continue to follow domestic views on the use of prior negotiations or statements in the identification of contract terms, despite the explicit recognition within uniform instruments of the value of such information. Therefore, provisions of the type found in PECL Article 6:101 are to be encouraged. d) Evidence of Practices and Usages Practices and usages may be useful in identification of contractual terms. Common Law allows reference to usages and practices to imply terms in gap filling, but terms are implied by law are subject to a test of ‘necessity’ in English and Australian law.139 This imposes a precondition that ‘unless such a term be implied, the enjoyment of the rights conferred by the contract would be rendered nugatory, worthless, or ... seriously undermined’.140 The English Sale of Goods Act 1979 ss 14(4) and 55(1) expressly mention practices and usages in relation to whether an implied obligation has been included, excluded, varied or negated. The test in Chinese law sets an easier threshold. It directs attention toward trade practices as an aid to identification of terms, where parties have failed to agree on key terms, or their agreement is unclear: CCC Article 510. 123 Practices and usages may provide contractual terms under harmonized law. The CISG in Article 8(3) directs the court to give due consideration to ‘any practices which the parties have established between themselves’ in determining the understanding of a reasonable person. Thus, terms may be identified by reference to past practices developed between the parties. CISG Article 9(1) expressly states that parties are ‘bound by any usage to which they have agreed’, but more significantly, CISG Article 9(2) states that widely known usages of international trade provide a further avenue for terms to be imported into the contract, provided parties knew or ought to have known of such usages, and have not agreed to the contrary. PECL Article 1:105 follows a similar pattern to CISG Article 9, with the provision that precludes application of usages to the contract where this would be ‘unreasonable.’ 124 PICC Article 4.8 deals with supply of omitted terms. It requires that terms important and appropriate for the contract be supplied by reference to the ‘intention of parties’, the nature and purpose of the contract, good faith, and reasonableness. Whilst this list does not include past practices and trade usages, the list is not exhaustive. Additionally, past practices and usages are included as matters to which regard is to be had in determining the ‘intention of the parties’ within PICC Article 4.3(b). 122

2. Meaning of Terms 125

Approaches to the central question of the meaning of contractual terms involve a number of interrelated considerations, which ultimately determine the ‘legal effect’ of the ‘bargain as a matter of law’.141 General rules on plain or literal meaning are relevant to the construction of meaning, as are the other general interpretive principles mentioned above. The following paragraphs examine the types of evidence permitted in determination of meaning.

Liverpool City Council v Irwin [1977] AC 239. Byrne v Australian Airlines Ltd (n 104) at 450. 141 Carter (n 5) [1.19].

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a) Standard of Intent Obviously, a major issue in ascertaining meaning is deciding whose meaning is 126 relevant.142 Thus, the appropriate standard of intent is important, that is, whether terms should be interpreted in accordance with the so-called subjective or objective intent of parties, as discussed earlier. b) Evidence of Surrounding Circumstances, Context, Plain Meaning, and Parol Evidence Rule In determining the meaning of terms, courts may benefit from considering the context in which those terms were created. Contractual context, background, or ‘surrounding circumstances’ are especially important for commercial contracts. The parties’ intent will often be viewed differently when understood through the prism of their commercial purpose. In the Civil Law, courts are not constrained from considering extrinsic evidence regarding surrounding circumstances. Thus, in Germany, Jordan, Kuwait, Syria, and Turkey, evidence demonstrating the parties’ actual intent is generally admissible; other Civil Law systems have included a provision to the effect that courts should take such evidence into account.143 For example, the Philippines Civil Code Article 1371 states that in determining the intention of contracting parties, ‘their contemporaneous and subsequent acts shall be principally considered’. See also Spanish Código Civil Article 1282, and Argentinian Código Civil y Comercial Article 1065(b). Also relevant is the need to interpret contracts in a commercially reasonable way, an overriding concern of courts in most jurisdictions. In the Common Law world, the role context should play in interpretation remains controversial, and is sometimes limited. Where it is not excluded, traditional approaches permit evidence of context only admissible to the extent it helps place the reasonable person in a similar situation. Thus only evidence that was either known or capable of being known by both parties will be admitted.144 Furthermore, the parol evidence rule or the plain meaning rule may exclude the use of extrinsic evidence, whether oral or written, for the purpose of establishing the meaning of words used. As mentioned earlier, the parol evidence rule generally arises in case law, but occasionally is found in statutory form. The Evidence Act 1872 (India) restricts use of oral or written evidence that is extrinsic to the written contractual terms in order to supply meaning to the written terms (section 93) or to establish that the terms were not meant to apply to facts to which they would apply on their plain meaning (section 94). See also the Evidence Act 1997 (Singapore) sections 94-101. The parol evidence rule ‘is not a rule of evidence but a rule of substantive law. Nor is it a rule of interpretation; it simply defines the subject matter of interpretation’. 145 It elevates the probative value of written terms that appear to be intended as a final a representation or integration of the agreement and consequently denies the relevance of extrinsic evidence that contradicts those written terms.146 This results in an ordering of evidence in which some types of evidence are excluded from consideration, although the Id. at [1.14]. Schwenzer, Hachem, and Kee (n 2) [26.33] n 60 (citing authorities relating to these and other Civil Law countries). 144 Carter (n 5) [1.12]; [8.23], Ch. 12, [1.21]. 145 See American Restatement § 213, Comment a. 146 Cole, ‘The Parol Evidence Rule: A Comparative Analysis and Proposal’ (2003) 26(3) UNSWLJ 680, 688. 142

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many exceptions and divergent approaches to the rule has resulted in different outcomes and thresholds for exclusion of extrinsic evidence across Common Law countries. The use evidence of surrounding circumstances to determine the meaning of terms in an integrated document is still a controversial point in Common Law. Some jurisdictions rely upon ambiguity as a ‘gateway’ to an exception to the parol evidence rule in the context of ascertaining meaning of written words. Consistent with its strict approach to interpretation, the Australian High Court has so far maintained a precondition of contractual ambiguity before admitting evidence of surrounding circumstances for the purpose of construction, although not always consistently.147 The “narrow” gateway view holds that extrinsic evidence can only be admitted to assist in clarifying the meaning of contract terms that are ambiguous, with a finding of ambiguity considered a prerequisite to the admission of extrinsic evidence. This position has been rightly criticized as illogical.148 Its result has been an unfortunate conflation of the plain meaning and parol evidence rules.149 One practical response by courts has been to lower the threshold for ambiguity. Professor Carter argues that determinations of ‘ambiguity’ cannot be made in isolation, and thus surrounding circumstances are required to assist in the determination as to whether express terms are ambiguous in the first place, that is, before the point at which Australian courts would admit such evidence.150 Indeed, England has now discarded the need for ambiguity as a prerequisite before extrinsic oral or written evidence can be used to explain the meaning of written terms. To ascertain the meaning ‘which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time’, Lord Hoffman states, in ICS v West Bromwich, regard should be had ‘not only [to] the text of the documents, but also the surrounding circumstances known to [the parties], and the purpose and object of the transaction’. 151 Likewise, American courts are not precluded by their parol evidence rule from admitting extrinsic evidence to help establish whether written words are capable of bearing more than one reasonable meaning. Under UCC § 2-202, ambiguity is not a precondition to the admission of evidence for this purpose. The American Restatement § 214 Reporter’s Note to Comment b observes that courts have been inconsistent. This inconsistency is perhaps due to the application of the ‘plain meaning rule’ (discussed above), and not the parol evidence rule. The position taken in Comment b to § 214 is that ambiguity is not necessary before recourse to evidence of statements of intent during negotiations for the purpose of determining whether contractual words are ambiguous. Likewise, § 212 Comment b directs courts to consider the negotiations and statements subsequent to formation as part of the context in which it must be decided whether the contractual words have a plain meaning, or whether they are ambiguous. The parol evidence rule has been deliberately omitted from harmonized law; see for example, CISG Articles 8(3) and 11. Broad approaches to the use of context in interpretation exist under the CISG and PICC, and also, with a slightly different formulation, in the PECL. Regarding contextual evidence, CISG Article 8(3) states that in determining 147 However, the High Court’s current position is still unclear. For the ‘true rule’, see Codelfa v State Rail (1982) 149 CLR 337, 352; Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104 [46]-[49]. But see, Royal Botanic Gardens and Domain Trust v South Sydney City Council (2002) 240 CLR 45. 148 See McKendrick (n 82) p. 101; Carter (n 5) [8.23]. 149 Carter (n 5) [8.23] (arguing Australian courts are using the parol evidence rule to police the plain meaning rule). 150 Id. 151 ICS v West Bromwich [1998] 1 WLR 896, 912; Wood v Capita Insurance Services Ltd [2017] AC 1173.

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party intent, due consideration is to be given to ‘all relevant circumstances’. Similarly, PICC Article 4.3 states that ‘regard shall be had to all the circumstances’. PECL Article 5:102(a) states that regard may be had to ‘the circumstances in which it was concluded’. Thus, the problems experienced in the Common Law regarding exclusion of contex- 136 tual and extrinsic evidence are not an issue at the level of harmonized international commercial law. The international tendency is to not accord one form of evidence greater weight than another. In the CISG, no special priority is accorded to written terms: CISG Articles 8(3) & 11. If the parties wish to restrict evidence under harmonized instruments, they must do so by agreement, through merger and NOM clauses. c) Evidence of Written versus Oral Terms The effect of the exclusionary rules of evidence in Common Law systems effectively accords written contract terms greater weight than oral terms, at least where the written terms appear complete. Arguably, the parol evidence rule elevates certainty and encourages the production of reliable evidence by imposing what is essentially a penalty default rule on those who do not ensure promises are reduced to writing. However, there are many variants of the rule across jurisdictions. The fact that the rule is subject to complex and numerous exceptions makes it difficult to apply in domestic, let alone in cross-border transactions. By contrast, in most Civil Law systems, codes expressly accord the parties’ common or mutual intent priority over contrary written terms: for example, German BGB § 133 directs courts to the ‘true intention rather than adhering to the literal meaning’, and Spanish Código Civil Article 1281 instructs Spanish courts that if the ‘literal meaning of ... clauses ... seem contrary to the evident intention of the contracting parties, the latter shall prevail over the former.’152 Similarly, see the Mexican Código Civil Article 1851. The French Code Civil Article 1188 requires courts to look to ‘the common intention of the parties rather than stopping at the literal meaning of its terms’, yet on the other hand, Article 1192 demands that ‘[c]lear and unambiguous terms are not subject to interpretation as doing so risks their distortion’. In contrast, for statements to specific parties, Chinese law turns away from ‘real intent’ toward a combination of literal meaning, nature and purpose of the act, usual practices and good faith: CCC Article 142. Although the PECL follows the general civilian pattern, the international tendency is to not accord one form of evidence greater weight than another.

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d) Evidence of Prior Negotiations The Common Law exclusionary rule relating to prior negotiations is distinct from 141 the parol evidence rule. Irrespective of whether the parol evidence rule applies, evidence of prior negotiations is still traditionally excluded from determination of meaning in Common Law, although regard may still be had to discussions between parties not directly involving negotiations. The traditional concerns have been (1) that prior negotiations are direct evidence of ‘subjective intent’, which systems focusing on objective intent generally avoid; (2) their admission will greatly expand litigation costs;153 (3) they are of dubious probative value, given that parties may change their position during the

152 The new Argentinian Código Civil y Comercial, Article 1062 provides for a literal approach ‘when by a legal or conventional provision a strict interpretation is expressly established’. Translation by Romañach. 153 Carter (n 5) [8-32].

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course of negotiations;154 (4) exclusion of such evidence may protect third parties that are relying on the contract.155 Even where surrounding circumstances are admissible, this does not necessarily include prior negotiations. In keeping with the strict application of this exclusionary rule, in Australia, evidence of statements from negotiations is not permitted for the purpose of ascertaining meaning, with rare exceptions.156 Thus even where words are ambiguous and extrinsic evidence of background circumstances is thereby admissible, evidence of prior negotiations that reflect ‘actual intentions and expectations’ is still inadmissible.157 At most, under this strictest version of the ‘objective’ approach, evidence from negotiations excluding statements of intent that were not incorporated into the contract is only permitted where there is prima facie ambiguity. Moreover, where the parol evidence rule also applies, such evidence may merely aid constructional choice between multiple meanings apparent on the face of the words, but not to contradict or override such words. The stance has been widely criticized, and it has been persuasively argued that it is unnecessary to exclude potentially valuable evidence of the meaning actually intended by the parties.158 The rule remains intact in England following the ICS v West Bromwich decision, where Lord Hoffmann justifies its retention as a matter of ‘practical policy’, 159 and has since been confirmed.160 One narrow exception recognized by courts is where the meaning which might otherwise be attributed to a contractual term was actually rejected by the parties during negotiations.161 By contrast, the Canadian and US law encourage the use of prior negotiations, including statements of intent, for the purpose of interpretation.162 Civil Law systems also view preliminary negotiations as useful evidence in the determination of intent, which some codes containing express provisions directing courts towards such evidence. See, for example, Argentinian Código Civil y Comercial Article 1065(a). As noted above, harmonized contract law tends to view precontractual negotiations as valuable evidence relevant to determining the meaning of a contract. The CISG in Art. 8(3) explicitly admits the use of ‘the negotiations’ in interpretation.163 The PICC Article 4.3(a) and PECL Article 5:102(a) specifically refer to ‘preliminary negotiations’ as a matter to which regard should be had in interpreting contracts. Pursuant to the PICC, these could include such things as catalogues, webpages, minutes of meetings and letters of intent, according to Professor Vogenauer, who points out that the previous version of Prenn v Simmonds [1971] 1 WLR 1381, 1384. Chartbrook Ltd v Persimmon Homes Ltd [2009] 1 AC 1101. 156 Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337, 352-353 (the exception being to evidence that a term with the meaning now alleged by one party was rejected by that same party during negotiations). 157 Codelfa v State Rail (1982) 149 CLR 337, 352. See also Trawl Industries Pty Ltd v Effem Foods Pty Ltd (1992) 27 NSWLR 326. 158 McLauchlan (n 64) p. 13; McKendrick (n 82) p. 101. 159 ICS v West Bromwich [1998] 1 WLR 896, 912–13 (Lord Hoffmann in point (3)). 160 Chartbrook Ltd v Persimmon Homes Ltd [2009] 1 AC 1101. 161 L. Schuler AG v Wickman Machine Tool Sales Ltd [1974] AC 235; James Miller & Partners Ltd v Whitworth Street Estates (Manchester) Ltd [1970] AC 583. Explaining the exception: Codelfa v State Rail (1982) 149 CLR 337, 352-353. 162 American Restatement § 212, Comment b and c; § 214 Comment b; Sunday’s Child v Irongate, 327 F.Supp.3 d 1322, 1340 (2018); Re Canadian National Railways (1978) 95 DLR (3 d) 242; Erewon Exploration v Northstar (1993) 108 DLR (4th) 709; Montreal Trust v Birmingham Lodge (1995) 125 DLR (4th) 193. 163 Finding that a lower court had erred in not considering so-called extrinsic evidence in upholding Article 8(3) CISG: Transmar Commodity Group Ltd v Cooperativa Agraria Industrial Naranjillo Ltd, 16- 9 May 2018 (2nd Cir, 2018) CISG-online 3060. 154

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the PICC was even more explicit in rejecting the notion that recourse to preliminary negotiations should be excluded.164 e) Evidence of Subsequent Conduct Pursuant to the Common Law exclusionary rule,165 again, as a matter quite distinct from the parol evidence rule,166 evidence of subsequent conduct of the parties in performing the contract is sometimes excluded from determination of the meaning of contractual terms.167 Subsequent conduct evidence is treated with a high level of suspicion and therefore inadmissible for the purposes of determining the meaning of terms, even where surrounding circumstances are admissible. This approach is heightened in jurisdictions which still strictly adhere to the notion of a search for the parties’ presumed intent from their manifest words or conduct from the perspective of a reasonable person (strict objective intent). Thus, in Australia, where reliable evidence of actual mutual intent is altogether discarded in favour of ‘presumed intent’ in interpretation of meaning, consideration of evidence of subsequent conduct is impermissible for the purpose of interpretation of contractual terms.168 However, many Common Law jurisdictions recognize the notion of objectively ascertainable actual mutual intention, and consequently allow subsequent conduct evidence to be considered in construction. In such jurisdictions, evidence of post-contractual conduct will be admitted to clarify the common meaning parties intended at the time they entered the contract. In the USA, subsequent conduct during performance is to be taken into account in determination of the meaning of terms where repeated performance is required by the contract and has been accepted or acquiesced without objection.169 A fortiori, subsequent conduct (‘course of performance’) is accorded higher probative value in interpretation than past practices between parties (prior dealings) and business custom or usages: American Restatement § 203(b).170 In Canada, subsequent conduct evidence is permissible for the purpose of ascertaining the meaning to be attributed to contractual terms, provided there is initial ambiguity.171 This is now also the majority view in New Zealand.172 By contrast, like Australia, since 1970, English law has excluded subsequent conduct evidence, despite the broadening of circumstances in ICS v West Bromwich for which Vogenauer (n 7) PICC Article 4.3 [5]. Brambles v Bathurst City Council (2001) 53 NSWLR 153, [164]; Australian Medic-Care Company Ltd v Hamilton Pharmaceutical Pty Ltd [2009] FCA 1220. 166 Carter (n 5) [8-34]. 167 See Butler, ‘New Zealand’ in DiMatteo (ed), International Sales Law: A Global Challenge (CUP, 2014) pp. 539, 546. 168 Limited exceptions apply to the use of evidence of subsequent conduct in Australian contract law, but these are directed as issues of formation rather than interpretation. Arguing that a reasonable person would view subsequent conduct evidence as persuasive: Spagnolo, ‘The international dimensions of Australian contract law’, Eldridge & Pilkington (eds) The Australian Law of Contract in the 21st Century: Debates and Directions (forthcoming, Federation Press, 2020), n 137; McLauchlan (n 16) 84. 169 UCC § 2-202 (to explain), § 2-208(1), (3) (where repeated performance is required, and contradictory performance is accepted or acquiesced without objection); American Restatement § 202(4), § 212, Comment b and c, § 214 Comment b; Sierra Club v Virginia Electric & Power Company, 903 F.3 d 403, 414 (2018). 170 See also UCC § 2-208(2). 171 Re Canadian National Railways (1978) 95 DLR (3 d) 242, [9], [81]–[83]; Erewon Exploration v Northstar Energy (1993) 108 DLR (4th) 709 at [101]–[103]; Montreal Trust v Birmingham Lodge (1995) 125 DLR (4th) 193. 172 Attorney-General v Dreux Holdings Ltd (1997) 7 TCLR 617, 633; Gibbons Holdings Ltd v Wholesale Distributors Ltd [2008] 1 NZLR 277, 283, 294–299, 308–311. 164 165

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other types of surrounding circumstances evidence might be taken into account for the purpose of construction of meaning.173 150 In stark contrast, Civil Law systems are less constrained in admitting evidence of conduct subsequent to the conclusion of the contract. It has been stated that, concerning the use of subsequent conduct to ascertain meaning, that ‘Civil Law legal systems seem to have no greater concerns about adjudicators using a wide range of factors’ and ‘require adjudicators to take into account all relevant circumstances of the case.’ 174 Some civil jurisdictions explicitly mention the use of subsequent conduct for the purpose of interpretation in their codes, such as the express requirement for courts to take subsequent conduct into account within the Argentinian Código Civil y Comercial Article 1065(b).175 The Spanish Código Civil Article 1282 goes further, indeed elevating evidence of subsequent conduct to the status of the best evidence regarding the meaning of terms, by stating that ‘[t]he acts of the contracting parties subsequent to the contract, relating to the matter in dispute will afford the best explanation of the intention of the parties at the time of making the contract.’ Similarly, the Philippines Civil Code Article 1371 states that in determining the intention of contracting parties, ‘their contemporaneous and subsequent acts shall be principally considered’. 151 Subsequent conduct evidence must be considered for the purpose of ascertaining meaning under harmonized law. The CISG Article 8(3) lists, amongst circumstances relevant to determining party intent, ‘any subsequent conduct’.176 Likewise, the PICC includes ‘the conduct of the parties subsequent to the conclusion of the contract’ in Article 4.3(c).177 PECL Article 5:102(b) similarly refers to ‘the conduct of the parties, even subsequent to the conclusion of the contract’. f) Evidence of Practices and Usages 152

Notably, a determination of the meaning of a contractual term is informed by past practices of the contracting parties and by trade usages of the particular industry or sector in which they transact business. Such evidence is not normally affected by the exclusionary rules.178 UCC § 2-208(2) requires courts to construe express terms as consistent with past practices (‘course of dealing’) and usages of trade whenever this is ‘reasonable’. Likewise, the American Restatement § 5 (Comment a) states that ‘both language and conduct are to be understood in the light of the circumstances including course of dealing or usage of trade or course of performance’. The importance of past practices and trade usages in US interpretation is also emphasized in the American Restatement §§ 202 (4), (5) and 203(b). UCC § 2-202(a) (see also § 1-205) notes that usage may explain terms of an agreement, such as the technical meanings of terms. The American Restatement § 219, Comment a, explains that usage has a range of meanings according to 173 James Miller & Partners Ltd v Whitworth Street (Manchester) Ltd [1970] AC 583, 603; L Schuler AG v Wickman Machine Tool Sales Ltd [1974] AC 235, 269; Prenn v Simmonds [1971] 1 WLR 1381, 1385; Agricultural and Rural Finance Pty Ltd v Gardiner (2008) 238 CLR 570, 582, 625; Maggs v Marsh [2006] EWCA Civ 1058; Charles, ‘Interpretation of Ambiguous Contracts by Reference to Subsequent Conduct’ (1991) 4 Journal of Contract Law 16, 22. 174 Schwenzer, Hachem, and Kee (n 3) [26.39]; [26.32]; [26.38]. 175 Replacing the former Argentinian Commercial Code Article 218(4) which had described subsequent conduct as the best form of evidence for ascertainment of meaning in a similar manner to the Spanish Civil Code. 176 See HGer [Commercial Court] Aargau, Switzerland, 5 February 2008, CISG-online 1740, at 3.1.1; OLG [Court of Appeal] Karlsruhe, Germany, 20 November 1992, CISG-online 54; Italdecor Sas v Yiu’s Industries (HK) Ltd, Courte di Appello di Milano, Italy, 20 March 1998, CISG-online 348. 177 See Vogenauer (n 7) PICC Article 4.3 [19]-[10]. 178 Charide Nominees Pty Ltd v Matour Nominees Pty Ltd [187] WAR 137.

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whether the usage prevails ‘among all people in the area, or only in a special trade or other group’ and that ‘usages change over time’. The American Restatement § 221 Comment b notes that trade usages are determined in accordance with the general principle that ‘neither party is bound by a meaning unless he knows or has reason to know of it’. If a party knows that the other party is unaware of the usage, then it cannot apply. By contrast, under Anglo-Australian law, a notorious trade usage may give meaning to a term regardless of whether or not the parties themselves are aware of the usage. 179 Civilian Codes also emphasize the use of past practice and trade usage in interpreta- 153 tion of contracts. The German BGB § 157 states that ‘contracts are to be interpreted as required by good faith, taking customary practice into consideration’. In France, usages may supplement express obligations in accordance with the French Civil Code Article 1194, and ‘usual practices’ aid in gap-filling where the quality of the act of performance is not agreed or unclear, in accordance with French Code Civil Article 1166. Likewise, the subject matter act of performance may be deduced by reference to usage or previous dealings between parties pursuant to French Code Civil Article 1163. In the Spanish Código Civil Article 1287, ‘uses or customs of the country’ can supplement contracts where there are ‘ambiguities’. See also Italian Codice Civile Article 1368, and Philippines Civil Code Article 1376. In Chinese law, CCC Article 142 includes ‘usual practices’ to be considered when interpreting intent for statements directed at specific parties. In harmonized law, the CISG Articles 8 and 9 provide that past practices and usages 154 in international trade are relevant in determining intent or in applying the objective reasonable person standard of intent under CISG Article 8(2). CISG Article 8(3) refers to ‘any practices which the parties have established between themselves’ and ‘usages’ as relevant. CISG Article 9(1) confines relevant usages to only those ‘which [the parties] have agreed’ or ‘established between themselves’. CISG Article 9(2) imports trade usages ‘widely known to, and regularly observed by’ parties in ‘international trade’ and of which the ‘parties knew or ought to have known’.180 The standard of ‘ought to have known’ perceives that parties trade usages which are widely known will be relevant, even if the party had no actual knowledge of them. CISG Article 9(2) has led to some debate over the meaning of ‘international’ trade usage. For example, is a usage known only in the two countries of the parties to the contract, but not generally used internationally, admissible evidence? At the least, some regional usages may not qualify as being widely known in international trade. Decisions and commentators vary on this point.181 PICC Article 4.3 recognizes the relevance of past practices and usages in interpreting 155 the meaning of contract terms. In determining either subjective or objective intent under PICC Articles 4.1 and 4.2, PICC Article 4.3 demands that regard shall be had to all the circumstances, including practices which the parties have established between themselves, the meaning commonly given to terms and expressions in the trade concerned, and usages in a general sense.182 PICC’s distinction between trade specific and general usages is also carried through in PECL Article 5:102; PECL also directs courts to past practices, common meanings ‘in the branch of activity concerned’, and general usages. Additionally, ‘usages and practices of the trades or professions’ are to be considered in 179 Con-Stan Industries of Australia Pty Ltd v Norwich Winterthur Insurance (Aust) Ltd (1986) 160 CLR 226, [238]. 180 Mankowski, in Mankowski (ed), Commercial Law (Beck/Hart/Nomos, 2019) CISG Article 9 [12] & [13] (‘professional market players are not allowed to close their eyes and to deny knowledge of what literally everyone in the respective industry knows’). 181 See for example Schmidt-Kessel, in Schwenzer (ed), Commentary on the UN Convention on the International Sale of Goods (CISG) (4th edn, OUP 2016) CISG Article 9 [19] (‘local and regional usages can be sufficient’). Contra Mankowski, id., [6], [9]. 182 PICC Articles 4.3(b); 4.3(e); and 4.3(g).

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determining ‘reasonableness’ under the general reasonableness standard in PECL Article 1:302. g) Ordering between interpretive rules Application of the various principles or maxims, context, standards of intent, practices and usages can lead to conflicting constructions. In such situations, rules sometimes indicate the appropriate ordering of evidence to ensure one interpretation prevails over another. The hierachical ordering of priority between express terms, past practices, and trade usage is usually implicit, and favours the meaning deduced from the express terms. Very few statutes or codes explicitly deal with ordering issues. 157 However, this hierachical ordering is made explicit in UCC § 2-208(2), which states that course of dealings (past practices) or trade usage should be construed as consistent with the written terms whenever reasonable, but that where this is not possible, express terms prevail. 158 Similarly, the American Restatement § 203(b) provides an ordering in which express terms prevail over course of performance (subsequent conduct), which prevails over course of dealings, and course of dealings prevail over a conflicting meaning provided by trade usage or business customs. Thus, subsequent conduct is accorded high probative value in US law. 159 Likewise, as noted above, the Spanish Código civil Article 1282 establishes that subsequent conduct gives the best evidence regarding the meaning of terms intended at the time of formation.183 156

V. Supplementation Civilian legal systems distinguish between contract interpretation and supplementation. Arguably, these are simply two points on the same continuum. However, supplementation or construction are seen, particularly through Common Law eyes, as the dividing point at which the court should no longer be seen as simply construing that which the parties have expressly agreed upon, but at which the court is in danger of seeking to impermissibly fill a gap in the contract, in a sense re-writing the contract for the parties. 161 This is an exaggeration because all exercises in construction only exist where there are competing meanings or ambiguity, thus ‘gap-filling’ is merely another means of construing the contract. American Restatement § 5 (Comment b) acknowledges that contract terms are supplied by law through default rules based on ‘presumed intent’, in other words, ‘implied terms’, will often rest ‘on considerations of public policy’. 162 Common Law courts ‘imply terms’ to fill gaps with varying enthusiasm, with some courts, such as those in Australia, taking a very hard line in application of the test of ‘business efficacy’ before permitting gap-filling through implied terms ad hoc (in fact) based on a necessity threshold,184 whereas England and Singapore prefer a more holistic approach.185 160

See also the now repealed Argentinian Commercial Code Article 218(4), discussed above (n 175). BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266. 185 Attorney General of Belize v Belize Telecom Ltd [2009] 1 WLR 1988, [21]; Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Ltd [2015] UKSC 72; Foo Jong Peng v Phua Kiah Mai [2012] 4 SLR 1267, [34], [36] and [43]. 183

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Nonetheless, Common Law jurisdictions do not generally require a finding of ambiguity before supplementation by reference to usages.186 Common Law courts also gap-fill indirectly by means of doctrines of ‘implied grant’ whereby it can be inferred from the grant of one thing that a party would have intended to grant all other things necessary to give effect to the primary grant. It still remains an adage of the Common Law that courts should not ‘re-write’ agreements for the parties, but notably many laws aimed at consumer protection expressly permit the court to adapt contracts in certain circumstances. Civil Law systems generally draw upon general principles such as good faith, or économie du contrat to supplement contracts.187 Extensive provisions on supplementation have been included in more recently revised Civil Law codes, such as the CCC. In Chinese law, in accordance with CCC Article 510, if parties have been unable to agree on quality, price or place of performance, or if their agreement is unclear, the adjudicator can determine such matters in accordance with the relevant terms of the contract, its nature and purpose, or trade practices. This is followed by an extensive list of specific default rules for quality (national or industry standards), price (market price), place and time of performance, and other matters in CCC Article 511, and in regard to sales contracts, time and location of delivery (CCC Articles 602 & 603), inspection periods (CCC Article 622), time and place of payment (CCC Articles 627 & 628), and quality.188 Conversely, a presumption of no modification is adopted for ambiguous terms in variation agreements: CCC Article 544. The new French Code Civil also contains extensive provisions guiding supplementation by default rules on a range of matters, including: subject matter or act of performance, which may be deduced from the contract, usage or previous dealings (French Code Civil Article 1163); quality which must, if not agreed or capable of determination, conform with legitimate expectations, taking into account nature, usual practices and amount agreed in exchange per French Code Civil Article 1166; and for breakdowns in price formulations by reference to an index which does not or no longer exists (index most closely related) in accordance with French Code Civil Article 1167. While failure to agree on price can be resolved under a default rule for service contracts (French Code Civil Article 1165), this is not so for sales contracts. In sales contracts, the price must either be agreed by parties, or provision made for determination by a third party: French Code Civil Articles 1591 & 1592.189 Unless otherwise agreed, costs of delivery are borne by the seller (French Code Civil Article 1608), delivery must be made at the place the goods were located at the time the contract was concluded (French Code Civil Article 1609), and payment of the price must occur at the time and place of delivery: French Code Civil Article 1651. Although it has been argued that the question of supplementation of terms in contracts governed by the CISG is a matter for the residual domestic law, the prevailing view is that the CISG determines the matter.190 As the prevailing view promotes greater uniformity and cohesion in the interpretive process, it is to be preferred. 186 American Restatement § 220 (permitting recorse to usage to determine whether there is an ambiguity or contradiction, as well as to resolve it), and § 222 Comment b (no requirement to establish ambiguity before evidence of usage can be shown); Appleby v Pursell [1973] 2 NSWLR 879, 889. 187 Schwenzer, Hachem, and Kee (n 3) [26.66] n 116. 188 For sale of goods, on quality (draft Chinese Civil Code Article 616, referring to draft Chinese Civil Code Articles 510 & 511(I)). 189 See also Lookofsky, Understanding the CISG: Worldwide Edition (2017) Chapter 3, n 32. 190 See generally Schmidt-Kessel (n 61) CISG Article 8 [26], [27]; Zuppi (n 97) CISG Article 8 [29]; BGer [Swiss Federal Court], 22 December 2000, CISG-online 628; Contra Arbitral Award, Agricultural Products Exchange Arbitration Court, Vienna, 10 December 1997, CISG-Online No. 351.

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164 165

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There is consensus in international law instruments that contracts with certain ‘open terms’ are enforceable. For example, in the case of ‘open price terms’, the CISG Article 55, PICC Article 5.1.7, and PECL Articles 6:105 and 6:106 recognize the parties right to set the price at a later time by either one of the parties or by a third person, unless the price set is grossly unreasonable. 169 In cases where the contract makes no provision for setting the price, then a reasonable price will be implied. Similarly, where the quality of anything to be supplied or provided under the contract cannot be determined from terms, usages or practices, PECL Article 6:107 provides for substitution of references to non-existent factors, to allow determination of open terms. 170 PECL Article 6:102 contains a broad provision concerning implied terms in general, stating that they may be implied from the intention of the parties, purpose of the contract, or good faith and fair dealing. 168

VI. Critique of Structures Used in Uniform Laws 171

Remembering that global law must be understood and applied across jurisdictions, and will remain relevant only if commercially acceptable and useful, we are led to two key observations when comparing the overall approaches of the current set of harmonized laws, in addition to more specific conclusions concerning particular interpretive rules mentioned throughout this Chapter.

1. Overall Structure of Rules on Contractual Interpretation 172

Unnecessary divisions, such as division of tests for intent into standards of intent for formation, on the one hand, and interpretation of meaning of terms, on the other, leads to confusion. The simple structures of the CISG and, to a lesser degree, PICC achieve the same results, but in a clearer format. The two-step approach found in the CISG and PICC is preferred to the three-tier approach of the PECL – that is, a limited subjective test followed by an objective test. A unitary objective test can suffice to cover interpretation, whether in relation to formation and identification of terms, or the meaning of terms, as well as all communications regarding performance, modification and termination. Some of the improvements in expression used in more recent uniform laws are to be preferred to those in the CISG as discussed above, but lowering the threshold for attribution of awareness under the limited subjective test is not a desirable trend. There is also a strong argument that the qualification that the objective reasonable person be ‘of the same kind’ should be retained.

2. Expansive List of Interpretive Principles or Maxims 173

The insertion of a general list of principles or maxims of interpretation in international law help direct the interpreter to a clear and more soundly reasoned analysis, and deter the use of idiosyncratic domestic principles.

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G. Illustrations I. Meaning and Legal Effect; Validity and Invalidity Fast food company M enters a contract with retailer W for the sale of foodstuffs. 174 M ensures that the contract includes a clause which could be interpreted either as contrary to the competition rules in W’s jurisdiction, and therefore void for illegality, or possibly interpreted as complying with those rules and therefore valid. M’s motive is not to actually rely on the clause as an effective restriction of W’s conduct, because M anticipates that W will breach the clause in any event, but to use these breaches in future as a lever in negotiations for future contract prices. Interpretation and legal effect are distinct issues. It is the job of the interpreter to affix meaning to the words of the contract, but it is law that gives the derived meaning a legal effect. While it is not necessarily the role of the court to choose an interpretation that would be enforceable under the law when the language if the words clearly state otherwise, in situations where there is ambiguity, interpretive principles will usually direct courts to prefer a meaning that will give the clause in question some type of effect (validity) rather than none, and sometimes direct courts to prefer a meaning that will give legal effect rather than not (see discussion at III.3(f) above). Parties often insert unenforceable clauses into contracts for strategic purposes, such as to threaten the other or to anchor future negotiations. This is acceptable in many jurisdictions, but may give rise to causes of action in jurisdictions that place broad duties of good faith upon parties.

II. Trade Usage versus Literal Meaning Diamond dealer A agrees to sell to diamond dealer B six diamonds, based upon 175 specifications relating to size, cut, clarity and color. A delivers six diamonds consistent with the contract specifications to B. B rejects the delivery as non-conforming. Both parties knew there of a (hypothetical) trade usage in the diamond trade that a contract for the sale of six diamonds requires the delivery of seven diamonds. This usage allows the buyer to select the six diamonds it believes to be the best of the batch and return the extra diamond. Under most harmonized laws, the contract should be interpreted in accordance with the trade usage that six diamonds mean seven diamonds. In the case of the CISG, the usage would need to be an internationally one. Of course, best practice would be to insert an express clause in the contract reflecting the trade usage.

III. Sliding Scale Rates and Commissions Manufacturer-exporter A enters into an exclusive agency agreement with B to market 176 and sell its goods in the country of Balgonia. The contract provides ‘a commission of 6% for sales totaling $250,000 and a 5% commission if sales exceed $250,000’. B sells $300,000 in the first year of the contract. Under a literal interpretation of the provision, B would be entitled to $15,000 (5% of $300,000), which makes little sense since if B sold $250,000 she would be entitled to $15,000 (6% of 250,000). This interpretation is commercially unreasonable since B receives the same commission for a larger amount of sales as it would on a smaller amount of sales. The more reasonable interpretation taking into account the commercial purpose of the contract and surrounding circumstances would be that B receives 6% on $250,000 and 5% for the remaining $50,000 or $17,500.

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IV. Warranties and Notice of Non-Conformity 177

A wholesaler sells 300 20 litre-sized containers of mustard to B a retailer. The contract provides that ‘all claims of non-conformity must be made within 30 days of receipt of the goods.’ Three months after delivery a government inspection of samples of the mustard found excessive amounts of mold in the containers. The government than seized and destroyed the remaining 259 containers. The court held that the contract clause was unenforceable in relation to latent defects. This can be seen as the court interpreting the phrase ‘all claims of non-conformity’ to mean all claims of non-conformity once known, as a matter of commercial sense, possibly due to usages, or defining the term in context of a duty to inspect the goods arising under the general law or within the contract itself. Alternatively, but less likely, the court could be seen as supplementing the contractual terms in regard to latent defects.

V. Integrated Agreements 178

In a final and integrated contract, A agrees to sell B certain distribution rights for its products. The parties had discussed a number of markets during the negotiation of the contract. A intended to sell the rights to the French market. B had also intended to purchase the rights to the Spanish and Italian markets. A had reason to know that B intended to buy the Spanish along with the French rights. B had reason to know that A did not intend to sell the rights to the Italian market. The language used could be interpreted to include the French and Spanish market rights or just the French rights, but not the Italian rights. A reasonable interpretation of the contract, given the evidence of the subjective understandings of the parties, was that the subject matter of the contract was the sale of distribution rights to the French and Spanish markets. The parol evidence rule will not prevent extrinsic evidence from being admitted, since an ambiguity appears on the face of the contract, and the evidence would not be led to contradict or supplement but instead to explain the terms. However, whether evidence regarding prior negotiations will be admitted will depend on the exclusionary rules in the jurisdiction concerned.

VI. Additional Terms 179

A entered into a formal written contract to sell B a used piece of specialized industrial equipment for $850,000 (USD). They orally agree that A would warehouse the equipment for one-year, while B’s factory is being constructed at the rate of $2,500 per month. A argues that since the oral agreement was not included in the written contract, it was not obligated to store the equipment. The oral agreement was collateral or not within the scope of the integrated written contract and would therefore constitute an enforceable independent contract, irrespective of whether the parol evidence rule applied.

H. Practitioner Tips & Contract Clauses I. Entire Agreement or Merger Clause 180

The following are examples of merger clauses. The main difference between clauses [a] and [b] is that version [b] separates the reference to earlier representations from 790

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reference to earlier agreements, although this is not of significance. Clause [a] contains a less extensive description of the types of non-contractual statements, and does not contain any acknowledgement of non-reliance. As the latter might assist with a claim brought under equitable estoppel, clause [b] is perhaps preferable.191 Clause [c] is far simpler, but does not as a result contain the precautionary words ‘written or oral’ and stands a greater chance of being read down. Since clause [b] does not refer to ‘conduct’, adding the last sentence from clause [c] would make it more comprehensive (see clause d). [a] This Agreement constitutes the entire agreement between the Parties and supersedes all communications, negotiations and agreements, whether oral or written, between the parties in relation to the subject matter of this Agreement. [b] This contract constitutes the whole agreement between the parties and supersedes any prior agreements relating to the subject matter of this contract. The parties hereby acknowledge that in entering this contract, they have not relied upon any other promises, representations, terms or understandings, whether written or oral. [c] This Agreement contains the entire agreement of the parties with respect to its subject matter. It sets out the only conduct relied on by the parties and supersedes all earlier conduct by the parties with respect to its subject matter. [d] This contract constitutes the whole agreement between the parties and supersedes any prior agreements relating to the subject matter of this contract. The parties hereby acknowledge that in entering this contract, they have not relied upon any other promises, representations, terms or understandings, whether written or oral. It sets out the only conduct relied on by the parties and supersedes all earlier conduct by the parties with respect to its subject matter. It is important to be aware that entire agreement clauses are often not effective. 192 See Part 2 for a fuller discussion of merger clauses.

II. No Oral Modification Clause The following are examples of such clauses:

181

[a] No variation, modification or amendment to this agreement shall be effective unless it is in writing, signed by each of the parties. [b] Any waiver, alteration or amendment to the terms of this agreement shall be valid only if made in writing and signed by the parties or their authorized agents. [c] This agreement may only be varied, supplemented or otherwise modified by written agreement signed by both parties. Again such clauses are often not upheld in practice, especially if the parties have 182 acted as if the written modification requirement was not in the contract. For example, in cases where the parties made repeated oral modifications of the contract, the courts have implied that they had waived the formality of a signed writing (waiver). Alternatively, for a party to suddenly disown an oral modification based on the no oral modification 191 However, whether such a clause would be effective in precluding estoppel has been controversial, and is now doubtful in some jurisdictions, such as Australia where estoppel is highly developed. See Saleh v Romanous [2010] NSWCA 274. 192 See ProForce Recruit Ltd v The Rugby Group Ltd [2006] EWCA Civ 69; Peden & Carter, ‘Entire Agreement and Similar Clauses’ (2006) 22 JCL 1; C. Mitchell, ‘Entire Agreement Clauses: Contracting Out of Contextualism’ (2006) 22 JCL 222.

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clause would cause an injustice where there has been reasonable reliance, and would not be allowed in most legal systems.

I. Cross References 183

Almost all the issues discussed in the Chapters of this book are subject to contract interpretation including in particular Chapter 2 on ‘Language and Translation Issues’, Chapter 9 on ‘Incorporation of Standard Terms’, Chapter 10 on ‘Trade Terms and INCOTERMS’, Chapter 25 on ‘Assignment, Delegation and Third-Party Rights’, Chapter 27 on ‘Agency and Distribution Agreements’, Chapter 28 on ‘Long-Term Contracts: Installment and Supply Contracts’ and Chapter 30 on ‘Choice of Law’.

J. Additional Sources 184 Beale, Chitty on Contracts: General Principles (Sweet & Maxwell 2012); Bonell, ‘CISG Article 7’ in Bianca &

Bonell (eds), Commentary on the International Sales Law (Giuffré 1987); Bridge, The International Sale of Goods (3rd edn, OUP 2013); Bridge, ‘Good Faith, the Common Law, and the CISG’ (2017) 22 Uniform Law Review 98; Brunner, Hurni & Kissling, ‘CISG Article 8’ in Brunner & Gottlieb (eds), Commentary on the UN Sales Law (CISG) (Wolters Kluwer 2019); Brunner & Wagner, ‘CISG Article 7’ in Brunner & Gottlieb (eds), Commentary on the UN Sales Law (CISG) (Wolters Kluwer 2019); Butler, ‘New Zealand’ in DiMatteo (ed), International Sales Law: A Global Challenge (CUP 2014); Carter, The Construction of Commercial Contracts (Hart 2013); Charles, ‘Interpretation of Ambiguous Contracts by Reference to Subsequent Conduct’ (1991) 4 Journal of Contract Law 16; Ching, ‘Justice and Harsh Results: Beyond Individualism and Collectivism in Contracts’ (2014) 45 University of Memphis Law Review 59; CISG Advisory Council Opinion No 3, ‘Parol Evidence Rule, Plain Meaning Rule, Contractual Merger Clause and the CISG’ (2004, Rapporteur: Prof. Richard Hyland); CISG Advisory Council Opinion No 13, ‘Inclusion of Standard Terms under the CISG’ (Rapporteur: Prof. Sieg Eiselen); Cole, ‘The Parol Evidence Rule: A Comparative Analysis and Proposal’ (2003) 26(3) UNSW LJ 680; DiMatteo (ed), International Contracting: Law and Practice (3 rd edn, Wolters Kluwer 2013); Farnsworth, Contracts (3rd edn, Aspen Publishing 2004); Farnsworth, ‘Duties of Good Faith and Fair Dealing under the PICC, Relevant International Conventions, and National Laws’ (1995) 3 Tulane J Int’l Comp L 47; Flechtner (ed), Uniform Law for International Sales under the 1980 United Nations Convention (4th edn, Kluwer 2009); Flechtner, Brand & Walter, Drafting Contracts under the CISG (OUP 2008); Goodhart, ‘Mistake as to Identity in the Law of Contract’ (1941) 57 LQR 228; Huber & Mullis, The CISG: A New Textbook for Students and Practitioners (Sellier 2007); Kelso, ‘The United Nations Convention on Contracts for the International Sale of Goods: Contract Formation and the Battle of Forms’ (1983) 21 Colum J Transnat'l L 529; Kirkman Gucuk and Talaz, ‘Turkey’s Court of Cassation Refuses to Enforce an Arbitration Clause in English Based on a Turkish Language Requirement’, Kluwer Arbitration Blog, 29 September 2018; Linzer, ‘The Comfort of Certainty’ (2002) 71(3) Fordham L Rev 799; Lookofsky, Understanding the CISG: (Fifth) Worldwide Edition (Wolters Kluwer 2017); Mankowski ‘CISG Article 8’ in Mankowski (ed), Commercial Law (Beck, Hart, Nomos 2019); Mankowski, ‘CISG Article 9’ in Mankowski (ed), Commercial Law (Beck, Hart, Nomos 2019); Mason, ‘Contract, Good Faith and Equitable Standards in Fair Dealing’ (2000) 116 LQR 69; McKendrick (ed), Goode on Commercial Law (4th edn, Penguin 2010); McLauchlan, ‘Contract Formation, Contract Interpretation, and Subsequent Conduct’ (2006) 25 University of Queensland Law Journal 77; McLauchlan, ‘Contract Interpretation: What Is It About?’ (2009) 31 Sydney L Rev 5; Mitchell, ‘Entire Agreement Clauses: Contracting Out of Contextualism’ (2006) 22 JCL 222; Nicholls, ‘My Kingdom for a Horse: The Meaning of Words’ (2005) 121 Law Quarterly Review 577, 587; Peden & Carter, ‘Entire Agreement — and Similar — Clauses’ (2006) 22 JCL 1; Perales Viscasillas, ‘Modification and Termination of the Contract (Article 29 CISG)’ (2005) 25 J L & Com 167; Perales Viscasillas, ‘Battle of the Forms and the Burden of Proof ’ (2002) 6 Vindobona J Int’l Com L & Arb 217; Perillo, ‘The Origins of the Objective Theory of Contract Formation and Interpretation’ (2000) 69 Fordham L Rev 427; Schmidt-Kessel, ‘CISG Article 8’ in Schwenzer (ed), Commentary on the UN Convention on the International Sale of Goods (CISG) (4th edn, OUP 2016); Schmidt-Kessel, ‘CISG Article 9’ in Schwenzer (ed), Commentary on the UN Convention on the International Sale of Goods (CISG) (4th edn, OUP 2016); Schroeter, ‘CISG Articles 14–24 and 19’ in Schwenzer (ed), Commentary on the UN Convention on the International Sale of Goods (CISG) (4th edn, OUP 2016); Schwenzer, ‘CESL and CISG’ in Schwenzer & Spagnolo (eds), Globalization vs Regionalization 109 (Eleven 2013); Schwenzer & Hachem, ‘CISG Article 7’ in Schwenzer (ed), Commentary on the UN Convention on the International Sale of Goods

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B. Introductory Note (CISG) (4th edn, OUP 2016); Spagnolo, CISG Exclusion and Legal Efficiency (Kluwer 2014); Spagnolo, ‘The international dimensions of Australian contract law’, Eldridge & Pilkington (eds) The Australian Law of Contract in the 21st Century: Debates and Directions (forthcoming, Federation Press, 2020); Spagnolo, ‘Opening Pandora’s Box: Good Faith & Precontractual Liability in the CISG’ (2007) 21(2) Temple Int’l & Comp LJ 261; Stanivukovic, ‘Interpretation of the Contract’ in Felemegas (ed), An International Approach to the Interpretation of the UN CISG 272 (CUP 2007); Van Alstine, ‘Dynamic Treaty Interpretation’ (1998) 146 U Penn L Rev 687; Vogenauer ‘Interpretation of Contracts: Concluding Comparative Observations’ in A Burrows and E Peel (eds), Contract Terms (Oxford University Press, 2007) 149-150; Vogenauer & Kleinheisterkamp (eds), Commentary on the PICC of International Commercial Contracts (2 nd edn, OUP 2015); von Bar, Clive (eds), Principles, Definitions and Model Rules of European Private Law: Draft Common Frame of Reference (DCFR) (Sellier 2009); Wildner, ‘Article 19 CISG: The German Approach to the Battle of the Forms in International Contract Law’ (2008) 20 Pace Int’l L Rev 1; Zimmermann & Whittaker, Good Faith in European Contract Law (CUP 2000); Zuppi in Kröll, Mistelis & Viscasillas (eds), UN Convention on Contracts for the International Sale of Goods: A Commentary (2 nd edn, Beck, Hart, Nomos 2018).

Part 2: Merger Clauses A. Topics Covered One of the most common contract terms is the merger clause. It is also called 185 the ‘final integration’, ‘entire agreement’, or ‘four corners” clause. The clause is often a boilerplate or standard term located near the end of a contract and above the signature lines. Its main purpose is to preclude the use of extrinsic evidence to contradict the written contract. ‘Merger clauses are so commonly used that the absence of one may give rise to a contrary inference.’193 However, the term is often perfunctory in its wording, precluding the consideration of any information or evidence from being considered in interpreting the contract. A literal interpretation would preclude the use of prior statements, negotiations, and possibly trade usage for any purpose including clarifying an ambiguity or filling in a gap in the contract. This Part will examine the law pertaining to the enforceability and interpretation of this ubiquitous contract term.

B. Introductory Note The merger clause is the product of practitioners working in the Common Law 186 system but has become commonly used in international contracts and recognized in various degrees in Civil Law countries. As a general matter, the clause is more likely to be enforced in the Common Law’s application of the objective theory of interpretation versus the Civil Law’s agreement in fact or subjective theory of interpretation. The merger clause, like the liquidated damages clause, is one of those types of provisions found in most contracts, especially in the Common Law, that are commonly used, but also highly scrutinized and often ignored by the courts. The merger clause in the exchange of forms scenario, common in the sale of goods, have a less impactful role since there is no single integrated document. The merger clause is premised on the existence of a document or documents intended to be the final statement of the parties’ agreement that should be protected from contradictory evidence. Courts and arbitral panels will invariably look at both the buyer and seller’s forms in determining the content of the contract, even if one 193 Farnsworth, Farnsworth on Contracts Vol 2 (Aspen 2004) p. 263, citing Rajala v Allied Corp., 66 Bankruptcy Ct. 582 (D. Kan. 1986).

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of the forms contains a merger clause. Merger clauses are more likely to be considered by the courts in commercial agency, installment (those using a single or set of contract documents), and distribution contracts.

C. Statement of Issues 187

Most written contracts incorporate, generally towards the end of the document, a merger, entire agreement, or integration clause. Its aim is to declare that the contract being signed is intended as the final manifestation of the parties’ agreement. Therefore, in the event of a dispute the parties, courts or arbitral tribunals are to seek a solution within the contract itself. Prior and contemporaneous representations, correspondences, and preliminary agreements are merged into the final contract. Therefore, these materials are not to be resorted to in the interpretation of the contract. A court or arbitrator may decide to bar all such information even in cases where the contract is ambiguous or contains a gap in coverage. Others will interpret the clause to bar such materials only when they conflict with express terms of the contract, but permit their use to supplement or clarify the contract. Thus, in the case of a gap or ambiguous language the judge or arbitrator will review such extrinsic evidence to provide a solution. The issues that will be discussed include: (1) Are merger clauses enforceable?, (2) Does it matter whether the clause was negotiated or was a standard term?, (3) What type of evidence does the clause preclude from being admitted into evidence? (4) Does a merger clause preclude the use of extrinsic evidence (negotiations, prior or contemporaneous statements, and preliminary agreements) for all purposes of for only certain purposes? (5) How can a party increase the likelihood that the merger clause will be enforced?

D. International Sales Transaction 188

Since most sales transactions are a result of an exchange of forms, it may be the case that only one of the forms contains a merger clause. In such a case, the interpreter may enforce the clause if it is deemed a non-material, additional term. Another complication is whether the clause is presented or interpreted as a negotiated or a standard term. The strongest case for the enforcement of a merger clause is in the case where there is a single form as when the parties negotiate an agreement and one party follows up by sending a confirmatory memorandum. Under most national legal traditions, the terms of the written confirmation would be considered as enforceable. A merger clause, and its enforceability, bear directly on the issue of interpretation since it acts as a gatekeeper for the evidence used in the interpretation process.

E. Sampling of Laws I. CISG Article 11 A contract of sale need not be concluded in or evidenced by writing and is not subject to any other requirements as to form. It may be proved by any means, including witnesses.

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II. CISG Advisory Council Opinion No. 3 Extrinsic evidence should not be excluded, unless the parties actually intended the 189 Merger Clause to have that effect. The question is to be resolved by reference to the criteria enunciated in Article 8, without reference to national law. Article 8 requires an examination of all relevant facts and circumstances when deciding whether the Merger Clause represents the parties' intent. Under the CISG, a Merger Clause does not generally have the effect of excluding 190 extrinsic evidence for purposes of contract interpretation. However, the Merger Clause may prevent recourse to extrinsic evidence for this purpose if specific wording, together with all other relevant factors, make clear the parties' intent to derogate from Article 8 for purposes of contract interpretation. Hence, merger clauses are enforceable under the derogation provision of Article 6. 191 However, the CISG Advisory Council Opinion indicates that the party attacking the enforcement of the clause has the opportunity to show that the parties did not intend to prohibit the use of extrinsic evidence, such as a seller’s pre-contractual representations or trade usage. Of course, that is why sellers incorporate a merger clause into their contracts to bar such representations and other pre-contract correspondences from being admitted into evidence.

III. UNIDROIT Principles of International Commercial Contracts 192

Article 2.1.17 Merger Clauses A contract in writing which contains a clause indicating that the writing completely embodies the terms on which the parties have agreed cannot be contradicted or supplemented by evidence of prior statements or agreements. However, such statements or agreements may be used to interpret the writing.

IV. Principles of European Contract Law 193

Article 2:105 Merger Clause (1) If a written contract contains an individually negotiated clause stating that the writing embodies all the terms of the contract (a merger clause), any prior statements, undertakings or agreements, which are not embodied in the writing do not form part of the contract. (2) If the merger clause is not individually negotiated it will only establish a presumption that the parties intended that their prior statements, undertakings or agreements were not to form part of the contract. This rule may not be excluded or restricted. (3) The parties' prior statements may be used to interpret the contract. This rule may not be excluded or restricted except by an individually negotiated clause. (4) A party may by its statements or conduct be precluded from asserting a merger clause to the extent that the other party has reasonably relied on them.

V. Common European Sales Law 194

Article 7 Not individually negotiated contract terms 1. A contract term is not individually negotiated if it has been supplied by one party and the other party has not been able to influence its content. (…)

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Chapter 23 Contract Interpretation and Merger Clauses 3. A party who claims that a contract term supplied as a part of standard contract terms has since been individually negotiated bears the burden of proving that it has been. Article 72 Merger clauses 1. Where a contract in writing includes a term stating that thee document contains all contract terms (a merger clause), any prior statements, undertakings or agreements which are not contained in the document do not form part of the contract. 2. Unless the contract otherwise provides, a merger clause does not prevent the parties’ prior statements from being used to interpret the contract. 3. In a contract between a trader and a consumer, the consumer is not bound by a merger clause. 4. The parties may not, to the detriment of the consumer, exclude the application of this Article or derogate from or vary its effects.

VI. German Bürgerliches Gesetzbuch 195 § 133 Interpretation of a declaration of intent When a declaration of intent is interpreted, it is necessary to ascertain the true intention rather than adhering to the literal meaning of the declaration. § 157 Interpretation of contracts Contracts are to be interpreted as required by good faith, taking customary practice into consideration. § 305 Incorporation of standard business terms into the contract (2) Standard business terms only become a part of a contract if the user, when entering into the contract, refers the other party to the contract to them explicitly or, where explicit reference, due to the way in which the contract is entered into, is possible only with disproportionate difficulty, by posting a clearly visible notice at the place where the contract is entered into, and gives the other party to the contract, in an acceptable manner, which also takes into reasonable account any physical handicap of the other party to the contract that is discernible to the user, the opportunity to take notice of their contents, and if the other party to the contract agrees to their applying. (2) The parties to the contract may, while complying with the requirements set out in subsection above, agree in advance that specific standard business terms are to govern a specific type of legal transaction. § 305 b Priority of individually agreed terms Individually agreed terms take priority over standard business terms. § 305 c Surprising and ambiguous clauses (1) Provisions in standard business terms, which in the circumstances, in particular with regard to the outward appearance of the contract, are so unusual that the other party to the contract with the user need not expect to encounter them, do not form part of the contract. § 306 a Prohibition of circumvention The rules in this division apply even if they are circumvented by other constructions.

VII. French Code Civil 196 Article 1101 A contract is a concordance of wills of two or more persons intended to create, modify, transfer or extinguish obligations. Article 1188 A contract is to be interpreted according to the common intention of the parties rather than stopping at the literal meaning of its terms. Where this intention cannot be discerned, a contract is to be interpreted in the sense which a reasonable person placed in the same situation would give to it.

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E. Sampling of Laws Article 1189 All the terms of a contract are to be interpreted in relation to each other, giving to each the meaning which respects the consistency of the contract as a whole. Article 1190 In case of ambiguity, a bespoke contract is interpreted against the creditor and in favour of the debtor, and a standard-form contract is interpreted against the person who put it forward. Article 1190 Where a contract term is capable of bearing two meanings, the one which gives it some effect is to be preferred to the one which makes it produce no effect. Article 1361 Evidence in writing may be supplemented by an admission in court, by a decisive oath, or by a beginning of proof by writing which is corroborated by another means of proof. Article 1361 Any written evidence constitutes a beginning of proof by writing where it originates from the person who is challenging the act or a person whom he represents and renders what is alleged likely to be true.

VIII. Spanish Código Civil 197

Article 1.281 If the terms of a contract are clear and do not leave any doubt as to the intention of the contracting parties, they shall abide by the literal meaning of its clauses. If the words seem contrary to the evident intention of the contracting parties, the latter shall prevail over the former. Article 1.282 In order to judge the intention of the contracting parties, their acts at the time of and subsequently to the contract shall be mainly taken into account.

IX. United Kingdom Sale of Goods Act 1979 198

Section 4 Formalities of contract Subject to this and any other Act, a contract of sale of sale may be made in writing (either with or without seal), or by word of mouth, or partly in writing and partly by word of mouth, or may be implied from the conduct of the parties.

X. American Uniform Commercial Code 199

§ 2-202(1). Final Written Expression: Parol or Extrinsic Evidence Terms with respect to which the confirmatory memoranda of the parties agree or which are otherwise set forth in a written record intended by the parties as a final expression of their agreement with respect to such terms as are included therein may not be contradicted by evidence of any prior agreement or of a contemporaneous oral agreement but may be explained or supplemented by evidence of course of dealing or usage of trade or by course of performance

XI. American Restatement (Second) of Contracts 200

§ 209 Integrated agreements An integrated agreement is a writing or writings constituting a final expression of one or more terms of agreement.

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Chapter 23 Contract Interpretation and Merger Clauses § 209, Comment a: Significance of integration Both integrated and unintegrated agreements may be explained or supplemented by operative usages of trade, by course of dealing between the parties, and by course of performance of the agreement. § 216, Comment e: Written term excluding oral terms (‘merger clause’) Witten agreements often contain clauses stating that there are no representations, promises or agreements between the parties except those found in the writing. Such a clause may negate the apparent authority of an agent to vary orally the written terms, and if agreed is likely to conclude the issue whether the agreement is completely integrated. Consistent additional terms may then be excluded even though their omission would have been natural in the absence of such a clause. But such a clause does not control the question whether the writing was assented to as an integrated agreement, the scope of the writing if completely integrated, or the interpretation of the written terms. § 216 Integrated agreement subject to oral representation of a condition Where the parties to a written agreement agree orally that performance of the agreement is subject to the occurrence of a stated condition, the agreement is not integrated with respect to the oral condition § 216, Comment b: Requirement of a condition inconsistent with a written form If the parties orally agreed that performance of the written agreement was subject to a condition, either their writing is not an integrated agreement or the agreement is only partially integrated until the condition occurs. Even a ‘merger’ clause in the writing, explicitly negating oral terms, does not control the question whether there is an integrated agreement or the scope of the writing.

XII. Chinese Contract Law 201 Article 5 The parties shall abide by the principle of fairness in defining the rights and obligations of each party. Article 6 The parties must act in accordance with the principle of good faith, no matter in exercising rights or in performing obligations. Article 496 Where standard terms are adopted in concluding a contract, the party providing such standard terms shall follow the principle of fairness to determine the rights and obligations of the parties, take reasonable measures to remind the party to focus on the exclusion or mitigation of its liabilities or other terms having significant interest with the other party, and explain such terms as required by the other party. Article 498 If a dispute over the understanding of a standard term occurs, the term shall be interpreted in accordance with general understanding. Where there are two or more kinds of interpretation, the interpretation unfavorable to the party supplying the standard terms shall prevail. Where a standard term is inconsistent with a non- standard term, the latter shall prevail.

F. Commentary I. Civil Law and ‘Agreement in Fact’ 202

The remnants of the theory of subjective intent continue to play a role in German contract interpretation and remains the core concept in French contract law. BGB § 133 speaks of finding the ‘true intent’ of the parties. This ‘agreement-in-fact’ approach in the Civil Law means that the courts are less likely to strictly enforce a merger clause when it is an obstacle to finding the true intentions of the parties. After parties execute a written contract, the question remains whether that contract constitutes the entire agreement of the parties. Clearly, the written form provides strong probative evidence of the parties’ 798

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agreement at least as to the terms found in the written contract. Even if the parties expressly agree that the written form represents their final agreement (merger or final integration clause) or a court determines it be a final integration post hoc, the finality of such determinations is often less than absolute. In the Civil Law, a merger clause, although enforceable under freedom of contract 203 rationales, is less likely to be enforced since it conflicts with the underlying model of German and French law – the agreement-in-fact. Extrinsic evidence that would show the parties’ actual intent as to a given issue or contract term is considered along with the contract. Furthermore, the duty of good faith in the negotiation of a contract gives the court greater leeway in receiving evidence that shows acts of bad faith negotiation, such as inflated representations by the seller of a product.

II. Common Law and Sanctity of Written Contract Traditional or classical Common Law recognizes the written contract intended to be 204 a final expression of the parties’ agreement to be sacrosanct. It sees the written contract as the objective manifestation of intent.194 The reasonable or objective manifestation interpretation is shielded by extrinsic evidence that would uncover the parties’ true, subjective intent. A contract that is considered a final integration of the parties’ agreement is protected from contradictory extrinsic evidence by the Common Law’s parol evidence rule, which favors a ‘four-corner’ analysis in contract interpretation. Aside from clarifying the meaning of the express terms of the contract, extrinsic evidence is used to imply terms to fill in gaps in the written agreement. In practice, especially in the US, courts have been adept at avoiding the merger clause prohibition and the parol evidence rule. The court, as a matter of law, can hold that there is a ‘gap’ in the contract or that contractual language is ambiguous. By doing so, extrinsic evidence would be admitted not to contradict, but to supplement the written contract. Modern Common Law sees the merger clause as a rebuttable presumption and not 205 conclusive. As noted above, the general rule in the Common Law is that merger clauses are enforceable as a reflection of party intent. But, there is a split in the courts as to whether the clause has a conclusive effect or is a rebuttable presumption. The modern tendency is that it is the latter of the two, allowing the court the discretion to determine independently of the merger clause whether the contract was a final integration. One court noted that a merger clause can be rebutted if it is found in a ‘pre-printed form drawn by a sophisticated seller.’195 Another court held that such clauses are more likely to be enforced when the contract is between sophisticated parties and the contract has the appearance of completeness: The ‘presumption of completeness is particularly strong where sophisticated parties have conducted extensive negotiations prior to entering the agreement and the agreement unambiguously sets the boundaries of what constitutes the entire agreement.’196 It should be noted that many international sales transactions are not extensively negotiated and that the final agreement is at best a combination of the forms being exchanged.

194 DiMatteo, ‘Reasonable Person Standard and the Subjectivity of Judgment’ (1997) 48 South Carolina L Rev 293. 195 Sierra Diesel Injection Serv. v Burroughs Corp., 874 F. 2 d 653 (9 th Cir. 1989). 196 Telcom Intl. Am. v AT &T Corp, 280 F3 d 175 (2 d Cir. 2001).

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III. Convergence of Civil and Common Laws 206

The above discussion is oversimplified in that the written, integrated contracts, with or without a merger clause, are considered the primary reflection of the parties’ agreement. Under the Civil Law system, the written contract is considered as the best measure of the parties’ actual agreement. For example, German law recognizes that a rebuttable presumption ‘that every written contract that looks complete on its face is accurate and complete.’197 In the end, the two approaches are not as far apart as they seem at first blush. The Common Law’s exclusionary principle (parol evidence rule) is no longer a monolithic obstacle to the admission of extrinsic evidence as courts have moved to a more contextual determination of meaning. In the past and present, the use of extrinsic evidence has covertly avoided the parol evidence rule by the courts simply declaring, as a matter of law, that a contract term is ambiguous. The ambiguity allows the court to declare that a four-corners analysis and plain meaning interpretation of the contract fails to provide the meaning of a term with sufficient certainty. This allows the court to perform a ‘totality of the circumstances’ analysis allowing prior dealing, course of performance, and trade usage evidence to be used to ferret out the true or most reasonable interpretation of the parties’ intended meaning. At the same time, it is important to realize that the Civil Law’s rejection of the parol evidence rule should not be interpreted to mean that the written contract intended to be the final integration of the parties’ agreement is ‘mere’ evidence of the parties’ intended meaning. Such a written contract would be regarded as highly probative evidence superior to the extrinsic evidence. When in doubt, if the extrinsic evidence doesn’t provide a clear or reasonable alternative meaning, the words of the contract control.

IV. Extent of Exclusion Provided by Merger Clause 207

The area of greatest debate is the role of the merger clause in precluding all forms of extrinsic evidence. The issue is whether a merger clause precludes use of evidence of prior negotiations, including past and contemporaneous oral statements (at time of the conclusion of the contract) in all instances of contract interpretation. For example, the American UCC allows in cases of ambiguity for the use of evidence of prior dealings, course of performance, and business customs or trade usage. It does not expressly allow for the entry of negotiation evidence. One explanation is that even in cases of ambiguity the merger clause serves to prevent the entry of negotiation evidence. The rationale being that the written contract as a final integration mergers all prior oral negotiations and preliminary written communications or preliminary agreements into the final written contract. In essence, the evidentiary trail leading to the execution of the final contract seizes to exist. This approach is questionable given it is that evidence that would seem most probative to understanding the parties’ actual intent regarding the meaning of the final contract. In sum, written contracts that seem to be final and complete have ‘integrative effects’ under the common and Civil Law systems. The ‘merger clause’ is a common provision used in both systems and is given at least a presumptive effect.

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V. Contextual Interpretation and the Ordering of Evidence Under the Common Law, a fully integrated contract is protected by the parol evi- 208 dence rule that prevents the admission of extrinsic evidence. A contract determined by a court to be a final integration of parties’ agreement, with or without a merger clause, would be protected from contradictory evidence taken from the parties’ negotiations, oral representations, written correspondences, prior dealings, as well as trade usage and business customs. The UCC embraces contextual interpretation of contracts by recognizing the impor- 209 tance of trade usage and business customs in business contracting, as well as the probative value of evidence provided by prior dealings between the parties and by how the parties performed on the contract in question (course of performance). However, the UCC reinforces the primacy of the written form by way of ordering of the evidence: written contract has priority over course of performance; course of performance has priority of prior dealings; and evidence of prior dealings has priority over trade usage. UCC § 1-205 states that: ‘express terms of an agreement and an applicable course of dealing or trade usage shall be construed wherever reasonable as consistent; but when such construction is unreasonable express terms control over both course of dealing and usage of trade and course of dealing controls usage of trade.’ That said, the UCC also instructs the courts to interpret when possible all the different types of evidence so that they are consistent with one another. In reality, American courts have shifted to a more contextual interpretation of con- 210 tracts making courts hesitant to preclude the use of extrinsic evidence when the court finds an ambiguity or a gap in the contract. The contract may be clear from a plain meaning perspective, but courts may review extrinsic evidence to see if an alternative reasonable interpretation is available despite the facial clarity of the contract. In the area of sales, this is allowed by UCC § 2-202 that prevents extrinsic evidence from contradicting a final written contract, but allows such evidence to explain or supplement the contract. Also merger clauses cannot prevent the introduction of extrinsic evidence in claims for misrepresentation, mistake, duress, and undue influence.

VI. Scope of Merger Clause The parties may have agreed to oral terms as a part of collateral or separate agree- 211 ment, while negotiating the primary contract. Some of these oral side agreements may last beyond the termination of the contract. Further, the parties may agree to modifications subsequent to the formation of the contract or the court may imply terms for various reasons. CESL Article 72 provides that merger clauses are enforceable in commercial contracts transactions but requires the clause to expressly exclude the use of prior statements of the parties to prevent them from being used to interpret the contract. A merger clause is void in consumer sales contracts. In UCC case law, a written record may be final for the included terms (integration), 212 but that does not mean that the parties intended that the record contain all the terms of their agreement (a total integration). Even if the record is final, complete and exclusive, it can be supplemented by evidence of non-contradictory terms drawn from an applicable course of performance, course of dealing or usage of trade unless those sources are carefully negated by the merger clause or another term in the contract. Whether a written agreement is final, and whether a final writing is also complete, are issues for the court. If the additional terms are those that, if agreed upon, they would certainly have

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been included in the document in the view of the court, then evidence of their alleged making must be decided as a matter of law. This section is not intended to suggest what should be the evidentiary strength of a merger clause as evidence of the mutual intent that the record be final and complete. That determination depends upon the particular circumstances of each case.

VII. Merger Clause as a Standard Term Under German law, the designation of a term as a standard term impacts its enforceability. BGB § 305 (1) states that ‘it is irrelevant whether the [standard term] provisions appear as a separate part of a contract or are included in the contractual document itself.’ It notes that such terms are enforceable only when the terms are brought to the attention of the other party and the other party is given a reasonable opportunity upon which to gain knowledge of their content. However, ‘the parties may agree in advance that particular standard business terms will apply to a particular type of transaction.’ If the merger clause is individually negotiated, then it should theoretically be enforced. In fact, the Civil Law has generally focused on the ‘agreement in fact’ or actual intent. It is, therefore, more lenient in allowing evidence that lens insight to the subjective intent of the parties even if that evidence contradicts a plain meaning interpretation of the written contract. 214 Under PECL, a standard term merger clause found in a standard form or in a separate area of general conditions is unlikely to be enforced unless the party asserting it can prove it was ‘individually negotiated.’ Furthermore, if the merger clause is deemed to have been individually negotiated, the clause only establishes a presumption of exclusion, which allows the attacking party an opportunity to prove that the parties did not intend the merger clause to have certain effects, such as excluding extrinsic evidence that would clarify an ambiguity in the contract. 213

VIII. Merger Clause and Arbitration 215

Since the preferred means of dispute resolution in international sales transactions is arbitration, the question becomes will an arbitration panel enforce a merger clause? On one hand, the argument can be lodged that arbitrators are obligated to follow the mandate of the submission, which may be to simply interpret a term in the contract. Would they feel compelled to enforce the contract as a whole, including the merger clause? The answer is that it is unlikely. Arbitration rules provide for the open and informal presentation of evidence. Each party has a right to be heard and to present whatever evidence it has at its disposal. An arbitration panel’s ultimate objective is to provide a ‘fair and equitable’ decision. They are unlikely to feel constrained in using and considering materials that allow them to make such a decision. However, if the contract places evidentiary restrictions in the arbitration provision (details the type of evidence that the panel can consider and specifically excludes types of extrinsic evidence), the panel would have to follow those instructions.

IX. CISG and Merger Clauses 216

The CISG does not specifically deal with the enforceability of merger clauses. In favor of their enforcement is the recognition by CISG Article 29 of the enforceability of ‘no oral modification’ clauses. The underlying principle of freedom of contract supports the

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parties’ right to agree to a merger clause. The ‘Explanatory Note by the UNCITRAL Secretariat on the CISG’ makes clear that the fundamental principle upon which the CISG is based is private autonomy. It notes that Article 6 allows the parties to derogate from CISG rules: ‘Derogation from the Convention will occur whenever a provision in the contract provides a different rule from that found in the Convention.’ Thus, if the parties’ contract includes a merger clause, then it is enforceable. However, in the common exchange of forms scenario if only the second form contains a merger clause, then the court or arbitral tribunal would have to decide whether such a clause ‘materially alters’ the offer. Under the principle of venire contra factum proprium, some courts and tribunals 217 applying Civil Law based rules have found that no-oral modification clauses have no effect against a de facto oral modification when one of the parties' conduct has encouraged or tolerated such oral modification (Common Law’s waiver), to the extent that the other party has relied on that conduct. The standards of interpretation in CISG Articles 8(3) (use of extrinsic evidence to apply reasonable person standard) and 11 (“It may be proved by any means, including witnesses.”) are incompatible with a no oral modification clause. The fact that a sales contract is in writing does not bar oral modifications pursuant to CISG Article 29(2) either. CISG Article 29(2) provides an exception: a party may be precluded by his conduct from asserting such provision to the extent that the other party has relied on that conduct (Common Law’s estoppel). In this regard, the CISG has endorsed the exception found in both Common Law and the Civil Law legal systems through the doctrine of estoppel and the principle of venire contract facturn proprium. There are clauses that can be used to buttress the strength of the no-oral modification 218 clause, such as a ‘no waiver clause’: Neither the failure nor any delay by any party in exercising any right, power or privilege under this agreement will operate as a waiver of such right, power or privilege, and no single or partial exercise of any such right, power or privilege will preclude any other or further exercise of such right, power or privilege or the exercise of any other right, power or privilege. The strength of the merger and no oral modification clauses is somewhat dependent 219 on whether the contract is a full or partial integration clause. The purpose of the merger or entire agreement clause is to signal that the written agreement in which it appears is a final integration of the parties’ agreement. A better approach is to see the merger clause as only a part of the evidence a court may use in determining of the agreement is a final integration. One commentator has noted a trend in American jurisprudence of an erosion of the impact of merger clauses.198 The American Restatement (Second) of Contracts notes that: “a writing cannot of itself prove its own completeness.”199 The stronger argument is that merger clauses do not make sense given the CISG’s 220 rejection of formalities in the formation of contracts and liberal evidence approach to contract interpretation. CISG Article 11 recognizes the informality of many sales of goods transactions by recognizing the enforceability of purely oral contracts, as well as allowing for the admission of any and all probative evidence including ‘witness testimony.’ This is consistent with CISG Article 8(1)’s preference for finding the actual intent or the agreement in fact. The second order rule found in CISG Article 8(2) recognizes 198 G. Wallach, ‘Declining Sanctity of Written Contracts-Impact of the Uniform Commercial Code on the Parol Evidence Rule’ (1979) 44 Missouri L Rev 651, 677. 199 Restatement (Second) of Contracts § 210, comment b (1981).

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the reasonable person as a method of interpretation. The reasonable person is a creation of the context in which the contract was concluded: to determine a reasonable person’s interpretation requires consideration of the circumstances of contract formation, including what the parties knew (negotiations, prior dealings) or should have known (trade usage, business customs, commercial practice). 221 The merger clause is supported in the Common Law by the parol evidence rule that protects written contracts intended to be the final agreement from being contradicted by other types of evidence. The merger clause provides evidence that the parties intended the written contract to be a final integration of their contract and essentially acts as a contractual (internal) parol evidence rule. The ‘no writing’ and open use of extrinsic evidence approach advanced by the CISG preempts the application of the parol evidence rule and diminishes the importance of designating a writing as a final integration of the parties’ agreement. 222 Since the CISG does not require a written form, a danger becomes whether a contract is formed at some point during the negotiations. In order, to prevent inadvertently entering into an oral contract and if it is important for your client that the negotiations result in a written contract, then it is prudent that a preliminary agreement be entered to derogate from CISG Article 11’s ‘no writing’ requirement. In the alternative, a correspondence should be sent and proposals should include a term that states: ‘There shall be no contract until each of us has accepted and signed a writing stating that it contains all of the terms or incorporates by reference to another writing all of the terms of a binding contract between us.’200

X. Nonreliance Clauses 223

Nonreliance clauses are intended to limit or eliminate liability for misrepresentations during the negotiation process. This provision acts as a less broad, quasi-merger clause. Unlike the merger clauses which states that any and all extrinsic evidence is merged into the final agreement, the nonreliance clause asserts that representations made prior to or contemporaneous with the entering the contract are not probative evidence because the parties are declaring they did not rely on any such representations or misrepresentations. That said, courts often make an exception in cases involving fraudulent misrepresentation. The waiver of reliance on representations may not preclude a claim for misrepresentations that were intentionally or fraudulently made. The rationale being that ‘tort (delict) travel outside of the contract.’ However, a counterargument is if reliance is an element of a tort claim, then a strong argument prevents a claim of fraud. The exception may also be challenged when the nonreliance clause expressly states that the parties waive any claim for fraudulent inducement or intentional misrepresentation.

G. Illustrations 224

Merger Clause and General Principles: Depending on the jurisdiction, a number of legal principles can be used to limit the reach of the merger clause: –

Principles of good faith and fair dealing: The insertion of the merger clause or its use to bar evidence of the actual agreement between the parties is an act of bad faith.

200 McMahon, ‘Drafting CISG Contracts and Documents and Compliance Tips for Traders’ available at http://www.cisg.law.pace.edu/cisg/contracts.html#a11.

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–

–

–

Rebus sic stantibus or reliance: A party cannot inconsistently with an understanding it has caused the other party to reasonably acted in reliance to its detriment on previous conduct or statements. Thus, if the parties act (course of performance) based upon a prior or oral agreement that would be precluded as evidence by the merger clause the merger clause should not be enforced. Waiver and estoppel: In the Common Law if a party does not object to a performance that contradicts he terms of the written contract, then the party has waived the protection of the merger clause to show its acceptance of the modified performance. If the party assures the other party that it would not enforce a certain term or agrees to a term that is not reflected in the written contract, then it may be estopped from asserting the written term or rejecting an oral term if to do so would cause an injustice to the other party. Collateral agreements: Nothing prevents a party from proving that the parties en- 225 tered into number of contracts – the written contract (with a merger clause) would be a final integration of what is covered in that contract and other contracts, such as oral agreements (entered into prior to or contemporaneous with the written contract) but the integration or merger clause does not extend to agreements collateral to the written contract and that have not been merged into that contract and, therefore, contain obligations independent of the written contract.

H. Cross References See Chapter 3 and 4 on ‘Precontractual Liability; Chapter 7 on ‘Contractual Formali- 226 ties’; and the first part of this Chapter on ‘Contract Interpretation’.

I. Practitioner Tips & Contract Clauses I. Choice of Law Since the different legal systems enforce merger clauses in different ways, as well as 227 having specific rules relating to their enforceability, if protecting the final integration of an agreement is of high importance to a party, then choice of law should be considered. The choice of law may be made specific to the merger clause: ‘On issues pertaining to the merger clause, such as enforceability, effect of clause, types of evidence precluded, and so forth, the law of … shall be applicable.’ The nuances of the law applicable to the contract should be incorporated into the 228 drafting of the merger clause and the execution of the contract. Here are some examples: –

PECL Article 2:105 differentiates between individually negotiated merger clauses 229 and merger clauses found in the set of standard terms. If found in the former it excludes evidence of prior statements and preliminary agreements. If found in the standard terms, then the clause provides only a rebuttable presumption.

–

PICC 2.1.17 and CESL Article 72 do not make the distinction found in the PECL. 230 The merger precludes the use of prior statements or agreements to challenge an express term of the written contract, whether the clause was individually negotiated or was a standard term. A standard merger clause does not prevent the use of such evidence in the interpretation of the contract. Also, merger clauses are not enforceable against consumers. Larry A. DiMatteo

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Following BGB § 305 contracts are to be interpreted as required by good faith, taking customary practice into consideration. According to BGB § 310 standard business terms only become a part of a contract if the user or refers the other party to the contract to them explicitly and if the other party to the contract agrees to their application.

II. Commercial Practice 232

Merger clauses are important in commercial contracting, especially where the conclusion of the contract was preceded by long-term negotiations, involving a multitude of oral statements, correspondences, and preliminary agreements. In such cases, the PICC and CESL approach is superior to that of the PECL.201 In contracting between sophisticated parties, involving prolonged negotiations and lengthy, complex contracts; it is not reasonable for a party to rely on oral assurances. In such scenarios, a stricter enforcement of the merger clause is justified.

III. Narrow and Broad Merger Clauses 233

Depending on the wording of the merger clause, the court, and the applicable law a merger clause can be narrowly or broadly construed. It could be more narrowly construed to exclude prior statements and preliminary agreements; a broader view of the clause or express wording in the clause could also exclude trade usage and business custom. Most civilian courts, as well as arbitral tribunals, will review all forms of probative evidence, including preliminary agreements and correspondences, as well as other ancillary agreements for purposes of clarifying or supplementing a written contract. It is difficult to see courts, both civil and common, and arbitral tribunals precluding evidence of trade usage in order to better understand an international sales contract due to a merger clause. If the practitioner wants to exclude a usage or custom she should do so by an express term stating that the specific usage or customs are not applicable to the contract. For example, they could expressly state that certain trade manuals or practices are not intended by the parties to be evidence of party intent. The preemption of a trade usage or custom is implicit if a contract term contradicts existing usage or custom; the term would control and need not expressly exclude the usage or custom.

IV. Enhancing the Enforceability of a Merger Clause 234

The practitioner is advised that if such a term is indeed important to its client then the term should be tailored as a ‘negotiated term.’ It should not be placed in a separate body of standard terms or general conditions. It should be conspicuously placed in the body of the contract, and ideally be discussed between the parties and signed or initialed by the parties. In the exchange of forms scenario, the party including the merger clause in its form should require the other party to sign and return the form, as well as sign the merger clause. This would also be prudent in the case of a single form (written confirmation) that should be signed and returned. This may be problematic in some legal systems, such as Germany, where there is a strong written confirmation rule and practice, and requiring a return defeats the nature and certainty of the written 201 Schulze (ed), Common European Sales Law (CESL): Commentary (Beck, Hart, Nomos 2012), CESL Article 72, pp. 352–53.

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confirmation. The use of a model international sales contract form, signed by both parties, would serve to bolster the intent of the parties relating to the merger clause, as well as eliminate the always present conflict of terms in the battle of the forms scenario. In reality, this rarely happens because parties like the convenience and security of being able to simply send their own forms.

V. Order of Preference Clause and Incorporation by Reference If there are multiple documents that make up the final agreement it is best to incor- 235 porate an ordering clause to determine, in case of conflict, which documents control. For example, such a clause may state that the contract takes precedence over general terms and conditions; general terms and conditions take precedence over specifications. Additional documents or materials that are intended to be part of the contract are 236 generally incorporated by reference in the main contract document. These ancillary documents may be attached to the main contract document as an Appendix, Annex, or Exhibit. Other times, the other documents are referenced but not attached. The better practice is that of attachment in order to avoid dispute over what documents are actually being referenced.

VI. Sample Clauses 237

Standard clause #1: This contract with exhibits attached, constitutes the entire agreement of the parties and supersedes all other written or oral agreements between the parties concerning its subject matter. #2: Each of the parties hereto agree that the Agreement comprises the full and entire agreement between the parties, and no other agreement or understanding of any nature concerning the same has been entered into or will be recognized, and all negotiations, acts, work performed, or payments made prior to the execution hereof shall be deemed merged in, integrated and superseded by the Agreement. #3: This clause states that all the terms of the contract are found in the current instrument and that all previous dealings and agreements are being replaced by this contract.

238

Clause derogating from CISG This writing constitutes the final and complete agreement of the parties, and it cannot be contradicted or supplemented by evidence of prior or contemporaneous statements, understandings, or agreements. By this clause, the parties intend to derogate from and vary the effect of Article 8(3), Article 11, and any other provision of the United Nations Convention on Contracts for the International Sale of Goods or other applicable law that would permit this writing to be contradicted or supplemented by evidence of prior or contemporaneous statements, understandings or agreements. 202

239

Clause related to long-term negotiations This contract contains the entire agreement of the Parties concerning the contractual venture, and supersedes and replaces all prior communications or representations between the parties including, without limitation, the contractual offer, the Letter of Intent, dated September 30, 2015, the Memorandum of Understanding, dated December 1, 2015, and all other correspondences, surrounding circumstances, and the course of negotiations.

202

Flechtner, Bland, & Walter (eds), Drafting Contracts Under the CISG (OUP 2008) p. 31.

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241

The Common Law and many Civil Law countries have adopted the interpretation against drafter or contra proferentem rule, in which clauses, including merger or nonreliance clauses that are considered ambiguous, should be interpreted in the way most favorable to the non-drafting party. To counteract the application of this rule of interpretation, a party may insert an anti-contra proferentem or construction clause: Construction Clause The parties have participated jointly in the negotiation and drafting of this agreement. If an ambiguity or question of intent or interpretation arises, this agreement shall be construed as if drafted jointly by the parties and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any of the provisions of this agreement.

VII. Nonreliance Clauses 242

Simple Nonreliance Clause It is understood and agreed that the parties to this contract entered into it after full investigation, neither party relying upon any statement or representation, not embodied in this contract, made by the other.

243

Nonreliance and Disclaimer Clause Note: Before buyer signs the contract, buyer should read it carefully and is free to consult an attorney of buyer’s choice.

244

Buyer understands and acknowledges that the salespersons representing seller in connection with this transaction do not have authority to make any statements, promises or representations in conflict with or in addition to the information contained in this contract. Seller and hereby disclaims any responsibility for any such statements, promises or representations. By execution of this contract, buyer acknowledges that buyer has not relied upon such statements, promises or representations, if any, and waives any rights or claims arising from any such statements, promises or representations.

J. Additional Sources 245 CISG Advisory Council Opinion No 3, ‘Parol Evidence Rule, Plain Meaning Rule, Contractual Merger

Clause and the CISG’ Farnsworth on Contracts Vol I (3rd edn, Aspen Publishers 2004), Chapter 7, §§ 7.2– 7.6 a (‘Determining the subject matter to be interpreted’); Flechtner, Bland & Walter (eds), Drafting Contracts Under the CISG (OUP 2008); Farach, ‘An Eloquent Argument for Enforcing Nonreliance Clauses: Billington v. Ginn-La Pine Island, Ltd., LLLP’ (2017) 91 Florida Bar Journal 48; Mitchell, ‘Entire Agreement Clauses: Contracting Out of Contextualism’ (2006) 22 JCL 222; Mitkidis & Neumann, 'Entire Agreement Clauses: Convergence between US and Danish Contract Law' (2017) 2017 NJCL 180; Peden & Carter, ‘Entire Agreement – and Similar – Clauses’ (2006) 22 JCL 1; G Pilet & P. Rosher, ‘Entire Agreement Clauses in International Business Contracts: Franco-English Comparison’ (2020) RDAI/International Business L.J. 1; Schulze (ed), Common European Sales Law (CESL): Commentary (Beck, Hart, Nomos 2012), CESL Article 72.

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CHAPTER 24 PRODUCTS LIABILITY Michel Cannarsa A. Topics Covered . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 B. Introductory Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 C. Statement of Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 D. International Sales Transaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 E. Sampling of Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 I. CISG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 II. UNIDROIT Principles of International Commercial Contracts . . . . . . . . . . . . . . 14 III. Consumer Sales Directive . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 IV. Directive Concerning Contracts for the Sale of Goods . . . . . . . . . . . . . . . . . . . . . . 16 V. EU Products Liability Directive . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 VI. American Restatement (Third) of Torts – Products Liability . . . . . . . . . . . . . . . . . 18 VII. Chinese Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 VIII. United Kingdom Sale of Goods Act 1979 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 IX. French Code Civil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 X. American Uniform Commercial Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 F. Commentary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 I. Direct Producers’ Contractual Liability for Defective Products to Ultimate Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 1. Consumer Sales Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 a) EU Consumer Sales Directive and Directive on certain aspects concerning contracts for the sale of goods. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 b) National Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 2. Warranty Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 3. Commercial Guarantees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 4. Producer’s Public Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 II. Non-Contractual Producers’ Liability for Defective Products to Ultimate Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 1. Negligence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 2. Tortious Misrepresentation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 3. Strict Liability in Tort . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 III. Remedies and Defenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 1. Privity of Contract as Defense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 2. Notification Duties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 3. Limitation Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 4. Damages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 5. Pure Economic Loss Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81 IV. Seller’s Right of Redress against Producer and Allocation of Liability in the Chain of Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82 1. Notification Duties and Limitation Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83 2. Extra-Contractual Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86 3. Exclusion of Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87 4. Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88 5. Network Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90 V. Product Safety and Recall Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92 G. Cross References & Additional Commentary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97 H. Practitioner Tips & Contract Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98 I. Additional Sources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101

A. Topics Covered Products liability cases generally involve complex legal issues that are at the cross- 1 roads of various legal areas. Products liability developed as a part of contract law and/or tort law, depending on the national jurisdiction concerned. Courts and academics relied Michel Cannarsa

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traditionally on various doctrines in order to admit direct legal claims from the victim against the producer. Indeed, one particularity of products liability cases is that, most of the times, no direct contractual link exists between the final user of the defective good and its producer. Privity of contract has therefore been a longstanding barrier to direct claims from the final purchaser against the remote producer. On another note, the extent of recoverable damage, with the exclusion of pure economic loss was also an obstacle to claims in contractual contexts. 2 Direct producer’s contractual liability for defective products relied historically on warranty claims, on claims based on commercial guarantees, but also on producer’s public statements. More recently, consumer regulations created new legal grounds for direct producer’s liability to the ultimate consumer and introduced several binding product safety and product recall rules.1 On the non-contractual side, producer’s liability has been first based on negligence or tortious misrepresentation before switching to strict liability in tort, at least in some jurisdictions including the US and the EU. 3 In modern (international) distribution commercial chains, the claimant in products liability cases is generally the final purchaser who sues his/her direct contractor, i.e. the final seller. This raises the issue of the seller’s right of redress, contractual or extra-contractual, against the producer and the allocation of liability in the chain of distribution. The degree of legal complexity is further increased by the possible application of rules of private international law and/or the CISG in claims involving the right of redress as it will be shown in the next parts of this Chapter. In addition, the development of so many digital technologies, in recent years, is having increasing repercussions in trade relations and in the field of law. Although legal experts have traditionally shown little interest in such matters, in recent years, it has become virtually impossible for them to ignore the impact of digital technologies on the law, and more specifically, the question of whether legal rules and regulations (applicable to international sales, products liability and product safety) can cope with the changes taking place in the economy, which is rapidly turning into a digital economy.2 The immaterial nature of a growing number of transactions and of their objects (intangible items) makes the transnational and crossborder dimension of more and more commercial transactions an inherent feature in the digital eco-system. The said phenomenon, on one side, fosters international commercial relations and transactions, but on the other side increases the legal complexity of these commercial transactions and of the value and distribution chains on which they are based.

B. Introductory Note 4

Product safety is a major issue of concern in national as well as in global economies, where finished products are put on the market to be used without inspection by customers. Products liability refers to the liability of suppliers (this category of business persons being broadly intended) of defective goods causing damage to persons and property. It is generally considered as an area of tort law even though, historically, contractual remedies have played a significant role in building producers’ liability towards 1 Regarding sectorial product safety rules, especially in the field of emerging digital technologies, IoT and data protection, see Section F, part V below, → mn. 92 ff. 2 Technology is developing and changing rapidly (from artificial intelligence to machine learning, from the Internet of Things to intelligent objects such as self-driving vehicles, healthcare applications, smart homes and blockchain to 3-D printers, via robotics, etc.). Unlike other milestone developments in industrial history, these various innovations seem to be unfolding rapidly, and in some cases at breakneck speed.

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end-users of products. The said liability is aimed at giving producers incentives to ensure products’ safety through the possibility to claim compensation in case of damage caused by defective goods. Products liability is supposed to reach a fair allocation of risks among consumers and producers, who are in the best position to avoid defects in goods (i.e. the cheapest cost avoiders). Products liability rules generally take a neutral standpoint vis-à-vis technology. US law has been a major source of influence in this legal area. In the 1980’s, the Euro- 5 pean Economic Communities (now European Union [EU]) introduced the 85/374/EEC Directive on Products Liability [Products Liability Directive], inspired to a large extent by US law.3 This EU legal framework applies to any product marketed in the European Economic Area4 and is a tool to achieve the Single Market policies: free exchange of goods and elimination of competition distortions. These policy objectives can easily be transposed globally and inspired various domestic legislations. The new Civil Code of the People's Republic of China includes as well a Chapter dedicated to product liability.5 In an international sales context, the major source of uniform law (the CISG) does, 6 in theory, not apply to a products liability claims according to its Article 5 and when the defective goods cause death or personal injury: ‘This Convention does not apply to the liability of the seller for death or personal injury caused by the goods to any person’. Besides, the CISG does in principle only apply to B2B sales contracts and generally not to B2C ones.6 Products liability claims therefore seem to be mainly regulated by domestic laws (or by regional harmonization tools like EU Directives or/and regulations). This Chapter is dedicated to the analysis of the main sources of products liability in various jurisdictions (mainly in the USA, in the EU, and to a certain extent in China) and to the ongoing developments triggered by the impact of emerging technologies on trade and legal rules. Domestic rules are the major sources of liability for international traders, involved in the business of selling goods in different countries causing damage because of their defectiveness. The international legal issues are not absent completely though, as we’ll see in a coming section.7

3 Council Directive 85/374/EEC of 25 July 1985 on the approximation of the laws, regulations and administrative provisions of the Member States concerning liability for defective products; see, on the historical genesis of the EU Directive, Stapleton, Product Liability (1994) p. 48. There is an ongoing assessment process of the Directive. After a ‘Report From the Commission to the European Parliament, The Council and the European Economic and Social Committee on the Application of the Council Directive on the approximation of the laws, regulations, and administrative provisions of the Member States concerning liability for defective products (85/374/EEC) COM(2018) 246 final, 7 May 2018’, an expert group was established by the European Commission in order to conduct a “fitness check” of the Directive in the context of emerging digital technologies. The conclusions of the said expert group have been published in October 2019: “Liability for Artificial Intelligence and other emerging digital technologies”, Report from the Expert Group on Liability and New Technologies – New Technologies Formation, available at www.ec.europa.eu/transparency/regexpert/index.cfm?do=groupDetail.groupMeet ingDoc&docid=36608. 4 The EEA encompasses the 27 EU Member States, Iceland, Liechtenstein and Norway. 5 Civil Code of the People’s Republic of China, Book VII Tort Liability, Chapter IV Product Liability, Articles 1202-1207 (to enter into force on 1st January 2021). See also the Product Quality Law promulgated in 1993 and revised in 1999 (special law on product quality and liability, defining liabilities of producers and sellers and providing a framework for damage allocation), the General Tort Law of 2009, the Law on the Protection of Consumer Rights and Interests of 1993 (current version of 2013) and the Food Safety Law. 6 CISG Article 2: ‘This Convention does not apply to sales: (a) of goods bought for personal, family or household use, unless the seller, at any time before or at the conclusion of the contract, neither knew nor ought to have known that the goods were bought for any such use.’ 7 See Section D, → mn. 10 ff.

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C. Statement of Issues Direct international sales contracts between a producer and a consumer are quite rare. In this kind of situations, consumer protection rules applicable in the consumer’s country of residence are generally considered as mandatory and cannot be derogated from.8 Besides, the CISG would not apply to this kind of contract.9 In the context of a more sophisticated international distribution chain, including tangible and non-tangible goods and services, various legal issues arise in case of damage caused by a defective product. 8 On one side, the final seller will generally be responsible towards the remote purchaser (often a consumer). This liability is usually based on the sale contract. A direct contractual claim by the consumer against a previous supplier or/and the producer is rarely admitted. If the final seller who made good the damage was not responsible for the defect, a claim of redress (to recover the consequential loss she suffered because she compensated the remote buyer) is generally granted to the final seller against previous suppliers.10 This claim may have an international dimension and might therefore fall into the scope of application of CISG. 9 On the other side, an extra-contractual claim can be possible and might directly target the final seller, but also any other supplier in the distribution chain, the importer and the producer of the goods. Can these extra-contractual rules apply concurrently with the provisions of CISG or does CISG exclude their application as a uniform international law?11 If CISG preempts domestic rules, especially domestic tort rules, this could reduce the level of protection of buyers suffering losses due to the non-conformity of goods. 12 Should the domestic courts, in a transnational context, answer the classification and the applicable law questions on the basis of their conflict of laws rules?13 The issue will be particularly acute when the loss suffered is the result of a damage caused to the prop7

8 See e.g. Products Liability Directive 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.’ See also Directive 1999/44/EC of 25 May 1999 on certain aspects of the sale of consumer Goods and associated guarantees [Consumer Sales Directive], Article 7: ‘(1) Any contractual terms or agreements concluded with the seller before the lack of conformity is brought to the seller’s attention which directly or indirectly waive or restrict the rights resulting from this Directive shall, as provided for by national law, not be binding on the consumer. (2) Member States shall take the necessary measures to ensure that consumers are not deprived of the protection afforded by this Directive as a result of opting for the law of a non-member State as the law applicable to the contract where the contract has a close connection with the territory of the Member States.’ From 1 January 2022, the Consumer Sales and Guarantees Directive will be repealed and replaced by Directive (EU) 2019/771 of 20 May 2019 on certain aspects concerning contracts for the sale of goods. It contains a similar provision in its Article 21. 9 CISG Article 2, quoted n 5. 10 Ebers, Janssen, Meyer (eds) European Perspectives on Producer’s Liability – Direct Producers’ Liability for Non-conformity and the Sellers’ Right of Redress (2009) p. 3. 11 Honnold’s answer is in the affirmative: Uniform Law for International Sales under the 1980 United Nations Convention, (3rd edn, 1999) p. 71–76, available at http://www.cisg.law.pace.edu/cisg/biblio/ho5.ht ml#dd6. 12 One of the issues is to determine whether the Products Liability Directive should be given precedence by virtue or CISG Article 90: ‘This Convention does not prevail over any international agreement which has already been or may be entered into and which contains provisions concerning the matters governed by this Convention, provided that the parties have their places of business in States parties to such agreement’. Because the Products Liability Directive has been adopted according to the EU treaties, this is one possible interpretation, especially taking into account the fact that the body of EU secondary legislation possibly overlapping with the CISG is growing. 13 E.g. Convention of 2 October 1973 on the Law Applicable to Products Liability.

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D. International Sales Transaction

erty of the plaintiff where CISG and products liability laws can apply concurrently.14 Overlaps between CISG and domestic products liability rules should however be limited, especially taking into account the respective scope of recoverable damages.

D. International Sales Transaction During the CISG travaux préparatoires, discussions surrounded the extent of the 10 exclusion in CISG Article 5 and in order to preserve the level of protection afforded by many domestic products liability rules the extension of the exclusion to damage to property was addressed. If the facts that lead to the application of domestic rules on products liability are the same facts that lead to the application of the CISG, one could argue, as Professor Honnold suggested,15 that domestic rules must be disregarded. This outcome would be independent of the grounds of liability: negligence, non-conformity, and defect. Professor Schlechtriem’s approach seems more consistent: the CISG should prevail 11 over domestic tort rules in actions to recover economic losses (‘for the inferior value of nonconforming goods’). These losses are ‘the essence of contractual interests’.16 At the opposite side, domestic products liability rules are generally focused on compensation for personal injuries and damage to other property (i.e. not including the defective good itself). In Professor Schlechtriem’s view, these interests exist ‘independently of contractual obligations’. This approach has probably the inconvenience of reducing international uniformity and to possibly create discriminations among buyers, depending on the level of protection that is afforded by domestic rules. In practice however, because domestic products liability rules are primarily designed for personal injury and damage to property suffered by consumers who do not have a direct contract with the producer in case of defect of the product, whereas the CISG was primarily designed for economic losses suffered by the buyer and claiming compensation from her immediate seller because of the non-conformity of the goods sold, few overlaps should occur in practice. One further issue is the concurrence between claims based on the CISG on one side 12 and based on domestic rules on the other side in the particular area of redress claims by sellers who had to compensate the remote buyer/user of the products because of a lack of conformity (on the basis of domestic contractual rules) or because of a defect (on the basis of domestic products liability rules). Beyond practical issues, like for example the notification duties and limitation periods, one should wonder whether the loss suffered by the final seller (especially damages paid to the remote buyer/user) is within the category of consequential losses in the light of CISG Article 7417 thus allowing the final seller to rely on a redress claim, or within the category of ‘liability of the seller for death or personal injury caused by the goods to any person’ of CISG Article 5 and therefore excluded from its scope of application. As it will be seen below, this question is of particular interests for importers into the EU of goods manufactured outside the EU. These importers are directly liable for personal injuries and damages to property caused by defective goods to injured persons into the EU on the basis of the Products Liability Directive. If they wish to claim for redress from the manufacturer based outside 14 CISG Article 5 does not exclude formally this category of damages from the Convention’s scope of application. 15 N 11. 16 Schlechtriem, ‘The Borderland of Tort and Contract – Opening a New Frontier?’ (1988) 21 Cornell Int’l LJ 467. 17 See below., → mn. 13.

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the EU, they should ascertain whether the CISG applies or not to the claim and what are the possible limitation and notification duties. They should also wonder what would be the applicable law to their claim on the basis of the forum’s conflict of laws’ rules. These issues might be further complexified by the blurred boundaries between goods and services. ‘Smart’ goods or the ‘internet of things’ increase the amalgation of goods and services, making it even more difficult to determine whether CISG applies to a given international contract.18They are of course also strongly advised to subscribe an insurance coverage accordingly.

E. Sampling of Laws I. CISG 13 Article 1 (1) This Convention applies to contracts of sale of goods between parties whose places of business are in different States. Article 2 This Convention does not apply to sales: (a) of goods bought for personal, family or household use, unless the seller, at any time before or at the conclusion of the contract, neither knew nor ought to have known that the goods were bought for any such use; Article 5 This Convention does not apply to the liability of the seller for death or personal injury caused by the goods to any person. Article 74 Damages for breach of contract by one party consist of a sum equal to the loss, including loss of profit, suffered by the other party as a consequence of the breach. Such damages may not exceed the loss which the party in breach foresaw or ought to have foreseen at the time of the conclusion of the contract, in the light of the facts and matters of which he then knew or ought to have known, as a possible consequence of the breach of contract.

II. UNIDROIT Principles of International Commercial Contracts 14 Article 7.1.1 Non-performance defined Non-performance is failure by a party to perform any of its obligations under the contract, including defective performance or late performance. Article 7.2.3 Repair and replacement for defective performance The right to performance includes in appropriate cases the right to require repair, replacement, or other cure of defective performance. The provisions of Articles 7.2.1 and 7.2.2 apply accordingly.

III. Consumer Sales Directive 15 Article 2(2)(d) Consumer goods are presumed to be in conformity with the contract if they: (d) show the quality and performance which are normal in goods of the same type and which the consumer can reasonably expect, 18 In favor of extending CISG’s application to service contracts, see Schwenzer, Ranetunge and Tafur, ‘Service Contracts and the CISG’ (2019) 10 Indian J. Int’l Econ. L. 172.

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E. Sampling of Laws given the nature of the goods and taking into account any public statements on the specific characteristics of the goods made about them by the seller, the producer or his representative, particularly in advertising or on labeling. Article 3 (1) The seller shall be liable to the consumer for any lack of conformity which exists at the time the goods were delivered. (2) In case of lack of conformity, the consumer shall be entitled to have the goods brought into conformity free of charge by repair or replacement […] or to have an appropriate reduction made in the price or the contract rescinded with regard to those goods […].

IV. Directive Concerning Contracts for the Sale of Goods 16

Article 6 Subjective requirements for conformity In order to conform with the sales contract, the goods shall, in particular, where applicable: – be of the description, type, quantity and quality, and possess the functionality, compatibility, interoperability and other features, as required by the sales contract; – be fit for any particular purpose for which the consumer requires them and which the consumer made known to the seller at the latest at the time of the conclusion of the sales contract, and in respect of which the seller has given acceptance; – be delivered with all accessories and instructions, including on installation, as stipulated by the sales contract; and – be supplied with updates as stipulated by the sales contract. Article 7 Objective requirements for conformity 1. In addition to complying with any subjective requirement for conformity, the goods shall: (a) be fit for the purposes for which goods of the same type would normally be used, taking into account, where applicable, any existing Union and national law, technical standards or, in the absence of such technical standards, applicable sector-specific industry codes of conduct; (b) where applicable, be of the quality and correspond to the description of a sample or model that the seller made available to the consumer before the conclusion of the contract; (c) where applicable, be delivered along with such accessories, including packaging, installation instructions or other instructions, as the consumer may reasonably expect to receive; and (d) be of the quantity and possess the qualities and other features, including in relation to durability, functionality, compatibility and security normal for goods of the same type and which the consumer may reasonably expect given the nature of the goods and taking into account any public statement made by or on behalf of the seller, or other persons in previous links of the chain of transactions, including the producer, particularly in advertising or on labelling. 2. The seller shall not be bound by public statements, as referred to in point (d) of paragraph 1 if the seller shows that: (a) the seller was not, and could not reasonably have been, aware of the public statement in question; (b) by the time of conclusion of the contract, the public statement had been corrected in the same way as, or in a way comparable to how, it had been made; or (c) the decision to buy the goods could not have been influenced by the public statement. 3. In the case of goods with digital elements, the seller shall ensure that the consumer is informed of and supplied with updates, including security updates, that are necessary to keep those goods in conformity, for the period of time: (a) that the consumer may reasonably expect given the type and purpose of the goods and the digital elements, and taking into account the circumstances and nature of the contract, where the sales contract provides for a single act of supply of the digital content or digital service; or (b) indicated in Article 10(2) or (5), as applicable, where the sales contract provides for a continuous supply of the digital content or digital service over a period of time. 4. Where the consumer fails to install within a reasonable time updates supplied in accordance with paragraph 3, the seller shall not be liable for any lack of conformity resulting solely from the lack of the relevant update, provided that: (a) the seller informed the consumer about the availability of the update and the consequences of the failure of the consumer to install it; and (b) the failure of the consumer to install or the incorrect installation by the consumer of the update was not due to shortcomings in the installation instructions provided to the consumer.

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V. EU Products Liability Directive 17 Article 1 The producer shall be liable for damage caused by a defect in his product. 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.

VI. American Restatement (Third) of Torts – Products Liability 18 § 1 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. §2 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; (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 the distributor, or a predecessor in the chain of distribution, and the omission of the instructions or warnings renders the product not reasonably safe.

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VII. Chinese Law Article 1202 Where a defective product causes any harm to another person, the manufacturer shall assume the tort liability. Article 1203 Where any harm is caused to another person by a defective product, the victim may require compensation to be made by the manufacturer of the product or the seller of the product. If the defect of the product is caused by the manufacturer and the seller has made the compensation for the defect, the seller shall be entitled to be reimbursed by the manufacturer. If the defect of the product is caused by the fault of the seller and the manufacturer has made the compensation for the defect, the manufacturer shall be entitled to be reimbursed by the seller.

VIII. United Kingdom Sale of Goods Act 1979 19

Section 14 Where the seller sells goods in the course of a business, there is an implied term that the goods supplied under the contract are of satisfactory quality.

IX. French Code Civil 20

Article 1641 The seller is bound to a warranty on account of the latent defects of the thing sold which render it unfit for the use for which it was intended, or which so impair that use that the buyer would not have acquired it, or would only have given a lesser price for it, had he known of them. Article 1642 A seller is not liable for defects which are patent and which the buyer could ascertain for himself. Article 1645 Where the seller knew of the defects of the thing, he is liable, in addition to restitution of the price which he received from him, for all damages towards the buyer.

X. American Uniform Commercial Code 21

§ 2-314 (1) Unless excluded or modified (Section 2-316), a warranty that the goods shall be merchantable is implied in a contract for their sale if the seller is a merchant with respect to the goods of that kind. […] § 2-313 (1) Any affirmation of fact or promise made by the seller to the buyer which relates to the goods and becomes part of the basis of the bargain creates an express warranty that the goods shall conform to the affirmation or promise.

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F. Commentary I. Direct Producers’ Contractual Liability for Defective Products to Ultimate Consumer 22

Direct producers’ contractual liability for defective products to ultimate consumers is usually based on traditional contractual remedies. Consumer sales regulations are generally limited to consumers’ claims against their direct contractor, the final seller. This is what this section will highlight.

1. Consumer Sales Law a) EU Consumer Sales Directive and Directive on certain aspects concerning contracts for the sale of goods. The Consumer Sales Directive is applicable to sales contracts and to the supply of consumer goods to be manufactured or produced.19 The professional seller is responsible towards the buyer acting as a consumer in case of non-conformity of the goods sold.20 This liability imposes to the seller to repair or replace the non-conforming good, to grant a price reduction or to terminate the contract.21 There is no direct producer’s liability towards the remote purchaser this issue being dealt with by the Products Liability Directive. The said Directive applies to claims of liability for personal injury and damage to other property (not to the defective product itself), while the Consumer Sales Directive relates to claims for non-conformity causing a direct loss.22 Therefore the final seller is the only person responsible on the basis of the contract with the consumer for the direct loss, i.e. the consequences of the non-conformity.23 Consequential damages are recoverable on the basis of domestic rules and are not the priority of the Consumer Sales Directive. 24 Directive (EU) 2019/771 of 20 May 2019 on certain aspects concerning contracts for the sale of goods, repeals the Consumer Sales Directive from 1 st January 2022. This new piece of legislation brings several updates, especially to take into account the new technology-driven economy. It was introduced in parallel to Directive (EU) 2019/770 of 20 May 2019 on certain aspects concerning contracts for the supply of digital content and digital services, laying down rules on certain requirements concerning contracts for the said contracts. Directive 2019/771 contains new rules regarding goods with digital contents, introducing new aspects of conformity and seller’s liability.24 23

Directive 1999/44/EC of the European Parliament and of the Council of 25 May 1999 (n 8). Article 3(1): ‘The seller shall be liable to the consumer for any lack of conformity which exists at the time the goods were delivered’. The concept of non-conformity is defined in Consumer Sales Directive Article 2(1). The concept of non-conformity is shared by all Member States: Hondius and Jeloschek, ‘Towards a European Sales Law – Legal Challenge posed by the Directive on the Sale of Consumer Goods and Associated Guarantees’ (2001) ERPL 158. 21 Article 3(2): ‘In case of lack of conformity, the consumer shall be entitled to have the goods brought into conformity free of charge by repair or replacement […] or to have an appropriate reduction made in the price or the contract rescinded with regard to those goods […].’ 22 The intent of the European Commission was to prevent any overlap between the Consumer Sales Directive and the Products Liability Directive. 23 Ebers, Janssen, Meyer (n 10) p. 4. 24 Article 7(3) and Article 10(2). 19

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b) National Laws We will deal essentially with the claims that mirror classical products liability claims, 25 i.e. those for compensation of consequential losses. A fair picture of the EU Member States’ provisions governing these claims for compensation of consequential losses in a sales contract context can be found in ‘The EC Consumer Law Compendium’, a study for the European Commission analyzing, among others, the implementation of the Consumer Sales Directive into the national legal orders.25 Claims for compensation of consequential losses are available in a significant number of Member States: Austria, Belgium, Bulgaria, France,26 Germany, Latvia, Malta, Spain, Ireland and the United Kingdom.27 These claims will however mostly reach the final seller and not the producer directly, though the initial project of the European Commission in drafting the Consumer Sales Directive included a direct warranty claim by the consumer against the producer.28 Direct warranty claims by the purchaser against the manufacturer are more frequent in domestic legislations.

2. Warranty Claims The warranty claim is a contractual claim in case of defective, non-conforming, or 26 unfit goods.29 Warranty claims were central in products liability cases in the Common Law area at the beginning of the 20th century.30 Common Law evolved from caveat emptor to caveat venditor,31 leading to the adoption of the United Kingdom Sale of Goods Act 1893 that introduced various warranties.32 The liability of the seller according to the Sale of Goods Act 1893 is strict and not based on her negligence.33 In the USA, courts allowed non-contracting plaintiffs to rely on the ‘implied warranty of merchantability’, when no inspection of the goods was possible.34 The exception to the privity doctrine was later confirmed by the US Supreme Court in East River.35 Warranty law in the USA opened the way to the strict liability in tort doctrine in products liability cases. The main rule is contained in the US Uniform Commercial Code [UCC] § 2-314 (‘Implied warranty: Merchantability; Usage of Trade’).36 UCC § 2-315 deals with the implied warranty of ‘fitness for particular purpose’, rather used in B2B contracts than in B2C contracts.

25 Schulte-Nölke, Twigg-Flesner, Ebers (eds), EC Consumer Law Compendium – Comparative Analysis (2007). The part dedicated to the Consumer Sales Directive was drafted by Twigg-Flesner and is available at https://ec.europa.eu/consumers/archive/cons_int/safe_shop/acquis/comp_analysis_en.pdf; See also, Ebers, Janssen, Meyer (n 10) part 3, pp. 171 et seq. 26 In Belgium and France, a non-rebuttable presumption of knowledge of the defect is imposed on professional sellers, allowing the buyer to be compensated for all consequential losses. 27 Damages will include ‘both the loss of value in the non-conforming goods and reasonable foreseeable consequential losses.’ 28 Green Paper COM (93) 509, of 15 November on guarantees for consumer goods and after-sales services, p. 86. 29 Bianca, Grundmann, Stijns (eds), La directive communautaire sur la vente (2004) p. 65. 30 Prosser, ‘The Implied Warranty of Merchantable Quality’ (1943) 27 Minnesota L Rev 117, 146–8, 155–6. 31 Atiyah, The Rise and Fall of Freedom of Contract (1979) p. 123. 32 See also the US Uniform Sales Act (1906). 33 E.g., Frost v Aylesbury Dairy Co Ltd [1905] 1 KB 608. 34 Henningsen v Bloomfield Motors Inc., 161 A. 2 d 69 (1960). Henningsen concerned a personal injury claim. The same approach was confirmed in an economic loss situation in Randy Knitwear v American Cyanamid, 181 N.E.2 d 399 (1962). 35 476 U.S. 858 (1986). 36 ‘(1) Unless excluded or modified (§ 2-316), a warranty that the goods shall be merchantable is implied in a contract for their sale if the seller is a merchant with respect to the goods of that kind. […]’.

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The UCC admits, at § 2-318, that a non-privity party can rely on a contractual warranty claim against the producer.37 These are exceptions to the doctrine of privity, both in its vertical and horizontal dimensions. The rule, though, is still relevant. The contract remains therefore the basis of the warranty claim and the extension of the number of persons entitled to sue the seller or the manufacturer is not without limits. According to UCC § 2-318, States have to select one out of three alternatives.38 28 Recoverable damages are, according to UCC §§ 2-71439 and 2-715, the economic loss and other consequential damage, including injury to person or property proximately resulting from any breach of warranty.40 What is central to the courts’ assessment of consequential damages is that they have to be foreseeable,41 though this requirement is not applicable to personal injuries. The recoverability of pure economic losses is a distinguishing feature of contractual claims. An economic loss is both a damage for inadequate value, costs of repair and replacement of a non-conforming good and the consequent loss of profits. The economic expectations of the plaintiff are disappointed because of the non-conformity of the good sold. This kind of interest is traditionally protected by contract law. At the opposite, extra-contractual products liability claims do not allow to recover such losses.42 They instead focus on compensation for personal injury and damage to other property. The US Supreme Court held that the ‘manufacturer in a commercial relationship has no duty either under a negligence or a strict products liability theory to prevent a product from injuring itself.’43 29 It might be worth indicating that a duty to mitigate damage is imposed by UCC § 2-715 (2)(a), especially in B2B contracts. The limitation period in warranty claims in the USA is of a maximum of four years after the cause of action has accrued according to UCC § 2-725.44 Limitation and exclusion contractual clauses should not be enforceable when they are unconscionable.45 According to UCC § 2-316 UCC, exclusion or modification of warranties clauses are enforceable provided that they are conspicuous and, in case of warranty of fitness, are by writing and conspicuous. Apparent defects are excluded from the warranty, unless the seller was aware of the defect.46 Limitation clauses can also exclude specific damages/remedies: see e.g. UCC § 2-719: ‘(3) Consequential damages may be limited or excluded unless the limitation or exclusion is unconscionable. Limitation of consequential damages for injury to the person in the case of consumer 27

UCC § 2-318: ‘Third party beneficiaries of warranties express or implied’. Alternative A: extension to any natural person who is in the family or household of the buyer or who is a guest in his home; Alternative B: extension to any natural person who may reasonably be expected to use, consume of be affected by the goods and who is injured in person by breach of the warranty; Alternative C: extension to any person who may reasonably be expected to use, consume or be affected by the goods and who is injured by breach of the warranty. 39 ‘(2) The measure of damages for breach of warranty is the difference at the time and place of acceptance between the value of the goods accepted and the value they would have had if they had been as warranted […]’. 40 See e.g. R. Clinton Construction Co. v Bryant & Reaves, Inc., 442 F.Supp. 838 (N.D. Miss. 1977). 41 Gerwin v Southeastern Cal. Ass’n of Seventh Day Adventists, 92 Cal. Rptr. 111 (1971). 42 Gordley, ‘The Rule Against Recovery in Negligence for Pure Economic Loss: An Historical Accident?’ in Bussani and Palmer (eds), Pure Economic Loss in Europe (2003). This can for example limit the recoverability, in tort, of damages caused by defective component parts to the product in which they are integrated. This is the so-called ‘integrated part’ doctrine. 43 Pope & Talbot, Inc. v Hawn, 346 U.S. 406, 346 U.S. 409 (1953); see also East River S.S. Corp. v Transamerica Delaval, Inc., 476 U.S. 858 (1986). See also Gilmore, The Death of Contract (1974) pp. 87–94. 44 The cause of action accrues when the breach occurs, regardless of the aggrieved party’s lack of knowledge of the breach. A breach of warranty occurs when tender of delivery is made (UCC § 2-725(2)). 45 See UCC § 2-302 dedicated to ‘Unconscionable Contract or Clause’. 46 Owen, ‘The Highly Blameworthy Manufacturer: Implications on Rules of Liability and Defense in Products Liability Actions’ (1977) 10 Ind L Rev 769. 37

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goods is prima facie unconscionable but limitation of damages where the loss is commercial is not’. Warranty clauses are also regulated by the Magnusson-Moss Warranty Act, which infringements are considered as a breach of Federal Law.47 To conclude on US law, let us stress that plaintiffs may rely on both contractual and extra-contractual claims, depending on the loss suffered and which they wish to recover. The ‘non-cumul’ rule therefore doesn’t apply. However, nowadays, extra-contractual claims largely prevail in products liability litigation. In French law, the seller (be it the manufacturer or a supplier) has the duty to deliver the good and to warrant it.48 Goods must be in conformity with the contract and be free of latent defects. Indeed, according to French Code civil Article 1641, the ‘seller is bound to a warranty on account of the latent defects of the thing sold which render it unfit for the use for which it was intended, or which so impair that use that the buyer would not have acquired it, or would only have given a lesser price for it, had he known of them.’ The liability of the seller is not based on negligence. Consequential losses are recoverable where the seller knew of the latent defect. This rule is based on French Code civil Article 1645: ‘Where the seller knew of the defects of the thing, he is liable, in addition to restitution of the price which he received from him, for all damages towards the buyer.’ This means that personal injury and damage to property are included in the scope of recovery.49 Courts generally impose a presumption according to which the professional seller (including the manufacturer) knew about the defects. The presumption cannot be rebutted,50 which means that a professional seller will have to compensate all injuries caused by goods presenting hidden defects. The defect must exist prior to the sales contract and must be hidden (see French Code civil Article 1642 ‘A seller is not liable for defects which are patent and which the buyer could ascertain for himself.’). The action resulting from latent defects must be brought by the buyer within a period of two years following the discovery of the defect. French law allows a direct warranty claim in chain of sales contracts from the remote buyer against the first seller (most of the time the producer).51 This is an exception to the doctrine of privity of contract which has been broadly extended to a variety of contexts.52 Theoretically speaking, this direct claim from the remote purchaser against the manufacturer relies on the idea that the warranty claim for latent defects is an accessory right attached to the good sold, which is therefore transmitted to the end purchaser. 53 One of the advantages of the direct warranty claim is that the end-consumer can sue § 102(a), 15 U.S.C.A. § 2302(a). French Code civil Article 1603. This provision applies to all sales contracts, not only to B2C sales contracts. 49 Where the seller did not know of the defects of the good sold, he is only liable for restitution of the price and for reimbursing the buyer for the costs occasioned by the sale. 50 Court of cassation, 19 January 1965, D. 1965, 389; for the producer’s side: Court of cassation, commercial chamber, 27 November 1973, JCP 1974, II. 17887, commentary by Malinvaud. 51 This direct claim is called ‘action directe’. Plancqueel, Contribution à l’étude des actions directes, Ph.D. thesis (1935); Cozian, L’action directe (1969); Teyssié, Les groupes de contrats (1975); Néret, Le sous-contrat (1979); Jamin, La notion d’action directe, Ph.D. thesis (1991). The first decision of the Court of cassation admitting the direct contractual claim goes back to 1820 (25 January 1820). 52 See Moréteau, ‘Revisiting the Grey Zone between Contract and Tort: The Role of Estoppel and Reliance’ in Koziol/Steininger (eds), European Tort Law 2004 (2005) p. 62: ‘In French law, contract is a big star with a very strong gravitational force. The French contract easily creates rights to the benefit of third parties. French law has developed a concept of chain of contract allowing direct action by a party at the end of the chain as against the one at the beginning.’ 53 See French Code civil Article 1615: ‘The obligation to deliver the good includes its accessories and all that was designed for its perpetual use’. 47 48

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the manufacturer and rely on a strict liability regime. There are however inconveniences: the plaintiff will not be allowed to rely on tort actions because of the strict non-cumul rule. Besides, the contractual nature of the claim entitles the business seller to enforce contractual clauses limiting or excluding liability against the remote purchaser, even if she is a consumer. Indeed, the contractual claim arises from the first contract of the chain and this first contract is generally concluded between two business persons. As a consequence, unfair contract terms legislation does not apply.54 35 The doctrine of privity in English law has been more vigorous, excluding most of the times direct contractual claims by the remote purchaser against the manufacturer. 55 The relevance of warranty law in products liability cases is therefore quite reduced. The warranty claim in English law is traditionally designed for business purchasers and aimed at getting compensation for economic losses. Warranty law is regulated by the Sale of Goods Act 1979 (for consumer contracts see the Consumer Rights Act 2015). Its s 14, which cannot be derogated from, deals with the implied terms about quality or fitness imposed on professional sellers: ‘Where the seller sells goods in the course of a business, there is an implied term that the goods supplied under the contract are of satisfactory quality.’56 The liability imposed on the seller is strict and is not based on her negligence. The buyer must start proceedings within a period of six years from the date on which the cause of action accrued.57 The seller cannot escape her liability when the defect could not be discovered58 and only foreseeable damages are recoverable.59 According to the Unfair Contract Terms Act 1977 and the Unfair Terms in Consumer Contracts Regulation 1994, no exclusion of liability is possible in case of death or personal injury and warranties cannot be excluded in B2C contracts.60 36 In Italian law, warranty against latent defects is regulated in Codice civile Articles 1490 to 1497. Consequential damages are recoverable, depending on the seller’s fault (Article 1494).61 There is also a warranty of ‘proper functioning’ in Codice civile Article 1512 (when the seller warrants the proper functioning). Italian scholars have been quite reluctant to see in warranty claims an adequate way to deal with damage caused by defective products, the main obstacle being the absence of a direct warranty claim from the remote purchaser against the manufacturer and the non-cumul rule. Dangerous goods have been considered as defective goods according to Codice civile Article 1492(2), but only in the direct contractual relation between the manufacturer and the first purchaser.62 Concerning the remote purchaser (often a consumer), scholars and courts have always preferred to rely on the extra-contractual claim of negligence of Codice civile Article 2043. 37 In Chinese law, various rules on consequences for selling defective goods are contained in the Law on the Protection of Consumer Rights and Interests, including the 54 Cour de cassation, 3rd chamber, 16 November 2005, Bull Civ. III, No. 222; D. 2006, 971, commentary by Cabrillac. 55 Grant v Australian Knitting Mills [1935] AC 85. The claim had to be extra-contractual, through the claim in negligence based on Donoghue v Stevenson precedent: ‘The duty is personal, because it is inter partes, it needs no interchange in words, spoken or written, or signs of offer or assent; it is thus different in character from any contractual relationship’. 56 Sale of Goods Act s 14(2). 57 Limitation Act 1980, Sections 2 (torts) and 5 (contracts). In case personal injuries or death, the time limit is three years (Section 11). See also Section 11(A) dedicated to products liability claims. 58 Frost v Aylesbury Dairy [1905] 1 KB 608. 59 Hadley v Baxendale (1854) 9 Exch 341. 60 Unfair Contract Terms Act 1977 s 6(2). 61 The fault is presumed: Troiano and Bisazza, in Ebers, Janssen and Meyer (n 10) p. 393. 62 Corte di cassazione, 13 March 1980, No. 1696, Giustizia civile, 1980, I, p. 1914. For a recent case, see Corte di cassazione, 27 February 2017, No. 18610.

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seller’s warranty against unsafe products63 and compensation duties for damage caused by defective products64, as well as punitive damages for defective products causing death and disability.65 In international sales transactions, the direct warranty claim existing in some juris- 38 dictions raises some contextual issues. The claim would have a contractual nature in a domestic context, like it is the case in French law. If it was the case in an international context, the CISG could apply if the claimant is not a consumer. However, that would probably be in contradiction with the concepts of ‘contracts of sale of goods between parties’ and ‘rights and obligations of the seller and the buyer arising from [the] contract’ used in CISG Articles 1(1) and 4. Courts would also have to apply conflict of laws rules depending on the qualification made: contract or tort. The European Court of Justice ruled out that a direct claim against the producer should be considered as a contractual claim according to the Brussels Convention on Jurisdiction and the Enforcement of Judgments in Civil and Commercial Matters.66 However, two recent decisions of the same court may suggest that the direct action between two remote contractors could be considered to fall into the scope of the contractual subject matter.67 That is not necessarily good news for the producer because she will not be able to 39 rely on contractual limitations and/or notification duties. The issue at stake is mainly for the producer to know whether she will be able to rely on contractual limitation clauses and/or notification duties.

3. Commercial Guarantees According to Consumer Sales Directive Article 6 and Directive on certain aspects 40 concerning contracts for the sale of goods Article 17, guarantees shall be legally binding on the offeror. They are enforceable as a contractual obligation by the consumer against the offeror (possibly the manufacturer). In Italian law, if the producer has offered a guarantee which extends to the remote purchaser, then she will be directly liable towards the said remote purchaser.68 In English law, consumer guarantees also can lead to direct liability towards the re- 41 mote purchaser. The consumer guarantee will be enforceable as a contractual obligation, even in the absence of a direct contractual link between the manufacturer and the end purchaser. It has been submitted that the rule of Consumer Sales Directive Article 6 could represent a ‘back door’ for direct liability of a producer in English law.69 In French Law, the manufacturer would in any case be directly and contractually 42 liable to the remote purchaser in case of a latent defect, even if no commercial guarantee has been issued. In an international context though, the situation would not be the same. This issue has been addressed in the Thermo King v Cisgna Insurance case.70 A French buyer entered into a sales contract with a French seller. The good sold (a Law on the Protection of Consumer Rights and Interests Article 18. Law on the Protection of Consumer Rights and Interests Article 14. 65 Law on the Protection of Consumer Rights and Interests Articles 49,51, 55. For a general overview of product liability in China, see Jin, ‘Between the Ideal and Reality: A Brief National Report on Consumer Protection in China’, in Durovic, Howells, Janssen and Micklitz, Consumer Law in Asia (Forthcoming). 66 Case C-26/91 Jakob Handte & Co. Gmbh v Traitement Mécano-chimiques des Surfaces SA [1992] ECR I-3967. See, more recently and in a, if not similar, comparable situation: Case C-543/10 Refcomp SpA v Axa Corporate Solutions Assurance SA and Others. 67 See ECJ, 7 March 2018, cases C-274/16 and C-447/16, Flighright (concerning a partial air transport) and 4 October 2018, n°C-337/17, Feniks (concerning an actio pauliana). 68 Troiano and Bisazza (n 61) p. 408. 69 Twigg-Flesner, in Ebers, Janssen and Meyer (n 10) p. 263. 70 Cour de cassation, 1st chamber, 5 January 1999, D. 1999, jurispr. p. 383, commentary by Witz. 63 64

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truck equipped with a freezer manufactured by a US company) caused damage to the French buyer because the freezer broke down. There was no sales contract between the US manufacturer and the French buyer. The French buyer sued nonetheless the US manufacturer directly on the basis on the manufacturer’s express warranty. The Court of cassation denied to the French buyer the possibility to rely on a direct contractual claim (based on the manufacturer’s express warranty) in the light of CISG Articles 1 and 4. It ruled that ‘the Convention applies to international contracts for the sale of goods and governs exclusively the rights and obligations, which such a contract gives rise to between the seller and the buyer.’ But more recent case law doesn’t seem as reluctant to admit the contractual nature of a direct claim between the remote purchaser and the manufacturer in an international context. However, French domestic sales law was applied whereas CISG was the applicable law to the original contract between the manufacturer (based in Italy) and its first contractor (based in France).71 43 In German law, a manufacturer’s warranty creates a contractual relationship between the manufacturer and the remote buyer.72 Express warranties in US law do also entitle the remote purchaser to rely on them directly against the producer.73

4. Producer’s Public Statements In Germany, according to BGB § 434, about material defects of goods in sales contracts, the concept of ‘quality’ includes characteristics which the buyer can expect from the public statements on specific characteristics of the thing that are made by the seller, the producer74 or her assistant, including without limitation in advertising or in identification. The seller can escape liability if she was ‘not aware of the statement and also had no duty to be aware of it, or at the time when the contract was entered into it had been corrected in a manner of equal value, or it did not influence the decision to purchase the thing […]’.75 45 An interesting rule regarding public statements can be found in Article 7 of the Directive on certain aspects concerning contracts for the sale of goods and seems to be a fair synthesis of many domestic rules in the Member States: 44

7. 1. In addition to complying with any subjective requirement for conformity, the goods shall: (…) (d) be of the quantity and possess the qualities and other features, including in relation to durability, functionality, compatibility and security normal for goods of the same type and which the consumer may reasonably expect given the nature of the goods and taking into account any public statement made by or on behalf of the seller, or other persons in previous links of the chain of transactions, including the producer, particularly in advertising or on labelling.

Cour de cassation, Commercial chamber, 16 January 2019, No. 17-21.477. Schwenzer and Schmidt, ‘Extending the CISG to Non-Privity Parties’ available at http://www.cisg.law .pace.edu/cisg/biblio/schwenzer-schmidt.html, p. 110. 73 Id., p. 111. See also below, in the section dedicated to Producers’ public statements, → mn. 44 ff. 74 Gesetz über die Haftung für fehlerhafte Produkte (Products Liability Act of 15 December 1989 – BGBl 1989, 2198), § 4(1) and (2): ‘(1) Producer in the meaning of this Act is the person who has manufactured the final product, a basic substance or a component part of the product. Furthermore, whoever represents himself as a producer by attaching his name, trademark or other distinctive mark is regarded as the producer. (2) Notwithstanding sub-paragraph 1, a person is also treated as a producer who, within the range of his commercial activity, imports into the area covered by the Treaty for the Establishment of the European Economic Community a product with a view to sale, hire, hire-purchase or any other form of distribution’. (translation available at: http://www.utexas.edu/law/academics/centers/transnational/work_ new/german/case.php?id=1397). 75 BGB § 434. 71

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The Consumer Sales Directive also already made the final seller liable for public 46 statements made by the producer. According to its Article 2(2)(d): ‘Consumer goods are presumed to be in conformity with the contract if they: (d) show the quality and performance which are normal in goods of the same type and which the consumer can reasonably expect, given the nature of the goods and taking into account any public statements on the specific characteristics of the goods made about them by the seller, the producer or his representative, particularly in advertising or on labeling.’76 The seller has limited chances not to be bound by the public statements made by the producer.77 In English Law, Consumer Rights Act s 9(5) provides that ‘The relevant circum- 47 stances mentioned in subsection (2)(c) include any public statement about the specific characteristics of the goods made by the trader, the producer or any representative of the trader or the producer’. Outside the statutory regime, it has been possible at Common Law to admit, as an exception, a direct claim by the consumer against the manufacturer based on statements made in advertising if there is an intention to be bound. The principle is illustrated in Carlill v The Carbolic Smoke Ball Company78. In US law, public statements and advertisements justified going beyond the privity 48 doctrine.79 A direct warranty claim is more likely to be accepted when the statement is made directly by the producer.80 Advertisements can generate a warranty.81 The statement must relate to a central feature of the product (e.g. safety). According to UCC § 2-313(1), ‘any affirmation of fact or promise made by the seller to the buyer which relates to the goods and becomes part of the basis of the bargain creates an express warranty that the goods shall conform to the affirmation or promise.’ A similar rule is found in Restatement (Second) of Torts § 402B: ‘One engaged in the business of selling chattels who, by advertising, labels, or otherwise makes to the public a misrepresentation of a material fact concerning the character or quality of a chattel sold by him is subject to liability for physical harm to a consumer of the chattel caused by justifiable reliance upon the misrepresentation even though (a) it is not made fraudulently or negligently, and (b) the consumer has not bought the chattel from or entered into any contractual relation with the seller’.

II. Non-Contractual Producers’ Liability for Defective Products to Ultimate Consumer As Prosser stated ‘“warranty” as a device for the justification of strict liability to the 49 consumer, carries far too much luggage in the way of undesirable complications, and

Emphasis added. According to Consumer Sales Directive Article 2(4), the seller is not bound if she was, and could not reasonably have been aware of the statement, or if she shows that by the time of conclusion of the contract the statement had been corrected or if she shows that the decision to buy the consumer goods could not have been influenced by the statement. These events are likely to be hard to prove for the seller. See also 7 1) (d) of the Directive on certain aspects concerning contracts for the sale of goods. 78 [1893] 1 QB 256. 79 Rogers v Toni Home Permanent Co., 147 N.E.2 d 612 (Ohio 1958): ‘The warranties made by the manufacturer in his advertisements and by the labels on his products are inducements to the ultimate consumers, and the manufacturer ought to be held to strict accountability to any consumer who buys the product in reliance on such representations and later suffers injury’. 80 Fullerton Aircraft Sales & Rentals v Beech Aircraft Corp., 842 F.2 d 717 (4 th Cir. 1988). 81 Campus Sweater & Sportswear Co. v M.B. Kahn Constr. Co., 515 F.Supp. 64 (D.S.C.), affd., 644 F.2 d 877 (4th Cir. 1979). 76

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is leading us down a very thorny path’.82 Extra-contractual liability seems to be a more consistent way to deal with damage caused by defective goods.

1. Negligence Before strict products liability emerged, Common Law jurisdictions recognized that a duty of care was imposed on manufacturers in certain circumstances, founding a tort liability based on negligence. In the Court of Appeals of New York’s decision, MacPherson v Buick Motor Co.83, the question to be determined was whether the defendant (Buick Motor Co.) owed a duty of care and vigilance to anyone but the immediate purchaser. The answer lies in Judge Cardozo’s opinion: ‘We are dealing with the liability of the manufacturer of a finished product who puts it on the market to be used without inspection by his customers. If he is negligent, where danger is to be foreseen, liability will follow. … There is here no break in the chain of cause and effect. … The maker of this car supplied it for the use of purchasers from the dealer. The dealer was indeed the one person of whom it might be said with some certainty that the car would not be used. Yet the defendant would have us say that the dealer was the only person whom the defendant was under a legal duty to protect. The law does not lead us to so inconsequent a conclusion.’ 51 English law moved in the same direction with the 1932 House of Lords’ decision in Donoghue v Stevenson,84 introducing the general tort of negligence in a products liability case.85 The plaintiff suffered injuries as a result of consuming part of the contents of a bottle of ginger-beer, made of dark opaque glass, and containing a snail in decomposition. She claimed compensation for the personal injury suffered directly from the manufacturer of the ginger-beer but could not rely on a contract with her. As Lord Atkin stated in the decision: ‘… in English law there must be, and is, some general conception of relations giving rise to a duty of care […]. The liability for negligence, whether you style it such or treat it as in other systems as a species of "culpa", is no doubt based upon a general public sentiment of moral wrongdoing for which the offender must pay. […] The rule that you are to love your neighbour becomes in law, you must not injure your neighbour; and the lawyer’s question, Who is my neighbour? receives a restricted reply. You must take reasonable care to avoid acts or omissions which you can reasonably foresee would be likely to injure your neighbour. Who, then, in law is my neighbour? The answer seems to be – persons who are so closely and directly affected by my act that I ought reasonably to have them in contemplation as being so affected when I am directing my mind to the acts or omissions which are called in question.’ 52 In Italian law, prior to the implementation of the Products Liability Directive, an interesting theory called the ‘enterprise risk’ was developed by Trimarchi.86 According to this theory, risk can be the legal basis of strict liability of the manufacturer, distinct from any negligence-based liability. Any business activity, in the same way as it makes profits should support the costs it generates. Codice civile Article 2050, dedicated to liability for dangerous activities, was one of the possible textual grounds for this liability. The theory 50

82 Prosser, ‘The Assault Upon the Citadel (Strict Liability to the Consumer)’ (1960) 69 Yale LJ 1099,1133. 83 111 N.E. 1050 (N.Y. 1916). 84 [1932] AC 562. 85 The fact that Donoghue v Stevenson created a completely new category in the law of torts can be discussed: ‘What Donoghue v Stevenson did may be described either as the widening of an old category or as the creation of a new and similar one. The general conception can be used to produce either categories in the same way’, Lord Devlin in Hedley Byrne v Heller [1964] AC 465, 525. 86 Trimarchi, Rischio e responsabilità oggettiva (1961).

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was however not put into practice by courts and the Italian Court of cassation, in its well-known Schettini v Saiwa decision87 relied rather, for products liability claims, on a presumption of negligence in case of a defective good put into the market and causing harm to final users. French law also has a general tort of negligence provision, French Code civil Article 53 1240: ‘Any act whatever of man, which causes damage to another, obliges the one by whose fault it occurred, to compensate it.’ However, French courts looked rather for other provisions, in contract and tort law, in order to impose a strict liability on the producer. For example, French Code civil Article 1242(1), dedicated to the liability for things in custody has been considered as a legal basis of the manufacturer’s strict liability for harm caused by dangerous products.88 Generally speaking, prior to the implementation of the Products Liability Directive into French law, a ‘safety obligation’, both in contracts and torts, to put on the market only products free from defects creating a risk for persons and property had been imposed by courts on professional sellers and manufacturers. In China as well, liability for defective product is mainly considered as a specific 54 category of liability in tort.89

2. Tortious Misrepresentation The issue of tortious misrepresentation is closely connected with the concept of 55 ‘information defect’ which will be discussed below and which generally leads to a negligence-based liability. Let us just mention that US law admits liability of commercial product sellers or distributors for harm caused by misrepresentation. 90 Product sellers are liable for fraudulent or negligent misrepresentation provided that the misrepresentation caused the harm suffered. Liability for innocent misrepresentation is not widely imposed. In French law also, fraudulent or negligent misrepresentation is a source of tortious 56 liability, but also of criminal liability, for example in case of misleading advertising. In English law, according to the Misrepresentation Act 1967 s 2(1), damages caused by fraudulent or negligent misrepresentation are recoverable.

3. Strict Liability in Tort Common Law and Civil Law jurisdictions moved progressively from negligence- 57 based liability in products liability cases to strict liability in tort, at least as far as manufacturing defects are concerned. The phenomenon started in the USA. In Escola v CocaCola Bottling Co.,91 Justice Traynor pleaded in favor of strict liability in tort. In Greenman v Yuba Power,92 strict liability in tort was admitted by the Supreme Court of California. The solution was then formalized in the Restatement (Second) of Torts, at § 402A. In 1985, in EU law, the Products Liability Directive was introduced, stating in its second recital ‘[…] liability without fault on the part of the producer is the sole means of adequately solving the problem, peculiar to our age of increasing technicality, of a fair apportionment of the risks inherent in modern technological production;’ and its sixth Corte di cassazione, 25 May 1964, No. 1270, Foro italiano, 1965, I, 2098. ‘A person is liable not only for the damage he causes by his own act, but also for that which is caused by the acts of persons for whom he is responsible, or by things which are in his custody.’ 89 See Chapter 5 of the 2009 Tort Law and Articles 1202-1207 of the new Civil Code. 90 See Restatement Third, Torts: Products Liability § 9. 91 24 Cal. 2 d 453, p. 461 (1944). See White, Tort Law in America – An Intellectual History (1980) p. 180. 92 377 P. 2 d 897 (Cal. 1963). 87

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recital: ‘[…] to protect the physical well-being and property of the consumer, the defectiveness of the product should be determined by reference not to its fitness for use but to the lack of the safety which the public at large is entitled to expect; whereas the safety is assessed by excluding any misuse of the product not reasonable under the circumstances’. 58 Both in EU and US law, the producer’s liability is based on the defect of the product having caused harm. According to Products Liability Directive Article 1: ‘The producer shall be liable for damage caused by a defect in his product’. In US law, the statement is the same: ‘[O]ne 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’.93 The concept of defect is defined in Products Liability Directive 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.’ The key notion is ‘safety’, which is not necessarily a unitary concept and might vary from one Member State to the other.94 In Chinese law, the notion of defectiveness is mainly based on the unreasonable lack of safety on one side, a concept very similar to the one in Article 6.1 of the EU Directive, and on various national and industry safety standards on the other side. Product liability seems therefore to be a strict liability, according to Article 41 of the Tort Law.95 59 Directive 2001/95/EC of 3 December 2001 on general product safety offers some guidance in defining the concept of safety, in Article 2: ‘(b) “safe product” shall mean any product which, under normal or reasonably foreseeable conditions of use including duration and, where applicable, putting into service, installation and maintenance requirements, does not present any risk or only the minimum risks compatible with the product's use, considered to be acceptable and consistent with a high level of protection for the safety and health of persons, taking into account the following points in particular: (i) the characteristics of the product, including its composition, packaging, instructions for assembly and, where applicable, for installation and maintenance; (ii) the effect on other products, where it is reasonably foreseeable that it will be used with other products; (iii) the presentation of the product, the labeling, any warnings and instructions for its use and disposal and any other indication or information regarding the product; (iv) the categories of consumers at risk when using the product, in particular children and the elderly. The feasibility of obtaining higher levels of safety or the availability of other products presenting a lesser degree of risk shall not constitute grounds for considering a product to be “dangerous”’. 60 Though there is no formal distinction among different categories of defects in the Products Liability Directive, three different defects shall be considered: Manufacturing defects, warning or instruction defects and design defects. Strict liability applies fully only in case of manufacturing defects. The producer’s liability in case of warning or design defects is triggered only in case of negligence of the said producer. Unlike the 93 Section 1 Restatement Third, Torts: Products Liability. Reimann, Liability for Defective Products and Services: Emergence of a Worldwide Standard?, General Report to the XVIth International Congress of Comparative Law (2002) p. 17. 94 Werro and Palmer (eds), The Boundaries of Strict Liability in European Tort Law (2004) p. 439. 95 Jin, ‘Between the Ideal and Reality: A Brief National Report on Consumer Protection in China’, in Durovic, Howells, Janssen and Micklitz, Consumer Law in Asia (Forthcoming). However, Article 42 of the Tort Law provides for a negligence-based liability in tort in certain circumstances.

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Products Liability Directive, the US Restatement Third on Products Liability formally distinguishes the three kinds of defects in its Section 2: ‘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; (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;96 (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 the distributor, or a predecessor in the chain of distribution, and the omission of the instructions or warnings renders the product not reasonably safe.’ A clarification of the various defect categories might be beneficial in the current thinking, notably as far as a lack of information or defective information are concerned. Given that information occupies a pivotal position in the new ecosystem, we should look closely at its potential defects. We might also consider a new category of defect, namely that of a ‘behavioural’ defect. In the presence of autonomous systems whose behaviour is, as their name suggests, autonomous, would it not be useful to take a close look at the said behaviour as soon as it is capable of manifesting itself ‘dangerously’ and thus in a way that is ‘defective’? The autonomy and the self-learning capability of new products and of all new devel- 61 opments in terms of AI have also been at the heart of recent and current work executed under the auspices of the European Commission in the area of ethical principles applicable to the development of AI, so that we can ensure that the developments in question are humancentric and trustworthy. It is worth thinking on the consequences, in terms of liability, when ethical guidelines are not adhered to. In the same way that principles such as privacy by design have developed in terms of personal data protection (and by the way, we must think about whether it is opportune to take the view that breaking the law governing personal data protection is indicative of a defective product), we could envisage a notion of the ‘ethics by design’-type. If a product’s design does not comply with the ethical principles developed at EU level, then it might be deemed to constitute a form of design defect: the product would be deemed not to present the level of safety that may be legitimately expected, as it does not achieve a sufficient level of compliance with ethical rules. As with other design defects, the defectiveness analysis would in all likelihood be based on a risk/benefit analysis (what are the benefits for society as a whole and what are the risks, and in particular the ethical risks, for that same society). The increasingly connected nature of products also raises problems of vulnerability to cyberattacks. This being the case, the idea is envisaged of integrating into the notion of defectiveness, the level of cybersecurity that may be legitimately expected. 97 In the Products Liability Directive, the person liable in case of damage caused by a 62 defective product is the producer. According to its Article 3, the importer into the EU and/or each supplier of the product shall be treated as its producer if the manufacturer is not based in the EU in the first situation, and if the manufacturer (or the importer) 96 Concerning design defects, some risks cannot be prevented at a reasonable cost. A ‘risk-benefit’ or ‘risk-utility’ analysis is generally applied. 97 See ‘Liability for Artificial Intelligence and other emerging digital technologies”, Report from the Expert Group on Liability and New Technologies, European Commission, 2019.

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cannot be identified in the second case.98 In the Restatement Third on Products Liability, comment (c) to Section 1 states: ‘The rule stated in this Section applies only to manufacturers and other commercial sellers and distributors who are engaged in the business of selling or otherwise distributing the type of product that harmed the plaintiff […]. Whether a defendant is a commercial seller or distributor within the meaning of this Section is usually a question of law to be determined by the court.’ According to comment (e), ‘The rule stated in this Section provides that all commercial sellers and distributors of products, including nonmanufacturing sellers and distributors such as wholesalers and retailers, are subject to liability for selling products that are defective. Liability attaches even when such nonmanufacturing sellers or distributors do not themselves render the product defective and regardless of whether they are in a position to prevent defects from occurring.’ This rule is designed to offer the greatest protection to the injured person and to prevent the absence of compensation when the manufacturer is insolvent.99 63 Products falling into the scope of application of the relevant provisions are all movables, even if incorporated into another movable or into an immovable, tangible personal property distributed commercially for use or consumption and electricity. 100 Liability of the producer requires that the goods are put into circulation.101 In US law, the product must have been sold.102 64 Even though the Products Liability Directive and other similar provisions takes a neutral standpoint vis-à-vis technology, the notion of product contained within it has been conceived in terms of, and is aimed primarily at, tangible objects. Surely there is scope within it to spell out further that the notion of product encompasses both tangible and intangible things? For example, would it not be relevant to deem that a software program contained on a physical medium, or incorporated into a tangible object, comes within the category of ‘products’, but this is not the case where the software is transmitted without this type of medium (e.g. where the software emanates from a cloud solution and therefore exists solely in the form of information). The EU legislator seems to consider software programs as products, notably via the Machinery Directive 2006/42/EC, Radio Equipment Directive 2014/53/EU and Medical Devices Regulations (EU) 2017/745 and 2017/746, which regards software programs as products, and the 98 Products Liability Directive Article 3: ‘(1) “Producer” means the manufacturer of a finished 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. (2) Without prejudice to the liability of the producer, any person who imports into the Community a product for sale, hire, leasing or any form of distribution in the course of his business shall be deemed to be a producer within the meaning of this Directive and shall be responsible as a producer. (3) Where the producer of the product cannot be identified, each supplier of the product shall be treated as its producer unless he informs the injured person, within a reasonable time, or the identity of the producer or of the person who supplied him with the product. The same shall apply, in the case of an imported product, if this product does not indicate the identity of the importer to in paragraph 2, even if the name of the producer is indicated’. 99 A manufacturer of a defective product component will also be subject to the liability (Restatement Third Products Liability Section 5 and Products Liability Directive Article 3(1)). 100 Products Liability Directive Article 2 and Restatement Third Products Liability § 19. In addition, second hand goods are included into the scope of application of Restatement Third Products Liability, according to its Section 8. 101 Products Liability Directive Article 7(a) allows the producer to escape liability if she proves that she did not put the product into circulation. 102 According to Restatement Third Products Liability § 20 ‘(a) one sells a product when, in a commercial context, one transfers ownership thereto either for use or consumption or for resale leading to ultimate use or consumption. Commercial product sellers include, but are not limited to, manufacturers, wholesalers, and retailers’.

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Court of Justice of the European Union seems to be doing likewise. Producers also seem to think that software programs should be regarded as products, regardless of the media on which they are held. Another factor to be taken into consideration when studying the notion of a product 65 in the context of emerging digital technologies is the evolutive, non-static and partly unpredictable nature of new ‘smart devices’. Firstly, many consumer goods now require frequent – even daily – updates. This means that, in addition to normal wear and tear, the product is now evolving in relation to its status on the day it was sold. This may have several consequences. The producer might for example accuse the consumer of not executing these updates, or of executing them imperfectly. The producer might then be tempted not to accept liability, or at least not to accept full liability. Secondly, so-called ‘autonomous’ systems, which possess machine-learning capability, present the dual characteristic of being both autonomous (given that their ‘behaviour’ is not necessarily entirely predictable) and also evolutive (the producer of this type of system might then take the view that it cannot be held liable for any unpredictable and autonomous ‘adverse behaviour’ on the part of its products). These various features impact primarily on the liability regime binding the producer and more particularly on the latter’s capacity to deny liability, in whole or in part, based on the notion either of development risk or of the victim’s wrongdoing. The fact that smart devices are, to some extent, interdependent, must definitely be 66 taken into consideration in our thinking regarding the notion of a product and also the liability chain in an international context. The conception of a product made up of various components corresponds only imperfectly to the IoT. In particular, this interdependence mentioned in the preceding sentence affects the nature of the harm caused by these intelligent objects: in fact, it makes it more likely that they will cause harm to other connected objects, based on erroneous information. This category of loss could well fall into the scope of application of the CISG. Risks linked to cybersecurity are also one facet, and not the least one, to bear in mind when evaluating the “robustness” of products and of the IoT.

III. Remedies and Defenses Contractual claims can lead to repair, replacement, price reduction, termination of 67 the contract and compensation for consequential losses. Products liability claims tend to cover personal injury and damage to property. There is therefore a quite clear divide between the two types of claims, based on the loss the plaintiff wishes to recover.

1. Privity of Contract as Defense Privity is not anymore a defense in products liability claims as they are generally 68 based on rules of extra-contractual liability. As far as warranty claims are concerned, we mentioned above in Section I.b that many jurisdictions went beyond the privity requirement in order to allow remote purchasers to rely on implied and express warranties claims. The privity requirement is however still operative in international contractual claims, especially if based on the CISG.103

103

Schwenzer and Schmidt (n 72).

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2. Notification Duties 69

Extra-contractual liability rules do not require any notification from the injured person. Notification duties are generally imposed in (commercial) sales contracts but, as stated above and quoting Professor Schlechtriem, losses suffered in products liability litigation are not the ‘essence of the contractual interests’. What matters more in products liability claims are limitations.

3. Limitation Period The Products Liability Directive imposes a limitation period of three years to proceedings for the recovery of damages.104 This limitation period begins to run ‘from the day on which the plaintiff became aware, or should reasonably have become aware, of the damage, the defect and the identity of the producer.’ In addition, the rights conferred upon the injured person are extinguished upon the expiry of a period of ten years from the date on which the producer put into circulation the actual product which caused the damage.105 71 As stated above, the limitation period in warranty claims in the USA is of a maximum of four years after the cause of action has accrued according to UCC § 2-725. In the field of torts, it depends on the statutes of limitation in the State concerned. 106 In English law, the injured person must start proceedings within a period of six years from the date on which the cause of action accrued.107 According to the Consumer Sales Directive Article 5(1) ‘The seller shall be held liable […] where the lack of conformity becomes apparent within two years as from delivery of the goods’. 70

4. Damages The recoverable damages in products liability claims in US law are harm to persons or property: personal injury and property damage.108 Traditionally, damages caused to the defective product itself are not recoverable under strict products liability rules. 109 The Restatement Third Products Liability § 21, Comment (d) states that ‘when a product defect results in harm to the product itself, the law governing commercial transactions sets forth a comprehensive scheme governing the rights of the buyer and seller’. This kind of loss is therefore recoverable under contractual claims. The mentioned provision defines the concept of ‘harm to the product itself ’: it may render the product ineffective so that repair or replacement is necessary; it may also result in consequential loss to the buyer (economic losses). 73 According to the Products Liability Directive, damage means damage caused by death or by personal injuries; damage to, or destruction of, any item of property other than the defective product itself,110 provided that the item of property is of a type ordinarily intended for private use or consumption and was used by the injured person mainly for his own private use or consumption.111 Non-material damages are recoverable on the basis of domestic rules. Since one of the main features of the ecosystem 72

Products Liability Directive Article 10. Products Liability Directive Article 11. 106 Limitation periods go roughly from one to six years. 107 Limitation Act 1980, ss 2 (torts) and 5 (contracts). In case personal injuries or death, the time limit is three years (s 11). See also s 11(A) dedicated to products liability claims. 108 Restatement Third Products Liability § 21. 109 East River SS Corp. v Transamerica Delaval Inc., 476 US 858 (1986). 110 With a minimum threshold of 500 euros. 111 Products Liability Directive Article 9. 104

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based on emerging digital technologies is its increasingly immaterial and intangible dimension, the harm that may be caused within its context will in all likelihood be of the same nature. The fact that information lies at the heart of the ecosystem in question should encourage to reflect on the nature of any harm caused by erroneous/defective information. The prejudice suffered as a result of the unauthorised disclosure of personal data comes to mind quite naturally in this context, in addition to questions of how the products liability regulation will work in conjunction with the GDPR.112 The injured person must prove the damage, the defect and the causal relationship between defect and damage.113 In order to reach a fair apportionment of risk between the injured person and the producer, the Products Liability Directive provides for exonerating circumstances. 114 The defenses are, alternatively, that the product was not put into circulation by the producer; that the defect did not exist at the time when the product was put into circulation; that the product was neither manufactured for sale or any form of distribution for economic purpose nor manufactured or distributed professionally; that the defect is due to compliance of the product with mandatory regulations issued by public authorities; that the state of scientific and technical knowledge at the time when he put the product into circulation was not such as to enable the existence of the defect to be discovered (the so-called development risk defense);115 in the case of a manufacturer of a component, that the defect is attributable to the design of the product in which the component part has been fitted or to the instructions given by the manufacturer of the product. In Chinese Law, there seems to be a presumption that, in case of damage, the product was defective and that the damage was caused by the defective product. Indeed, it is up to the producer to prove that there was no causal relationship between the defect and the damage or that there the product was not defective.116 As in the EU Products Liability Directive, Chinese Product Quality Law includes a development-risk defense exemption. Indeed, the producer is not liable if, when the product was put into circulation and taking into account the scientific and technical knowledge, the defect could not be discovered.117 Development risks are a key issue in the various legal regimes and are the main indicator of a true strict liability regime. Indeed, if producers can escape liability by proving that ‘the state of scientific and technical knowledge at the time when [they] put the product into circulation was not such as to enable the existence of the defect to be discovered’, liability for design defects will be mainly based on negligence, i.e. based on the fact that the producer could have discovered it by relying on the state of scientific and technical knowledge but she/he didn’t because of a lack of diligence.118 The debate relating to the development-risk defense is even more crucial in the context 112 Regulation (EU) 2016/679 of the European Parliament and of the Council of 27 April 2016 on the protection of natural persons with regard to the processing of personal data and on the free movement of such data, and repealing Directive 95/46/EC (General Data Protection Regulation). 113 Products Liability Directive Article 4. 114 Products Liability Directive Recital 7. 115 The Products Liability Directive grants to the Member States the option whether to adopt this development risk defense or not (Article 15(b)). Most have adopted it as did the majority of jurisdictions in the USA: Owen, ‘Defectiveness Restated: Exploding the Liability Myth’ (1996) U Ill L Rev 743, 785. 116 Jin, ‘Between the Ideal and Reality: A Brief National Report on Consumer Protection in China’, in Durovic, Howells, Janssen and Micklitz, Consumer Law in Asia (Forthcoming). 117 Product Quality Law Article 41 § 2 (3). 118 See on this issue Howells and Mildred, ‘Is European Products Liability More Protective Than the Restatement (Third) of Torts: Products Liability?’, (1998) 65 Tenn. L. Rev. 985.

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of AI, IoT and so forth. Indeed, in the field of machine learning and autonomous systems, producers could rely on the fact that the product was defect-free when put into circulation and that it later became defective, unpredictably, on the basis of its self-learning capacities/features. This would mean that more and more losses, caused by unforeseen consequences of emerging digital technologies and cybersecurity threats, would be supported by consumers. One of the issues here is therefore to determine whether the development-risk clause should be maintained in the various legal regimes from an innovation perspective: a fair allocation of risks and losses between producers and consumers is a key concern in order to make digital goods and markets socially acceptable. 79 In the Restatement Third Products Liability, there are presumptions of defectiveness in certain circumstances: ‘when the incident that harmed the plaintiff was of a kind that ordinarily occurs as a result of a product defect and was not, in the particular case, solely the result of causes other than product defect existing at the time of sale or distribution’119. Besides, a ‘product’s noncompliance with an applicable product safety statute or administrative regulation renders the product defective with respect to the risks sought to be reduced by the statute or regulation’120. Causation issues are generally dealt with according to domestic rules.121 Apportionment of liability is granted to the producer in case of fault of the injured person122 and limitation clauses are not allowed in products liability claims.123 80 Damages for breach of contract by one party consist of a sum equal to the loss, including loss of profit, suffered by the other party as a consequence of the breach. Such damages may not exceed the loss which the party in breach foresaw or ought to have foreseen at the time of the conclusion of the contract, in the light of the facts and matters of which he then knew or ought to have known, as a possible consequence of the breach of contract.

5. Pure Economic Loss Claims 81

Both the Restatement Third Products Liability and the Products Liability Directive exclude pure economic losses from the list of recoverable damages. The Consumer Sales Directive and the Directive on certain aspects concerning contracts for the sale of goods, as do generally warranty laws, complements the Products Liability Directive in offering to the consumer a non-conformity claim in order to be compensated for this category of losses.

IV. Seller’s Right of Redress against Producer and Allocation of Liability in the Chain of Distribution 82

When the supplier, other than the manufacturer, be it the final seller or any of the previous suppliers (including the importer), had to compensate the injured person (who 119 Restatement Third Products Liability § 3. There is a similar presumption in the Consumer Sales Directive Article 5(3): ‘Unless proved otherwise, any lack of conformity which becomes apparent within six months of delivery of the goods shall be presumed to have existed at the time of delivery unless this presumption in incompatible with the nature of the goods or the nature of the lack of conformity’. See also Article 11 of the Directive on certain aspects concerning contracts for the sale of goods. 120 Restatement Third Products Liability, § 4(a). 121 E.g. Restatement Third Products Liability, § 15. 122 Products Liability Directive Article 8(2) and Restatement Third Products Liability § 17(a). 123 Products Liability Directive Article 12 and Restatement Third Products Liability § 18 (for harm to person).

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can be the remote purchaser) on the basis of a contractual or an extra-contractual claim, she is entitled to claim redress from a previous supplier in the contractual chain. It might be more difficult to succeed in a redress claim directly against the manufacturer.

1. Notification Duties and Limitation Period The Consumer Sales Directive requires the consumer who wishes to rely on the rights 83 conferred by the Directive, to inform the seller of the lack of conformity within a period of two months from the date on which he detected the lack of conformity.124 The Member States were however free to introduce this requirement or not. A majority of Member States have done so.125 This puts the seller who intends to pursue remedies against the person or persons liable in the contractual chain in a better position compared to the countries where no notification requirement is imposed on the consumer. Indeed, in a commercial contract context, the buyer (here the last seller who had to compensate the consumer for the losses caused by the non-conformity of the goods) will generally have to notify the non-conformity quite quickly to her previous supplier. The problem will be particularly acute if CISG applies to the claim of redress by a commercial seller against her previous supplier in the contractual chain. According to CISG Article 39(1): ‘[t]he 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.’ Concerning limitation periods, they are generally short in B2B transactions and a bit 84 longer in B2C contracts. The Consumer Sales Directive Article 5(1) for example states that the seller is liable where the lack of conformity becomes apparent within two years as from delivery of the goods. This is hardly compatible with the requirement of CISG Article 39(2) providing – generally only for merchants – that ‘in any event, the buyer loses the right to rely on a lack of conformity of the goods if he does not give the seller notice thereof at the latest within a period of 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.’ In the area of products liability, we said that the Products Liability Directive for 85 example provides with an extinction period of liability of 10 years. A limitation period of three years to proceedings for the recovery of damages is also imposed. However, there is no notification duty. Generally speaking, limitation periods in the field of tort can be longer than the two years limitation imposed by CISG Article 39(2).

2. Extra-Contractual Claims Extra-contractual claims and especially products liability claims are ill-equipped to 86 provide to the seller a right of redress. Indeed, the loss which the seller suffered because she had to compensate the remote purchaser for damage caused by a non-conforming or defective good will be considered as an economic loss. As stated earlier, in most situations these losses are not recoverable under tort law rules.

3. Exclusion of Liability Limitation or exclusion clauses are common in B2B contracts. As stated above, they 87 are enforceable unless they are unconscionable or unreasonable. The seller’s contractual right of redress may therefore be limited accordingly. 124 125

Consumer Sales Directive Article 5(2). Ebers, Janssen, Meyer (n 10) p. 50.

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4. Remedies According to Consumer Sales Directive Article 4 and 18 of the Directive on certain aspects concerning contracts for the sale of goods, the seller is entitled to pursue remedies against the person or persons liable in the contractual chain if she was liable to a consumer because of a lack of conformity. The person liable against whom the final seller may pursue remedies, together with the relevant actions and conditions of exercise are determined by domestic legal provisions. A vast majority of Member States opted for a contractual right of redress against the immediate supplier, and not directly against the producer.126 It is worth mentioning the particular choice made by Austria and Germany that have extended the non-conformity contractual claim to all sales contracts, not only consumer sales contract. The final seller is therefore entitled to rely on the same provisions against her own supplier.127 89 Article 1203 of the new Civil Code of China provides as well for a redress claim by the seller against the manufacturer if the defect of the product is caused by the manufacturer and the seller has made the compensation for the defect. 88

5. Network Liability Network liability ‘has the advantage that the buyer has the option to take proceedings against the most convenient or most solvent party, or the person with the best reputation.’128 When different contracts are connected by a single goal or because these contracts have the same object (e.g. a chain of sales contracts from the producer to the remote purchaser), they are all included in a single contractual group, a distribution network.129 This could justify the contractual nature of the claim from the remote buyer against any of the members of the network, without prejudice of the right of recourse of the member who had to compensate the remote buyer. 91 In international sales transactions, on another note and as stated in the introductory section, if the loss suffered by the final seller is within the category of consequential losses according to CISG Article 74, the seller’s right of redress might be governed by the Convention, with its limitations. There is uncertainty here as qualifications of the redress claim might vary from one country to another. If the redress claim is considered as an extra-contractual claim, then the CISG should be disregarded. If the redress claim is classified as a contractual one, then doubts about the applicability of the CISG can be raised.130 90

V. Product Safety and Recall Rules 92

General safety requirements are often imposed by public authorities. The General Product Safety Directive 2001/95/EC Article 3 contains an obligation for the producer to place only safe products on the market. The product is deemed safe when it conforms Id., p. 44. Id., p. 48. 128 Id., p. 69. 129 A theory of “group of contract” has been developed in French law in order to justify direct contractual claims from the final buyer against the various members of the group. See Teyssié, Les groupes de contrats (1975). 130 Ebers, Janssen, Meyer (n 10) p. 58. The authors state that ‘before [the redress claim of the Consumer Sales Directive] was implemented, it was common business practice to exclude the application of [the] Convention. Now, many authors advise sellers to an international sales contract not to do so if they fear to be held liable for redress’. 126

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to specific EU or national provisions governing the safety of the product in question. Post distribution duties are imposed in various jurisdictions. When other measures are not enough to prevent the risk involved by a product, recall of the product can take place. Article 5 of the aforementioned Directive states that producers shall choose to take appropriate action including, if necessary to avoid risks which the products might pose, withdrawal from the market, adequately and effectively warning consumers or recall from consumers. This might be at the request of the competent authorities. In US law, both post distribution duties and recall procedures can be found in the Restatement Third Products Liability. § 10 provides that: (a) ‘One engaged in the business of selling or otherwise distributing products is subject to liability for the harm to persons or property caused by the seller’s failure to provide a warning after the time of sale or distribution of a product if a reasonable person in the seller’s position would provide such a warning. (b) A reasonable person in the seller’s position would provide a warning after the time of sale if: (1) the seller knows or reasonably should know that the product poses a substantial risk of harm to persons or property; and (2) those to whom a warning might be provided can be identified and can reasonably be assumed to be unaware of the risk of harm; and (3) a warning can be effectively communicated to and acted on by those to whom a warning might be provided; and (4) the risk of harm is sufficiently great to justify the burden of providing a warning’. Concerning recall duties, Restatement Third Products Liability § 11 reads: ‘One engaged in the business of selling otherwise distributing products is subject to liability for harm to persons or property caused by the seller’s failure to recall a product after the time of sale or distribution if: (a)(1) a governmental directive issued pursuant to a statute or administrative regulation specifically requires the seller or distributor to recall the product; or (2) the seller or distributor, in the absence of a recall requirement under Subsection (a)(1), undertakes to recall the product; and (b) the seller or distributor fails to act as a reasonable person recalling the product’. In Chinese law, Articles 1205 and 1206 of the new Civil Code impose post distribution obligations and recall duties in case of danger for the personal or property safety of consumers. According to Article 1205, ‘the victim shall be entitled to require the manufacturer or seller to assume the tort liability by ceasing infringement, removing the obstruction, or eliminating the danger’. Article 1206 states that ‘[w]here any defect of a product is found after the product is put into circulation, the manufacturer or seller shall take such remedial measures as ceasing sale, warning and recall in a timely manner […]’. These recall duties are also provided by the Law on the Protection of Consumer Rights and Interests (Article 19) and various regulations (applicable to automobiles, food products, etc.). It is important to bear in mind that these obligations that the products meet the safety standards and requirements and the post distribution duties are imposed on importers when the manufacturer is established in another jurisdiction. Cybersecurity updates will become an increasingly important duty to be supported by manufacturers, especially in the IoT area.

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G. Cross References & Additional Commentary Though mainly considered as an area of extra-contractual liability in its modern 97 shape, products liability has several connections with various issues of contract law, which are addressed in the following Chapters of this Treatise: Chapter 14 (Conformity

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of Goods); Chapter 17 (Performance and Breach of Contract); Chapter 19 (Remedies and Damages); Chapter 29 (Post-Contract: Continuing Obligations & Rights).

H. Practitioner Tips & Contract Clauses Traders involved in cross-border selling will generally face an extra-contractual liability based on domestic rules when their goods cause injuries to remote purchasers or users because of their defectiveness. These rules are usually mandatory rules and cannot be derogated from or limited in their application. There are also connected rules, like for example in the USA the class actions and punitive damages tools, which can multiply the effect of products liability rules. This suggests adapting the marketing strategy in order to limit liability: the knowledge of the domestic regulations and of the period of liability, with the help of lawyers’ advice, is of vital importance. This will allow a sound risk analysis. Adapting products warnings and introducing design changes might also meet the reasonable expectations of the consumers. A consistent insurance coverage, as well as a settlement strategy, are also recommended. 99 International aspects are more likely to occur in case of a redress claim exercised by a seller who had to compensate a remote purchaser. Because this redress claim will trigger private international law issues and could fall into the scope of application of the CISG, the seller at the end of the chain might face difficulties in exercising it. One of the key issues in this debate is the classification of the loss: economic losses will generally be recovered in the realm of contract law whereas personal injury and damage to property relates to extra-contractual products liability. 100 At first sight, it seems that the final seller and the importer of products manufactured abroad have few incentives to rely on the CISG provisions considering its notification duties and limitation period. At the opposite, manufacturers could see advantages in the application of the CISG as an alternative to domestic rules on products liability and redress claims as well as, obviously, to conflict of laws of the forum. 98

I. Additional Sources 101 Ebers, Janssen & Meyer, European Perspectives on Producer’s Liability – Direct Producers’ Liability for

Non-conformity and the Sellers’ Right of Redress (Sellier 2009); Fairgrieve, Product Liability in Comparative Perspective (CUP 2005); Fairgrieve and Goldberg, Product Liability, 3 rd ed. (Oxford University Press 2020); Fischer, Powers, Jr., Cupp, Jr., Green & Sanders, Products Liability, Cases and Materials (5 th edn., West Academic Publishing 2014); Henderson, Jr., Twerski, Restatement of the Law Third: Products Liability (The American Law Institute 1997); Howells, Consumer Product Safety (Routledge 2020); Koziol, Green, Lunney, Oliphant, Yang, Messner, Product Liability: Fundamental Questions in a Comparative Perspective (De Gruyter 2017); Owen, Montgomery & Davis, Products Liability and Safety (The Foundation Press, 7 th ed., 2015); Stapleton, Product Liability (Butterworths 1994); Whittaker, Liability for Products: English Law, French Law, and European Harmonisation (OUP 2005); The Development of Product Liability (Cambridge University Press 2014)

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CHAPTER 25 ASSIGNMENT, DELEGATION AND THIRD-PARTY RIGHTS N. Orkun Akseli Part I:

Assignment and Delegation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1

A. Topics Covered . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B. Introductory Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C. Statement of Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . D. International Sales Transaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . E. Sampling of Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. CISG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. UNIDROIT Principles of International Commercial Contracts . . . . . . . . . . . . . . III. Principles of European Contract Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Common European Sales Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. German Bürgerliches Gesetzbuch . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI. French Code Civil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VII. Spanish Código Civil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VIII. American Uniform Commercial Code (UCC) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IX. United Kingdom Sale of Goods Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . X. Common Law of Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XI. American Restatement (Second) of Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XII. Chinese Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F. Commentary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. ‘Assignment’ Defined and Distinguished from Similar Transactions . . . . . . . . . II. Validity of an Assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Formal Validity Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Substantive Requirements and Assignability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Statutory Prohibitions on Assignability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Contractual Prohibitions on Assignability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Debtor Protection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . G. Practitioner Tips & Contract Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . H. Additional Sources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 2 5 6 8 8 10 14 16 18 20 23 24 29 30 31 33 34 34 43 44 56 57 68 78 83 88

Part II:

Contracts for the Benefit of Third Parties/Third Party Rights . . . . .

89

A. Topics Covered . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B. Introductory Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C. Statement of Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . D. International Sales Transaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . E. Sampling of Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. CISG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. UNIDROIT Principles of International Commercial Contracts . . . . . . . . . . . . . . III. Principles of European Contract Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Common European Sales Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. German Bürgerliches Gesetzbuch . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI. French Code Civil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VII. Spanish Código Civil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VIII. American Uniform Commercial Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IX. United Kingdom Sale of Goods Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . X. Common Law of Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XI. American Restatement (Second) of Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XII. Chinese Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F. Commentary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. The Basis of Third Party Claims in Contracts for the Benefit of Third Parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Exemption Clauses for the Benefit of Third Parties . . . . . . . . . . . . . . . . . . . . . . . . . . III. Modification/Variation and Revocation of the Contract for the Benefit of Third Parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Defences Available to the Promisor Against the Beneficiary . . . . . . . . . . . . . . . . . V. Remedies Available to the Promisee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

89 90 92 93 94 94 95 96 97 98 99 100 101 105 106 107 108 109

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109 120 121 129 130

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Part I: Assignment and Delegation A. Topics Covered 1

This part deals with the assignment of rights and the delegation of duties.

B. Introductory Note Assignment, delegation and third party rights are significant clauses in international sales contracts. Their significance arises out of the fact that they focus on a tripartite relationship. This tripartite relationship (between the assignor-assignee-debtor/obligorobligee-delegate/promisor-promisee-beneficiary) affects third parties’ rights. Third parties’ (such as creditors of the assignor, liquidator, insolvency administrator etc.) rights arise out of the contract between the assignor (oblige/promise) and the debtor (obligor/promisor). Particularly assignment and delegation clauses are necessary to balance the competing business interests. The following sections will explain firstly, the assignment of rights, then the delegation of performance of duties and finally, the third party beneficiary rights. 3 With the globalisation of trade and the increase in the need to facilitate credit in the last three decades international organisations such as the United Nations Commission on International Trade Law (UNCITRAL) and International Institute for the Unification of Private Law (UNIDROIT) have prepared conventions. Private study groups mandated by the European Union have also prepared rules (such as Principles for European Contract Law – PECL) which contain provisions dealing with assignment. These conventions aim to modernise the law to the extent they relate to the assignment of receivables (UN Convention on the Assignment of Receivables in International Trade; and UNIDROIT Convention on International Factoring) and harmonise the rules among certain countries (PECL). 4 The abbreviations for some of the sources of law used in this Chapter include: Civil Law Codes (CC), Convention on Contracts for the International Sale of Goods (CISG), United Kingdom Sale of Goods Act (SGA), Principles of European Contract Law (PECL), Restatement (Second) of Contract Law, UNIDROIT Principles of International Commercial Contracts (PICC), and the Uniform Commercial Code (UCC). 2

C. Statement of Issues 5

The issues that will be focused on in this section will be as follows: (a) the difference between assignment and similar forms of transfer (delegation, novation); (b) formal validity requirements; (c) substantive requirements including assignability, anti-assignment clauses; (d) the protection of the debtor including debtor’s defences, assignee’s rights against the debtor/obligor.

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D. International Sales Transaction Assignment of rights, and in particular, the right to payment (receivables), is an 6 important feature of sales transactions. Particularly, the policy differences between jurisdictions on the anti-assignment clauses pose risks to sellers/creditors/assignors. International conventions dealing with the assignment of receivables (UNIDROIT Convention on International Factoring and the UN Convention on the Assignment of Receivables in International Trade) recognise effectiveness of an assignment notwithstanding any agreement prohibiting the assignment.1 This part analyses the assignment of rights/ receivables arising out of contracts.2 These are voluntary assignments whereby the assignor assigns its claim on a voluntary basis rather than by operation of law (e.g. by death, bankruptcy).3 Assignment clauses in contracts deal with how and when a party wishing to transfer 7 its rights to another party may do so under the contract. Often assignment clauses prohibit an assignment without the other party's consent. Anti-assignment clauses help debtors avoid the situation of having to deal with a third party who was not a party to the original contract.

E. Sampling of Laws I. CISG The CISG does not directly deal with the assignment issues. Assignment issues are 8 excluded by Article 4 of the CISG and are left to the choice of law rules.4 (reference to Butler with Eiselen). As is the case with the validity of contracts, the validity of the assignment of receivables are outside the scope of the CISG.5 9 In the same token, the CISG does not deal with the delegation of performance.

II. UNIDROIT Principles of International Commercial Contracts UNIDROIT Principles deal with the assignment of rights under Chapter 9, section 1 10 and assignment of contracts Chapter 9, section 3. 11 Assignment of rights is defined under Article 9.1.1 as follows: ‘“Assignment of a right” means the transfer by agreement from one person to (the “assignor”) to another person (the “assignee”), including transfer by way security, of the assignor’s right to payment of a monetary sum or other performance from a third person (“the obligor”).’

UNIDROIT Factoring Convention Article 6; UN Convention Article 9. Eg German BGB section 413; Swiss Code of Obligations Article 174; French Code civil Chapter VIII Article 1689 et seq.; Contract law of the People’s Republic of China Chapter 5; Spanish Código civil Chapter 7. 3 Functional equivalent of assignment such as the French subrogation that is used in lieu of assignment is also part of this discussion (French Code civil Article 1249). 4 Mather, ‘Choice of Law for International Sales Issues Not Resolved’ (2001) 20 Journal of Law and Commerce 155, 191 et seq. 5 Viscasillas, ‘Applicable Law, the CISG, and the Future Convention on International Commercial Contracts’ (2013) 58 Villanova Law Rev. 733, 735. 1

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Chapter 25 Assignment, Delegation and Third-Party Rights 12

Assignment of contracts is defined under Article 9.3.1 as follows: ‘“Assignment of a contract” means the transfer by agreement from one person (the “assignor”) to another person (the “assignee”) of the assignor’s rights and obligations arising out of a contract with another person (the “other party”).’

13

UNIDROIT Principles deal with the transfer of obligations under Chapter 9, section 2. Under the transfer of obligations heading Article 9.2.1 defines transfer (delegation) as follows: “an obligation to pay money or render other performance may be transferred from one person (the “original obligor”) to another person (the “new obligor”) either (a) By an agreement between the original obligor and the new obligor subject to Article 9.2.3, or (b) By an agreement between the obligee and the new obligor, by which the new obligor assumes the obligation.”

III. Principles of European Contract Law PECL deal with the assignment of claims under Chapter 11. The provisions of the PECL on assignment apply to the assignment by agreement of a right to performance (“claim”) under an existing or future contract and except where otherwise stated or the context otherwise requires, to the assignment by agreement of other transferable claims (Article 11.101). 15 PECL deal with the transfer of contract (substitution of new debtor) under Chapter 12. 14

IV. Common European Sales Law CESL does not explicitly deal with assignment. Particularly the Proposal for a Regulation of the European Parliament and of the Council on a Common European Sales Law6 leaves assignment outside the scope of the CESL suggesting that assignment should be governed by the pre-existing rules of national law outside the CESL under the Rome I Regulation or any other applicable conflict of laws rules.7 17 CESL does not explicitly deal with delegation.8 16

V. German Bürgerliches Gesetzbuch 18

BGB regulates assignment between sections 398-413. Section 398 defines assignment as follows: ‘A claim may be transferred by the obligee to another person by contract with that person (assignment). When the contract is entered into, the new obligee steps into the shoes of the previous obligee.’

19

BGB regulates delegation of duties/debt between sections 414 and 419. Section 414 defines contract between obligee and transferee as follows: ‘A debt may be assumed by a third party by contract with the obligee in such a way that the third party steps into the shoes of the previous obligor.’

COM (2011) 635 final; 2011/0284 (COD). Id. 19–20. 8 See above n 6.

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7

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VI. French Code Civil Code civil regulates assignment between Article 1689 and 1701. According to Article 20 1689 an assignment is defined as follows: ‘In case of assignment of a claim, or of a right or of an action against a third party, delivery takes place between the assignor and the assignee by handing over the instrument of title.’

Assignment of receivables is also further governed by the Loi Dailly Loi facilitant 21 le credit aux entreprises (Law of 2 January 1981) which specifically regulates the assignment of receivables by businesses to credit institutions. 22

Code civil Article 1216 Art. 1216 A contracting party, the assignor, may assign his status as party to the contract to a third party, the assignee, with the agreement of his own contractual partner, the person subject to assignment. This agreement may be given in advance, notably in a contract concluded between the future assignor and person subject to assignment, in which case assignment takes effect as regards the person subject to assignment when the contract concluded between the assignor and the assignee is notified to him or when he acknowledges it. An assignment must be established in writing, on pain of nullity. Art. 1216-1 If the person subject to assignment has expressly consented to it, assignment of contract discharges the assignor for the future. In its absence, and subject to any term to the contrary, the assignor is liable jointly and severally to the performance of the contract. Art. 1216-2 The assignee may set up against the person subject to assignment the defences inherent in the debt itself, such as nullity, the defence of non-performance, termination or the right to set off related debts. He cannot set up against him defences personal to the assignor. The person subject to assignment may set up against the assignee all the defences which he could have been able to set up against the assignor. Art. 1216-3 If the assignor is not discharged by the person subject to assignment, any securities which may have been agreed remain in place. Where the assignor is discharged, securities agreed by third parties remain in place only with the latter’s agreement. If the assignor is discharged, any joint and several co-debtors remain liable to the extent which remains after deduction of the share of the debtor who has been discharged.

VII. Spanish Código Civil Código civil regulates assignment of rights under Chapter 7 between Articles 1526 23 and 1536. Article 1526 provides that an “Assignment of a credit, right or action shall not be effective against third parties until the date on which it is to be considered certain in accordance with Articles 1218 and 1227.”

VIII. American Uniform Commercial Code (UCC) Assignment under US law is governed mainly by the UCC Article 9 (secured transac- 24 tions component of the Uniform Commercial Code) but also there are intersections with the UCC Article 2 (the sales law component) as well as the Restatement (Second) Contracts. UCC Article 9 treats all transactions that intend to secure a payment or performance of an obligation by the attachment of a security interest (UCC Article

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§ 1-201(35)) on the personal property as secured transactions. UCC Article § 9-109 excludes some of the assignment from its scope (wages, assignment for collection, assignment of a single account in satisfaction of a pre-existing debt). UCC Article 9 applies to both security transfer and outright assignments (UCC § 9-109). 25 Article 2 deals with the delegation of performance under section 2-210(1). Delegation is defined as follows: ‘A party may perform his duty through a delegate unless otherwise agreed or unless the other party has a substantial interest in having his original promisor perform or control the acts required by the contract. No delegation of performance relieves the party delegating of any duty to perform or any liability for breach.’

26

UCC Article 2-210(2) deals with the assignment of rights in relation to sale of goods and also makes a reference to UCC Article 9. UCC § 2-210(2) reads as follows: ‘Unless otherwise agreed, all rights of either seller or buyer can be assigned except where the assignment would materially change the duty of the other party, or increase materially the burden or risk imposed on the buyer or seller by the contract, or impair materially the chance of obtaining return performance. A right to damages for breach of the whole contract or a right arising out of the assignor's due performance of the assignor's entire obligation can be assigned despite agreement otherwise.’

27

The UCC Article 2-210(4) explains the difference between the delegation of performance of the duties and the assignment of rights. ‘An assignment of "the contract" or of "all my rights under the contract" or an assignment in similar general terms is an assignment of rights and unless the language or the circumstances (as in an assignment for security) indicate the contrary, it is a delegation of performance of the duties of the assignor and its acceptance by the assignee constitutes a promise by him to perform those duties. This promise is enforceable by either the assignor or the other party to the original contract.’

28

The UCC Article 9 Part 4 ‘Rights of Third Parties’ deals with the alienability of debtor’s rights and the debtor protection rules. Particularly, UCC §§ 9-401(b) indicates that “an agreement between the debtor and secured party which prohibits a transfer of the debtor’s rights in collateral or makes the transfer a default does not prevent the transfer from taking effect.”

IX. United Kingdom Sale of Goods Act 29

SGA does not directly deal with the assignment of receivables. The formal validity of assignment is governed by the Law of Property Act 1925 s. 136. Substantive requirements of an assignment of rights and protection of the debtor are generally governed by case law. If the assignment fulfils the requirements of section 136 then it will be valid as a legal assignment of things in action. If the requirements are not fulfilled an assignment under English law will still be valid as an equitable assignment. S. 136(1) reads as follows: “Legal assignments of things in action. 1.

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Any absolute assignment by writing under the hand of the assignor (not purporting to be by way of charge only) of any debt or other legal thing in action, of which express notice in writing has been given to the debtor, trustee or other person from whom the assignor would have been entitled to claim such debt or thing in action, is effectual in law (subject to equities having priority over the right of the assignee) to pass and transfer from the date of such notice—

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E. Sampling of Laws (a) the legal right to such debt or thing in action; (b) all legal and other remedies for the same; and (c) the power to give a good discharge for the same without the concurrence of the assignor: Provided that, if the debtor, trustee or other person liable in respect of such debt or thing in action has notice— (a) that the assignment is disputed by the assignor or any person claiming under him; or (b) of any other opposing or conflicting claims to such debt or thing in action; he may, if he thinks fit, either call upon the persons making claim thereto to interplead concerning the same, or pay the debt or other thing in action in to court under the provisions of the Trustee Act, 1925.”

X. Common Law of Contracts If the assignment agreement does not adhere to the requirements of the Law of Prop- 30 erty Act 1925 s. 136, it may still be valid under Common Law as an equitable assignment.

XI. American Restatement (Second) of Contracts § 317 et seq. deal with the assignment of a right which reads as follows:

31

“(1) An assignment of a right is a manifestation of the assignor’s intention to transfer it by virtue of which the assignor’s right to performance by the obligor is extinguished in whole or in part and the assignee acquires a right to such performance. (2) A contractual right can be assigned unless (a) the substitution of a right of the assignee for the right of the assignor would materially change the duty of the obligor, or materially increase the burden or risk imposed on him by his contract, or materially impair his chance of obtaining return performance, or materially reduce its value to him, or (b) the assignment is forbidden by statute or is otherwise in‐operative on grounds of public policy, or (c) assignment is validly precluded by contract.”

§ 318 deals with the delegation of performance of duty which reads as follows:

32

“(1) An obligor can properly delegate the performance of his duty to another unless the delegation is contrary to public policy or the terms of his promise. (2) Unless otherwise agreed, a promise requires performance by a particular person only to the extent that the obligee has a substantial interest in having that person perform or control the acts promised. (3) Unless the obligee agrees otherwise, neither delegation of performance nor a contract to assume the duty made with the obligor by the person delegated discharges any duty or liability of the delegating obligor.”

XII. Chinese Law Chinese Contract Law regulates assignment of rights under Article 545 of the Civil 33 Code which reads as follows: Article 545 A creditor may assign its claim, in whole or in part, to a third party, except under the following circumstances: (1) The claim may not be assigned in light of the nature of the contract. (2) The claim may not be assigned according to the agreement between the parties. (3) The claim may not be assigned according to the provisions of the laws. If the parties agree that a non-monetary claim shall not be assigned, the agreement shall not be effective against a third party in good faith. If the parties agree that a monetary claim shall not be assigned, the agreement shall not be effective against a third party.

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Chapter 25 Assignment, Delegation and Third-Party Rights Article 546 Where a creditor assigns its claim without giving the debtor notice, such assignment will have no effect on the debtor. A notice by the creditor to assign the claim shall not be revoked, unless such revocation is consented to by the assignee. Article 547 Where a creditor assigns its claim, the assignee shall acquire any accessory right related to the claim, unless the accessory right is strictly personal to the creditor. The assignee's acquisition of the accessory right shall not be affected by the failure to initiate transfer registration procedures or the non-transfer of possession with respect to the accessory right. Article 548 Upon receipt of the notice of assignment of the claim, a debtor may raise against the assignee any defenses against the assignor.

F. Commentary I. ‘Assignment’ Defined and Distinguished from Similar Transactions Assignment and transactions including delegation, contract for third party beneficiary, novation, acknowledgment and power of attorney are generally confused. However, they are not overlapping concepts or transactions. International contracts contain delegation and third party beneficiary clauses.9 35 Assignment is the transfer of a right to performance arising out of an underlying contract between the debtor and the creditor (assignor) to a third party (assignee). 10 Once assignment is made it extinguishes rights of creditor (assignor) against the debtor whole or in part in favour of the third party (assignee).11 As a result of the assignment the assignee is entitled to sue the debtor. The assignment may be made with or without the consent of the debtor. The following is generally referred to explain assignment: 34

‘Assignment means the immediate transfer of an existing proprietary right, vested or contingent, from the assignor to the assignee. Anything that in the eye of the law can be regarded as an existing subject of ownership, whether it be a chose in possession or a chose in action, can to-day be assigned, unless it be excepted from the general rule on some ground of public policy of by statute.’ 12

Assignment is a frequently used significant financing technique (such as in receivables financing, factoring and securitisation). Particularly in securitisation assignment needs to be absolute for the purposes of bankruptcy remoteness of the special purpose vehicle (SPV). 37 Assignment can be either absolute (true sale / outright transfer) or for security purposes. In the former the assignor transfers its right under the contract irrevocably to the assignee. Factoring is an example of this type of receivables financing where the assignee is transferred receivables by way of sale and receivables are not used as security. In the latter, the assignment is made in order to secure an obligation whereby the assignor assigns her claims against third parties to the assignee. In this type the assignment may either take the form of a mortgage or a charge. In mortgage, the asset will be transferred to the mortgagor if loan is repaid (mortgage transfer). In relation to charge, the asset 36

See below, → mn. 90. Midland Mutual Life Insurance Co. v. Mercy Clinics, Inc., 579 N.W.2 d 823, 833 (Iowa 1998); Commonwealth v. Power, 420 Mass. 410, 421 n.8, 650 N.E.2 d 87, 93 (1995), cert. denied 516 U.S. 1042 (1996). 11 Restatement (Second) of Contracts § 317(1) (1981). 12 Norman v Federal Comr of Taxation (1963) 109 CLR 9, 26 High Court of Australia. 9

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may be subject of a charge by the creditor (assignment by way of charge). However, under English law charge does not transfer property rights on the assets as it is only an encumbrance over the assets. Thus, upon performance of the obligation, the charge will terminate.13 Assignment by way of security is common in receivables and may also be addressed as ‘non-possessory security’. There will be no assignment if the debtor is requested by the creditor to pay to a third party. The third party who receives the payment will be considered as the agent of the creditor and have collected the payment on behalf of the creditor. Similarly, if the creditor and the debtor have agreed that the debtor should make the payment to a third party, this will not be considered as an assignment. This is because the transfer is based on an agreement between the creditor and debtor and debtor’s consent is not required in the assignment. The above two examples are considered as contracts for the benefit of third parties and differ from assignment. Acknowledgement enables the third party to sue the debtor as a result of agreement between the creditor and the debtor whereby the debtor agrees to pay the third party and notifies of him of the agreement. The difference between acknowledgement and assignment is the existence of consideration in the latter transaction. Despite the absence of consideration requirement in acknowledgment the third party, by virtue of Contracts (Rights of Third Parties) Act 1999 can sue the debtor for the monies owed. 14 Power of Attorney also enables the third party to sue for the debt on behalf of the creditor.15 Delegation is, in general terms, the transfer by a party of that party’s duty or condition of performance of that duty to another party.16 The fact that the delegating party delegated its duties does not discharge that party from performing the obligation. Otherwise, by virtue of delegation delegated parties may be put under obligation beyond their financial and physical abilities.17 Novation requires the consent of three parties (creditor, debtor and third party), therefore differs from assignment which can take place with or without the consent of the debtor. Novation is a contract where debtor, creditor and a third party decide that the debtor shall owe its debt to the third party. There is a new contract between the debtor and the third party,18 thus the original debt is not assigned. The third party at Common Law do not acquire rights under Contracts (Rights of Third Parties) Act 1999.19

13 Bridge, ‘England and Wales’ in Sigman & Kieninger (eds), Cross-Border Security Over Receivables (Sellier 2009) 147, 150. 14 Shamia v Joory [1958] 1 Q.B. 448; Treitel, The Law of Contract (11th edn, Sweet & Maxwell 2003) 673–674. 15 Treitel (n 14) 674. 16 Restatement (Second) of Contracts § 318(1) (1981) ‘An obligor can properly delegate the performance of his duty to another unless the delegation is contrary to public policy or the terms of his promise.’ Restatement (Second) of Contracts § 319(1) ‘Where a performance by a person is made a condition of a duty, performance by a person delegated by him satisfies that requirement unless the delegation is contrary to public policy or the terms of the agreement.’. 17 Restatement (Second) of Contracts § 318(3) (1981). Eg First American Commerce Co. v. Washington Mutual Savings Bank, 743 P.2 d 1193 (Utah 1987). 18 Rasbora Ltd v JCL Marine Ltd [1977] 1 Lloyd’s Rep. 645. 19 S. 1(1). In order for the third party to acquire rights under the Contract (Rights of Third Parties) Act 1999, the third party should not be a party to this tripartite relationship.

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38

39

40 41

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II. Validity of an Assignment 43

Validity of an assignment is divided into two parts. The first part includes the formal validity requirements issues such as the formal validity of an assignment (effectiveness between the parties and against third parties); whether a specific contractual form and notice to debtor are required. The second part includes the substantive validity that is the assignability requirements (anti-assignment clauses, bulk assignment of receivables and assignment of future receivables).

1. Formal Validity Requirements 44

There is no specific form under English law for an assignment to be formally valid. A statutory assignment must be prepared in writing by the assignor. However, an assignment which is not written may still be effective as an equitable assignment. An equitable assignment does not require any specific form (an equitable chose in action may either be assigned as a statutory or equitable assignment).20 While German law treats assignment as a contract, English law does not regard “assignment as a ‘contract’”.21 Thus, an assignee does not need to provide consideration unless it is an assignment of future debts. Hein Kötz explains this point as follows: “[i]n the common law the term “contract” is not used in [the context as understood in Civil law jurisdictions]. Bargain is essential to the Common law conception of contract; if one views assignment as a transaction aiming merely at the transfer of a right, it is indeed hard to see an element of bargaining in it.”22

The assignment needs to be communicated by the assignor to the assignee or it must be in a form of agreement between assignor and assignee so that assignee is aware of the existence of an assignment.23 An assignment may need to be notified to the debtor by the assignor or the assignee in order to be valid. For example, under Chinese Civil Code Article 546 assignor needs to notify the debtor of the assignment. Failure of notification results in the ineffectiveness of the assignment to the debtor. There is no specific formality in terms of form of the contract. It can be concluded in writing, oral or in other forms (Chinese Civil Code Article 469). 46 Under English law assignment can either be legal (statutory) or equitable assignment. A legal (statutory) assignment is defined under section 136 of the Law of Property Act 1925. A legal assignment will transfer the legal right on personal rights of property (chose in action).24 The significance of legal assignment is that the assignee has the right by itself to bring an action and enforce the personal rights of property without the necessity of the assignor to join as the claimant. Equitable assignment is the invention of courts of equity. The assignor, in this type of assignment, assigns the equitable right 45

20 The Law of Property Act 1925 s. 53(1)(c) ‘a disposition of an equitable interest or trust subsisting at the time of the disposition, must be in writing signed by the person disposing of the same, or by his agent thereunto lawfully authorised in writing or by will.’. 21 Beale, Fauvarque-Casson, Rutgers, Tallon & Vogenauer, Cases, Materials and Text on Contract Law (2nd edn, Hart 2010) 1295. 22 Kötz, ‘Rights of Third Parties, Third Party Beneficiaries and Assignment’ in von Mehren (ed), International Encyclopaedia of Comparative Law Ch. 13 v.7 (Mohr Siebeck 2008) 65. 23 Id. 1295. 24 This is also known as the ‘chose in action’ which means ‘all personal rights of property which can only be claimed or enforced by action, and not by taking physical possession.’ See Holdsworth, ‘The History of the treatment of choses in action by the Common Law’ (1920) 33 Harvard L. Rev. 967, 967–968. Torkington v Magee [1902] 2 K.B. 427, 430. Chose in action has been described as ‘All personal rights of property which can only be claimed or enforced by action, and not by taking physical possession.’.

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to the personal rights of property. When there is an absolute equitable assignment of an equitable right to the personal rights of property, the assignee will have the right to sue by his own without the need for the assignor to join. If there is an equitable assignment of legal right to the personal rights of property, the assignor may be joined by the assignee in an action. This is to protect the debtor from the assignor who may dispute the validity of the assignment or sue on the basis of retained interest in the property.25 Under s. 136 of the Law of Property Act 1925 (a) an assignment must be about a debt; (b) a notice in writing must be given to the debtor; (c) the agreement must be in writing and signed by the assignor; (d) assignment must be absolute and not by way of charge only. Thus when the assignor assigns the rights to payment from the debtor under the contract it must have unconditionally transferred these rights. If the assignment is (a) not in writing, (b) no written notice has been provided, (c) not absolute (by way of charge, part of a debt, conditional), then it will be an equitable assignment. The distinction between a legal and equitable assignment is that the legal assignment enables the assignee to sue the debtor without the need for the assignor to join. On the other hand, in cases where the assignment is not absolute (i.e. where the assignee does not have the full property rights) or the debtor has not been notified or the assignment is not in writing, the assignee will need to be joined by the assignor to sue the debtor. If the assignment is for security purposes, in addition to the agreement, additional 47 steps, such as notice to the debtor, are necessary.26 According to Dearle v Hall first to give notice of assignment to the debtor with value and without the knowledge of another assignment will be granted priority. If the interest is on land, the agreement must be in writing. In terms of effectiveness of an assignment to third parties, a legal and an equitable assignment will be effective against the creditors and trustee in bankruptcy or liquidator of the assignor as the assignment provides both contractual and proprietary rights to the assignee. Thus, without notification of the debtor or a written assignment, the equitable assignment provides proprietary rights to the assignee. For reasons of priority and the good discharge of debtor a notice may be necessary. This should mainly be done by the assignee that has interest in providing notice to debtors so that debtors get a good discharge by paying the right party.27 If the assignor is an incorporated body, it must register the security assignment (charge) under Companies Act 2006 Part 25 s. 860(7)(f) with the Companies House. However, while desirable, registration is not possible for the sale of receivables. If an individual assigns receivables (outright or by way of security), the assignment needs to be registered in the bills of sale register as a Bill of Sale under the Bills of Sale Act 1878 (Insolvency Act 1986 s. 344). 28 German BGB § 398 recognises the free assignability of a claim. The assignee obtains 48 rights as soon as the contract is entered into and takes the assignor’s place. The agreement can be oral and the debtor does not have to have information about it. This has the result that the creditors and the bankruptcy administrator of the assignor cannot extend claims against the assignee (provided that the contract of assignment has been entered into before the bankruptcy decision of the creditor). The assignment has effectiveness 25 Sealy & Hooley, Commercial Law Text, Cases and Materials (3rd edn, Butterworths 2003) 908. See Raiffeisen Zentralbank Österreich AG v Five Star General Trading LLC [2001] EWCA Civ 68, [2001] QB 825 at [60]. 26 Dearle v Hall (1828) 3 Russ 1. 27 For example, under the UN Convention on the Assignment of Receivables in International Trade Article 13 either the assignor or the assignee may send a notification and a payment instruction and after notification is sent only the assignee may send the payment instruction. 28 There is currently a Law Commission work on the Bills of Sales Acts to reform the law in this area in order to enable unincorporated businesses to have better access to finance.

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without the need to obtain the consent of the debtor. There seems to be a nuance between English and German laws where in the latter it is expressly indicated that a contract is necessary to transfer the rights, whereas the former does not regard assignment as a contract. In relation to the priority of two assignees who are successively assigned the same debt, the assignee who has been assigned first will have the priority. BGB §409 provides that the assignee notifies the debtor of the assigned claim. Notification may also be in the form of payment instruction. If the debtor pays the assignor due to not being notified of the assignment, as part of debtor protection, debtor will have a good discharge and the assignee may have a personal claim right against the assignor. The debtor’s payment will be included in the assignor’s estate (BGB §§ 407-408). If there is competition between multiple assignees, the assignee to whom the assignment is made first or who has first attached to the contractual right will have priority (first in time is first in right).29 49 French Code civil Articles 1689-1690 state that for the assignment of a claim or of a right or of an action against a third party instrument of title needs to be exchanged between the assignor and the assignee. This makes the assignment only valid between assignee and assignor. Thus the assignment is a contract between the assignor and assignee. The assignee’s rights become effective as against third parties once the debtor is notified or an authentic act in the form of notarial acceptance is done by the debtor (art. 1690). Therefore, there is a nuance between German and French systems in the sense that there is a dual step in the latter system to make the assignment effective against third parties whereas in the former the conclusion of the assignment contract is sufficient to make the assignment effective against third parties. Over the years the burdensome requirements of Article 1690 have been somewhat relaxed. For example, assignee’s service of statement of claim against the debtor, rather than providing a normal notice, to recover an assigned debt has been held to be sufficient signification.30 However, in cases where the assignor has made successive assignments, the assignee that fulfils the requirements of Article 1690 (notification of debtor) will be considered to have acquired the rights.31 Loi Dailly has been instrumental in reducing the formalities required under the Code civil by facilitating the bulk assignment of receivables. Under Loi Dailly notification is not required and identification of receivables is sufficient. Thus, the applicability of Code civil assignment provisions in some cases has been somewhat limited. Code civil uses other methods to reduce the formalities in the assignment of receivables. These include payment with subrogation (Articles 1249 and 1250) whereby, by operation of law, the assignee obtains the rights of the assignor by paying the assignor and taking his place. In subrogation, the formalities indicated under Article 1690 do not apply. Article 1341 suggests that transactions of certain value need to be in private writing or in a notarial document. 50 In relation to the effectiveness of an assignment, the Spanish Código civil provides that the agreement between the assignor and assignee shall be effective against third parties from the date it is registered (Articles 1526, 1218, 1227). Article 1218 indicates that “Public instruments constitute evidence, effective even against third parties, of the 29 There are exceptions to this rule in Germany where the bank and the supplier are competing claimants. In those cases, the date of the agreement to assign will be taken as the main point of reference in determining the priority. BGB § 138 suggests that bulk assignment of future receivables made in favour of banks will be considered as invalid on unconscionability or public policy grounds. This regulation enables suppliers to have priority over banks. For more discussion see Katz (n 22) 98–99. 30 Bull Civ IV no 65, Cass Com, 18 February 1969; but also notification requirement may be dispensed with if this will not be detrimental to the third party rights. Bull Civ I no 13 Cass Civ (1), 8 January 1955. 31 Beale et al (n 21) 1299.

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fact which motivates their execution and of the date thereof. They shall also constitute evidence effective against the contracting parties and their successors, as concerns the statements made therein by the former.” Article 1227 provides that “the date of a private document shall only be effective against third parties from the day on which it should have been entered in or registered with a public registry …” The debtor shall be released from the obligation if she pays to the assignor before becoming aware of the assignment. The PECL Article 11.104 is similar to Civil Law jurisdictions in the sense that it does 51 not require an assignment to be in writing and there are no other requirements as to form. An assignment may be proved by any means including witnesses. Article 11.401 deals with priorities. According to this article, creation (attachment) is the significant point in terms of achieving priority. The assignee who has been assigned before the creditor of the assignor attaches the claim will have priority. If the assignor is bankrupt the assignee’s interest will have priority over the claims of the insolvency administrator and creditors subject to the rules in applicable bankruptcy laws on publicity, ranking of claims and the avoidance of transactions in bankruptcy proceedings. The CISG provides certain exceptions under Article 4. Accordingly, the assignment of 52 rights is implicitly excluded from the scope of the CISG. The significance of this position is that assignment may adversely affect the rights of the third party or the debtor (buyer) who expects that the CISG would still apply to the contract. Had assignment been included in the CISG this would have made ascertaining the applicable law difficult. This is because applicability provision of the CISG is not applied on a uniform basis. CISG case law32 state that the validity of the assignment of rights/receivables is excluded from the scope. This is in line with the fact that the validity of contracts is excluded from the CISG’s scope. Recently, a proposal made by Switzerland33 pointed out that a possible future work by the UNCITRAL in the area of international sales law that fills the gaps in the CISG in the light of general contract law may be necessary. Assignment of rights, delegation of duties/performance and third party rights are among those areas identified by this proposal. UNIDROIT Principles of International Commercial Contracts covers those areas 53 which are excluded by the CISG such as the assignment of rights, delegation of duties and third party rights. UNIDROIT Principles Article 9.1.1 suggests that assignee needs to be informed of the existence of the assignment and that an agreement is necessary for a valid assignment. The assignment covers both outright and security purposes. A notice to debtor is not necessary for the validity of the assignment as between the parties and the agreement between the assignor and assignee is sufficient for its effectiveness. Debtor’s consent is not required, unless the obligation in question has a personal character (Article 9.1.7). For security assignment, special form may be required. However, notice is necessary for debtor’s good discharge and payment to the right creditor (assignee) (9.1.10) and in the case of successive assignments payment to the assignee who first provides the notice (9.1.11). The notice needs to be backed supported by an additional step according to which until the debtor receives an adequate proof that the assignee is the new creditor to whom the debtor should pay, the debtor may withhold the payment (9.1.12). This is to protect the debtor from fraudulent payment requests from parties who are not privy to the underlying contract. The assignment of a right to the assignee transfers all rights to payment and performance under the contract in 32 Bezirksgericht Arbon, 9 December 1994, UNILEX 1996; Oberlandesgericht Hamm (Germany), 8 February 1995, Praxis des Internationalen Privat- und Verfahrensrechts 1995, 197. 33 UNCITRAL, Possible Future Work in the Area of International Contract Law: Proposal by Switzerland on Possible Future Work by UNCITRAL in the Area of International Contract Law, U.N. Doc. A/CN.9/758 (8 May 2012).

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relation to the right assigned and all rights securing performance of the right assigned (Article 9.1.14). The assignor undertakes to the assignee that unless the assigned rights is an future right, that the rights exist; that there are no encumbrances and the assignor has the right to assign; that the assigned right has not been assigned previously; that the debtor has no defences; that there are no rights of set-off nor will there be and that the assignor will reimburse the assignee for any payment received from the debtor the notice of assignment was given (Article 9.1.15). 54 Restatement (Second) Contracts § 317(1) regards assignment as a “manifestation of the assignor’s intention to transfer …”. Thus the Restatement follows the Common Law notion that the assignment is not a contract. § 317(2) of the Restatement provides that a contractual right can be assigned if the duty of the debtor towards the assignor by virtue of an assignment would not be altered; or the assignment is not forbidden by statute or otherwise; or there is no anti-assignment clause. Restatement (Second) Contracts § 327(2) enables the assignee to disclaim the assignment within a reasonable time. Under American law, unlike English law, the distinction between law and equity has diminished and thus the assignee does not need the assignor to join him when suing the debtor and the debtor does not need to be notified. UCC Article § 2-210(2) provides a similar rule for the sale of goods. UCC Article 9 provides automatic perfection 34 of security interests created under Article 2 thus as soon as an assignment agreement is entered into this will have third party effects without the need to take further steps to publicise the rights of the assignee. A gratuitous assignment is irrevocable if the assignment is in a writing either signed or under seal that is delivered by the assignor or the assignment is accompanied by delivery of a writing of a type customarily accepted as a symbol or as evidence of the right assigned (Restatement (Second) Contracts § 332). Under UCC Article 9 for an assignment to be enforceable as against the debtor and third parties, a security agreement needs to be signed by the assignor and the rights assigned must be described (UCC § 9-203(1)) (attachment). For the security interest to be effective as against third parties (perfection), the security agreement needs to be filed. Where there are multiple assignments, Restatement (Second) of Contracts § 342 grants priority to the subsequent assignee who has given value without notice of a prior assignment. UCC Article 9 adopts filing system according to which first to file will obtain priority. 55 Chinese law enables the free assignability of rights under the contract unless there are contractual or statutory prohibitions or contracts dealing with personal rights that are not assignable (Chinese Civil Code Article 545). Assignor is under the obligation to notify the debtor of the assignment. This is a formal validity requirement without which the assignment will be valid against the debtor (Article 546) unless the assignee agrees with the revocation of notification rights.

2. Substantive Requirements and Assignability 56

Assignability is about whether rights are assignable between assignor and assignee. Assignability of a contract is limited by contractual prohibitions or by operation of law.

34 ‘Automatic perfection’ means that the security interest is effective against third parties as soon as it attaches (that is (1) a security agreement concluded, (2) value given by the secured party, (3) the debtor has rights or power to transfer rights in the collateral; and the attachment creates a proprietary interest in the collateral identified by the parties) and the secured party is not required to take any further action to perfect it. Perfection is the process whereby the secured party take relevant steps (e.g. registration of the security interest on the collateral in a public registry and thereby providing public notice) to make her claim superior and effective against third parties who may attempt to assert claims on the same collateral.

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a) Statutory Prohibitions on Assignability It is mostly recognised that rights that have personal character are unassignable (e.g. 57 Chinese Civil Code Article 545). If the assignment alters the substance of performance, in order to protect the debtor, it is deemed unassignable (BGB § 399). If the performance of the obligation requires a particular expertise and that is the reason for commissioning, then the contractual right is deemed to be unassignable (i.e. the service must be rendered in person) (BGB § 613, 644). If a business is transferred, the employment contracts will pass to the assignee/transferee (BGB § 613 a). Statute35 prohibits the assignment of some rights, as does public policy.36 In the US, 58 tort claims are non-assignable due to the claim’s personal nature and the risk of champerty it carries with it.37 Restatement (Second) of Contracts has four exceptions to the free assignability (§ 317(2)(a)). These are: (a) assignments that materially change the performance of the debtor; (b) assignments that would materially decrease the likelihood that the debtor would receive the intended return performance from the assignee; (c) assignments that would materially reduce the value of the return performance to the debtor; (d) assignments that would materially increase the risk of the debtor. Certain contracts in which rights are linked to the beneficiary, such as contracts of 59 personal service, are, by their nature, non-assignable.38 Under French Code civil Article 1699 to discourage parties from assigning mere rights of action if the assignee has paid consideration for this right, the debtor may discharge herself by making the actual payment, the expenses and costs and the interest from the day of assignment. 39 Code civil suggest that according to which the ‘assignment of disputed rights have either been held invalid or viewed with the greatest suspicion … where the assignee [has] made it a business to buy and enforce rights that formed the subject matter of pending litigation.’ 40 The French Code civil Article 1699 provides that if a disputed claim is assigned by the assignor to the assignee, the debtor against whom litigation is pending may release himself by reimbursing the assignee with the actual price of the assignment. This is also the case under Spanish Código civil Article 1535 with the exception of assignments made to co-heir or co-owner of the assigned right; made to a creditor as payment of his credit and made to the possessor of a property subject to the litigious right thus assigned (Spanish Código civil Article 1536). Also, under French Code civil Article 1597 judges, members of the judiciary acting as Government procurators, registrars, bailiffs, 35 In the UK e.g. Social Security benefit and child benefits are not assignable see Social Security Administration Act 1992 s.187; Pension Schemes Act 1993 s.159; Pensions Act 1995 s. 91. BGB § 400 pensions, salaries and public benefit entitlements are unassignable. In the USA, Federal Anti-Assignment Act (41 U.S.C. § 15), municipal laws and state assignment of wage laws prohibit the assignment of rights. 36 Re Mirams [1891] 1 Q.B. 594 where an assignment of the salary of a public officer has been held to be void; Methwold v. Walbank (1750) 2 Ves. Sen. 238 and Liverpool Corp. v. Wright (1859) 28 L.J.Ch. 868 (where a public officer cannot assign his salary); see also Arbuthnot v. Norton (1846) 5 Moo PCC 219 (where it was held that a judge could not assign his salary); for a similar decision in the US see e.g. Byers v. Comer 68 P.2 d 671 (Ariz.), modified, 70 P.2 d 330 (Ariz. 1937); Worthington, ‘The Disappearing Divide between Property and Obligation: The Impact of Aligning Legal Analysis and Commercial Expectation’ (2007) 42 Tex. Int’l L. J. 917, 927–928; Bell, Modern Law or Personal Property in England and Ireland, (Butterworths 1989) 380. In Re Freeman 232 B.R. 497, 501 (Bankr. M.D. Fla. 1999); Restatement (Second) of Contracts § 317(2)(b). 37 Lingel v Olbin 98 Ariz. 249, 253, 8 P.3 d 1163, 1167 (2000). 38 Nokes v. Doncaster Amalgamated Collieries Ltd. [1940] AC 1014; Griffith v Tower Publishing Co Ltd and Moncrieff [1897] 1 Ch 21 (personal contracts –publishing contract); Peters v General Accident & Life Assurance Corp Ltd [1937] 4 All ER 628 (insurance policy cannot be assigned but the sums payable under the policy can be). 39 Cass. Civ. 19 March 1957, Gaz. Pal. 1957.2.33; Cass. Civ. 10 Jan. 1962, Bull. Civ. 1962 I 19, no. 22. 40 Kötz (n 22) 60–61.

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advocates and notaries may not become assignees of suits, contested rights and actions which are within the jurisdiction of the court that will decide the action on the claim. 60 French law recognises the assignment of future receivables. Particularly, Loi Dailly inserted Article L313-24 to the Code Monetaire et Financier enabling the assignability of future rights. Similar insertion has been proposed to the Code civil. Article 1130 of the Code civil suggests that future things may be object of an obligation and this may be extended to the assignment of future rights. 61 The German BGB section 411 provides a procedure for the assignment of salary. According to this section “if a military person, an official, a clergyman or a teacher at a public institution of education assigns the transferable portion of his official income, inactive status pay or retirement pay, the disbursing fund must be notified of the assignment by delivery of a publicly or officially certified document issued by the previous obligee. Pending notice, the fund is deemed to be unaware of the assignment.”

In relation to the assignment of future receivables, German Law, similar to the Factoring Convention, Receivables Convention and the Guide, takes the position that the assigned right (receivables) need not be specified or determinable at the time of assignment but it would be sufficient if they are determinable at the time they come into existence.41 63 Under Common Law, the assignability of intangible property was not possible unless it was in a documentary form (e.g. bill of lading). The concern was based on maintenance and champerty against which there were rules which prohibit assignment of bare right of action on the grounds of public policy.42 These have been regarded as assignments encouraging litigation and are unassignable under English Law.43 However, the modern view is that the assignment of a right of action should be available for an assignee provided that the assignee has a genuine commercial interest or a proprietary interest or the assignor is able to satisfy its debt to the assignee.44 It is clear that once assignment takes place, it also transfers the right to sue for the recovery of receivables. The assignee will have the right to recover the debt.45 Equity has produced results to fill the gaps related to the assignment of intangible property. Under English law the assignment of future rights is allowed.46 The future right (a right that has not arisen yet or conditional upon the occurrence of an event) must relate to an existing contract. The main point of connection is that the future right must be connected to the assignment at the time it is created. This prevents the assignment of future rights that are ‘mere expectancies’.47 64 PECL suggest that (Article 11.102) contractual claims are generally assignable subject to Article 11.301 and 11.302. PECL (Article 11.102(2)) permits the assignment of future claims arising under an existing or future contract if at the time when the receivable comes into existence, or at such other time as the parties agree, it can be identified as the claim to which the assignment relates. Particularly, PECL requires the consent of the debtor for assignment if the performance can only be rendered by the assignor (Article 11:302). This is generally in line with the national laws. 62

Bundesgerichtshof (Germany), 25 October 1952, NJW1953, 21. Gullifer (ed), Goode on Legal Problems of Credit and Security (5th edn, Sweet & Maxwell 2013) 113. 43 In re Trepca Mines Ltd (No. 2) [1963] Ch. 199 (C.A.). 44 See e.g. Massai Aviation Services Ltd. v Attorney General [2007] UKPC 12; Ellis v Torrington [1920] 1 K.B. 399; Trendtex Trading Corp v Credit Suisse [1980] Q.B. 629 CA; [1982] A.C. 679 HL; Re Timothy’s Pty Ltd and the Companies Act [1981] 2 N.S.W.L.R. 706. 45 Camdex International Ltd. v Bank of Zambia [1998] Q.B. 22, 32–33. 46 Tailby v Official Receiver (1888) 13 App Cas 523; Holroyd v Marshall (1862) 10 HLC 191, 11 ER 999. 47 Beale et al (n 21) 1306; Treitel (n 14) 683. 41

42

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UNIDROIT Principles Article 9.1.3 states that assignment of a right to non-monetary 65 performance is possible only if the assignment does not render the performance more burdensome. Article 9.1.8 also enables the debtor to be compensated by the assignor or the assignee for the costs created as a result of the assignment. This is understandable in terms of monetary performance, however, if the performance has a personal nature 9.1.8 will not be useful. Partial assignments are allowed under Article 9.1.4 so long as it is divisible and does not render the obligation burdensome. Article 9.1.5 enables the assignment of future receivables provided the right to payment can be identified to the assignment at the time it comes into existence. This is in line with national laws and international instruments. French Civil Code is silent on the issue but the case law seems to suggest that partial assignments are admissible.48 German law suggests that partial assignments may be admissible to the extent that the assignment does not create unconscionability in which case the assignment will be ineffective against the assignee.49 English law suggests that partial assignments are valid and the assignee is protected through the equitable rules. In the case of a partial assignment the assignment cannot be absolute so it cannot be considered as a legal assignment, hence the inapplicability of the Law of Property Act 1925 s. 136(1). In those cases, the assignment will be considered as an equitable assignment where the assignee will be joined by the assignor to sue the debtor.50 Restatement (Second) of Contracts § 326 (1) recognises the effectiveness of partial assignments. However, the assignor or the assignee cannot bring an action to the debtor unless he has consented to the partial assignment. For this action all persons entitled to the promised performance must join the proceedings (Restatement (Second) of Contracts § 321(2)). Restatement (Second) of Contracts § 321 allows the assignability of future rights un- 66 less prohibited by statute. A right to payment expected to arise out of an employment or business contract is effective in the same way as an assignment of an existing right. The purported assignment of a right expected to arise under a contract not in existence will operate as a promise to assign this future right when it arises and as a power to enforce it. UCC Article 9 § 204 validates the after-acquired property clauses according to which an assignment of receivables to be acquired after the security agreement will be effective. The requirement of specificity hinders the assignability of future receivables. The 67 UNIDROIT International Factoring Convention Article 5 and the UN Convention on the Assignment of Receivables in International Trade Article 8 and UNCITRAL Legislative Guide on Secured Transactions Recommendation 24 set aside statutory limitations on the assignment of future receivables. The time of identification for existing receivables is the time of conclusion of the contract, and for future receivables it is the time when receivables come into existence. There is no requirement for a new act to transfer rights. A description of the future assets should be sufficient and there is no need to specify receivables individually. While the Factoring Convention recognises the assignment of future receivables only as between the parties to a factoring contract (assignor and assignee), the Receivables Convention (and the Legislative Guide) recognises the assignability as against third parties as well. As the Factoring Convention does not deal with the priorities, unlike the Receivables Convention, its regulation of assignment of future receivables is limited to the validity and enforceability as between parties to the factoring contract.51 As the rule under the Factoring Convention operates between the Cass. Civ. 24 Oct. 1911 D.P. 1914.1.318. Kötz (n 22) 63–64. 50 Williams v Atlantic Assurance Co. Ltd. [1933] 1 K.B. 81, 100 (C.A.); Walter & Sullivan Ltd v J. Murphy & Sons Ltd [1955] 2 Q.B. 584 (C.A.). 51 UNIDROIT Study LVIII–Doc.14, para. 30. 48 49

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assignee and assignor, it will not bind the debtor unless he has written notice relating to the receivables arising under the original contract, made at or before the time when notice is given.52 b) Contractual Prohibitions on Assignability Most sales contracts contain an anti-assignment clause which prohibits the seller (assignor) to assign her right to payment to an assignee without the written consent of the debtor. In most common and Civil Law jurisdictions53 assignment is effective against the debtor and third parties notwithstanding an anti-assignment clause. This is mainly based on the fact that the flow of credit needs to be facilitated, particularly, for small businesses54 and the rights of the assignee need to be protected in order for the financiers to provide lower cost credit. 69 However, there are legitimate reasons as to why anti-assignment clauses are used. The main reason is the protection of the debtor’s interests. Debtors may often, despite receiving notice of assignment, overlook the notice and pay by mistake to the assignor and do not get god discharge. While the debtor’s defences against the assignor that have arisen before the receipt of the notice of assignment may be set up against the assignee, same arguments cannot be made in relation to the rights of set-off. Debtors also wish to protect their rights of set-off. However, with the notice of assignment, the rights of set-off for present and future dealings cannot be asserted against the assignee. Furthermore, the debtor may not wish to deal with a new creditor that it has not dealt with before. In the same token, transaction costs may increase with the change of creditor.55 70 Under the US Law, except otherwise agreed and subject to UCC §§ 9-406, all rights may be assigned (UCC § 2-210(2)). This section takes the position that an assignment made notwithstanding an anti-assignment clause shall be effective, thus anti-assignment clause has been regarded as invalid. UCC § 2-210(2) is supplemented by Common Law principles in cases where the assignor breaches an anti-assignment clause.56 Restatement (Second) Contracts § 322(2) suggests that an anti-assignment clause does not prohibit an assignor to assign the rights under the contract to an assignee and the assignment between the assignee and the assignor will be valid. However, the assignor may be liable for damages under the anti-assignment clause against the debtor for breach of contract.57 UCC §§ 9-406 to 409 deal with the elimination of anti-assignment clauses. UCC § 9-406(d) renders anti-assignment clauses in accounts, chattel paper, payment in tangi68

52 See Akseli, International Secured Transactions Law Facilitation of Credit and International Conventions and Instruments (Routledge 2011) 143–144. 53 Eg Uniform Commercial Code Article 9 ss. 9-406(d) and 9-408(a); Swiss Code of Obligations Article 164; s. 354(a) of the German Commercial Code (Handelsgesetzbuch, HGB). 54 See e.g. Article 1 of the Small Businesses, Enterprise and Employment Bill 2015. According to this Article the UK Government has the right prepare regulations that will recognise the effectiveness of assignments made in violation of anti-assignment clauses. The rationale of this is to facilitate small businesses’ access to finance by enabling them to use mainly factoring financing technique. The Business Contract terms (Assignment of Receivables) Regulations 2017 recognises the effectiveness of assignments made notwithstanding an anti-assignment clause to the extent these clauses are included in contracts made with small and medium enterprises (s. 2). However, there is a long list of excluded contracts (s. 1). 55 McKnight, ‘Contractual Prohibitions on a Creditor’s Right to Alienate Debts’ (2003) 18 J.I.B.L. 1, 3; Akseli, ‘Contractual Prohibitions on Assignment of Receivables: An English and UN Perspective’ (2009) 7 JBL 650, 656–658. 56 UCC § 1-103, UCC § 2-106 and comment 7 to the UCC § 2-210(2). 57 This seems to be the same approach under the UN Convention on the Assignment of Receivables in International Trade Article 9(2). Third Circuit: Paccom Leasing Corp. v E.I. du Pont de Nemours & Co., Civ. A. Nos. 89-225-CMW, 90-311-CMW, 1991 WL 226775 (D. Del. Oct. 30, 1991).

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bles and promissory notes ineffective.58 UCC § 9-408 also renders prohibitions on the assignment of general intangibles, promissory notes and health care insurance receivables ineffective. This provision eliminates prohibitions on the creation, attachment and perfection of a security interest. Under French Loi Dailly a prohibition of an assignment has no effectiveness against 71 the assignee. This is also supported by the Code Civil Article 1165 which states that “Agreements produce effect only between the contracting parties; they do not harm a third party, and they benefit him only in the case provided for in Article 1121.”59

However, under Code civil Article 1145 an assignment made notwithstanding a pro- 72 hibition may impose liabilities on the assignor towards the debtor. There is, however, one exception to the free assignability of receivables and this is dealt with under Article 900-1 of the Code civil. According to this Article if the prohibition is temporary and justified by a legitimate and serious interest, then the assignment will not be given effectiveness. This provision applies particularly to distribution and subcontracting agreements and does not necessarily affect commercial parties’ financing as they can instead use subrogation.60 The validity of anti-assignment clauses is restricted in favour of free use of property.61 Spanish law suggests that all rights are assignable unless otherwise agreed (Article 1112). PECL Article 11.301 generally recognises the effectiveness of an assignment made 73 notwithstanding an anti-assignment clause. An assignment is not effective against the debtor unless: (a) the debtor has consented to it; or (b) the assignee neither knew nor ought to have known of the non-conformity; or (c) the assignment is made under a contract for the assignment of future rights to payment of money. Assignor may still be liable to the debtor for knowingly assigning the claim under the contract where he has not conformed to his obligations (such as non-conformity of goods, delivery etc). PECL’s recognition of effectiveness of assignment made in violation of anti-assignment clauses is rather limited compared to the international conventions prepared by the UNCITRAL and the UNIDROIT. UNIDROIT Convention on International Factoring (Article 6)62 and the UN Con- 74 vention on Assignment of Receivables in International Trade (Article 9)63 take similar 58 Official Comment 5 to the UCC § 9-406 explains that ineffective means having ‘no effect whatsoever; the clause does not prevent the assignment from taking effect between the parties and the prohibited assignment does not constitute a default under the agreement between the account debtor and assignor.’ 59 For French Code civil Article 1121 see below, → mn. 112. 60 See Rasche, ‘Prohibitions on Assignment, A European Civil Code and Business Financing’ (2002) The European Legal Forum 133, 135. 61 Cass Civ 1 June 1853, DP 1853.1.191. 62 “(1) The assignment of a receivable by the supplier to the factor shall be effective notwithstanding any agreement between the supplier and the debtor prohibiting such assignment. (2) However, such assignment shall not be effective against the debtor when, at the time of conclusion of the contract of sale of goods, it has its place of business in a Contracting state, which has made a declaration under Article 18 of this convention. (3) Nothing in paragraph 1 shall affect any obligation of good faith owed by the supplier to the debtor or any liability of the supplier to the debtor in respect of an assignment made in breach of the terms of the contract of sale of goods.” 63 ‘(1) An assignment of a receivable is effective notwithstanding any agreement between the initial or any subsequent assignor and the debtor or any subsequent assignee limiting in any way the assignor’s right to assign its receivables. (2) Nothing in this article affects any obligation or liability of the assignor for breach of such an agreement, but the other party to such agreement may not avoid the original contract or the assignment contract on the sole ground of that breach. A person who is not party to such an agreement is not liable on the sole ground that it had knowledge of the agreement. (3) This article applies only to assignments of receivables: (a) Arising from an original contract that is a contract for the supply or lease of goods or services other than financial services, a construction contract or a contract for the sale or lease of real property;(b) Arising from an original contract for sale, lease or licence of industrial or other

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approaches by eliminating the effectiveness of anti-assignment clauses. However, the UNIDROIT Convention does not make any distinction between sovereign debtors and other debtors and thus, limits the free assignability of all types of receivables under Article 18. The UN Convention draws a distinction between sovereign and other type of debts and only allows a reservation with respect to sovereign debtors and a reservation made by a Contracting State is only valid for sovereign receivables. 75 Under English law anti-assignment clauses are standard conditions of hire-purchase agreements.64 Helstan Securities Ltd v Hertfordshire County Council65 and Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd.66 decisions have confirmed the view that an assignment made in violation of an anti-assignment clause will be regarded as ineffective. Four interpretations have been suggested in relation to anti-assignment clauses.67 (a) The anti-assignment clause may be effective as between the assignor and the debtor, but has no effectiveness as against the assignee and the breach of anti-assignment clause only grants the debtor the right to claim damages from the assignor. 68 (b) Anti-assignment clause may prevent effectively the assignor from assigning the right to third parties and thus the debtor is not affected and can obtain a good discharge by making a payment to the assignor. Under this interpretation the assignor has the right to enter into a contract to assign the fruits of the contract. Under this interpretation the debtor is effectively protected. Any agreement between the assignor and a third party regarding the assignment of the fruits of the contract, after the debtor’s payment, cannot affect the debtor. (c) The anti-assignment clause effectively prohibits the assignor from assigning both the right to payment and its fruits, even after the payment is done. This interpretation clearly excludes the assignor from access to immediate financing and may have adverse financial affects. (d) The breach of an anti-assignment clause may enable the debtor to claim damages and to avoid the contract with the assignor. This reduces the assignor’s right to payment. This approach has been rejected by the UN Convention on the Assignment of Receivables where the breach of an anti-assignment clause is not sufficient to avoid the underlying contract.69 Anti-assignment clauses have been recognised as effective against assignees by preventing assignees to claim against the debtor. However, the anti-assignment clause does not affect the validity of the assignment as between the assignor and the assignee. The assignee may still have the right over the assigned receivables if the assignor has collected these from the debtor and holds on trust for the assignee. This will prevent the third parties (e.g. the creditors of the assignor) from claiming the receivables.70 More recently, in Barbados Trust Co Ltd v Bank of Zambia71 the debate has become more acute as the Court of Appeal was split on the issue as to whether the assignee as the non-party beneficiary should be allowed to recourse by directing the assignor to sue the debtor for the payment of the receivables. 72 76 German BGB § 399 suggests that a claim may not be assigned if the debtor and the creditor agree that the performance cannot be made to a person other than the original intellectual property or of proprietary information; (c) Representing the payment obligation for a credit card transaction; or (d) Owed to the assignor upon net settlement of payments due pursuant to a netting agreement involving more than two parties.’. 64 Bridge, Personal Property Law (3rd edn, Clarendon Law Series 2002) 159. 65 [1978] 3 All ER 262. 66 [1994] AC 85. 67 Goode, ‘Inalienable Rights’ (1979) 42 MLR 553, 554. 68 This is similar to the approach taken by the UN Convention on the Assignment of Receivables Article 9. 69 Akseli (n 55) 658–659. 70 Don King Productions Inc. v Warren [2000] Ch 291 (CA). 71 [2007] EWCA Civ 148, [2007] 1 Lloyd’s Rep 494. 72 Goode, ‘Contractual Prohibitions Against Assignment’ (2009) LMCLQ 301.

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creditor without a change of its contents. However, if the debtor is a government entity or the right arises out of a commercial transaction the assignment made in violation of an anti-assignment clause will be rendered effective.73 The exception to the rule in § 399 is in § 405. According to this section if the debtor has signed a document which evidences the creditor’s right, the debtor cannot invoke the fact that entering or acknowledging the obligation prohibits its assignability if the assignee was shown of the document and relied on it when accepting the assignment. In the absence of these conditions under German law an anti-assignment clause will prevent an assignee to obtain enforceable rights against the debtor. However, the assignment will still be effective as between the assignee and the assignor as this is a separate relationship from the underlying contract and should not be affected by the anti-assignment clause. German courts have developed the point where an anti-assignment clause affects the priorities of creditors. According to this view an assignee may not obtain priority position if there is an assignment made in violation of an anti-assignment clause, thus losing priority to the general creditors of the assignor.74 Similarly, a Federal Supreme Court decision held that the first assignee in time did not prevail as debtor had not consented to the assignment.75 UNIDROIT Principles recognises the effectiveness of an assignment between the 77 assignor and the assignee where the right is a monetary right despite an anti-assignment clause in the contract between the assignor and the debtor (Article 9.1.9 para. 1). On the other hand, Article 9.1.9 para. 2 deals with the non-monetary rights. Anti-assignment clauses will be effective against the assignee where the assigned right is a non-monetary right.

3. Debtor Protection Assignment as a tripartite relationship affects the interests of the debtor. On the other 78 hand, assignment is necessary for the facilitation of commerce and credit. Thus the law has rules to protect the interests of the debtor. The debtor will obtain a good discharge by paying the assignor unless she has notice of assignment. By paying the assignor the debtor will be relieved from the obligation. The assignee who has paid the assignor in advance will be required to recover these monies from the assignor. The law also provides rules for the debtor to assert defences and rights of set-off against the assignee. The key point in the debtor protection is the provision of notice to the debtor. Notice 79 to the debtor aims to inform the debtor of the new creditor, the amount and where the payment should be made. Thus, it must be clear that the right to payment has been assigned to a new creditor (assignee) so that the payment can be made to the intended new creditor.76 PECL Article 11:303(4) indicates that if the debtor pays the assignor with the knowledge of the assignment, the debtor may not be discharged. Similar concept is evident in national laws. For example, BGB § 40777 and French Article L313-28 to the Code Monetaire et Financier. Under the French Code civil Article 1691 if before either the assignor or the assignee notifies the debtor, the debtor pays the assignor he will get a good discharge. BGB § 408 suggest that in the case of multiple assignees, the debtor may be discharged if without notice of another assignment it pays to the assignee who has not Ss 343, 345 and 354(a) of the German Commercial Code (Handelsgesetzbuch, HGB). Eg Bundesgerichtshof (Germany), 14 October 1963, BGHZ 40, 156, 160; Bundesgerichtshof (Germany), 1 February 1978, BGHZ 70, 299, 303; Bundesgerichtshof (Germany), 3 December 1987, BGHZ 102, 293, 301. Kötz (n 22) 65, 66. 75 Bundesgerichtshof (Germany), 28 November 1968, BGHZ 51, 113. For criticism of this line of decisions see Kötz (n 22) 66–67. 76 James Talcott Ltd v John Lewis & Co Ltd and North American Dress Co Ltd [1940] 3 All ER 592. 77 See above. 73

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acquired the right. UNIDROIT Principles Article 9.1.10 – 9.1.12 also provide similarly. Restatement (Second) Contracts § 338(1) states that “the assignor retains his power to discharge or modify the duty of the [debtor] to the extent that the [debtor] performs or otherwise gives value until but not after the [debtor] receives notification that the right has been assigned and that performance is to be rendered to the assignee.” UCC Article 9 § 406 requires notification of assignment to the debtor does not cut off the debtor’s right to pay the original creditor unless there is an explicit instruction to make the payment to the assignee. Also the notification needs to reasonably identify the rights assigned. 80 Debtor should also be allowed to assert defences to the assignee. Debtor may assert defences as to the invalidity of the assignment thereby attempting to prevent the assignee to be the debtor’s creditor. BGB § 410 suggests that the debtor may refuse payment to the assignee until the assignee produces a document entitling him as the creditor of the claim. Similarly, UCC Article 9 § 406 requires that the debtor to request the assignee to produce a document that proves the existence of an assignment entitling the assignee as the creditor. The assignment in principle does not limit the defences available to the debtor. This is in line with the principles that the assignee takes the right to payment subject to equities.78 The assignment transfers the contractual right, securities, and all other accessory rights.79 The debtor also has a legitimate defence against the assignee, if the assignor fails to perform its obligations arising from the underlying contract (e.g. non-delivery of goods, delivery of goods non-conforming goods, late delivery etc.). If the underlying agreement between the assignor and the debtor is void, the assignee will have no right.80 Defences in that respect may be raised in relation to non-performance which has occurred before or after the assignment or the receipt of notice. 81 Assignee may wish to protect itself from the possible defences. One method is to ask for an acknowledgement that the right to payment exists and that no defences or rights of set-off will be asserted against the assignee (waiver of defences). 82 The assignor may be asked to deliver the documents in his possession to the assignee to warrant83 the existence and for the enforceability of the claim.84 If the assignment is a gratuitous assignment, assignor’s warranty does not apply (BGB § 523; French Civil Code Article 1693). The main rule in terms of defences is that the assignee’s rights cannot be prejudiced by the debtor or the assignor after the notification of assignment to the debtor. There are some exceptions to this rule. Particularly, under UCC Article 9 § 406 debtor may exceptionally be protected by keeping its defences even after the notice of assignment.85 A right of set-off need to Eg Restatement (Second) of Contracts § 336(1); UCC Article 9 § 318(1)(a); BGB § 404. BGB § 401; Spanish Código civil Article 1528; French Code civil Article 1692. 80 But cf. BGB § 405 where, for example, the debtor provides a note indicating the existence of a debt to the assignor and the assignment is based on this document, the assignee will have the right based on this assignment. 81 But cf. BGB § 404 which requires the justification of defences at the time of assignment. This is presumably for the purposes of fixing the defences and making them more predictable for the assignee. However, it is also possible that the breach may have occurred after the assignment and the receipt of notice but the contractual basis for the breach has been in existence before the assignment and notice. Reichsgericht, 11 November 1913, RGZ 83, 312. In French case law, similar argument has been made Cass. Com. 9 February 1993, Bull, Civ IV no 51. 82 Bundesgerichtshof (Germany), 18 October 1972, NJW 1973, 39; Article L313-29 Code Monetaire et Financier; Cass. Com. 3 December 1991, Bull Civ IV no 370. Under Article 22(2) of the EU Consumer Credit Directive, consumers cannot waive their rights of defence. Similarly, under UCC Article 9 § 206 save consumer transactions waiver of defences are valid and enforceable by the assignee. 83 BGB § 437; French Code civil Article 1693; Spanish Código civil Article 1529; Restatement (Second) of Contracts § 333(1)(b). 84 BGB § 402-403, French Code civil Article 1689. 85 Peden Iron & Steel Co v McKnight 128 S.W. 1956 (Tex. Civ. App. 1910). 78 79

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accrue before the notification is received.86 BGB § 406 makes an exception when the assigned claim matures before the right of set-off. Under French Code civil Article 1295 and Spanish Código civil Article 1198 debtor’s right of set-off will depend whether an acknowledgement or notification to the debtor have been used which aim to validate an assignment. PECL Article 11.307 and the UNIDROIT Principles Article 9.1.13 indicate that the 81 debtor may assert defences against the assignee that she could assert against the assignor. In relation to the rights of set-off, the debtor can assert these available up to the time the notice of assignment was received. Under Chinese Contract law Article 82, debtor may assert its defences to the assignee that available to it against the assignor. Article 83 also states that the debtor has rights of set-off against the assignee which are available up to the time the notice of assignment was received. As conclusion, it can be argued that most laws respect the assignability of contractual 82 rights (right to payment). Anti-assignment clauses are still effective in most jurisdictions but there are measures in legislations to override these for the purposes of facilitation of the flow of credit.

G. Practitioner Tips & Contract Clauses When drafting assignment clauses special care is necessary. Particularly, policy on 83 anti-assignment clauses differs among jurisdictions and the business intent and culture would add difficulty in drafting a waterproof clause. It is also important that when drafting an assignment clause, the clause refers to rights under the contract and not just the assignment of contract which may denote delegation of duties. Also the word “assign” should be used in order not to confuse the real intention with transfer or delegation of rights or title.87 The debtor may wish to avoid dealing with a third party that has not been a party to the original contract. It is also important to remember that under assignment rights under the contract are assigned and not the contract. Therefore, the following clause has the potential to create litigation: “No party may assign this agreement (contract).”

The main problem with the above clause is that it is open to construction by courts 84 that the intention of the parties may construed as to prohibit the assignment of rights or duties, or both. Thus it would be advisable to refrain from drafting assignment clauses that suggest the assignment of contract.88 Assignment and Delegation: Neither party shall voluntarily, by operation of law, or otherwise assign any of its rights or delegate any of its duties, hypothecate, give, transfer, mortgage, sublet, license, or otherwise transfer or encumber all or part of its rights, duties, or other interests in this Agreement or the proceeds thereof without the other party's written consent. Any attempt to make an assignment or delegation in violation of this provision shall be a material default under this Agreement and any assignment or delegation in violation of this provision shall be null and void.

The following is an example of an anti-assignment clause.

86 UCC Article 9 § 318(1)(b); Restatement (Second) Contracts § 336(2). Business Computers Ltd v Anglo-African Leasing Ltd. [1977] 2 All ER 741 (Ch). 87 Almost all international texts and the UCC Articles 9 and 2 as well as the Restatement (Second) of Contracts § 317 speak of “assignment”. 88 Cedar Point Apartments Ltd. v Cedar Point Investment Corp., 693 F.2 d 748, 753 (8 th Cir. 1982), cert. denied 461 U.S. 914 (1983).

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Example 1: Assignment and Subcontracts: Any assignment of SELLER's Contract rights or delegation of SELLER's duties shall be void, unless prior written consent is given by BUYER. SELLER shall be responsible for all GOODS performed/supplied by sub‐contractors under this Contract.

86

Example 2: The Consultant shall not assign or transfer any or all of its rights and obligations under the Agreement without the prior written agreement of the Company.

87

It is important to note that in waivers of defence and rights of set-off, and acknowledgement that the right to payment exists, the form prepared by the assignee should be unambiguous. Any ambiguity will be interpreted against the party (Contra Proferentem) that drafts it i.e. this is generally the assignee as the financier.89

H. Additional Sources 88 Kötz, ‘Rights of Third Parties, Third Party Beneficiaries and Assignment’ in von Mehren (ed) International

Encyclopaedia of Comparative Law Ch. 13 v.7 (Mohr Siebeck 2008); Bridge, ‘England and Wales’ in Sigman & Kieninger (eds) Cross-Border Security Over Receivables (Sellier 2009) 147; Beale, Fauvarque-Casson, Rutgers, Tallon & Vogenauer, Cases, Materials and Text on Contract Law (2nd edn, Hart 2010) 1295; Beale, Bridge, Gullifer & Lomnicka, The Law of Security and Title-Based Financing (2nd edn, OUP 2012); Farnsworth, Farnsworth on Contracts (Aspen Publishing, 3rd ed. Vol. III 2004); Gullifer (ed), Goode on Legal Problems of Credit and Security in (5th edn, Sweet & Maxwell 2014); Goode, ‘Contractual Prohibitions Against Assignment’ (2009) LMCLQ 301; Akseli, International Secured Transactions Law Facilitation of Credit and International Conventions and Instruments (Routledge 2011); Akseli, ‘Contractual prohibitions on assignment of receivables: an English and UN perspective’ (2009) J.B.L. 650–678; Tolhurst & Carter, ‘Prohibitions on assignment: a choice to be made’ (2014) 73(2) C.L.J. 405–434.

Part II: Contracts for the Benefit of Third Parties/Third Party Rights A. Topics Covered 89

The second part deals with third party rights respectively contracts for the benefit of third parties

B. Introductory Note 90

A third party beneficiary contract is where a third party benefits from the contract between the promisor and promisee. By virtue of the promisor’s promise to the promisee to render a performance, the third party acquires a direct interest. This direct interest grants the third party (beneficiary) the right to enforce the promise. The difference between assignment and third party beneficiary is that the right of the beneficiary to enforce the promise does not arise from a direct contract between the promisor and the beneficiary but a separate contract between the promisor and promise where the beneficiary is not a party. The third party beneficiary may be intended (where the parties 89

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E. Sampling of Laws

intended that third party benefits) or incidental (where the parties do not intend but nevertheless the third party incidentally benefits from the contract). The difference between third party rights and an assignment is that in the former, 91 unlike the latter, there is no transfer of a right. The right is rather acquired by the third party as of the time of the conclusion of the contract. Third party beneficiary relationship also differs from agency. An agent acting under full authority from the principal may enter into a contract with a third party on the principal’s behalf. While the principal is not face-to-face party to the contract between the agent and the third party, due to the agency contract, the principal is deemed as the real contracting party with the third party.

C. Statement of Issues This section will be dealing with the third party rights and the contracts for the 92 benefit of third parties. These issues may generally arise under life insurance contracts and international or domestic sales contracts where sub-contractors or producers and end users/purchasers are involved.

D. International Sales Transaction Third party rights are important in the international sales law context. Goods are 93 produced or manufactured and sold through the chain contracts. These contractual relationships pose questions as to whether an end user has the right to claim enforcement of an obligation and damages from the producer or manufacturer even though there is no direct contractual partnership.

E. Sampling of Laws I. CISG The CISG does not deal directly with third party rights and these contracts are 94 outside the sphere of application.90 Commentators suggest that third party rights are within the scope of the CISG so long as the right is based on the contract which is governed by the CISG.91

II. UNIDROIT Principles of International Commercial Contracts UNIDROIT Principles deal with third party rights under Chapter 5, section 2. A 95 contract in favour of a third party is an agreement between two parties distinct from the third person beneficiary that they will confer a benefit on the third person beneficiary and that the third party beneficiary will acquire a right of action against the party who promised this benefit. 90 See above n 33. Bundesgerichtshof (Germany), 12 February 1998, NJW 1998, 3205, 3206; Usinor Industeel v Lecco Steel Products, Inc., US Dist Ct (ND Ill), 28 March 2002, 2002 WL 655, 540. 91 Eg Schwenzer & Schmidt, ‘Extending the CISG to Non-Privity Party’ (2009) 13 Vindobona J. of Int’L Com. L. & Arb. 109–122; Schlechtriem & Schwenzer, Commentary on the UN Convention on the International Sale of Goods Article 21 CISG para. 14 83–84 (3rd edn, OUP 2010).

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III. Principles of European Contract Law 96

PECL deal with third party rights under Article 6.110. The basis of third party claims are under paragraph (1). PECL Article 6.110 reads as follows: ‘Stipulation in Favour of a Third Party (1) A third party may require performance of a contractual obligation when its right to do so has been expressly agreed upon between the promisor and the promisee, or when such agreement is to be inferred from the purpose of the contract or the circumstances of the case. The third party need not be identified at the time the agreement is concluded. (2) If the third party renounces the right to performance the right is treated as never having accrued to it. (3) The promisee may by notice to the promisor deprive the third party of the right to performance unless: (a) the third party has received notice from the promisee that the right has been made irrevocable, or (b) the promisor or the promisee has received notice from the third party that the latter accepts the right.’

IV. Common European Sales Law 97

CESL does not explicitly deal with third party beneficiaries.92

V. German Bürgerliches Gesetzbuch 98

BGB regulates third party beneficiaries between sections 328 and 335. Section 328 defines contract for the benefit of third parties as follows: ‘(1) Performance to a third party may be agreed by contract with the effect that the third party acquires the right to demand the performance directly. (2) In the absence of a specific provision it is to be inferred from the circumstances, in particular from the purpose of the contract, whether the third party is to acquire the right, whether the right of the third party is to come into existence immediately or only under certain conditions, and whether the power is to be reserved for the parties to the contract to terminate or alter the right of the third party without his approval.’

VI. French Code Civil 99 Delegation Art. 1336 Delegation is a transaction by which one person (the delegator) obtains from another (the delegate) an obligation in favour of a third party (the beneficiary of the delegation), who accepts him as debtor. Unless otherwise provided, the delegate may not set up against the beneficiary of the delegation any defence arising from his relations with the delegator, or from the relations between the latter and the beneficiary of the delegation. Art. 1337 Where the delegator is debtor of the beneficiary of the delegation and the instrument demonstrates expressly the will of the beneficiary of the delegation to discharge the delegator, the delegation takes effect as a novation. However, the delegator remains bound if he had expressly undertaken to guarantee the future solvency of the delegate, or if the delegate is subject to a procedure for cancellation of his debts at the time of the delegation.

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E. Sampling of Laws Art. 1338 Where the delegator is debtor of the beneficiary of the delegation but the latter has not discharged his debt, the delegation provides the beneficiary with another debtor. Satisfaction rendered by one of the two debtors discharges the other to the extent of the satisfaction so rendered. Art. 1339 Where the delegator is creditor of the delegate, his rights are extinguished only by the performance of the delegate’s obligation in favour of the beneficiary of the delegation, and only to the extent of that performance. Until then, the delegator may require or accept satisfaction only in relation to the share beyond that which the delegate has undertaken. He may enforce his rights only if he performs his own obligation in favour of the beneficiary of the delegation. An assignment or distraint of the rights of the delegator can take effect only subject to these same limitations. However, if the beneficiary of the delegation has discharged the delegator, the delegate is also discharged as against the delegator, to the extent of the value of his undertaking in favour of the beneficiary of the delegation. Art. 1340 A simple indication by the debtor of a person designated to perform in his place does not constitute either novation or delegation. The same is true of a simple indication by the creditor of a person designated to receive satisfaction on his behalf.

VII. Spanish Código Civil Article 1257 reads as follows:

100

“Contracts shall only be effective between the parties who execute them, and their heirs; except, in respect of the latter, in the event that the rights and obligations arising from the contract should not be transferable, either by nature, by covenant or by the provisions of the law. If the contract should contain any stipulation in favour of a third party, the latter may demand performance thereof, provided that he should have made known his acceptance to the obligor before it is revoked.”

VIII. American Uniform Commercial Code § 2-318 provides three alternatives.93

101 102

Alternative A A seller's warranty whether express or implied extends to any natural person who is in the family or household of his buyer or who is a guest in his home if it is reasonable to expect that such person may use, consume or be affected by the goods and who is injured in person by breach of the warranty. A seller may not exclude or limit the operation of this section.

103

Alternative B A seller's warranty whether express or implied extends to any natural person who may reasonably be expected to use, consume or be affected by the goods and who is injured in person by breach of the warranty. A seller may not exclude or limit the operation of this section.

104

Alternative C A seller's warranty whether express or implied extends to any person who may reasonably be expected to use, consume or be affected by the goods and who is injured by breach of the warranty. A seller may not exclude or limit the operation of this section with respect to injury to the person of an individual to whom the warranty extends.

93 Alternative A has been adopted by 29 states; Alternative B has been adopted by eight states and Alternative C has been adopted by six states.

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IX. United Kingdom Sale of Goods Act 105

SGA does not directly deal with third party beneficiaries. This is mainly dealt with by case law and the Contracts (Rights of Third Parties) Act 1999. The basis of third party claims (s. 1), exemption clauses for the benefit of third parties (s.1(6)), defences available to the promisor (s. 3), remedies available to the promisee (s. 4) and modification and recission (s. 2) are governed under the Contracts (Rights of Third Parties) Act 1999.

X. Common Law of Contracts 106

English Contracts (Rights of Third Parties) Act 1999 deals with the third party rights (s. 1).

XI. American Restatement (Second) of Contracts 107

Chapter 14 deals with the contract beneficiaries. §302 deals with the intended and incidental beneficiaries. (1) Unless otherwise agreed between promisor and promisee, a beneficiary of a promise is an intended beneficiary if recognition of a right to performance in the beneficiary is appropriate to effectuate the intention of the parties and either a. The performance of the promise will satisfy an obligation of the promisee to pay money to the beneficiary; b. The circumstances indicate that the promisee intends to give the beneficiary the benefit of the promised performance. (2) An incidental beneficiary is a beneficiary who is not an intended beneficiary.

XII. Chinese Law 108

Articles 522-523 deal with the third party beneficiaries. Article 522 Where the parties agree that the obligor shall perform the obligations to a third party, but the obligor fails to perform the obligations to the third party or the performance does not comply with the terms of the contract, the obligor shall be liable to the obligee for breach of contract. Where the law stipulates or the parties agree that a third party may directly request a debtor to perform the obligations to the third party, and such third party does not expressly reject the request within a reasonable period, if the debtor does not perform the obligations to the third party or the performance does not comply with the terms of the contract, the third party may request that the debtor assume the liability for breach of contract; and any defence of the obligor against the obligee may be asserted against the third party. Article 523 Where the parties agree that a third party performs the obligations to the obligee, and the third party fails to perform the obligations or the performance does not comply with the terms of the contract, the obligor shall be liable to the obligee for breach of contract.

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F. Commentary I. The Basis of Third Party Claims in Contracts for the Benefit of Third Parties The ability to grant rights to third parties, in a sense, expands the autonomy of 109 parties. Like assignment, third party beneficiary status is created through a tripartite relationship. Third party rights are created by way of contract. Most legal systems have rules that enable two parties (the promisor and the promisee) to create a right that is enforceable by a third party who is not a party to the contract. Conferral of a mere benefit cannot be regarded as a contract for the benefit of a third party. The third party should be able to demand the performance (an enforceable right) of the right from the promisor. Particularly, the growth of insurance and the life insurance contracts has enabled the development of “third party beneficiaries” doctrine. Third party rights can also be seen in actions in chain sale contracts. Conversely, traditional Common Law doctrine of privity is also regarded as a bar to create enforceable rights for third parties. Under French Code civil Articles 1119 and 1165 provide two general positions: “As 110 a rule, one may, bind oneself and stipulate in his own name, only for oneself”; and “Agreements produce effect only between the contracting parties; they do not harm a third party, and they benefit him only in the case provided for in Article 1121.” There is an exception to the two articles in Article 1121. “One may likewise stipulate for the benefit of a third party, where it is the condition of a stipulation which one makes for oneself or of a gift which one makes to another. He who made that stipulation may no longer revoke it, where the third party declares that he wishes to take advantage of it.” Requirements, particularly, “the gift” requirement, under Article 1121 have been interpreted by courts as any type of performance such as payment of the life insurance premium. In terms of the stipulation of something to the promisee has been understood as the moral profit that in the event of the occurrence of an event the third party beneficiary will benefit.94 Entering into a contract through motivation by moral benefit/interest overrides the limitations of Article 1121. Therefore, courts look at the intention of the parties to ascertain whether benefit is intended. Unlike English law, American law has historically recognised contracts for the benefit 111 of third parties. The law distinguished sole beneficiary and creditor beneficiary. The former indicates where the promisee enters into a contract with the promisor solely for the benefit of a third party. The latter indicates where the promisee enters into a contract to with the promisor to discharge his own obligation to a third party whereby the promisor pays under the contract to the third party. While these two terms were used under the Restatement of the Law of Contracts § 133, they have not been included under the Restatement (Second) of Contracts which speaks of incidental and intended beneficiaries (§ 302). A beneficiary can be either incidental or intended. Accordingly, if the parties to a contract have decided to confer benefits to a third party the third party will be regarded as the intended third party and will be allowed recovery.95 On the other hand, sometimes the promisor and the promisee may not intend specifically to confer benefits to a third party under the contract. Notwithstanding with the intention of the parties, the third party may nevertheless benefit from the contract. In those cases, the third party will be Beale et al (n 21) 1174–1175; Kötz (n 22) 18–19. Cases which require the clearly manifested intent of the promisor to confer benefit to a third person Eg Smith v Anglo-California Trust Co., 205 Cal. 496, 271 P. 898 (1928); Fruitvale Canning Co. v Cotton 115 Cal. App 2 d 622, 252 P.2 d 953 (1953). But cf. Lucas v Hamm 15 Cal. Rptr. 821, 364 P.2 d 685 (1961). 94

95

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regarded as the incidental third party. An incidental third party will have no enforceable right under the contract.96 On the other hand, the intended third party will have enforceable rights. The intended third party has the right to sue the promisor if the promise is breached. 112 The creation of the enforceable third party right can be either express or implied. As long as it is objectively interpreted that the clause confers an enforceable benefit to the third party and it is the intention of the parties the right should be conferred upon. In France, in terms of interpretation of contract as to whether the contract confers an express or implied enforceable right, the courts have wide discretion, particularly, the lower courts whose decisions and interpretations are relied by the higher courts. 97 While the French courts rely on the implied contract concept, this has become less necessary due to the enactment and implementation of certain legislation such as the Product Liability Directive (Directive 1985/374/EEC of 25 July 1985) enshrined under Code civil Articles 1386(1) to (18) and the increased use of Article 1384(1). German BGB § 328 enables the third party to be able to obtain an enforceable right arising from the contract between the promisee and promisor and demand performance (BGB § 328(1)). BGB § 328 does not explain what type of conditions to be present or applied. Courts analyse the intentions of the parties as to whether a benefit is intended with the present contract by the promisor and the promisee. The enforceable right conferred upon the person may be express or implied. In the absence of an express conferral, BGB § 328(2) will be interpreted by taking into account the circumstances (the purpose of the contract, the terms of the contract and whether the parties have understood these) of each to indicate that the parties have had an intention to confer the enforceable right on the third party.98 In Germany, the intention to benefit test has been applied to ascertain whether the promisee’s stipulation of the benefit is exclusive for the third party.99 BGB § 329 provides the following: “Where one party to a contract agrees to satisfy an obligee of the other party without assuming the obligation, then in case of doubt it may not be assumed that the obligee is to acquire the right to demand satisfaction from him directly.”

113

Accordingly, the promisor may agree to pay promisee’s creditor without assuming the debt. This is similar to the creditor beneficiary under American law. In those cases, the third party has been given the right by German courts to sue the promisor for breach of contract where the payment has not been made.100 BGB § 330 limits the scope of contracts for the benefit of third parties to three situations namely: life insurance or life annuity policies where payment to a third party is agreed between the promisor and the promisee; in a gratuitous disposition where a duty of performance is imposed; and in the case of assumption of property where there is a promise for a third party. In both Germany and France contracts have been interpreted “boldly in a way that extends their scope to third parties, with no discernible reference to the intentions.”101

96 Feingold v John Hancock Life Ins. Co. 753 F.3 d 55, C.A.1 (Mass.), May 27, 2014 (NO. 13-2151) (in a dispute arising out of retention of life insurance policy by the insurer the First Circuit dismissed the claim by the claimant and found that the claimant was not a third party beneficiary to the Global Resolution Agreement (GRA) to which the defendant and several states were party. Therefore, the claimant was an incidental beneficiary and not a direct beneficiary of the GRA). 97 Beale et al (n 21) 1188. 98 Bundesgerichtshof (Germany), 17 January 1985, NJW 1985, 1457. See also Kötz (n 22) 21. 99 Kötz (n 22) 21. 100 Reichsgericht, 7 February 1907, RGZ 65, 166; Reichsgericht, 29 October 1937, JW 1938, 42. 101 Beale et al (n 21) 1189.

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English law102 recognises the validity of third party contracts under limited circum- 114 stances.103 Doctrines of privity (contracts can only create rights and obligations between those who are parties to the contract) and consideration (a promise can only be enforceable if it is supported by a consideration and the contract can only be enforced by someone who has provided consideration; in other words, there must be a bargain between the parties) have been forwarded as the two important limitations before the contracts for the benefit of third parties.104 The Contracts (Rights of Third Parties) Act 1999 was enacted as a result of the need to set exceptions to the doctrine of privity rule. The Contracts (Rights of Third Parties) Act 1999 s. 1, subject to exceptions, enables a third party to enforce a right arising out of a contract between the promise and promisor.105 The enforceable right conferred upon the person may be express or implied. If the enforceable right is not express, s.1(1)(b) and (2) will assist and there is a ‘‘presumption of enforceability’ that can only be rebutted if the parties have expressly stated not to confer a right or if it is otherwise obvious from the circumstances that they did not wish to do so.’106 S. 1(3) indicates that the third party must be expressly identified in the contract. This identification can be by name, or as a member of class or as answering a particular description.107 Without identification under the Contracts (Rights of Third Parties) Act 1999 or in the pre-Act case law, a third party would not have a contractual claim.108 Unlike French and German laws, English law does not extend contractual liability, but applies tort law rules (tort of negligence) according to which the defendant is sued due to breach of duty owed to the claimant. The applicability of vicarious liability is limited. However, English law provides other avenues to mitigate the vulnerability of third parties. These include, on a limited basis, in landlord-tenant cases, Defective Premises Act 1972 s. 4 and in cases where the death of a person who supports the claimant causes loss (relational loss), Fatal Accidents Act 1976 ss. 1-3.109 In France and Germany, particularly, two lines of cases, based on physical injury and 115 pure economic loss, have been produced. In France implied contract for the benefit of third parties has been found in cases where the dispute related to the contracts of carriage (transportation company owes an obligation of security to the passenger and the dependents have accrued benefit from this obligation)110 and cases where tort law cannot provide a solution.111 French law has also enabled the potential beneficiaries of an implicit contractual relationship, where exemption clauses made it impossible to claim benefit, to claim their right through a tortuous action.112 In Germany, the law also enScottish law recognises contracts for the benefit of third parties: ius quaesitum tertio. Exceptions to this limitation are: Section 11 of the Married Women’s Property Act 1882 and Common Law exceptions. Some of the very early cases where exceptionally the law recognised the right of third parties are Dutton v Poole (1678) 2 Lev. 210, 83 E.R. 523. But cf. Tweddle v Atkinson (1861) 1 B & S 393, 121 E.R. 762. 104 Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd [1915] AC 847; Beswick v Beswick [1968] AC 58 (HL). 105 For the background legislative history of the Act see Privity of Contract: Contracts for the benefit of third parties, Law Com no. 242 (1996). 106 Beale et al (n 21) 1183. 107 Cf. German and French cases above do not have this type of identifiability requirement. 108 Cavalier v Pope [1906] AC 428(HL). 109 Clark v London General Omnibus Co. Ltd. [1906] 2 KB 648 (CA). For a details of these acts see Beale et al (n 21) 1209–1211. 110 Cass Civ 6 December 1932, DP 1933.1.137. Particularly, in this occasion, the passenger’s ticket conferred a right to claim damages arising from defective performance or non-performance to the dependents or to people to whom the passenger owes duty to support, but not a right to claim performance. Cass Civ 24 May 1933 DP 1933.1.137. 111 Cass Civ (2) 17 December 1954, D 1955, 269. 112 Cass Civ (2) 23 January 1959, D 1959, 281. 102

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abled third parties in implicit situations to have rights. This is generally achieved through tort law. 113 German courts have applied the contractual liability to provide remedy to third party claims (BGB §§ 328, 278).114 Particularly, BGB § 278 confers contractual liability on the employee’s negligent conduct. It has also been accepted that a contract between two parties has the protective effect for third parties (BGB § 311(3)). 115 This protective effect of the contract due to culpa in contrahendo principle has been extended to pre-contractual negotiations.116 Vicarious liability (BGB § 831) can be by-passed, if the claim can be sought through contract117 and the “employer may escape [vicarious liability] if he shows that he properly selected and supervised the employee whose negligence caused the accident”.118 Limitation of period in both tort and contractual claim cases are three years (BGB § 195). BGB § 311(3) makes a reference to BGB § 241(2) which deals with secondary obligations of the contractual parties. BGB § 311(3) regulates the liability of third parties and confers rights to third parties where the protective duty has been violated. Cases pre-dating the 2002 modernisation of the BGB are still applicable with regards to the requirements for the inclusion of third parties in cases where there is a violation of protective duty. 116 Pure economic loss cases occur when the harm caused does not activate a tort action or tortious liability. Financial loss is an example where pure economic loss may occur. Pure economic loss cases are traditionally seen in German law rather than English law where in the latter there is reluctance to extend contractual liability concept to tort/physical injury cases. Under German law, economic interests are not categorised as interests to be protected under BGB § 823(1), hence the necessity to extend contractual/tortious liability. French law, on the other hand, allows recovery of pure economic loss under its tort law, thus, there is no need to extend contractual liability to these types of cases. 119 Cases of pure economic loss generally occur in situations where a third person enters into a contract with a seller whose provides information to the third party upon receiving expert opinion from an expert. Third party in those cases has been seen to sue the expert as the third party relied upon this information and entered into a contract believing this information to be correct.120 English law has a restrictive approach to pure economic loss121 and has treated cases where the expert or the auditor owes duty to clients and third parties under the notion of fiduciary relationship. However, Hedley Byrne & Co Ltd v Heller & Partners Ltd122 enabled the relying party to sue an expert who has made a negligent statement and caused the other party to suffer loss and claim damages, and subsequent case law (where third parties have relied on the expert opinion and en113 Eg Strict Liability Act Haftplichtgesetz § 1. Third party compensation claims BGB § 844 and Strict Liability Act § 5(1)(2). The claimant needs to prove the fault of the defendant. BGB § 823(1). 114 Reichsgericht, 7 June 1915, RGZ 87, 64 (whether the third parties/relatives can enforce the contractual obligation of the transporter to protect the physical safety of the passenger). 115 Reichsgericht, 10 February 1930, RGZ 127, 218. (BGB § 278, § 328. The contract between two parties has the protective effect for third parties). English law does not extend the liability that far. See Privity of Contract: Contracts for the Benefit of Third Parties, Law Com no 242 (London, 1996), para. 7.25. 116 Bundesgerichtshof (Germany), 28 January 1976, NJW 1976, 112. 117 Beale et al (n 21) 1198. 118 Kötz (n 22) 23. 119 For more detailed discussion, see Beale et al (n 21) 1212 et seq. 120 Eg Cour d’appel de Paris, 18 June 1957, JCP 1957.II.10134 (contractual liability of an expert providing wrong information to the seller and third party sued the expert). But cf. Cass Comm 17 October 1984, JCP 1985.II.20458 (where the auditor was liable on the tortious grounds) French Code civil Article 1382. Similarly, in Germany, Bundesgerichtshof (Germany), 26 November 1986 in NJW 1987, 1758 (a claimant in this cases was able to sue both on the grounds of protective effect of the contract as well as the physical injury BGB § 826). For the criticism see Beale et al (n 21) 1216-1217. 121 Eg Candler v Crane, Christmas & Co [1951] 2 KB 164 (CA). 122 [1964] AC 465 (HL).

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tered into contracts and suffered loss)123 recognised the liability of the expert to third parties who received and relied upon this information and the information was related to their transaction.124 If the expert’s professional carelessness, which would have otherwise benefited a third party, has caused the third party loss, the expert will be liable to the third party for that loss.125 Disputes and actions related to third party rights can also be seen in chains of con- 117 tracts. These are contracts for the sale of goods where by the manufacturer sells goods to the distributor and then the goods are sold by the distributor to an intermediary and then to the end user. The question is whether in this type of chain contracts the end user has the right to sue and claim damages from the manufacturer/producer or conversely, the manufacturer/producer claim the payment of sale price from one of the parties down the chain. The complexity becomes more acute if one of the parties in the chain has become insolvent. The legal question as to whether these types of contracts confer benefit to third parties has been a point of legal dispute. Claims may arise for the performance or non-performance of obligations. In relation to claims for the performance of an obligation, national laws are not generally sympathetic to these types of claims where the creditor tries to claim enforcement of a right from another party down or up the chain. However, there are legislative exceptions in certain types of cases under French Code civil Articles 1753 and 1994(2) (in owner/landlord against sub-tenant cases); Spanish Código civil Article 1722. German law, on the other hand, takes an approach where the contract can produce effect only between the parties and the sub-contractor cannot claim performance from a party that he has not entered into a contract with.126 In relation to claims for damages for the non-performance of an obligation where the 118 contract between two parties confer a benefit to the third party (such as a guarantee), most national systems are not sympathetic to the idea that the third party can claim the enforcement of an obligation that has not been performed. Most laws limit the final buyer’s contractual rights with her immediate seller.127 The main approach is that the final buyer can pursue the claim from her immediate seller and not from another seller up the chain. For example, in a case in Germany where the claimant was provided a warranty as beneficiary was allowed to sue the manufacturer.128 However, the right to sue was based on the warranty provided by the manufacturer for the benefit of the end user, rather than the contract between the claimant/end user and the intermediary. Without a warranty BGB §§ 478(5) and 479(3) would not allow the end user to sue the manufacturer as these provisions only allow the end user in a chain contract situation to sue their immediate contractual partners. In England, a strict approach has been adopted and without a direct contractual relationship and in the absence of a warranty, a benefit for the third party would not arise and the chain of contracts should be followed.129 However, in a tort case arising from duty of care and negligence recovery of damages for pure econoEg Smith v Eric S Bush [1990] 1 AC 831. If the transaction was not related to the information provided by the auditors see Caparo Indusctries Plc v Dickman [1990] 2 AC 605 (HL). 125 Bundesgerichtshof (Germany), 11 January 1977, NJW 1977, 2073; White v Jones [1995] 2 AC 207; Cass Civ (1), 14 January 1981, JCP 1982.II.19728. 126 Bundesgerichtshof (Germany), 13 December 1973, WM 1974, 197. 127 Ebers, Janssen & Meyer (eds), European Perspectives on Producers’ Liability: Direct producers’ Liability for non-conformity and the sellers’ right of redress (Sellier 2009). French Code civil Article 1165 produces a similar result that contracts only produce results for the contractual parties, though there is an exception in Article 1121. 128 Bundesgerichtshof (Germany), 28 June 1979, NJW 1979, 2036. 129 Simaan General Contracting Co v Pilkington Glass Ltd (No. 2) [1988] QB 758. 123

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mic loss was allowed despite a chain of relationship was not strictly followed.130 France is an exception where manufacturers are not denied liability in chain of contracts and an end user has been given a right to sue the distributor and the manufacturer.131 In an international sale of goods transaction where the applicable law was the CISG, the European Court of Justice held that in the absence of a direct contract of sale between the manufacturer and the end user, the end user had no right to sue the manufacturer under the CISG, thus the Cour d’Appel’s decision was not upheld.132 119 UNIDROIT Principles Articles 5.2.1 and 5.2.2 deal with the validity and enforceability of contracts in favour of third parties and the requirements necessary for the validity (such as the identifiability of the beneficiary). 5.2.3 to 5.2.5 deal with the possible conflict of interests that may arise between the three parties (third party’s right to invoke the contractual provision by excluding/limiting the liability of third party; defences of the promisor; original parties’ right to modify/revoke the third party’s right). Third party may also renounce his right (Article 5.2.6). PECL Article 6.110 enables a third party to require the performance of contractual obligation which has been expressly agreed upon by the promisor and the promise or may be inferred from the purpose of the contract. The identifiability of the beneficiary at the time of the conclusion of the contract is not a requirement.133 Draft Common Frame of Reference Article II-9:301 suggest that the contract may confer benefit to a third party and the third party need not be in existence or identified at the time of the conclusion of the contract. The contract may limit the conditions of the third party right.

II. Exemption Clauses for the Benefit of Third Parties 120

The benefit for the third party may be an exclusion or limitation of the liability. The clause that provides benefit to an employer may also been interpreted as a clause that provides protection to employees134 or in the cases of carriage of goods, the exemption clause may also be interpreted as protecting third parties such as stevedores, warehousemen and independent contractors taking part in the carriage process.135 However, under English law the liability of third parties (stevedores) has not been included in the exemption clause on the grounds that the exemption clause could not be construed to exclude the liability of stevedores/ship’s crew and that even if the clause had expressly mentioned them, they would not have been protected as they were not party to a contract between passengers and the shipping company.136 As a result of unfavourable decisions that hold subcontractors liable, exclusion clauses have been redrafted and expanded to include subcontractors in the protective shield of exclusion/exemption clauses. Contracts of carriage contain exemption clauses to protect shipping companies and their employees from liability. These clauses, which are known as “Himalaya clauses” have been extended to protect subcontractors to alleviate the difficulties caused by the Adler v Dickson deciJunior Books Ltd. v Veitchi Co Ltd. [1983] 1 AC 520. Cass ass plen, 7 February 1986, Bull Civ AP no 2, D 1986, 232. But cf. Code civil Article 1165. However, there are certainly conflicting decisions Cass ass plen, 12 July 1991, D 1991, 549 where the employer of a builder who contracted for the services of a sub-contractor cannot sue the subcontractor. 132 Jakob Handte & Co. GmbH v Traitements Mécano-chimiques des Surfaces SA Case C-26/91, 17 June 1992. 133 But cf. UNIDROIT Principles Article 5.2.2 where the beneficiary must be identifiable adequately but need not be at the time of the conclusion of the contract. 134 Bundesgerichtshof (Germany), 7 December 1961, NJW 1962, 388 (a clause that grants protection from liability to the employer has been interpreted to provide protection to the employees as well.). 135 Bundesgerichtshof (Germany), 28 April 1977, VersR 1977, 717; Beale et al (n 21) 1252. 136 Adler v Dickson [1955] 1 QB 158; Scruttons Ltd. v Midland Silicones Ltd. [1962] AC 446. 130

131

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sion and to protect third parties such as the shipping company or carrier’s crew, agents and subcontractors. These clauses are found in bills of lading. Contracts (Rights for Third Parties) Acts 1999 s.1(6) indicates that the third parties would be protected if they are mentioned or described in the clause.

III. Modification/Variation and Revocation of the Contract for the Benefit of Third Parties The promisor and the promisee may agree to modify or revoke the benefit conferred 121 upon the third party. The main question in this case is when the parties can modify or revoke the contract and how they can do that. Under German law BGB § 328(2) provides the following: “In the absence of a specific provision it is to be inferred from the circumstances, in particular from the purpose of the contract, whether the third party is to acquire the right, whether the right of the third party is to come into existence immediately or only under certain conditions, and whether the power is to be reserved for the parties to the contract to terminate or alter the right of the third party without his approval.”

In addition to this provision BGB § 331(1) provides the following:

122

“If the performance for the third party is to occur after the death of the person to whom it is promised, the third party acquires the right to the performance, in case of doubt, upon the death of the promisee.”

Under French law, on the other hand, Code civil Article 1121 provides a different 123 solution as follows: “One may likewise stipulate for the benefit of a third party, where it is the condition of a stipulation which one makes for oneself or of a gift which one makes to another. He who made that stipulation may no longer revoke it, where the third party declares that he wishes to take advantage of it.”

According to this article, if the beneficiary accepts the right, then the promisee’s right 124 of revocation will cease. Similarly, the Spanish Código civil Article 1257(2) follows the French law and provides that “If the contract should contain any stipulation in favour of a third party, the latter may demand performance thereof, provided that he should have made known his acceptance to the obligor before it is revoked.”

Under English law, Contracts (Rights of Third Parties) Act 1999 s. 2, without the con- 125 sent of the beneficiary parties to the contract may not rescind the contract. For this, the beneficiary must have communicated his assent (which may be by words or conduct) to the term to the promisor, the promisor is aware that the third party has relied on the term or the promisor can reasonably be expected to have foreseen that the third party would rely on the term and the third party has in fact relied on it. It can be argued that, when the above approaches to modification are compared, the approach taken by English law is more comprehensive. 126 PECL Article 6.110 provides that “The promisee may by notice to the promisor deprive the third party of the right to performance unless: (a) the third party has received notice from the promisee that the right has been made irrevocable, or (b) the promisor or the promisee has received notice from the third party that the latter accepts the right.”

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Draft Common Frame of Reference Article II-9:303 provides that the term may be modified or removed before the notification of third party that the right has been conferred upon. 128 Under American Law, once the intended third party is notified and acts upon the contract, the promisor and the promisee cannot modify or rescind the contract without the approval of the intended third party. If there is a specific term in the contract conferring an enforceable right upon the third party, the promisor and the promisee cannot discharge or modify the duty. In the absence of such a term the promisor and the promise retain the power to discharge or modify the duty.137 127

IV. Defences Available to the Promisor Against the Beneficiary 129

The promisor has all defences, set-offs and counterclaims against the beneficiary which would have been available to her against the promisee. Third party may bring claims to the promisor arising out the contract. Three types of defences, generally, may be directed against the beneficiary.138 These are: (1) defences arising from the promisor and promise’s contract (e.g. non-performance by the promisee, or the invalidity of the underlying contract between the promisor and the promisee,139 or defences arising from insurance contracts, or a defence that the contract ceased to exist 140 are generally regarded as valid grounds for defence); (2) defences arising from the relationship between the promisee and the beneficiary;141 and (3) the defences arising from the relationship between the promisor and the beneficiary.142 German BGB § 334, English Contracts (Rights of Third Parties) Act 1999 s. 3 and the Draft Common Frame of Reference Article II-9:302 enable promisor to rely on defence, rights of set-off and counterclaims. French case law also provides examples of the promisor’s ability to rely on defences and set-off according to which validity of the agreement for the benefit of a third party is subordinate to the underlying agreement.143 German law also provides examples where the promisor’s right to rely on defences against the third party beneficiary has been excluded in certain cases.144 Under American law,145similarly, the promisor has rights of defence and set-off against the third party beneficiary that she would have against the promisee (Restatement (Second) of Contracts § 309). Particularly, under Restatement (Second) of Contracts § 309(4), the promisor may assert rights of defence and set-off from his relationship between himself and the beneficiary.

V. Remedies Available to the Promisee 130

In cases where the third party’s enforcement is impracticable or where the promisee has stronger interest in enforcing the right conferred upon the third party, the law provides the promisee with certain remedies. These cases generally arise out of contracts made by municipalities or governments for the benefit of inhabitants or citizens. If there See generally Restatement (Second) of Contracts § 311. Kötz (n 22) 47–49. 139 Restatement (Second) of Contracts § 309(1). 140 Restatement (Second) of Contracts § 309(2). 141 BGB § 812 according to which the promisor may recover from the third party via unjust enrichment/restitution method. 142 Restatement (Second) of Contracts § 309(4). 143 Eg Cass com, 25 March 1969, Bull civ IV no 118. 144 Eg Bundesgerichtshof (Germany), 17 January 1985, NJW 1985, 1457. 145 Rouse v United States 94 U.S. App. D.C. 386, 215 F.2 d 872 (D.C. Cir. 1954). 137

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is breach of promise, some national laws enable the promisee to enforce the contract as well as claim damages from the promisor. German BGB § 335 and French case law 146 provide examples where the promise may have remedies as against the promisor based on the breach of the promise. English law, however, only enables the promisee to recover his losses. The promisee is not able to recover the third party’s loss on his behalf. Contract (Rights of Third Parties) Act 1999 does not deal with this matter (s. 4). While there are conflicting decisions147 as to the right of the promisee to recover the loss suffered by the third party, the view is that the promisee can recover on behalf of the third party “where the third party would otherwise be left without a remedy.”148 In America,149 the Restatement (Second) of Contracts § 313(2) states the following in relation to government contracts: (2) In particular, a promisor who contracts with a government or governmental agency to do an act for or render a service to the public is not subject to contractual liability to a member of the public for consequential damages resulting from performance or failure to perform unless (a) the terms of the promise provide for such liability; or (b) the promisee is subject to liability to the member of the public for the damages and a direct action against the promisor is consistent with the terms of the contract and with the policy of the law authorizing the contract and prescribing remedies for its breach.

G. Practitioner Tips & Contract Clauses A typical Himalaya clause that enables third parties to benefit from exemption from 131 liability is as follows: “It is expressly agreed that no servant or agent of the carrier (including every independent contractor from time to time employed by the carrier) shall in any circumstances whatsoever be under any liability whatsoever to the shipper, consignee or owner of the goods or to any holder of this bill of lading for any loss, damage or delay of whatsoever kind arising or resulting directly or indirectly from any act, neglect or default on his part while acting in the course of or in connection with his employment and with prejudice to the generality of the foregoing provisions in this clause, every exemption limitation condition and liberty herein contained and every right, exemption from liability, defense and immunity of whatsoever nature applicable to the carrier or to which the carrier is entitled hereunder shall also be available and shall extend to protect every such servant or agent of the carrier acting as aforesaid and for the purpose of all the foregoing provisions of this clause the carrier is or shall be deemed to be acting as agent or trustee on behalf of and for the benefit of all persons who are or might be his servants or agents from time to time (including independent contractors as aforesaid) and all such persons shall to this extent be or be deemed to be parties to the contract in or evidenced by this bill of lading.”150

Service contracts also contain third party rights clauses. The following is a clause 132 where the applicable law is English law.

Cass civ (1), 12 July 1956, D 1956, 749; Cass com, 14 May 1979, DS 1980, 157. Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd. [1994] AC 85 (HL) (where it was held that the promisee can recover the loss suffered by the third party on behalf of the third party); but cf. Alfred McAlpine Ltd v Panatown Ltd. (1998) 88 Building LR 67 (CA); [2000] UKHL 43, [2001] 1 AC 518 (where the House of Lords held that the promisee can only recover his losses and not those of the third party). 148 Beale et al (n 21) 1263. 149 Eg H.R. Moch Co. Inc. v Rennselaer Water Co. 247 N.Y. 160, 159 N.E. 896 (Ct. App. 1928). Specific remedy may be available to the promisee, but this is possible only in limited circumstances (Restatement (Second) of Contracts § 307). 150 Port Jackson Stevedoring Pty. Ltd. v Salmond and Spraggon (Australia) Pty. Ltd [1981] 1 WLR 138; [1980] 3 All ER 257 (Privy Council); see also New Zealand Shipping Co. Ltd. v AM Satterwaite & Co Ltd (the Eurymedon) [1975] AC 154. 146

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Chapter 25 Assignment, Delegation and Third-Party Rights “The Contracts (Rights of Third Parties) Act 1999 shall not apply to the Agreement and no person other than the Consultant and the Company shall have rights any rights under it. The terms of the Agreement or any of them may be varied, amended or modified or the Agreement may be suspended, cancelled or terminated by agreement in writing between the parties or the Agreement may be rescinded, without the consent of any third party.”

H. Additional Sources 133 Kötz, ‘Rights of Third Parties, Third Party Beneficiaries and Assignment’ in von Mehren (ed) International

Encyclopaedia of Comparative Law Ch. 13 v. 7 (Mohr Siebeck 2008); Beale, Fauvarque-Casson, Rutgers, Tallon & Vogenauer, Cases, Materials and Text on Contract Law (2nd edn, Hart 2010) 1295; E. Farnsworth, Farnsworth on Contracts (Aspen Publishing, 3rd ed. Vol. III 2004); Treitel, The Law of Contract (13th edn, Sweet & Maxwell 2011).

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CHAPTER 26 DEFENSES Francesco Paolo Patti and Willibald Posch A. Topics Covered . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B. Introductory Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C. Statement of Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . D. International Sales Transaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . E. Sampling of Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. CISG and the Convention on the Limitation Period in the International Sale of Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. UNIDROIT Principles of International Commercial Contracts . . . . . . . . . . . . . . III. Principles of European Contract Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Common European Sales Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. German Bürgerliches Gesetzbuch . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI. French Code Civil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VII. Spanish Código Civil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VIII. Restatement (Second) of Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IX. Chinese Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F. Commentary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Defects in Consent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Introductory Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Commentary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Mistake . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Introductory Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Commentary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Fraud (Deceit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Introductory Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Commentary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Threats or Duress and Undue Influence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Introductory Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Commentary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. Unfair Exploitation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Introductory Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Commentary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI. Failure to Co-operate and Breach of the Duty of Good Faith . . . . . . . . . . . . . . . . . 1. Introductory Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Commentary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VII. Contributory Negligence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Introductory Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Commentary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VIII. Limitation Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Introductory Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Commentary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IX. Set-Off . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Introductory Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Commentary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . G. Cross References & Additional Commentary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . H. Additional Sources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 2 7 8 9 9 10 11 12 13 14 15 16 17 18 18 18 19 26 26 30 49 49 52 63 63 64 72 72 74 80 80 83 90 90 91 96 96 97 106 106 108 117 118

A. Topics Covered This Chapter deals with some of the numerous defenses used against breach of 1 contracts claims: defects in consent, mutual or unilateral mistake, misrepresentation or fraud (deceit), duress (threat), undue influence, unfair exploitation (unconscionability), failure to co-operate, bad faith, contributory negligence, expiration of limitation period, and set-off. The label “defenses in contract” covers a broader amount of rules and Francesco Paolo Patti and Willibald Posch

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doctrines than those covered in this Chapter, such as, “good faith in bargaining” and “frustration”, which are covered in other Chapters.1 The present Chapter focuses in a residual manner on the areas of affirmative defenses directly related to defects in consent, contributory negligence, and set-off.

B. Introductory Note The idea of a legal ‘defense’ can be defined as ‘that which is alleged by a party proceeded against in an action or suit, as a reason why the plaintiff should not recover or establish that which he seeks by his complaint or petition’.2 With regard to contracts in general, and international contracts for the sale of goods in particular, there are various situations in which defenses can be used to defeat claims for performance or damages by the other party. Under the Civil Law tradition, a number of defenses are related to ‘defects in consent’ (vitiated consent). Thus, mistake, fraud, and threat may give the aggrieved party the right to avoid the contract, or obtain an adaptation of the contract. The Common Law tradition embraces a number of traditional concepts as grounds for the invalidity of a contract, such as ‘mistake’ (or error), ‘fraud’ (or deceit), and ‘threat’ (or duress). 3 Despite the commonality of defenses in the civil and Common Laws, there are some significant differences. In general terms, Civil Law jurisdictions tend to protect parties’ intention in a stronger way than the Common Law. In fact, the idea is that since the parties’ actual or subjective intention is the most essential element in the formation of a contract, a party should be allowed to avoid the contract whenever his or her intention suffers from a ‘defect’.3 A ‘mistake’, whether ‘common’ or ‘unilateral’, may void a contract. Common Law is likely to recognize mistake to invalidate a contract to protect the party who had reasonably relied on the promisor’s intention to be bound by the contract. Nonetheless, the rules on mistake in the Common Law are aligned with those found in the Civil Law.4 A party induced to enter into a contract because of a misleading assertion or a non-disclosure of material facts has the basis for a defense or a claim of ‘misrepresentation’ to void the contract and obtain damages. A contract can be voided if one party was coerced into entering the contract (‘duress’) or unduly persuaded or influenced (based upon a confidential relationship). The common strain in these defenses is one party’s intent was impaired: there was no particular intent to the specific content of the agreement. The Common European Sales Law (CESL) has a Chapter dedicated to ‘defects in consent’5, that are similar to those found in the European PECL and DCFR.6 According to Chapter 5 of the CESL on ‘Defects in Consent’, a party having concluded the contract in a state of relevant mistake, deception, threat, or unfair exploitation may resort to a notice of avoidance of the contract. 2

For a general overview, see Dyson, Goudkamp & Wilmot-Smith (eds), Defences in contract (2017). Bryant, The Law of Pleading Under the Codes of Civil Procedure (1899) p. 240. 3 Kötz, Comparative Contract Law, in: Reimann & Zimmermann (eds), The Oxford Handbook of Comparative Law (2nd ed. 2019) 903, 920. 4 Saintier, Defects of Consent in English Law: Protecting the Bargain?, in: DiMatteo & Hogg (eds), Comparative Contract Law: British and American Perspectives (2015) 120, 129. 5 COM (2011) 635 final. According to Chapter 5 of the CESL on ‘Defects in Consent’, a party having concluded the contract in a state of relevant mistake, deception, threat, or unfair exploitation may resort to a notice of avoidance of the contract. 6 See especially Jansen & Zimmermann, Contract Formation and Mistake in European Contract Law: A Genetic Comparison of Transnational Model Rules, 31 Oxford Journal of Legal Studies (2011) 625-62. 1

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D. International Sales Transaction

The duty of contracting parties to treat each other in good faith has become widely 4 recognized as a general principle of the law of the international sale of goods.7 International sales law recognizes defenses for breaching the duties of good faith and the duty to co-operate, as well as, the failure to act in accordance with reasonable standards of fair dealing. If the breach of contract induced by the party making the claim for breach or damages (failure to co-operate) were preventable, then the other party may have a defense or counterclaim (set-off) based on contributory negligence. The lapse of a limitation period is another defense. If a party fails to bring a claim 5 for breach of contract in a timely manner, then the claim will be unenforceable due to the expiration of the statute of limitations. The limitation period can be provided in the contract, domestic law, or by the incorporation in the contract of the Convention on the Limitation Period in the International Sale of Goods. Finally, it is generally acknowledged in many domestic systems of contract law that, 6 if two parties owe each other obligations of the same kind, there may be a ground for setting off the right to performance of the one party against the claim of the other party. In the Civil Law legal systems,8 the right to set-off is widely acknowledged as a defense of substantive contract law or in the law of obligations, in the Common Law tradition it is rather conceived of as a procedural device. The CISG does not provide rules for set-off, delegating the issue to domestic law.

C. Statement of Issues This Chapter’s primary purpose is to review the different types of ‘defects in consent’ 7 that support a defense to breach of contract. Secondarily, the issue posed is determining the legal consequences of the different types of ‘defects in consent’ defenses. Other issues to be discussed include: (1) how can a party react to the other party’s failure to co-operate? (2) What are the effects of contributory negligence in cases of contractual liability? (3) What are the consequences neglecting a limitation period to bring an action? (4) What are the requirements for setting-off one claim against the claim brought by the other party?

D. International Sales Transaction One of the shortcomings of the CISG is that it does not include provisions ‘for all 8 kinds of defects in consent but leaves them to national law’.9 Since questions concerning the validity of contract are exempted from the CISG according to Article 4 CISG, it does not include a Chapter on defects in consent. Therefore, if a party to an international sales contract to which the CISG applies wants to reject a claim for performance by referring to a situation where its free intention had become vitiated, no ground for a defense can be found in CISG. Only if, and so far as the applicable national law would 7 Cf CISG, Article 7(1) providing that in the interpretation of the Convention regard is to be had to its international character and to the need to promote uniformity in its application as well as to the observance of good faith in international trade; see also PICC, Article 1.7, stating that each party to an international commercial contract must act in accordance with good faith and fair dealing in international trade and that this duty cannot be excluded or limited by the parties. See also, PECL, Article 1:201; CESL, Article 2 (importance of good faith in general contract law). 8 Zweigert & Kötz, Einführung in die Rechtsvergleichung auf dem Gebiet des Privatrechts (3 rd edn, 1996) use as title for the relevant Chapter 31 ‘Irrtum, Täuschung, Drohung’, which in the translation by Weir became ‘mistake, deceit, and duress’. 9 See Magnus, ‘CISG vs. CESL’ in Magnus (ed), CISG vs. Regional Sales Law Unification (2012) p. 111.

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so provide,10 the affected party has the right to establish that it had been, at the time of the conclusion of the contract, either mistaken, or induced by the other party’s deceptive conduct or threat. Although defects in consent provisions are found in the PICC, PECL,11 and CESL, in almost all cases parties to international sales transactions will have to look to domestic law to determine their legally available claims and defenses.

E. Sampling of Laws I. CISG and the Convention on the Limitation Period in the International Sale of Goods 9 Article 4 CISG This Convention governs only the formation of the contract of sale and the rights and obligations of the seller and the buyer arising from such a contract. In particular, except as otherwise expressly provided in this Convention, it is not concerned with: (a) the validity of the contract or of any of its provisions or of any usage; Article 71(1) CISG A party may suspend the performance of his obligations if, after the conclusion of the contract, it becomes apparent that the other party will not perform a substantial part of his obligations as a result of: (a) a serious deficiency in his ability to perform or in his creditworthiness; or (b) his conduct in preparing to perform or in performing the contract. Article 77 CISG A party who relies on a breach of contract must take such measures as are reasonable in the circumstances to mitigate the loss, including loss of profit, resulting from the breach. If he fails to take such measures, the party in breach may claim a reduction in the damages in the amount by which the loss should have been mitigated. Article 80 CISG A party may not rely on a failure of the other party to perform, to the extent that such failure was caused by the first party’s act or omission. Article 81 CISG (1) Avoidance of the contract releases both parties from their obligations under it, subject to any damages, which may be due. Avoidance does not affect any provision of the contract for the settlement of disputes or any other provision of the contract governing the rights and obligations of the parties consequent upon the avoidance of the contract. (2) A party who has performed the contract either wholly or in part may claim restitution from the other party of whatever the first party has supplied or paid under the contract. If both parties are bound to make restitution, they must do so concurrently.

10 In the Member States of the EU (with the exception of Denmark) the relevant rules of conflict of laws are provided by the Regulation (EC) No. 593/2008 of the European Parliament and of the Council of 17 June 2008 on the law applicable to contractual obligations (Rome I) [2008] OJ L177/6. 11 Lando & Beale (eds), Principles of European Contract Law (Parts I and II) (2000) p. 229.

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E. Sampling of Laws Article 84(2) CISG (2) The buyer must account to the seller for all benefits, which he has derived from the goods or part of them: (a) if he must make restitution of the goods or part of them; or (b) if it is impossible for him to make restitution of all or part of the goods or to make restitution of all or part of the goods substantially in the condition in which he received them, but he has nevertheless declared the contract avoided or required the seller to deliver substitute goods. Article 88(3) CISG (3) A party selling the goods has the right to retain out of the proceeds of sale an amount equal to the reasonable expenses of preserving the goods and of selling them. He must account to the other party for the balance. Article 8 Convention on the Limitation Period in the International Sale of Goods The limitation period shall be four years. Article 9 Convention on the Limitation Period in the International Sale of Goods The limitation period shall commence on the date [on] which the claim accrues. Article 10 Convention on the Limitation Period in the International Sale of Goods (1) A claim arising from a breach of contract shall accrue on the date on which such breach occurs. (2) A claim arising from a defect or other lack of conformity shall accrue on the date on which the goods are actually handed over to, or their tender is refused by the buyer. (3) A claim based on fraud committed before or at the time of the conclusion of the contract or during its performance shall accrue on the date on, which the fraud was or reasonably could have been discovered Article 23 Convention on the Limitation Period in the International Sale of Goods Notwithstanding the provisions of this Convention, a limitation period shall in any event expire not later than ten years from the date on which it commenced to run.

II. UNIDROIT Principles of International Commercial Contracts 10

Article 3.2.1 Definition of mistake Mistake is an erroneous assumption relating to facts or to law existing when the contract was concluded. Article 3.2.2 Relevant mistake (1) A party may only avoid the contract for mistake if, when the contract was concluded, the mistake was of such importance that a reasonable person in the same situation as the party in error would only have concluded the contract on materially different terms or would not have concluded it at all if the true state of affairs had been known, and (a) the other party made the same mistake, or caused the mistake, or knew or ought to have known of the mistake and it was contrary to reasonable commercial standards of fair dealing to leave the mistaken party in error; or (b) the other party had not at the time of avoidance reasonably acted in reliance on the contract. (2) However, a party may not avoid the contract if (a) it was grossly negligent in committing the mistake; or (b) the mistake relates to a matter in regard to which the risk of mistake was assumed Article 3.2.3 Error in expression or transmission An error occurring in the expression or transmission of a declaration is considered to be a mistake of the person from whom the declaration emanated. Article 3.2.4 Remedies for non-performance A party is not entitled to avoid the contract on the ground of mistake if the circumstances on which that party relies afford, or could have afforded, a remedy for non-performance. Article 3.2.5 Fraud A party may avoid the contract when it has been led to conclude the contract by the other party’s fraudulent representation, including language or practices, or fraudulent non-disclosure of circumstances

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Chapter 26 Defenses which, according to reasonable commercial standards of fair dealing, the latter party should have disclosed Article 3.2.6 Threat A party may avoid the contract when it has been led to conclude the contract by the other party’s unjustified threat, which, having regard to the circumstances, is so imminent and serious as to leave the first party no reasonable alternative. In particular, a threat is unjustified if the act or omission with which a party has been threatened is wrongful in itself, or it is wrongful to use it as a means to obtain the conclusion of the contract. Article 3.2.7 Gross disparity (1) A party may avoid the contract or an individual term of it if, at the time of the conclusion of the contract, the contract or term unjustifiably gave the other party an excessive advantage. Regard is to be had, among other factors, to (a) the fact that the other party has taken unfair advantage of the first party’s dependence, economic distress or urgent needs, or of its improvidence, ignorance, inexperience or lack of bargaining skill, and (b) the nature and purpose of the contract. (2) Upon the request of the party entitled to avoidance, a court may adapt the contract or term in order to make it accord with reasonable commercial standards of fair dealing. (3) A court may also adapt the contract or term upon the request of the party receiving notice of avoidance, provided that that party informs the other party of its request promptly after receiving such notice and before the other party has reasonably acted in reliance on it. Article 3.2.8 Third persons (1) Where fraud, threat, gross disparity or a party’s mistake is imputable to, or is known or ought to be known by, a third person for whose acts the other party is responsible, the contract may be avoided under the same conditions as if the behaviour or knowledge had been that of the party itself. (2) Where fraud, threat or gross disparity is imputable to a third person for whose acts the other party is not responsible, the contract may be avoided if that party knew or ought to have known of the fraud, threat or disparity, or has not at the time of avoidance reasonably acted in reliance on the contract. Article 7.4.7 Harm due in part to aggrieved party Where the harm is due in part to an act or omission of the aggrieved party or to another event as to which that party bears the risk, the amount of damages shall be reduced to the extent that these factors have contributed to the harm, having regard to the conduct of each of the Article 7.4.8 Mitigation of harm (1) The non-performing party is not liable for harm suffered by the aggrieved party to the extent that the harm could have been reduced by the latter party’s taking reasonable steps. (2) The aggrieved party is entitled to recover any expenses reasonably incurred in attempting to reduce the harm. Article 8.1 Conditions of set-off (1) Where two parties owe each other money or other performances of the same kind, either of them (“the first party”) may set off its obligation against that of its obligee (“the other party") if at the time of set-off, (a) the first party is entitled to perform its obligation; (b) the other party’s obligation is ascertained as to its existence and amount and performance is due. (2) If the obligations of both parties arise from the same contract, the first party may also set off its obligation against an obligation of the other party which is not ascertained as to its existence or to its amount. Article 8.2 Foreign currency set-off Where the obligations are to pay money in different currencies, the right of set-off may be exercised, provided that both currencies are freely convertible and the parties have not agreed that the first party shall pay only in a specified currency. Article 8.3 Set-off by notice The right of set-off is exercised by notice to the other party.

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E. Sampling of Laws Article 8.4 Content of notice (1) The notice must specify the obligations to which it relates. (2) If the notice does not specify the obligation against which set-off is exercised, the other party may, within a reasonable time, declare to the first party the obligation to which set-off relates. If no such declaration is made, the set-off will relate to all the obligations proportionally. Article 8.5 Effect of set-off (1) Set-off discharges the obligations. (2) If obligations differ in amount, set-off discharges the obligations up to the amount of the lesser obligation. (3) Set-off takes effect as from the time of notice

III. Principles of European Contract Law 11

Article 4.103 Mistake as to facts or law (1) A party may avoid a contract for mistake of fact or law existing when the contract was concluded if: (a) (i) the mistake was caused by information given by the other party; or (ii) the other party knew or ought to have known of the mistake and it was contrary to good faith and fair dealing to leave the mistaken party in error; or (iii) the other party made the same mistake, and (b) the other party knew or ought to have known that the mistaken party, had it known the truth, would not have entered the contract or would have done so only on fundamentally different terms. (2) However a party may not avoid the contract if: (a) in the circumstances its mistake was inexcusable, or (b) the risk of the mistake was assumed, or in the circumstances should be borne, by it. Article 4.104 Inaccuracy in communication An inaccuracy in the expression or transmission of a statement is to be treated as a mistake of the person who made or sent the statement and Article 4:103 applies. Article 4.105 Adaption of Contract (1) If a party is entitled to avoid the contract for mistake but the other party indicates that it is willing to perform, or actually does perform, the contract as it was understood by the party entitled to avoid it, the contract is to be treated as if it had been concluded as the that party understood it. The other party must indicate its willingness to perform, or render such performance, promptly after being informed of the manner in which the party entitled to avoid it understood the contract and before that party acts in reliance on any notice of avoidance. (2) After such indication or performance the right to avoid is lost and any earlier notice of avoidance is ineffective. (3) Where both parties have made the same mistake, the court may at the request of either party bring the contract into accordance with what might reasonably have been agreed had the mistake not occurred. Article 4.106 Incorrect information A party who has concluded a contract relying on incorrect information given it by the other party may recover damages in accordance with Article 4:117(2) and (3) even if the information does not give rise to a right to avoid the contract on the ground of mistake under Article 4:103, unless the party who gave the information had reason to believe that the information was correct. Article 4:107 Fraud (1) A party may avoid a contract when it has been led to conclude it by the other party's fraudulent representation, whether by words or conduct, or fraudulent non-disclosure of any information, which in accordance with good faith and fair dealing it should have disclosed. (2) A party's representation or non-disclosure is fraudulent if it was intended to deceive. (3) In determining whether good faith and fair dealing required that a party disclose particular information, regard should be had to all the circumstances, including: (a) whether the party had special expertise; (b) the cost to it of acquiring the relevant information;

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Chapter 26 Defenses (c) whether the other party could reasonably acquire the information for itself; and (d) the apparent importance of the information to the other party Article 4:108 Threats A party may avoid a contract when it has been led to conclude it by the other party's imminent and serious threat of an act: (a) which is wrongful in itself, or (b) which it is wrongful to use as a means to obtain the conclusion of the contract, unless in the circumstances the first party had a reasonable alternative. Article 4:109 Excessive benefit or unfair advantage (1) A party may avoid a contract if, at the time of the conclusion of the contract: (a) it was dependent on or had a relationship of trust with the other party, was in economic distress or had urgent needs, was improvident, ignorant, inexperienced or lacking in bargaining skill, and (b) the other party knew or ought to have known of this and, given the circumstances and purpose of the contract, took advantage of the first party's situation in a way which was grossly unfair or took an excessive benefit. (2) Upon the request of the party entitled to avoidance, a court may if it is appropriate adapt the contract in order to bring it into accordance with what might have been agreed had the requirements of good faith and fair dealing been followed. (3) A court may similarly adapt the contract upon the request of a party receiving notice of avoidance for excessive benefit or unfair advantage, provided that this party informs the party who gave the notice promptly after receiving it and before that party has acted in reliance on it. Article 4:110 Unfair terms which have not been individually negotiated (1) A party may avoid a term which has not been individually negotiated if, contrary to the requirements of good faith and fair dealing, it causes a significant imbalance in the parties' rights and obligations arising under the contract to the detriment of that party, taking into account the nature of the performance to be rendered under the contract, all the other terms of the contract and the circumstances at the time the contract was concluded. (2) This Article does not apply to: (a) a term which defines the main subject matter of the contract, provided the term is in plain and intelligible language; or to (b) the adequacy in value of one party's obligations compared to the value of the obligations of the other party. Article 9:504 Loss Attributable to Aggrieved Party The non-performing party is not liable for loss suffered by the aggrieved party to the extent that the aggrieved party contributed to the non-performance or its effects. Article 9:505 Reduction of loss (1) The non-performing party is not liable for loss suffered by the aggrieved party to the extent that the aggrieved party could have reduced the loss by taking reasonable steps. (2) The aggrieved party is entitled to recover any expenses reasonably incurred in attempting to reduce the loss. Article 13:101 Requirements for set-off If two parties owe each other obligations of the same kind, either party may set off that party's right to performance ("claim") against the other party's claim, if and to the extent that, at the time of set-off, the first party: (a) is entitled to effect performance; and (b) may demand the other party's performance. Article 13:107 Exclusion of right of set-off Set-off cannot be effected: (a) where it is excluded by agreement; (b) against a claim to the extent that that claim is not capable of attachment; and (c) against a claim arising from a deliberate wrongful act.

IV. Common European Sales Law 12 Article 48 Mistake 1. A party may avoid a contract for mistake of fact or law existing when the contract was concluded if:

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E. Sampling of Laws (a) the party, but for the mistake, would not have concluded the contract or would have done so only on fundamentally different contract terms and the other party knew or could be expected to have known this; and (b) the other party: (i) caused the mistake; (ii) caused the contract to be concluded in mistake by failing to comply with any pre-contractual information duty under Chapter 2, Sections 1 to 4; (iii) knew or could be expected to have known of the mistake and caused the contract to be concluded in mistake by not pointing out the relevant information, provided that good faith and fair dealing would have required a party aware of the mistake to point it out; or (iv) made the same mistake. 2. A party may not avoid a contract for mistake if the risk of the mistake was assumed, or in the circumstances should be borne, by that party. 3. An inaccuracy in the expression or transmission of a statement is treated as a mistake of the person who made or sent the statement. Article 49 Fraud 1. A party may avoid a contract if the other party has induced the conclusion of the contract by fraudulent misrepresentation, whether by words or conduct, or fraudulent non-disclosure of any information which good faith and fair dealing, or any pre-contractual information duty, required that party to disclose. 2. Misrepresentation is fraudulent if it is made with knowledge or belief that the representation is false, or recklessly as to whether it is true or false, and is intended to induce the recipient to make a mistake. Non-disclosure is fraudulent if it is intended to induce the person from whom the information is withheld to make a mistake. 3. In determining whether good faith and fair dealing require a party to disclose particular information, regard should be had to all the circumstances, including: (a) whether the party had special expertise; (b) the cost to the party of acquiring the relevant information; (c) the ease with which the other party could have acquired the information by other means; (d) the nature of the information; (e) the apparent importance of the information to the other party; and (f) in contracts between traders good commercial practice in the situation concerned. Article 50 Threats A party may avoid a contract if the other party has induced the conclusion of the contract by the threat of wrongful, imminent and serious harm, or of a wrongful act. Article 51 Unfair exploitation A party may avoid a contract if, at the time of the conclusion of the contract: (a) that party was dependent on, or had a relationship of trust with, the other party, was in economic distress or had urgent needs, was improvident, ignorant, or inexperienced; and (b) the other party knew or could be expected to have known this and, in the light of the circumstances and purpose of the contract, exploited the first party’s situation by taking an excessive benefit or unfair advantage. Article 52 Notice of avoidance 1. Avoidance is effected by notice to the other party. 2. A notice of avoidance is effective only if it is given within the following period after the avoiding party becomes aware of the relevant circumstances or becomes capable of acting freely: (a) six months in case of mistake; and (b) one year in case of fraud, threats and unfair exploitation. Article 54 Effects of avoidance 1. A contract which may be avoided is valid until avoided but, once avoided, is retrospectively invalid from the beginning. 2. Where a ground of avoidance affects only certain contract terms, the effect of avoidance is limited to those terms unless it is unreasonable to uphold the remainder of the contract.

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Chapter 26 Defenses 3. The question whether either party has a right to the return of whatever has been transferred or supplied under a contract, which has been avoided, or to a monetary equivalent, is regulated by the rules on restitution in Chapter 17. Article 162 Loss attributable to creditor The debtor is not liable for loss suffered by the creditor to the extent that the creditor contributed to the non-performance or its effects. Article 163 Reduction of loss 1. The debtor is not liable for loss suffered by the creditor to the extent that the creditor could have reduced the loss by taking reasonable steps. 2. The creditor is entitled to recover any expenses reasonably incurred in attempting to reduce the loss.

V. German Bürgerliches Gesetzbuch 13 § 119 Voidability for mistake (Irrtum) (1) A person who, when making a declaration of intent, was mistaken about its contents or had no intention whatsoever of making a declaration with this content, may avoid the declaration if it is to be assumed that he would not have made the declaration with knowledge of the factual position and with a sensible understanding of the case. (2) A mistake about such characteristics of a person or a thing as are customarily regarded as essential is also regarded as a mistake about the content of the declaration. § 123 Voidability on the grounds of deceit or duress (Täuschung and Drohung) (1) A person who has been induced to make a declaration of intent by deceit or unlawfully by duress may avoid his declaration. (2) If a third party committed this deceit, a declaration that had to be made to another may be avoided only if the latter knew of the deceit or ought to have known it. If a person other than the person to whom the declaration was to be made acquired a right as a direct result of the declaration, the declaration made to him may be avoided if he knew or ought to have known of the deceit. § 254 Contributory negligence (1) Where fault on the part of the injured person contributes to the occurrence of the damage, liability in damages as well as the extent of compensation to be paid, depend on the circumstances, in particular to what extent the damage is caused mainly by one or the other party. (2) This also applies if the fault of the injured person is limited to failing to draw the attention of the obligor to the danger of unusually extensive damage, where the obligor neither was nor ought to have been aware of the danger, or to failing to avert or reduce the damage. § 387 Requirements (set-off) If two persons owe each other performance that is substantially of the same nature, each party may set off his claim against the claim of the other party as soon as he can claim the performance owed to him and effect the performance owed by him. § 388 Declaration of set-off Set-off is effected by declaration to the other party. The declaration is ineffective if it is made subject to a condition or a stipulation as to time. § 389 Effect of set-off The effect of set-off is that the claims, to the extent that they correspond, are deemed to expire at the time when they are set against each other as being appropriate for set-off.

VI. French Code Civil 14 Article 1129 (Existence of Consent) In accordance with article 414-1, one must be of sound mind to give valid consent to a contract.

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E. Sampling of Laws Article 1130 Mistake, fraud and duress vitiate consent where they are of such a nature that, without them, one of the parties would not have contracted or would have contracted on substantially different terms. Their decisive character is assessed in the light of the person and of the circumstances in which consent was given. Article 1131 Defects in consent are a ground of relative nullity of the contract. Article 1132 Mistake of law or of fact, as long as it is not inexcusable, is a ground of nullity of the contract where it bears on the essential qualities of the act of performance owed or of the other contracting party. Article 1133 The essential qualities of the act of performance are those which have been expressly or impliedly agreed and which the parties took into consideration on contracting. Mistake is a ground of nullity whether it bears on the act of performance of one party or of the other. Acceptance of a risk about a quality of the act of performance rules out mistake in relation to this quality. Article 1134 Mistake about the essential qualities of the other contracting party is a ground of nullity only as regards contracts entered into on the basis of considerations personal to the party. Article 1135 Mistake about mere motive, extraneous to the essential qualities of the act of performance owed or of the other contracting party is not a ground of nullity unless the parties have expressly made it a decisive element of their consent. However, mistake about the motive for an act of generosity is a ground of nullity where, but for the mistake, the donor would not have made it. Article 1136 A mistake as to value is not a ground of nullity where, in the absence of a mistake about the essential qualities of the act of performance, a contracting party makes only an inaccurate valuation of it. Article 1137 Fraud is an act of a party in obtaining the consent of the other by scheming or lies. The intentional concealment by one party of information, where he knows its decisive character for the other party, is also fraud. Article 1138 Fraud is equally established where it originates from the other party’s representative, a person who manages his affairs, his employee or one standing surety for him. It is also established where it originates from a third party in collusion. Article 1139 A mistake induced by fraud is always excusable. It is a ground of nullity even if it bears on the value of the act of performance or on a party’s mere motive. Article 1140 There is duress where one party contracts under the influence of a constraint which makes him fear that his person or his wealth, or those of his near relatives, might be exposed to considerable harm. Article 1141 A threat of legal action does not constitute duress, except where the legal process is deflected from its proper purpose or where it is invoked or exercised in order to obtain a manifestly excessive advantage. Article 1142 Duress is a ground of nullity regardless of whether it has been applied by the other party or by a third party.

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Chapter 26 Defenses Article 1143 There is also duress where one contracting party exploits the other’s state of dependence and obtains an undertaking to which the latter would not have agreed in the absence of such constraint, and gains from it a manifestly excessive advantage. Article 1144 In the case of mistake or fraud the period for bringing an action for nullity runs only from the day when they were discovered, and in the case of duress the period runs only from the day when it ceased. Article 1347 Set-off is the simultaneous extinguishment of reciprocal obligations between two persons. If it is invoked, it operates up to the value of the lower of the two obligations at the date when all the conditions for set-off are met. Article 1347-1 Subject to the provisions of the following sub-section, set-off takes place only in the case of two fungible obligations which are certain, liquidated and enforceable. Obligations are fungible if they are of a sum of money, even in different currencies, provided that they can be converted; or if they have as their subject-matter a quantity of things of the same generic kind. Article 1347-2 Unless the creditor consents, there can be no set-off of rights that cannot be attached, or of the obligation to return a deposit, a thing loaned for use, or a thing of which the owner has been unjustly deprived. Article 1347-3 A period of grace for payment is no obstacle to set-off. Article 1347-4 If there is more than one debt liable for set-off, the rules for the allocation of payments are applicable. Article 1347-5 Where the debtor has acknowledged without reservation the assignment of the creditor’s right, he may not set up against the assignee a set-off which he could have set up against the assignor. Article 1347-6 A guarantor may set up against the creditor a set-off which arises between the creditor and the principal debtor. A joint and several debtors may take advantage of a set-off which arises between the creditor and one of his co-debtors in order to deduct from the total debt the separate part of the debt owed by that debtor. Article 1347-7 Set-off does not prejudice vested rights of third parties. Article 1348 Set-off may be ordered by a court even if one of the obligations, although certain, is not yet liquidated or enforceable. Unless otherwise decided, in these circumstances set-off is effective at the date of the decision. Article 1348-1 The court may not refuse to set off related debts for the sole reason that one of the obligations would not be liquidated or enforceable. In that situation, set-off is deemed to be effective on the day when the first of the obligations becomes enforceable. In that same situation, the acquisition by a third party of rights in relation to one of the obligations does not prevent the debtor from raising set-off. Article 1348-2 The parties are free to agree to extinguish all reciprocal obligations, present or future, by set-off. Such a set-off takes effect on the date of their agreement or, if it concerns future obligations, when they co-exist.

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VII. Spanish Código Civil 15

Article 1,195 Setoff shall take place when two persons, in their own right, are reciprocally creditors and debtors of one another. Article 1,196 For setoff to apply, the following is required: 1. That each obligor is a principal obligor and in his turn is the principal creditor of the other. 2. That both debts consist of an amount of money or, if the things owed are fungible, that they are of the same species and also of the same quality, if the latter should have been designated. 3. That both debts are outstanding. 4. That they are due and payable. 5. That there is no attachment or dispute initiated over any of them by third parties and duly notified to the debtor. Article 1,202 The effect of set-off is to extinguish both debts in the coinciding amount, even if creditors and debtors should be unaware of it. Article 1,265 (error, violencia o intimidación and dolo) Consent given pursuant to error, duress, intimidation or fraudulent misrepresentation shall be null and void.

VIII. Restatement (Second) of Contracts In the Common Law, judge made doctrines provide the rules relating to ‘defects 16 in consent.’ There are well-established rules on unilateral and mutual mistake, misrepresentation, duress, and undue influence. These concepts are understood as contextually related.12 § 151 Mistake defined A mistake is a belief that is not in accord with the facts. § 152 When mistake of both parties makes a contract voidable (1) Where a mistake of both parties at the time a contract was made as to a basic assumption on which the contract was made has a material effect on the agreed exchange of performance, the contract is voidable by the adversely affected party unless he bears the risk of the mistake. (2) In determining whether the mistake has a material effect on the agreed exchange of performance account is taken of any relief by way of reformation, restitution, or otherwise. § 153 When mistake of one party makes a contract voidable Where a mistake of one party at the time a contract was made as to a basic assumption on which he made the contract has a material effect on the agreed exchange of performances that is adverse to him, the contract is voidable by him if he does not bear the risk of the mistake under the rule stated in § 153 and:

12 Cf Peel, Treitel on The Law of Contract (13th edn, 2011) Chapters 8, 9 and 10; ALI, Restatement of the Law, Contracts Second (1981) Chapters 6 and 7.

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Chapter 26 Defenses (a) the effect of the mistake is such that enforcement of the contract would be unconscionable, or (b) the other party had reason to know of the mistake or his fault caused the mistake § 154 When a party bears the risk of a mistake A party bears the risk of a mistake when: (a) the risk is allocated to him by agreement of the parties, or (b) he is aware, at the time the contract is made that he has only limited knowledge with respect to the facts to which the mistake relates but treats his limited knowledge as sufficient, or (3) The risk is allocated to him by the court on the ground that it is reasonable in the circumstances to do so. § 157 Effect of fault of party seeking relief A mistaken party’s fault I failing to know or discover the facts before making the contract does not bar him from avoidance or reformation under the rules stated in the Chapter, unless the fault amounts to a failure to act in good faith and in accordance with reasonable standards of fair dealing. § 160 When action is the equivalent to an assertion (concealment) Action intended or known to be likely to prevent another from learning a fact is equivalent to an assertion that the fact does not exist. § 162 When a misrepresentation is fraudulent or material (1) A misrepresentation is fraudulent if the marker intends his assertion to induce a party to manifest his assent and the maker: (a) knows or beliefs that the assertion is not in accord with the facts, or (b) does not have the confidence that he states or implies in the truth of the assertion, or (c) knows that he does not have the basis that he states or implies for the assertion. (2) A misrepresentation is material if it would be likely to induce a reasonable person to manifest his assent, or if the maker knows that it would be likely to induce the recipient to do so. § 175 When duress by threat makes a contract voidable (1) If a party’s manifestation of assent is induced by an improper threat by the other party that leaves the victim no reasonable alternative, the contract is voidable by the victim. (2) If a party’s manifestation of assent induced by one who is not a party to the transaction, the contract is voidable by the victim unless the other party to the transaction in good faith and without reason to know of the duress either gives value or relies materially on the transaction. § 177 When undue influence makes a contract voidable (1) Undue influence is unfair persuasion of a party who is under the domination of the person exercising the persuasion or who by virtue of the relation between them is justified in assuming that that person will not act in a manner inconsistent with his welfare. (2) If a party’s manifestation of assent is induced by undue influence by the other party, the contract is voidable by the victim. (3) If a party’s manifestation of assent is induced by one who is not a party to the transaction, the contract is voidable by the victim unless the other party to the transaction in good faith and without reason to know of the undue influence either gives value or relies materially on the transaction. § 350 Avoidability as a limitation on damages (1) Except as stated in Subsection (2), damages are not recoverable for loss that the injured party could have avoided without undue risk, burden or humiliation. (2) The injured party is not precluded from recovery by the rule stated in Subsection (1) to the extent that he has made reasonable but unsuccessful efforts to avoid loss.

IX. Chinese Law 17 Article 143 The civil juristic acts with the following conditions are valid: (1) The persons of the civil conduct have a corresponding capacity for civil conduct; (2) The expression of intention is true; (3) Not violating the mandatory provisions of laws and administrative regulations, and not violating the public order and social customs.

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F. Commentary Article 146 A civil juristic act performed by the actor and the counterparty based on false expression of intention shall be invalid. A civil juristic act which is concealed by means of false expression of intention shall be handled according to the relevant provisions of laws. Article 147 The persons of civil conduct have the right to request the People's Court or arbitration organisations to revoke the civil juristic acts based on major misunderstandings. Article 148 The parties infringed by fraud have the rights to request the People's Court or arbitration organisations to revoke the Civil Juristic Acts that have been perpetrated by means of fraud and against the true meanings of the counterparties. Article 149 The persons infringed by fraud which has been implemented by third parties and has caused the civil juristic acts of the counterparties, in which the counterparties know or should have known such fraud, have the right to request a people's court or arbitration organisations to revoke the civil juristic acts. Article 150 If a party or third parties who, by means of coercion, have caused the other party to carry out the civil juristic acts in violation of their true meaning, the persons under coercion have the rights to request a people's court or the arbitration organisations to revoke them. Article 151 The injured party has the right to request a people's court or the arbitration organisations to revoke the conducts, if one party uses the state of danger or lack of judgment of the other party resulting in the unfairness in the establishment of the civil juristic acts. Article 152 Under any of the following circumstances, the right of revocation is eliminated: (1) The party concerned has not exercised the right of revocation within 1 year from the date of knowing or ought to have known the grounds for revocation; the party concerned in the major misunderstanding has not exercised the right of revocation within 3 months from the date of knowing or ought to have known the grounds for revocation; (2) The parties have not exercised the right of revocation within 1 year from the date of termination of the coercion; (3) The parties expressly waive the right of revocation after they know the grounds thereof. If the parties have not exercised the right of revocation within 5 years from the date of the civil juristic acts, the right of revocation shall be eliminated. Article 155 The invalid or revoked civil juristic acts are not legally binding from the beginning. Article 568 Where the parties have obligations towards one another, and the type and nature of the subject matter of such obligations are the same, any party may offset its own obligation against a due obligation of the other party, except where, according to the nature of the obligation, an agreement between the parties or the law provides that such obligations shall not be offset.

F. Commentary I. Defects in Consent 1. Introductory Note Often defenses to breach of contract claims are based upon a defect in consent at 18 the time of the conclusion of the contract – the party’s manifestation of intent is not

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reasonably reflected in the contract or the subject matter of the contract. Or one or both parties may have been mistaken in respect of the subject matter of the contract or of the personal qualities and abilities of the other contracting party. A party may have entered into a contract only because it had been induced by the deceptive or fraudulent conduct of the other party, or because the party was induced into entering the contract due to psychological or economic pressure or threats inflicted by the other party. In such cases, the victim of an unfair exploitation can seek a voiding of the contract. Using defects in consent as a defense depends in many respects on the arrangement of the rules on invalidity and the rules on remedies for breach of contract. In cases of fraud, threats, and unfair exploitation the defense is self-evident and is justified by the other party’s wrongdoing. In the field of mistake, the defect in consent may be generally used as a ground to escape from liability.

2. Commentary Only where the CISG expressly provides for a specific type of vitiated consent, as in its Article 71 (anticipatory repudiation) for a mistake with regard to the other party’s ability to perform or creditworthiness, the remedies of the CISG would have priority and the mistaken party is only entitled to a suspension of its performance. Whether the remedies provided by CISG would be the only available ones, if a party’s mistake concerns the qualities of a delivered good, or whether such a mistake would entail the right of the mistaken party to declare the contract void under the applicable national law has found controversial answers in the practice of the courts.13 20 The PICC provides in Article 3.1.4. that the provisions on fraud, threat and gross disparity are of a mandatory character, but not claims relating to mistake. Whereas it would be contrary to good faith if the parties provided contract provisions excluding claims based upon fraud, threat and gross disparity when, the parties to a contract may agree that a party’s mistake shall not be a ground for avoidance. According to PICC, Article 3.2.12., the party who has the right to avoid the contract because its consent to the conclusion of a contract had been vitiated shall give notice of avoidance of the contract within a reasonable time after the avoiding party knew or could not have been unaware of the relevant facts. The reference to a ‘reasonable time’ provided needed flexibility in the law of international commercial contracts. 21 PECL goes further than CISG with regard to defects in consent by including a Chapter on ‘validity’. PECL had a clearly discernible influence on later efforts to create uniform rules on contract law within the EU, such as CESL. The experts who drafted the CESL utilized the CISG, PICC, and PECL as models. The provisions on ‘defects in consent’ are found in the fifth Chapter of the CESL. However, in some aspects the rules of CESL on ‘defects in consent’ do not fully comply with the pattern of the PICC and PECL. For example, CESL provides definite time limits for the notice of avoidance. In case of a mistake the limit is six months and in cases of fraud, threats and unfair exploitation the period is one year (CESL Article 52(2)). 22 In the continental European codifications of the Civil Law, mistake, fraud, and threats represent the traditional grounds for avoiding a contract because of vitiated consent of one or both parties. They are subsumed in the category of ‘defects in consent’ and the relevant rules concerning the invalidation of contractual agreements because of vitiated consent are laid down in a systematic order.14 Since a mistaken party can declare a 19

13 Cf Schwenzer/Hachem in Schlechtriem & Schwenzer (eds), Commentary on the UN Convention on the International Sale of Goods (CISG) (3rd edn, 2010) p. 90; Schwenzer, id. p. 590. 14 Cf BGB §§ 119 and123; French Civil Code Article 1132-1136; Spanish Civil Code Article 1265.

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contract avoided only, if the mistake is an essential or fundamental one, the conditions for the availability and execution of the declaration of avoidance because of mistake are regulated in the codifications with greater detail. Contracts affected by a defect in consent are not void by operation of law but voidable 23 (anfechtbar in German). After the reform of 2016, under French law vitiated consent gives rise to a relative nullity through an action of the protected party (Article 1131). Thus, if performance of such a contract is requested, a party may set up the defense, that the contract is void as an invalid agreement.15 It is also acknowledged either by statutory provisions or by the courts that a party, which, in a situation of inferiority or weakness, was induced by the other party to enter into an unfair contract that provides the other party an excessive benefit, may resort to avoidance of the contract.16 In the Common Law, a category of ‘defects in consent’ is not generally recognized. 24 However, judge-made rules are similar to those of the codified systems. Thus, the law acknowledges concepts such as mistake, fraudulent misrepresentation, and duress together with undue influence and unconscionable bargains. While mistake makes a contract void, fraudulent misrepresentation makes a contract voidable by one of the parties. s 62 of the English Sale of Goods Act of 1979 provides, that ‘the rules of the Common Law, including the law merchant, except in so far as they are inconsistent with the provisions of this Act, and in particular the rules relating to the effect of fraud misrepresentation duress or coercion, mistake or other invalidating cause, apply to contracts for the sale of goods’. Mistake, fraudulent and material misrepresentation, duress and undue influence are also acknowledged by the Restatement. Article 54 of the Chinese Contract Law provides for a party’s right to ask for amend- 25 ment or cancellation of a contract if the contract was concluded due to a ‘material mistake’, or if a party had been induced to enter into a contract against its true intention by the other party’s fraud or duress. The right to cancel a contract is, according to Article 55, limited to a period of one year and can be waived by express statement or conduct of the party entitled to cancellation. According to Article 56 invalid or cancelled contracts are not legally binding ab initio.

II. Mistake 1. Introductory Note Notwithstanding significant differences in the way ‘mistake’ is dealt with in the 26 domestic systems of contract law and in the recent documents on the unification of contract law, there is an important common characteristic of all the conceptions of mistake: a mistake, to be a legally relevant one, must be serious, ‘very serious’ in that it has a material effect or goes to a basic assumption of the contract.17 The mistake must make the contract ‘fundamentally different’ from what was originally intended. This is the case if the mistaken party, ‘but for the mistake’, would not have concluded the contract or would have concluded it ‘on fundamentally different contract terms’, and the other party knew or could be expected to have known this.18 All Civil Law systems provide rules on mistake or error, as well as, criteria for 27 recognizing legally significant mistakes. It is generally recognised that not every misSee also, Article 143 CCC. Cf BGB § 138 on contracts violating public policy by exploiting a weak party for disproportionate pecuniary advantage. 17 Cf PECL, Article 4:103, Comment, Parts I/II, 230. 18 PICC Article 3.2.2. (1); PECL, Article 4:103 (1); CESL, Article 48. 15

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apprehension affecting a party’s promise to conclude a contract entitles that party to declare the contract avoided or to establish a defense based upon a defect in consent. With regard to the conditions, which make a mistake a legally relevant one, in some contract laws mistakes may not lead to a right to void the contract, if the mistake is only related to the motive for entering a contract. 28 In the Common Law, a specific assent is attached to the distinction of a ‘unilateral mistake’ and a ‘common’, ‘mutual’ or ‘shared mistake’.19 For a long time it was required that for a mistake to be operative it must have been one of fact and not of law, but the House of Lords has changed its position recently and today a contract may also be void for a mistake of law. For identifying a mistake as one which is sufficiently serious or ‘fundamental’ to make a contract void, two aspects appear to be important: First, whether the mistaken party would have entered the contract on the same or different terms had the mistake been absent; and second, whether the other party knew or ought to have known of the mistake and its importance to the mistaken party.20 29 With regard to international sales contracts a mistake concerning the qualities of the subject matter of the contract or specific properties of the person of the contracting partner may affect the decision of one or both parties to enter into a contract. A party may also be subjected to a mistake concerning the legal framework surrounding the contract, especially in cases where the applicable law is foreign to the mistaken party.

2. Commentary According to Article 4 CISG the CISG is not concerned with questions relating to the validity of the contract, ‘except as otherwise expressly provided in the Convention’. As mentioned earlier, an express provision concerning a specific situation of mistake is found in Article 71 CISG, which allows a party to suspend the performance of its obligation if, after the conclusion of the contract, it becomes apparent that the other party will not perform a substantial part of its obligations as ‘a result of a serious deficiency in his ability to perform or in his creditworthiness’. In other situations of a mistake of fact or law affecting the intention to conclude a contract to which the CISG applies, the question under which conditions a party’s mistake could result in the avoidance of an international sales contract must be resolved in accordance with the applicable national law. 31 PICC Articles 3.2.1–3.2.4 provide rules on mistake as a ground for avoidance starting with a general definition of mistake, conditions that make a mistake a legally relevant one, and the reasons why a party may not avoid the contract in certain circumstances. Article 3.2.1 the PICC provide a general definition of ‘mistake’ by stating that the word means ‘an erroneous assumption relating to facts or to law existing when the contract was concluded’. This introductory article should make it clear that the consequences of a party’s mistake at the time of the conclusion of the contract are basically the same, irrespective of whether the mistake relates to the factual basis of the contractual agreement, or to the legal circumstances. Clarification is further provided for the qualification of errors occurring in the expression or transmission of a declaration as mistake and for the preference in favor of the remedies for non-performance as provided in PICC, Chapter 7, rather than allow an avoidance on the ground of mistake. 30

19 See Bridge, The Sale of Goods (3rd edn, 2014) para. 4.68, ‘common mistake’ should be preferred to ‘mutual mistake’, since only ‘according to older terminology, the parties’ shared mistake is “mutual’’. 20 See Spark, Vitiation of Contracts – International Contractual Principles and English Law (2013) 115– 135.

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As a mistake of a party concluding a contract must be serious to entail legal conse- 32 quences, such as avoidance of the contract, the general definition of mistake is followed by an article which draws the dividing line between serious mistakes resulting in legal consequences such as the avoidance or adaptation of the contract, and mistakes remaining without legal consequences. Therefore PICC, Article 3.2.2 defines the conditions necessary to classify a party’s mistake as a ‘relevant mistake’. By stating that a party may only avoid the contract for mistake if, when the contract was concluded, the mistake was of such importance that a reasonable person in the same situation as the party in error would only have concluded the contract on materially different terms or would not have concluded it at all if the true state of affairs had been known, the PICC resorted to a standard combining objective and subjective elements. It is also required that either the other party made the same mistake, or caused the mistake, or knew or ought to have known of the party’s mistake and it was contrary to ‘reasonable commercial standards of fair dealing’ to leave the mistaken party in error. However, if the mistaken party was grossly negligent in committing the mistake, or if the mistake relates to a matter in regard to which the risk of mistake was assumed or, having regard to the circumstances, should be borne by the mistaken party, no defense of avoidance of the contract may be set up. Another condition is that the other party had not at the time of avoidance reasonably acted in reliance on the contract. Article 4.103 PECL, on mistake provides basically the same definition (‘fundamental 33 mistake as to fact or law’) as the PICC with slightly different words.21 Thus, a party may avoid a contract for mistake of fact or law existing at the time when the contract was concluded if either the mistake was caused by information given by the other party; or the other party knew or ought to have known of the mistake and it was contrary to good faith and fair dealing to leave the mistaken party in error; or if the other party made the same mistake, and the other party knew or ought to have known that the mistaken party, had it known the truth, would not have entered the contract or would have done so only on fundamentally different terms. From these formulations it clearly follows that a mistake must be very serious to allow a party to escape from contractual obligations it entered because of a mistake as to the content or nature of the subject matter or properties of the other party. Likewise the second paragraph of Article 4.103 resembles the respective provisions in the PICC, stating that the mistaken party would not be entitled to declare the contract avoided, if its mistake was inexcusable in the circumstances,22 or if the risk of the mistake was assumed by, or in the circumstances should be borne by that party. Article 48 CESL provides that a party may avoid a contract for mistake of fact 34 or law existing when the contract was concluded, if the party, had it been aware of the mistake, would not have concluded the contract or would have done so only on fundamentally different terms and the other party knew or could be expected to have known of the mistake. It is further necessary that the other party either caused the mistake, or caused the contract to be concluded in mistake by failing to comply with its pre-contractual information duties, or knew or could be expected to have known of the mistake and caused the contract to be concluded in mistake by not pointing out the relevant information, provided that good faith and fair dealing would have required a party aware of the mistake to point it out. Although the CESL did not became hard law, the rules seem to express a modern understanding of defects in consent, in the 21 Lohsse, Art. 4:103 – Fundamental Mistake as to Facts or Law, in: Jansen & Zimmermann (eds), Commentaries on European Contract Laws (2018) 657-73. 22 This formulation is even stronger but less accurate than the expression ‘gross negligence in committing the mistake’ in PICC, Article 3.2.2.

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light of the growing importance of pre-contractual duties.23 The CESL rules describe in more detail the state of affairs of defects in consent and could be helpful in framing a case. In addition they contain some elements of Common Law that could make them understandable for Common Law lawyers in international contexts.24 35 The German BGB makes a fundamental distinction between a mistake of motive and a mistake concerning the content and substance of the contract and acknowledges only the latter as having the effect of making the contract voidable.25 A second differentiation is made between a serious mistake which affects the validity of the agreement and a less significant mistake for which the consequences must be borne by the mistaken party. According to § 119 BGB, a party’s mistake cannot result in nullity by operation of the law. If a party to a contract was mistaken about the content of a declaration it made or had no intention whatsoever of making a declaration with this content and if it may be assumed that the party would not have made the declaration with knowledge of the true facts, the mistaken party may ‘avoid its declaration of intent’. Under § 120 BGB, a declaration of intent that has been incorrectly transmitted by the person or facilities used for its transmission may be avoided subject to the same condition as provided by § 119 BGB for a mistake relating to the content of a declaration of intent. 36 BGB § 121 states that avoidance must be effected in the cases set out in §§ 119 and 120 BGB, without undue delay (German: unverzüglich) after the person entitled to declare the contract void obtained knowledge of the ground for avoidance, but in any case avoidance is excluded after ten years from the time the declaration of intent was made. 26 37 After the reform of 2016, the French Civil Code provides a detailed set of rules with respect to mistake.27 Mistake, fraud and duress are grounds of nullity of contract only where they are of such a nature that, without them, one of the parties would not have contracted or would have contracted on substantially different terms. The determination of a material mistake (goes to the basis of contract) is assessed in the light of the person and of the circumstances in which consent was given. In the French legal tradition, mistake may affect the law or factual circumstances. According to Article 1132, it is a ground of nullity as long as it is not inexcusable and where it bears on the essential qualities of the act of performance owed by one of the parties. In this framework, the essential qualities of the act of performance are those which have been expressly or impliedly agreed upon and which the parties took into consideration at the time of contracting (Article 1133). The latter rule does not apply where the party has accepted the risk of the level of quality of the act of performance. Nullity may be invoked only where the contract was entered into on the basis of considerations personal to a party (Article 1134). Under Article 1135, mistake about a motive is not a ground of nullity 23 Patti, ‘Fraud’ and ‘Misleading Commercial Practices’: Modernising the Law of Defects in Consent, 12 European Review of Contract Law (2016) 307, 323-28. 24 With respect to the relationships with German and English Law, see Cartwright & Schmidt-Kessel, Defects in Consent: Mistake, Fraud, Threats, Unfair Exploitation, in: Dannemann & Vogenauer (eds), The Common European Sales Law in Context: Interactions with English and German Law (2013) 373-400. 25 This distinction is a characteristic of the codified contract laws of the legal systems of the ‘German legal family’ including the Civil Codes of Austria (1811), Germany (1900) and Switzerland (1911) cf Zweigert & Kötz, Einführung in die Rechtsvergleichung (3rd edn. 1996) as translated by Weir, § 5. Cf Austrian General Civil Code, §§ 871, 901; BGB § 119; Swiss Law of Obligations, Article 24(2). 26 According to BGB § 122 the mistaken party declaring avoidance of its declaration may be required to pay damages to the other party or a third person for losses caused by the avoidance. However, such a duty to pay damages would not arise if the injured person knew or ought to have known the reason for the voiding of the contract. 27 See generally Aubert de Vincelles, Validity of Contract: Dol, Erreur and Obligation d'Information, in: Cartwright & Whittaker (eds), The Code Napoléon Rewritten – French Contract Law after the 2016 Reforms (2017) 79, 92-98.

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unless the parties have expressly made it a decisive element of their consent. Also, a mistake as to value is not a ground of nullity where the contracting party made an inaccurate valuation (Article 1136). An action based on mistake has to be brought within a period of five years from the time the mistake was discovered.28 The Spanish Civil Code includes only rather vague provisions for ‘mistake’ in its Article 1266. According to Article 1266 Spanish Civil Code, it is requested for a party’s ‘error’ to invalidate its consent that the mistake must concern the substance of the thing, which constituted the subject matter of the contract or relates to the principal reason for a party to enter the contract. It is further provided in the same article that a mistake relating to the person of the contracting party shall only invalidate the contract where having that person as contracting party was the principal reason for the mistaken party to conclude the contract, and that a simple error in a party’s calculation cannot qualify as a ‘mistake’ resulting in the avoidance of the contract, but shall give rise only to its correction. Because of the close relationship of the French Civil Code and Spanish Civil Code, no significant differences appear to exist between them with regard to the definition and effects of mistake, as applied by the courts. The English Common Law acknowledges the concept of mistake as a ground to nullify the parties’ consent and to void a contract.29 The meaning of mistake is somewhat different from what is provided in the Civil Law in that its field of application is narrower. This may be explained by the traditional focus on ‘common mistakes’ and by the fact that cases applying the rules of mistake in laws in the Civil Law are associated in English law with the doctrine of misrepresentation.30 Another difference between English Common Law and the Civil Law (German, French and Spanish) has been eliminated. Previously, the Common Law distinguished between mistakes of law and mistakes of fact and holds that only mistakes of facts could be grounds for voiding a contract. In Kleinwort Benson Ltd v Lincoln City Council31, and more recently, in the 2005 case of Brennan v Bolt Burdon32 the courts rejected this traditional distinction and abandoned the rule that a mistake would not give rise to a cause of action if it was a mistake of law. The question, whether a mistake may have the effect to make a contract void, depends on the kind of mistake. First of all, the distinction between a common or shared mistake and a unilateral mistake is important. With regard to both types of mistake, the mistake must be ‘fundamental’ as to a party’s expected performance. With regard to the question whether a common mistake makes a contract voidable, English courts distinguish between mistakes concerning the existence of the subject matter, mistakes concerning the identity of the subject matter, mistakes as to the possibility of performing the contract, mistakes as to the quality, mistakes as to the quantity, and mistakes of law. 33 Not all kinds of these types of common or mutual mistakes make a contract avoidable contract. With regard to common mistake, the English Court of Appeal provided a list of elements34 that allow a common mistake to void a contract: ‘(i) there must be a common 28 It should be noted that, according to Article 1185, the defense of nullity is not subject to prescription if it relates to a contract which a party has not received any performance. 29 Peel (n 12) paras 8-001–8-083. 30 Spark (n 20) 93-114. 31 [1999] 2 AC 349. 32 Brennan v Bolt Burdon and others [2005] QB 303; see also, Deutsche Morgan Grenfell Group PLC v Inland Revenue Commission [2006] UKHL 49. 33 Cf Peel (n 12) paras 8-008–8-026. 34 The Great Peace Shipping Ltd v Tsavliris Salvage (Int’l) Ltd [2003] QB 679 n 76. Cf Peel (n 12) para. 8-007.

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38

39

40

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42

43

44

45

46

assumption as to the existence of a state of affairs, (ii) there must be no warranty by either party that that state of affairs exists, (iii) the non-existence of the state of affairs must not be attributable to the fault of either party, (iv) the non-existence of the state of affairs must render performance of the contract impossible, (v) the state of affairs may be the existence, or a vital attribute, of the consideration to be provided or circumstances which must subsist if performance of the contractual adventure is to be possible’. The later element is a general requirement that a mistake must relate to something ‘fundamental’ to the contract. In a unilateral mistake one of the two parties is mistaken as to a fundamental aspect of the contract and this is known, or ought to have been known, by the other party. The contract is enforceable if the non-mistaken party did not know and had no reason to know of the mistake. Unilateral mistakes relating to the person, to the subject matter, and to the terms of the contract are distinguishable.35 Only in exceptional cases, where a mistake is known to the other party or negligently induced, can a unilateral mistake make the contract void.36 According to s 62 of the Sale of Goods Act the rules of the Common Law relating to the effect of mistake apply to contracts for the sale of goods in so far as they are not inconsistent with the provisions of the Sale of Goods Act. Since the Act only slightly deals with the issue, the legal rules of mistake are found in the Common Law.37 The only relevant provision in the Sale of Goods Act is s 6 concerning a ‘common mistake’ in a contract for the sale of perishable goods. Restatement § 152 determines when a ‘common mistake’ would make a contract voidable, whereas § 153 provides for the voiding of a contract because of a unilateral mistake. § 154 enumerates circumstances to be used in determining if the risk of mistake had been allocated to one of the parties. § 376 provides that the party avoiding the contract on the ground of mistake is entitled to restitution for any benefit that it had conferred on the other party by way of part performance or reliance (same is provided for avoidance because of misrepresentation, duress or undue influence). § 152 deals with the issue of mutual mistake. It requires the mistake to be in existence at the time of contract formation, concern a ‘basic assumption’ on which the contract was made, and must have a material effect on the agreed exchange of performances. Whether the mistake has a material effect on the agreed exchange of performances is to be determined by taking account ‘of any relief by way of reformation, restitution, or otherwise’. § 153 deals with the case of unilateral mistake. Previously, a unilateral mistake could only de claimed in cases where the other party knew or ought to have known the mistake. However, some courts will allow avoidance if enforcement of the contract against the mistaken party would be oppressive or unconscionable and the other party would not be subjected to substantial hardship as result of the rescission. Like mutual mistake, the unilateral mistake must exist at the time when the contract was concluded, it must concern a basic assumption on which the contract was made, and it must have a material effect on the agreed exchange of performances that is averse to the mistaken party, provided there had been allocation of risk relating to the subject of the mistake. Other grounds for avoiding a contract due to unilateral mistake are cases were enforcement of the contract would be unconscionable or when the other party had reason to know of the mistake or caused the mistake by its fault. According to § 154 a party bears the risk of a mistake when the risk is allocated to that party by agreement, or that party is aware, at the time the contract was made, that it Id. paras 8-034–8-026. Id. paras 8-048–8-052. 37 Cf Bridge (n 19) para. 4.75: ‘common mistake has little part to play in the law of sale of goods’. 35 36

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has only limited knowledge with respect to the facts to which the mistake relates but treats its limited knowledge as sufficient, or the risk is allocated to that party by the court on the ground that it is reasonable in the circumstances to do so. Chinese Contract Law adopted the concept of ‘mistake’ together with other types of 47 ‘defects in consent’, such as fraud and duress.38 Generally, a contract may be adapted or rescinded, when the manifestation of intention by a party is vitiated. The CCC 2021 provides for particular grounds of revocation of juristic acts (contracts). The revocable contract has been formed and becomes effective, but due to the problems related to the declaration of intent, the contract becomes void when a party exercises his right to revoke the contract.39 Article 146 states that: “The civil juristic acts by persons of civil conduct and counterparties under false expression of intention are invalid.“ Article 147 holds a contract where there was a mistake of material facts is invalid: “For a civil juristic act that is performed based on a substantial misunderstanding, the actor has the right to request a people's court or an arbitral institution to revoke such act.,“ such as, the type, quality, specification and quantity of the subject matter. Article 148 states that a contract is voidable when a party’s real intention is “a result of fraud committed by another party. “Where a contract’s invalidity is a result of one party’s fault, the party at fault has to compensate for any damages. If the revocation is due to one party’s significant misconception in concluding the contract, the amount of the party’s compensation shall not be more than the benefit that the other party would have gained if the contract was valid.40 Article 152 of the CCC 2021 states that the right of revocation expires if the party 48 concerned has not exercised the right of revocation within 1 year from the date of knowing the grounds for revocation. Nevertheless, in case of misconception the right expires where the party has not exercised the right of revocation within 3 months from the discovery or the possible discovery of the ground for revocation.

III. Fraud (Deceit) 1. Introductory Note ‘Fraud’ or ‘deceit’ is another type of defect in consent. The Civil Law includes provi- 49 sions on fraud or deceit as a ground for the invalidation of a contract. These rules are stated in a systematic scheme along with ‘mistake.’ The accepted goal is that the party that has become victim of a fraudulent conduct of the other party shall not be bound by a contract it did not want and it shall eventually be entitled to claim damages. Rules on fraud may be found in all the codifications of Civil Law, in the very old Codes41 as well as the more recent codifications of later periods.42 In these rules, fraudulent conduct of a contracting party, which induces the other party to conclude a contract, is acknowledged as a ground for the avoidance of the contract. In the Common Law the focus is on ‘fraudulent misrepresentation’. This concept 50 points to a situation in which a person has been induced to conclude a contract by a misleading statement made by a person knowing or believing that the statement was not 38 Wang, Prospect of Validity in Chinese Contract Law, in: DiMatteo & Lei (eds), Chinese Contract Law: Civil and Common Law Perspectives (2017) p. 215, at 225-28. 39 Id. p. 225. 40 Wang (n 38) pp. 237-38. 41 French Civil Code, Article 1116; Austrian General Civil Code, § 870. 42 Spanish Civil Code Articles 1269, 1270; BGB § 123; Swiss Law of Obligations, Article 28; Italian Civil Code, Articles 1439, 1440.

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true, or recklessly not caring whether it was true or false.43 The effect of such fraudulent misrepresentation is that the contract is voidable and the misled party may, in addition to a claim for damages, rescind the contract. 51 With the exception of CISG, the international contract rules, such as the PICC, PECL and CESL, provide for a rescission of the contract in cases of deceit or fraud. All three instruments agree – with only marginal variations – on a definition of fraud, which focuses on a party being induced to enter into a contract by the other party’s fraudulent representation44.

2. Commentary PICC Article 3.2.5 provides the basic rule on fraud. According to this article a party may avoid the contract when it has been led to conclude the contract by the other party’s fraudulent representation, including deceptive use of language or practices and fraudulent non-disclosure of circumstances, which, according to reasonable commercial standards of fair dealing, the latter party should have disclosed. It would be contrary to good faith in international commercial contracts if a party’s right to avoid a contract because of the other party’s fraudulent conduct could be excluded or modified by contract. The party’s right to waive its right of avoidance once it is free from fraudulent influence is not affected. 53 PECL Article 4:107 defines fraud much like the definition found in the PICC. PECL provides in the second paragraph of Article 4:107 that a party’s intention to deceive the other party is required to make its representation or non-disclosure a fraudulent one. Since in many cases of fraud the mere withholding of information, which is only available to the dishonest party could induce the other party to consent to an offer and conclude a disadvantageous contract, some guidance is given for qualifying silence as fraudulent conduct. The third paragraph states that in determining whether good faith and fair dealing requires a party to disclose particular information, regard should be had to all the circumstances, including whether the party had special expertise, the cost to it of acquiring the relevant information, whether the other party could reasonably acquire the information for itself, and the apparent importance of the information to the other party. According to PECL, Article 4:118, remedies for fraud cannot be excluded or restricted. 54 In the first paragraph of CESL Article 49 the definition of fraud follows the pattern provided by PICC and PECL. Thus, a party may avoid a contract if the other party has induced the conclusion of the contract by fraudulent misrepresentation, whether by words, conduct, fraudulent non-disclosure, or by any pre-contractual information duties required under other provisions of CESL. The second paragraph determines when a misrepresentation qualifies as fraudulent and the third paragraph of CESL Article 49 enumerates the relevant ‘circumstances’ for determining whether good faith and fair dealing required the party to disclose particular information which is available to that party only. By referring to ‘misrepresentation’ instead of ‘presentation’, the general provision on ‘fraud’ in CESL Article 49 corresponds favorably with English legal terminology. A misrepresentation must be made with knowledge or belief that the representation is false, or recklessly as to whether it is true or false, whereas non-disclosure must be intended to induce the person from whom the information is withheld to make a mistake in entering the contract. 52

43 44

900

See Derry v Peek [1889] 14 App Cas 337. See Lohsse, Art. 4:107 – Fraud, in: Jansen & Zimmermann (n 21) 689-94.

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A crucial question concerns a party’s duty do disclose and whether silence of the first party constitutes fraud in light of good faith and fair dealing.45 CESL Article 49 refers to all the circumstances and provides an enumeration of factors to be considered in determining if there was a duty to disclose.46 That the remedies for fraud cannot be directly or indirectly excluded or restricted by contract follows from CESL Article 56. Under BGB § 123, a person who has been induced to make a declaration of intent by deceit may avoid this declaration. If a third party committed the deceit a declaration that had to be made to another may be avoided only if the latter knew or ought to have known of the deceit. BGB § 124 provides that a claim of deceit must be brought within a period of one year. This period starts to run at the time when the person discovers the deceit. The avoidance is barred, however, if ten years have passed since the declaration of intent (contract formation) was made. The 2016 French Civil Code contains a comprehensive set of rules on fraud. Article 1137 defines ‘Fraud’ as an act of a party in obtaining the consent of the other by scheming or lies. A significant novelty is that an intentional concealment (fraud) by one of the parties of information, where the latter knows its decisive character for the other party, is also expressly considered fraud. The solution follows the path of European model rules and creates a connection between duties to inform and defects in consent, 47 which in other Romanistic legal systems is not evident.48 Moreover, the French Civil Code makes clear that fraud can also originate from the other party’s representative, such as an employee or one standing surety for him (Article 1138). According to the same provision relative nullity of the contract may also originate from a third party in collusion with a party to a contract. Finally, Article 1139 states that a mistake induced by fraud is always excusable (see also Article 1132). For example, a wrong appraisal amounts to a ground of nullity even if it bears on the value of the act of performance. Nevertheless, in order to have the contract declared void, the party has to prove, that without the fraud, he would not have contracted or would have contracted on substantially different terms. According to the general rule encompassed in Article 2224, an action based on fraud has to be brought within a period of five years from the time the fraud is discovered.49 According to Article 1269 of the Spanish Civil Code, a case of deceit or fraudulent misrepresentation is when one party induces the other with insidious words or machinations (maquinaciones) to enter into a contract that the other party would not have concluded but for the fraudulent inducement. Article 1270 provides that for fraudulent misrepresentation to render a contract null and void, the fraud must be ‘serious’ in nature and that an incidental deception shall give rise only to a right to claim damages. Article 1301 limits the period to claim an avoidance of the contract due to misrepresentation to four years from the date of contract.

45 Beale & Howells, Pre-contractual Information Duties in the Optional Instrument, in: Schulze & Stuyck (eds), Towards a European Contract Law (2011) 49-53. 46 Viz. (a) whether the party had special expertise; (b) the cost to the party of acquiring the relevant information; (c) the ease with which the other party could have acquired the information by other means; (d) the nature of the information; (e) the apparent importance of the information to the other party; and (f) in contracts between traders good commercial practice in the situation concerned. 47 Aubert de Vincelles (n 27) 99–107. 48 See, for example, Italian Civil Code Article 1439. 49 As for mistake, it should be noted that, according to Article 1185, the defense of nullity is not subject to prescription if it relates to a contract which has not received any performance.

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English Common Law allows a victim of material misrepresentation or fraud to claim damages or to obtain a rescission of the contract, or both.50 Therefore, there are two types of misrepresentation (fraudulent or material) recognized as a basis for rescinding a contract. The misrepresentation need not be intentional, but it must be material; it need not be fraudulent. Alternatively stated, a claim for fraud has to be based on a material misrepresentation; but absent fraudulent intent, a material representation is by itself a ground for rescission of the contract. In the context of inducement to enter into a contract by deceit it is the misrepresentation and not the motive, which is of primary interest. ‘Fraudulent misrepresentation’ points at a situation in which a person has been induced to conclude a contract by a misleading statement made by a person knowing or believing that the statement was not true, or recklessly not caring whether it is true or false.51 The effect of such fraudulent misrepresentation is that the contract is voidable and the misled party may bring suit for damages. There is no provision on deceit in the Sale of Goods Act.52 60 The American Restatement § 162 lists the requirements for ‘fraudulent’ or ‘material’ misrepresentation: a misrepresentation is ‘fraudulent if the maker intends his assertion to induce a party to manifest his assent and the maker knows or believes that the assertion is not in accord with the facts, or does not have the confidence that he states or implies in the truth of the assertion, or knows that he does not have the basis that he states or implies for the assertion’. A misrepresentation is ‘material’ if it would be likely to induce a reasonable person to manifest his assent, or if the maker knows that it would be likely to induce the recipient to do so. According to § 164 a party may avoid a contract if its manifestation of assent was induced by either a fraudulent or a material misrepresentation upon which he was justified in relying upon.53 The deceived party may either choose to remain bound and keep what it has received, and claim damages, or to avoid the contract and to claim restitution. 61 Much like the UK Sale of Goods Act, the UCC does not contain provisions relating to defects in consent with one exception: There is one provision on remedies for fraud in the revised UCC § 2-72154 stating that ‘remedies for material misrepresentation or fraud include all remedies available under this Article for non-fraudulent breach. Neither rescission or a claim for rescission of the contract for sale nor rejection or return of the goods shall bar or be deemed inconsistent with a claim for damages or other remedy’ 62 Under Articles 148 and 149 of the CCC 2021, a party who enters into a contract based on fraud committed by the other party or a third party, “has the right to request a people's court or an arbitral institution to revoke such act”. 59

50 On the complex notion of misrepresentation and its legal consequences (damages, rescission), cf. Peel (n 12) paras 9-001 et seq. 51 See Derry v Peek [1889] 14 App Cas 337; cf Peel (n 12) para. 9-030. 52 Cf Bridge (n 19) para. 8.03. 53 If the manifestation of assent is induced by a fraudulent or a material misrepresentation by a third person, the contract is, according to § 164, voidable by the recipient, unless the other party in good faith and without reason to know of the misrepresentation gives value or relies materially on the transaction. 54 It should be noted that Revised Article 2 has been thoroughly rejected by the states, so the original Article 2 remains the law. However, revised § 2-721 clarifies an ambiguity in the original Article 2; the courts could use it as a non-mandatory source of law.

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IV. Threats or Duress and Undue Influence 1. Introductory Note The defense of threats (psychological duress) is available when a party creates a 63 reasonable fear in the other party that it would suffer serious negative consequences if that party should decide to abstain from entering the contract. A party, thus induced to make a declaration of consent by threats is not free in its decision to conclude a contract. If such fear has been generated by the other party’s unjustified coercion the intimidated party has a right to avoid the contract. Rules on this type of defective consent are provided in all Civil Law systems and are commonly associated with the rules on fraud.55 The principle of the threat in the Civil Law is comparable to the concepts of duress and undue influence found in the Common Law. All these principles allow the aggrieved party to void the contract.

2. Commentary The provisions on contracts concluded under threat and the legal consequences of the 64 defect in consent, such as in PICC Article 3.2.6, PECL Article 4:108 and CESL Article 50, are closely related.56 The principle that the duress or threat left the aggrieved with no ‘reasonable alternative’ but to enter the contract is not found in CESL Article 50. Article 50 states that a party may avoid a contract ‘if the other party has induced the conclusion of the contract by the threat of wrongful, imminent and serious harm, or of a wrongful act’. The PICC Article 3.2.6 requires that under the circumstances the threat must be ‘so imminent and serious as to leave the first party no reasonable alternative’. Accordingly, PECL Article 4:108 provides that a party may avoid a contract when he has been led to conclude a contract by the other party’s imminent and serious threat of an act, which is wrongful in itself. With Articles 1267 and 1268 the Spanish Civil Code recognizes duress and intimidation and their legal consequences in a very similar way as the traditional French model and allows for annulment of the contract where there is a forced consent. The party’s right to avoid the contract or to set up a defense for non-performance will be denied if the intimidated party had a ‘reasonable alternative’ (PICC Article 3.2.6). There is a great deal of commonality across French, German, and Spanish law in their 65 rules of defective consent based on threat or duress. What is different is the limitation periods allowed for bringing a claim of duress or threat and the time of commencement of the time period. According to BGB §§ 123 and 124, a person claiming duress must declare the contract avoided within a period of one year from the time when the duress stops and an overall period of ten years from the time when the declaration of intent was made. French Civil Code Article 2224 provides for a maximum period of five years to bring a claim of violence. The BGB recognizes the claims or defenses of deceit and duress in a single section. 66 According to BGB § 123, a party may raise a defense against a claim for non-performance by asserting the contract is void, because it had been induced by unjustified duress. The French Civil Code partially amended the former rules on duress.57 According to the new definition in Article 1140, there is duress where one party contracts under the influence of a constraint which makes him fear that his person or his wealth, or 55 French Civil Code Articles 1140–43; BGB § 123; Spanish Civil Code Articles 1267, 1268; cf Austrian General Civil Code § 870; Swiss Law of Obligations Articles 29, 30; Italian Civil Code Articles 1435, 1436. 56 See also Lohsse, Art. 4:108 – Threats, in: Jansen & Zimmermann (n 21) pp. 695–700. 57 See Kennefick, Violence in the Napoleonic Code: the Surprising Survival of Third Parties, in: Cartwright & Whittaker (n 28) 109–127.

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those of his near relatives, might be exposed to considerable harm. Article 1141 clarifies that a threat of legal action does not amount to duress, except where the legal process is deflected from its proper purpose or where it is invoked or exercised in order to obtain a manifestly excessive advantage. Finally, it should be noted that duress is a ground of nullity regardless of whether it has been applied by the other party or by a third party (Article 1142). The provisions of the Spanish Civil Code follow the French model of the old Civil Code. According to Article 1267, duress (violencia) means an irresistible force by which a person is coerced to consent, whereas in the case of ‘intimidation’, a party has a rational fear of suffering an imminent and serious harm to his person or property, or to the person or property of his spouse or family. Relevant criteria in determining the existence of intimidation are the age and condition of the affected person. According to Article 1268, duress and intimidation stemming for a third party is sufficient to annul the contract. In English Law, duress is usually a threat directed by a contracting party at the other party, leading to the conclusion of a contract. The traditional distinction between ‘duress of the person’ and ‘duress of goods’ has lost its importance since it is accepted in modern English case law that the latter form of duress may be sufficient to justify the rescission of a contract by the aggrieved party. Likewise, it is generally acknowledged, that ‘economic pressure’, such as the threat by one party to break a contract unless the other party agrees to its modification, constitutes duress and may be grounds for avoidance.58 Older Common Law only recognized physical duress, but modern law has expanded the concept to include economic duress.59 ‘Undue influence’ is a concept that was developed by the courts of equity to provide relief in cases when a party was unduly ‘persuaded’ to enter into a contract. Cases of undue influence involve contract between parties that have a confidential or familial relationship. Alternatively stated, most cases of undue influence involve relationships of trust, such as parent and child, solicitor and client, religious adviser and disciple (but not husband-wife).60 The contract is not an arm’s length transaction, meaning the weaker party is vulnerable to the persuasion of the other party. The key element in duress is coercion, while the key element in undue influence is improper persuasion. In the latter case, one party is vulnerable to the persuasion of the other party. Thus, the rules on duress and undue influence serve similar functions in that they aim to protect vulnerable parties. In the Civil Law there is no independent principle of undue influence, instead, such cases are treated as cases of duress. The Restatement states that the threats that may lead to avoidance of the contract must be ‘improper’. Accordingly, § 176 lists factors to be used in determining if a threat is improper: (a) what is threatened is a crime or a tort, or the threat itself would be a crime or a tort if it resulted in obtaining property, (b) what is threatened is a criminal prosecution, (c) what is threatened is the use of civil process and the threat is made in bad faith, or (d) the threat is a breach of the duty of good faith and fair dealing. A threat is also improper if the resulting exchange is not on fair terms, and (a) the threatened act would harm the recipient and would not significantly benefit the party making the threat or (b) what is threatened is otherwise a use of power for illegitimate ends. Chapter 7 of the Restatement provides rules relating to duress and undue influence. With regard to duress, it makes a distinction between two situations: physical compul58 See Dimskal Shipping Co SA v International Transport Workers Federation (‘The Evia Luck’), [1992] 2 AC 152. 59 Cf Peel (n 13) paras 10-002–10-011. 60 Cf Bank of Credit & Commerce International SA v Aboody [1990] 1 QB 923; Barclays Bank Plc v O’Brien [1994] 1 AC 180.

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sion to induce a person to assent (§ 174) and duress by an improper threat (including threats that are economic in nature), which, according to § 175, makes the contract voidable. Also, the threat need not come from the other contracting party. If the threatened party’s manifestation of assent is induced by one who is not a party to the transaction, the contract is, according to § 175(2), voidable by the victim ‘unless the other party to the transaction acts in good faith and without reason to know of the duress and either gives value or relies materially on the transaction. Restatement § 177 defines ‘undue influence’ as unfair persuasion of a party who is under the domination of the person exercising the persuasion or who by virtue of the relation between them is justified in assuming that the party will not act in a manner inconsistent with his welfare or interests. If a party’s manifestation of assent is induced by undue influence by the other party, the contract is voidable. Article 150 of the CCC 2021 uses the term ‘coercion’ in place of duress or threat. 71 Coercion produces a ‘declaration of intent that conflicts with a party’s true intent caused by a threat to inflict harm to the life, health, honor, reputation or property of that party or to his relatives or friends, or to other third parties’.61 According to Article 150, if a party or third party through the means of coercion, have caused the other party to carry out the civil juristic acts in violation of their true meaning, the persons under coercion have the right to request a people's court or to an arbitration tribunal to revoke the contract. The claim for revocation for coercion must be brought within a year from the date of the termination of the coercion (Article 152).

V. Unfair Exploitation 1. Introductory Note In addition to mistake, fraud and threats, a fourth category of ‘defects in consent’ 72 relates to the exploitation of one party by the other party. This category is referred to by a number of names. PICC Article 3.2.7 refers to it as ‘gross disparity’, under PECL Article 4.109 it is called ‘excessive benefit or unfair advantage’, and CESL Article 51 utilizes the phrase of ‘unfair exploitation’.62 The basic concept of unfair exploitation focuses on contracts that appear to have gross disparities in the values of the exchanged performances. In some Civil Law systems such cases are not dealt with as defects in consent, but as violations of good morals because of usurious conduct.63 Thus, it is acknowledged in the BGB that a party who is in a situation of reduced bargaining capacity, at the time of the conclusion of the contract, may avoid the contract. A distinction is drawn between duress and the exploitation of a necessitous situation. There is no such clear distinction in English and American contract law, but in certain instances ‘undue influence’ may serve the same functional goal. In order to set up the defense of ‘unfair exploitation’, the party must show that the 73 other party has taken unfair advantage of the first party’s calamities, such as dependence, economic distress or urgent needs, or of its improvidence, ignorance, inexperience or lack of bargaining skill, and the other party knew or could be expected to have known of these vulnerabilities.

61 Wang (n 38) p. 220. Cf also Jiang, Enlarged State Power to Declare Nullity: The Hidden State Interest in the Chinese Contract Law, 7 Journal of Civil Law Studies (2014) 147, 180-83. 62 Se generally Lohsse, Art. 4:109 – Excessive Benefit or Unfair Advantage, in: Jansen & Zimmermann (n 21) 689-94. 63 Cf BGB § 138; Austrian General Civil Code § 879(2) 4.

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2. Commentary 74

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Whereas contracts between businessmen and consumers have received the attention of legislators and given rise, especially within the EU, to numerous statutes aimed at protecting consumers against bargaining power imbalances that favor the business entity, American Common Law and UCC § 2-302 recognize the ‘doctrine of unconscionability’, which is used to protect consumers from overly one-sided contracts that are products of the superior bargaining power or informational asymmetries that favor the business entity. In the Civil Law, some countries have specific provision dealing with unfair exploitation (Germany and France, the latter after the reform of 2016). 64 The theories or rationales behind the different principles or rules vary depending on the applicable law. However, this is not the case in international instruments since the terms ‘gross disparity’ (PICC Article 3.2.7), ‘excessive benefit or unfair advantage’ (PECL Article 4.109), and ‘unfair exploitation’ (CESL Article 51) all are based upon the idea of the unenforceability of grossly unfair and exploitative contracts.65 PICC Article 3.2.7 allows a party to avoid a contract or a contract term if, at the time of the conclusion of the contract, the contract or a contract term unjustifiably gave the other party an excessive advantage that was a product of exploitation. Alternatively, a contract may be adapted upon request of the party entitled to avoidance and thus, a solution in accord with reasonable commercial standards of fair dealing is realised. As long as the aggrieved party has not reasonably acted in reliance on the validity of the contract, a court may also adapt the contract or term upon the request of the party receiving notice of avoidance. Under PECL Article 4:109, a contract may be avoided when: (1) a party, at the time of the conclusion of the contract, was either in a situation of dependence or trust relative to the other party, or was under serious economic pressure (distress, urgent needs, improvidence, ignorance, inexperience, poor bargaining skills), (2) this weakness was unfairly exploited by the other party, (3) resulting in that other party receiving an ‘excessive benefit or unfair advantage’. A court may either avoid (rescind) the contract or adapt the contract upon request of the aggrieved party. The CESL rule on ‘unfair exploitation’ is found in Article 51. It requires the same three elements listed in PECL Article 4:109. In German contract law, the abuse of a contracting party’s necessitous situation is not acknowledged as a form of defect in consent but constitutes a legal transaction violating ‘public policy’ because of its usurious nature. BGB § 138 provides that a legal transaction is void when one party exploits the predicament, inexperience, lack of sound judgment or considerable weakness of will of the other party, to gain pecuniary advantages which are clearly disproportionate to the performance rendered (grossly unfair contracts). Article 1143 of the French Civil Code states that there is also duress where one contracting party exploits the other’s state of dependence and obtains an undertaking to which the latter would not have agreed in the absence of such constraint, and gains from it a manifestly excessive advantage. In the past, French courts referred to the doctrine of cause (causa) found in former Articles 1131 et seq. to void contracts, if the cause, on which an obligation is based, would be contrary to public morals or public policy. In the past, French Courts have also interpreted ‘violence’ in a generous way to cover cases involving the exploitation of an economically weak party. English law deals with ‘unfair exploitation’ through two legal concepts. First, exploitive contracts are presumed to be a product of undue influence if the two parties 64 65

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See also Italian Civil Code Article 1448. Lohsse (n 62).

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were in a relationship of trust. Second, contracts that were the product of the exploitation of a party’s particular weaknesses can be voided (rescission) or adapted (reformation) by the equitable relief of setting aside or modifying a transaction which qualifies as an ‘unconscionable bargain’.66 Restatement § 208 regulates ‘unconscionable contract or term’ and accepts that a court may refuse to enforce the contract, or may enforce the remainder of the contract without the unconscionable term, or may so limit the application of any unconscionable term as to avoid any unconscionable result. Under the UCC, the principle of unconscionability applies to commercial and consumer contracts. In practice, courts only rarely provide relief due to unconscionability in commercial contracts. The CCC 2021 provides for a new ground of revocation, similar to cases of ‘unfair 79 exploitation’. According to Article 151, the injured party has the right to request a people's court or the arbitration tribunal to revoke the contract, if the other party uses the state of danger or lack of judgment of the other party resulting in the unfairness in the formation of the contract.

VI. Failure to Co-operate and Breach of the Duty of Good Faith 1. Introductory Note The Civil Law systems include provisions, which impose a general duty to perform 80 contracts in good faith. In some Civil Law systems the respective rules, irrespective of their appearance as a general clause, have had a strong effect on the evolution of contract law, as in the case of BGB § 242. It simply states that ‘an obligor has a duty to perform according to the requirements of good faith, taking customary practice into consideration’. This provision has been used broadly in the regulation of contracts – in the interpretation and enforcement of contracts and in the interpretation of other provisions of the BGB. Other references to the duty to perform a contract in good faith are found in the French and Spanish Codes, but do not have the same far-reaching effects. However, a duty to co-operate has been derived from the general duty of good faith in these legal systems. English law67 has rejected a general duty (implied-in-law) of good faith in contract 81 law, but recently an English court (Yam Seng Pte Limited v International Trade Corporation Limited [2013] EWHC 111) has decided that a duty of good faith may be impliedin-fact based upon the particular circumstances of a case. A general duty of good faith in the performance and enforcement of contracts is found in Restatement § 205 and UCC § 1-203 (§ 1-304 in Revised Article 1) includes a general provision on the ‘obligation of good faith’ stating that every contract and duty within the UCC imposes an obligation of good faith in its performance and enforcement. § 2-103 provides a definition of good faith: ‘Good faith in the case of a merchant means honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade.’ There are other references to good faith in Article 2 (sale of goods) attached to more specific rules. For example, § 2-305 (open price term) states that the ‘price to be fixed by the seller or by the buyer means a price for him to fix in good faith’; § 2-306 (output, requirements, and exclusive dealings contracts) states that the ‘term which measures the quantity by the output of the Cf Peel (n 12) para. 10-042. See also, MacQueen, ‘Good Faith in the Scots Law of Contract: An Undisclosed Principle?’ in Forte (ed), Good Faith in Contract and Property Law (Hart Publishing 1999) pp. 5-37; Goode, ‘The Concept of “Good Faith” in English Law’ in Centro di studi e ricerche di diritto comparato e straniero Saggi (Roma: Conferenze e Seminari 1992) p. 7. 66 67

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seller or the requirements of the buyer means such actual output or requirements as may occur in good faith’; 2-311 (options and cooperation respecting performance) states that ‘any such specification must be made in good faith and within limits set by commercial reasonableness’; and so forth. 82 In most domestic contract laws, it has been widely recognized that the parties have an obligation to deal with one another in an honest and fair way, and to co-operate in the performance of the contract. The need for such conduct is even greater in international transactions. This is recognized by all the international instruments, which emphasize a duty to co-operate in good faith and to act in accordance with reasonable standards of fair dealing. The PICC, PECL, and CESL all include more or less detailed provisions on the parties’ general duty to act in good faith (PICC Article 1.7, PECL Article 1:201; CESL Article 2) as well as their duty to co-operate (PECL Article 1:202; CESL Article 3). 68

2. Commentary Whereas in domestic systems of contract law the duty of the contracting parties to act in good faith and to co-operate is not generally acknowledged and may be derived, with different effect on the judicial practice, from general provisions such as BGB § 242 or Article 1104 of the French Code Civil, the international instruments – PICC, PECL and CESL – are using very similar formulations when they expressly acknowledge the mandatory duty to observe good faith and to co-operate. 84 In the Common Law systems, as noted above, there a split between the UK’s rejection of a general duty of good faith and American law’s embrace of such a duty. English courts remain hesitant to accept a general duty of good faith and the Sale of Goods Act 1979 abstains from any mention of good faith. In contrast, a duty of good faith is implied in every contract under American law. 85 The CISG Article 7(1) states that: ‘In the interpretation of this convention regard is to be had to... the observance of good faith in international trade.’ A literal reading of this provision is that the principle of good faith only relates to the application of CISG rules and does not obligate contracting parties to act in good faith. However, the majority view (court and arbitral decisions) is that the parties due have an obligation of good faith under the CISG. Also, it can be argued that the duty of good faith can be implied from the specific provisions of the CISG that refer to a reasonableness standard, such as Article 32(2) (‘by means of transportation appropriate in the circumstances’); Article 34 (‘unreasonable inconvenience’ and ‘unreasonable expense’); Article 37 (same); Article 48 (‘unreasonable delay’ and ‘unreasonable inconvenience’); Article 60 (‘could reasonably be expected’); Article 77 (‘take such measures as are reasonable’); and Article 85 (‘must take such steps as are reasonable’). The German Supreme Court recognized the principle of good faith and fair dealing in applying the CISG, holding that in good faith the offeree should inquire about the offeror’s standard conditions and when neglecting such inquiry should be held liable.69 86 The PICC, PECL and CESL all recognize the principle of good faith and fair dealing. PICC Article 1.7 provides, that each party must act in accordance with good faith and fair dealing in international trade, and that the parties have no right to exclude or limit this duty. In addition, Article 5.1.3 states that each party shall co-operate with the other party when such co-operation may reasonably be expected for the performance of that party's obligations. The PECL expressly acknowledges the general principle concerning 83

68 See generally Schmidt, Art. 1:201 – Good Faith and Fair Dealing, in: Jansen & Zimmermann (n 21) pp. 101-56 and Id., Art. 1:202 – Duty to Co-operate, id. (n 22) pp. 157-65. 69 Cf BGH 31 October 2001, BGHZ 149, 113 (118).

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the parties’ duty to act in good faith and observe the rules of fair dealing in Article 1:201, whereas Article 1:202 imposes on the parties the duty to co-operate in order to give full effect to the contract. CESL Article 2 notes the mandatory nature of the principle of ‘good faith and fair dealing’. The breach of this duty ‘may preclude the party in breach from exercising or relying on a right, remedy or defense which that party would otherwise have, or may make the party liable for any loss caused to the other party’. Article 3 expressly provides that the parties have an obligation to co-operate with each in the performance of their contractual obligations. As noted above, BGB § 242’s duty of good faith has been used expansively by the Ger- 87 man courts to police improper conduct, as a gap-filling device, and to modify the effects of existing statutory provisions in order to adapt the traditional rules of contract to the changing needs of a post-industrial society. With regard to the conduct of the contracting parties, BGB § 242 has been utilized to impose on the parties a common duty to combine their efforts to secure the success of a contractual agreement (Mitwirkungspflicht). French Civil Code Article 1104 declares that contracts must be negotiated, formed, and performed in good faith. The French case law had previously recognized such a duty. extended to the formation and interpretation of the contracts. Therefore, the parties’ good faith obligations include the duty of mutual loyalty in concluding and performing the contract. Article 1258 of the Spanish Civil Code requires that the binding effect of a contract shall not be limited to what is expressly agreed but shall also be governed in accordance with good faith, custom, and the law. A good faith duty is also found in Article 57 of the Spanish Commercial Code. English law, as noted above, does not recognize a general duty of good faith and fair 88 dealing or to co-operate in the performance of contracts, nor is one found in the Sale of Goods Act. There are, however, specific rules for certain cases that require the parties to negotiate and treat each other in good faith. The Restatement relates the duty of good faith and fair dealing to considerations of fairness. The meaning for good faith in § 207 is nearly identical to the one found in the UCC (‘honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade’). In Chinese contract law good faith is considered an essential element.70 According to 89 a widely accepted understanding of the principle, it provides for a duty to respect the interests of the other party, attend to its affairs with the same care used for one’s own affairs, ensuring that each party to the legal relationship obtains its due share of benefit, and not to benefit oneself at the cost of the other. Article 7 of the CCC 2021 states that subjects engaging in civil activities “shall follow the principles of good faith, adhere to honesty and keep their commitments.” Article 5 states that: “All civil subjects engaging in civil activities shall observe the principle of fairness to determine reasonably the rights and obligations of all parties concerned. “

VII. Contributory Negligence 1. Introductory Note A breaching party may request a reduction in the damage amount due to the fault of 90 the non-breaching party by arguing that the injured party contributed to the amount of damages incurred or violated its duty to mitigate or limit its damages. Depending on the legal system, the defense may be one of ‘contributory negligence’ or breach of the duty to 70 McKendrick & Liu, Good Faith in Contract Performance in the Chinese and Common Laws, DiMatteo & Lei (n 38) p. 72.

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mitigate damages. Contributory negligence is more commonly found as a defense in the law of torts or delict. However, some legal systems also recognize it as a defense in contract law. BGB § 254 and § 846 provide rules on contributory negligence that are applicable to contractual as well as non-contractual liability; other domestic laws, such as French law, have left it to the courts to establish the rules of contributory negligence in a contractual context. CISG, PICC, PECL and CESL, all the international instruments include provisions on contributory negligence or the breach of the duty to mitigate a loss.

2. Commentary Domestic contract laws as well as the international documents acknowledge a defense that the non-breaching party by careless activity had contributed to its loss, or failed to perform its duty to mitigate damages. If successful, the defense results would be a proportionate reduction of the damages owed to the injured party. CISG Article 77 imposes on a party that is subject of a breach to mitigate its losses. To comply with that duty, a party must take measures that are reasonable in the circumstances to minimize its losses and if it fails in doing so, the party in breach may claim a reduction in damages in the amount by which the loss should have been mitigated. CISG Article 80 recognizes the principle of contributory fault and allows for a reduction and the possibility of the elimination of damages: ‘A party may not rely on a failure of the other party to perform, to the extent that such failure was caused by the first party’s act or omission.’ A general principle of contributory negligence can be derived from CISG Articles 77 and 80 that would allow for the apportionment of damages between the contracting parties. 92 PICC Article 7.4.7 refers to cases of contributory negligence by providing a proportional reduction in the amount of damages, if the loss from the breach of contract is due in part to an act or omission of the aggrieved party, or to another event for which that party bears the risk. PICC Article 7.4.8 provides that the party suffering loss from a breach of contract must accept a reduced compensation if it failed to comply with its duty to take reasonable steps to mitigate the loss. The mitigating party may recover any expenses reasonably incurred in attempting to reduce the harm. PECL Article 9:504 provides a general rule on contributory negligence and PECL Article 9:505 determines the consequences for a violation of the duty to mitigate. According to these provisions, the non-performing party is not liable for loss suffered by the aggrieved party to the extent that the aggrieved party contributed to the non-performance or failed to take reasonable steps to reduce its damages. CESL Articles 162 and 163 provide the same framework as the PECL (contributory negligence-breach of duty to mitigate) and, like the PICC and PECL allows the creditor to recover any expenses reasonably incurred in attempting to reduce the loss.71 93 The German BGB provides clear rules on contributory damages and its effects, as well as on the duty to mitigate. According to BGB § 254, a party suffering damages from the other party’s breach of contract has to accept a reduction of compensation or even the forfeiture of its claim for damages, if the claiming party contributed to the occurrence of the damages. The extent of compensation to be paid by the breaching party depends on the circumstances, in particular to the extent that one or the other party was the main cause of the damages. The breaching party is also entitled to a proportional reduction of damages if the damaged party failed to comply with its duty to mitigate the loss. 94 Express statutory provisions on contributory negligence or the duty to mitigate are absent in the French Civil Code Chapter on damages, even after the reform of 2016 (Ar91

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ticles 1231–1231-7). Instead, the French courts developed rules on how careless activity of the party suffering from a breach of contract would affect its claim for damages. The courts have established the general rule that the claim for damages will be reduced if a party suffering loss from a breach carelessly contributes to its own damages.72 The Spanish Civil Code also fails to expressly recognise contributory negligence in cases of contractual liability or a party’s duty to mitigate. Again, court practice accepts a proportional reduction of the liability in cases were the non-breaching party contributes to its own damages or abstains from taking reasonable measures to limit damages. In English Common Law, the defense of contributory negligence is found in tort law, 95 but not in contract law. However, the Contributory Negligence Act 1945 provides for a reduction of damages in proportion to the damaged person’s degree of responsibility. The Act does not apply to all kinds of contributory fault in cases involving breach of contract. It is only applies in cases where the breach of a contractual duty of care amounts to a tort. 73 English law does recognize a general duty to mitigate. Thus, the party claiming damages from the other party must take reasonable steps to keep the loss within limits and it must avoid any unreasonable conduct that would result in an increase of the loss. If that party fails to comply with this duty, the amount of recoverable damages is reduced. 74 Restatement § 350 provides that damages are not recoverable for a loss that the injured party could have avoided ‘without undue risk, burden, or humiliation’. The injured party is not precluded from recovery to the extent that it has made reasonable but unsuccessful efforts to avoid the loss. If a party fails to make reasonable efforts to minimize its loss, then the amount of recovery will be reduced accordingly.

VIII. Limitation Period 1. Introductory Note All legal systems provide rules on limitation or prescription periods in which claims 96 for breach of contract may be brought. However, they differ significantly with regard to the duration of the prescription periods, grounds for the extension of the period (suspension or postponement), or the effects of the expiration of the prescription period. A breaching party is generally allowed a defense that a claim is untimely due to the expiration of the statute of limitations (prescription period). With regard to international sales contracts the rules on the relevant period of time may be found either in the applicable domestic law, as determined by the rules of conflict of laws, or, if applicable, in the Convention on the Limitation Period in the International Sale of Goods. The PICC provides articles on ‘limitation’ and the PECL and CESL have provisions on ‘prescription’; they differ with regard to the duration of the general prescription period.

2. Commentary Common to all systems of law is the rule that a party to a contract may resort to the 97 defense that a claim for breach of contractual duties has become unenforceable because the statutory period of limitation has expired. The Convention on the Limitation Period in the International Sale of Goods was intended to be a harmonization instrument because of the various limitation periods across national and international laws. Unfortunately, as of October 1, 2015, only twenty-nine countries have ratified the original See Cour de cassation, Civ 1er, 31 January 1973, D. 1973, 149. Peel (n 12) paras 20-123–20-129. 74 Id. at paras 20-115–20-122. 72 73

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version and 22 states have ratified or acceded to the amended version. Numerous states such as Germany, France, Spain, and China are Contracting States of CISG, but have not adopted the Limitation Convention. In these states the domestic law, as determined by the rules on conflict of laws75 apply. If a claim for performance of contractual duties is brought against a party to a contract at a time when the statutorily fixed period of limitation has already expired, the defendant party may resort to the objection that the claim is time barred. If, however the party would for whatever reason perform after the expiry of the limitation period, it has no right of restitution. The CISG does not provide a limitation period mainly because of the existence of the Convention on the Limitation Period in the International Sale of Goods. This Convention had been prepared by UNCITRAL and adopted for ratification in 1974, prior to the adoption of the CISG in 1980. In order to comply with the CISG, the original version of the Limitation Convention was amended in 1980. According to Article 8 of the amended version, the general limitation period is fixed at four years. Articles 9-12 provide rules for determining the commencement date of the limitation period. Commencement dates may vary. Article 10.2 of the principles provides a general limitation period of three years ‘beginning on the day after the day the obligee knows or ought to know the facts as a result of which the obligee’s right can be exercised.’ Article 23 sets an outer limit or maximum limitation period of ten years. Modification of the limitation period by the parties is restricted. According to Article 25, the expiration of the limitation period shall be taken into consideration in any legal proceeding only if invoked by a party to such proceeding. Article 10.3 allows the parties to modify the limitation period, but the parties may not shorten the general limitation period to less than one year and the maximum limitation period to less than four years; they may not extend the maximum limitation beyond fifteen years. It is further provided in Article 10.4 that, where the obligor acknowledges the right of the obligee before the general limitation period expires, that period starts to run anew on the day after acknowledgement. Article 10.5 enlists a number of grounds, most important among them the commencement of judicial proceedings, which result in the suspension (tolling) of the limitation period for the duration of the proceedings. Chapter 14 of the PECL deals with prescription in detail.76 Article 14:201 provides a general period of prescription of three years with the maximum period being ten years (Article 14:202). However, in cases involving claims for personal injury the period can be extended to a maximum of 30 years. In well-structured articles the PECL provide rules on the commencement, extension of the period of prescription, maximum length, the renewal of the prescription period, and the legal effects of prescription. Article 14:601 provides rules by which the parties may modify the prescription period by agreement. The CESL’s prescription rules are found in Articles 178–186. These rules were strongly influenced by Chapter 14 of the PECL. The CESL does recognize a ‘short period of prescription’ (Article 179) of two years. The 2002 revision of the BGB included a comprehensive reform of the German statute of limitations, which was implemented by the Act on the Modernization of the Law of Obligations77 replaced the former standard period of limitation of thirty years by a period of three years, but recognizes situations in which limitation periods can be set 75 Cf for the Member States of the EU Article 12 of the Regulation (EC) No 593/2008 of the European Parliament and of the Council of 17 June 2008 on the law applicable to contractual obligations (Rome I), [2008] OJ L177/6. 76 Cf Lando, Clive, Prüm & Zimmermann (eds), Principles of European Contract Law (Part III) (2003) pp. 157 et seq. 77 BGBl 2001 I 3136: This act amended the Chapter on prescription in BGB §§ 194–218.

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at ten or thirty years. With regard to defective goods, BGB § 438 provides a limitation period of two years commencing upon delivery of the defective good. In the French Civil Code the articles for prescription are arranged in Title XX ‘Of Extinctive Prescription’ as amended in 2008.78 According to the new Article 2224, the general prescription period is now five years from the day when a person knew or ought to have known of the facts, which would permit him to exercise a right. For sale of goods contracts, Article L. 110-4 of the Code de Commerce provides a period of five years unless they are subject to special shorter periods of prescription. Title XVIII of the Spanish Civil Code ‘on prescription’ (Articles 1961ss) provides various rules on prescription. Article 1967 n° 4 states that actions involving the ‘obligation to pay merchants the price of the goods sold to others who are not or who, being merchants, deal in another trade’ are barred after three years. In England, the Limitation Act 198079 constitutes the statutory framework for the limitation of actions. Most important for contractual obligations is the time limit for actions founded on ‘simple contract’. According to s 5 of the Act, actions have to be brought within a period of six years from the date when the cause of action accrued. s 11 a special time period of three years for an action for breach of a contractual duty where the damages claimed consist of or include damages in respect of personal injuries. These time periods commence either on the date on which the breach of contract occurred, or upon occurrence of the negligent act or omission. The three-year period for personal injury claims begins at the time of the injury. Each state in the United States sets its own limitation periods. For example, Florida in Title VIII, Chapter 95 of its statutes provide for limitations. With regard to contractual claims, it is provided in Article 95.11 that a legal or equitable action on a contract shall be commenced within five years. UCC § 2-725, provides a four-year statute of limitations for contracts involving the sale of goods, or one year after the breach should have been discovered, but no longer than five years after the right of action accrued (when the breach occurs, even if the aggrieved party did not have knowledge of the breach. The parties may reduce the period of limitation by agreement to no less than one year but may not extend the period beyond five years. Articles 188 of the CCC 202180 sets a general limitation period of three years to bring a claim for violations of civil rights. Article 594 fixes a limitation period for bringing an action or applying for arbitration regarding disputes over contracts for international sales of goods and contracts for technology imports and exports shall be four years. Article 189 provides that in installment contracts, the limitation of action shall run from the date of payment of the last installment expires. Article 195 provides that the limitation period shall be interrupted in cases where “the obligee files a lawsuit or applies for arbitration.“ In any case, a claim is subject to a maximum limitation of twenty years from the infringement of rights. The rules on limitation of action are supplemented by interpretations of the Supreme People’s Court on ‘Certain Issues Concerning the Implementation of Periods of Limitation in Civil Litigation’.81 The authority of this interpretation may change under the new Civil Code.

Law No. 2008-561 of 17 June 2008. Chapter 58 of the Limitation Act. 80 Of 12 April 1986, effective 1 January 1987. 81 Zheng, in Bu (ed), Chinese Civil Law (2013) 19 et seq. 78 79

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IX. Set-Off 1. Introductory Note ‘Set-off ’ is characterized as ‘the process by which a person may use a right to performance held against another person to extinguish in whole or in part an obligation owed to that person’. For the declaration of set-off a number of requirements must be met. First of all, there must be ‘mutuality’ which means that claim and cross or counterclaim must exist between the same parties. It is widely acknowledged that the obligations that the parties owe one another must be of the same kind. Thus, a money claim can be set off only against another money claim. Further requirements are that the cross-claim of the party declaring set-off must be due and that the party declaring set-off is entitled to oblige the other party to accept performance. 107 Not all international instruments, such as the CISG, in the field of contract law include provisions on the right to set-off, but there are a number of specific rules, which may be understood as accepting set-off for particular situations. The PICC and PECL contain a number of articles on set-off. The right to set-off are included in the substantive contract laws of the BGB §§ 387 et seq. (Aufrechnung), the French Code Civil Articles 1347 et seq. (compensation), or the Spanish Civil Code Articles 1195 et seq. (compensación), and in Chinese Contract Law. In the Common Law, set-off is understood as a device of civil procedure law (counterclaim).82 106

2. Commentary In most codifications, in civil or Common Law, right to set-off is seen as a reasonable means to balance claims and cross-claims between two persons in an effective way. In some systems set-off is limited to monetary debts, others allow set-off for all kinds of fungible goods, such as crops or replaceable commodities. Most national laws require that for set-off to be effective it must be declared. Likewise, a notice of set-off is necessary according to the PICC and PECL. A valid declaration of set-off has the effect that the claims, to the extent that they are corresponding, are extinguished at the time when they are set against each other. Thus, set-off is an effective defense between parties who have an established commercial relationship. 109 The CISG does not provide a comprehensive set of rules for set-off. Thus, some comments and court decisions are of the opinion that with regard to contracts governed by the CISG the availability and the requirements of set-off are to be determined by the applicable domestic law. There are, however, a number of articles, which come close to recognizing set-off in specific situations. Article 81(2) discusses a mutual duty to make restitution: ‘If both parties are bound to make restitution, they must do so concurrently. Article 84(1) requires the seller to refund the price and 84(2) states that the ‘buyer must account to the seller for all benefits which he has derived from the goods.’ Article 88(3) provides that the party entrusted to preserve and resale the goods ‘has the right to retain out of proceeds of sale an amount equal to the reasonable expenses of preserving the goods and of selling them.’ With regard to these specific situations of set-off, the CISG is the applicable law. Whether a general principle of set-off can be derived or implied from those articles is highly debated.83 108

Cf Federal Rules of Civil Procedure, Rule 13. Bridge, The International Sale of Goods (3rd edn, 2013) para. 12.41 (buyer’s right of price reduction in Article 50 may be seen as a s type of set-off). 82

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The PICC provides rules for set-off in Chapter 8. According to Article 8.1, one of the 110 conditions of set-off is that the two parties: owe each other money or other performances of the same kind’ and that, at the time of set-off, the first party is entitled to perform its obligation, whereas the other party's obligation is ascertained as to its existence and amount, and performance is due. However, the first party may also set off its obligation against an obligation of the other party, which is not ascertained as to its existence or to its amount, if the obligations of both parties arise from the same contract.

Since the PICC focuses on international commercial contracts there is a specific 111 provision on set-off dealing with the issue of setting the currency. It provides that the right of set-off may be exercised, if both currencies are freely convertible and there is no agreement that the first party shall pay only in a specified currency. In addition, the PICC provides that the right of set-off is exercised by notice to the other party, that set-off takes the effect of discharging the obligations from the time of notice, and that the notice must specify the obligations to which it relates. As to the later issues, if the obligations are not specified, then other party may, within a reasonable time, declare to the first party the obligation to which set-off relates. In the absence of such declaration, the set-off will relate to all the obligations proportionally. The requirements for set-off are defined in PECL Article 13:101 in a very similar way 112 as in PICC Article 8.1.84 And similar to the PICC, it is provided that set-off is prohibited with regard to unascertained claims as to its existence or value ‘unless the set-off will not prejudice the interests of the other party’. It is presumed that the other party’s interests will not be prejudiced, if the claims of both parties arise from the same legal relationship. PECL also provide rules on foreign currency set-off, set-off by notice and effects of setoff, especially when set-off involves a plurality of claims and obligations. What is new in PECL is Article 13:107 a provision for situations in which the right to set-off cannot be exercised:85 This is primarily the case of set-off being excluded by agreement. In addition, set-off cannot be affected against a claim to the extent that that claim is not capable of attachment or against a claim arising from a deliberate wrongful act. The CESL does not address the issue of set-off.86 Therefore the question of whether a respective defense is available is governed by the rules of the domestic law that is applicable under the Rome I Regulation.87 BGB § 387 provides within the division on ‘extinction of obligations’ a Chapter of ten 113 sections on set-off or Aufrechnung. According to these provisions, the right of set-off must comply with the requirement that the performances to be set off by the parties ‘are substantially of the same nature’ and for set-off to be effective it must be declared. A valid declaration of set-off has the effect that the claims, to the extent that they correspond, are deemed to expire at the time when they are set off against each other. Further provisions deal with the specific problems of set-off where the places of performance are different; exclude the right of set-off against a claim which is subject to a defense; or prohibit set-off against a claim that is based on an intentionally committed tort or against a non-pledgeable claim. § 396 deals with the situation where one of the parties has more than one claim suitable for set-off. 84 Cf Lando, Clive, Prüm & Zimmermann (eds), Principles of European Contract Law (Part III) (2003) pp. 139 et seq. 85 Fleckner, Art. 13:107 – Exclusion of Right of Set-off, in: Jansen & Zimmermann (n 21) 1813 et seq. 86 Cf Preamble of the proposed regulation, COM (2011) 635 final, p. 20 (27). 87 Regulation (EC) No 593/2008 of the European Parliament and of the Council of 17 June 2008 on the law applicable to contractual obligations [2008] OJ L177/6. The relevant provision concerning the right to set-off is Article 17 of the Regulation, stating that ‘where the right to set-off is not agreed by the parties, set-off shall be governed by the law applicable to the claim against which the right to set-off is asserted’.

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The French Civil Code’s Articles 1347–1348-2provide for the right of set-off or compensation. According to Article 1347-1, set-off is brought about as of right by the sole operation of the law, even without the knowledge of the debtor. The two debts are reciprocally extinguished when they exist at the same time to the extent of their respective amounts. Article 1347-1 provides that set-off takes place ‘only in the case of two fungible obligations which are certain, liquidated and enforceable’. In addition, Article 1348 French Civil Code states that set-off may be ordered by a court even if one of the obligations, although certain, is not yet liquidated or enforceable. Unless otherwise decided, in these circumstances set-off is effective at the date of the decision. Spanish Civil Code Articles 1,195 et seq. provide for compencasión. According to these articles, the right of set-off requires a situation where two persons are reciprocally creditors and debtors of one another, and that each obligor is a principal obligor and in turn is the principal creditor of the other. Both debts must consist of an amount of money or of fungible things of the same species and quality, both debts must be due and payable, and there must not be any claims on the debts from third parties. Finally, Article 1,202 states that set-off are effective in extinguishing both debts (in the coinciding amounts) even if the creditors and debtors are unaware of the extinguishment. 115 Since set-off has been conceived in traditional English law as a procedural device, little can be found in the English treatises on contract law. Because of the limited availability of the remedy of specific performance, the right of set-off is acknowledged with regard to money debts only. Thus, the right of set-off relates to enforceable monetary cross-claims and in contracts of sale set-off may be utilized as a defense by buyer against the seller’s claim for payment of the price. In the United States, set-off is found in the Common Law. In Citizen Bank of Maryland v Strumpf,88 the US Supreme Court held that ‘the right to set-off allows entities which owe each other money to apply their mutual debts against each other thereby avoiding the absurdity of making A pay B when B owes A.’ In the same decision the Court held that for set-off to be effective, three steps have to be taken – a decision to effectuate the set-off; some action accomplishing the set-off, and a recording of the set-off.89 116 Article 99 of the Chinese Contract Law provides rules on set-off, which adhere to the pattern of set-off rules discussed above – the performances, which the parties owe each other must be due and the subject matters of the obligation must be identical in type and quality. If these requirements are met, either party may set-off its obligation against the obligation of the other party, unless set-off is prohibited by law or in light of the nature of the contract. The party who avails itself of the right of set-off shall notify the other party and the notice, to become effective, must reach the other party. Finally, it is provided that set-off may not be subject to any condition or time limit. 114

G. Cross References & Additional Commentary 117

See also Chapter 3 Pre-contractual Liability in the Civil Law (Illescas), Chapter 4 Precontractual Liability in the Common Law (DiMatteo), Chapter 11 Validity of Contract Terms (Ferrante), Chapter 16 Examination and Notice of Non-Conformity (Janssen), and Chapter 22 Excuse: Impossibility and Hardship (DiMatteo).

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Citizen Bank of Maryland v Strumpf, 516 U.S. 16 (1995). Federal Rules of Civil Procedure (as amended on 25 April 2014) provides for set-off in Rule 13.

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H. Additional Sources

H. Additional Sources Bridge, The International Sale of Goods (3rd edn, OUP 2013); Bridge, The Sale of Goods (3rd edn, OUP 2014); Bu (ed), Chinese Civil Law (Beck, Hart, Nomos 2013); Cartwright & Whittaker (eds), The Code Napoléon Rewritten – French Contract Law after the 2016 Reforms (Hart Publishing 2017); Dannemann & Vogenauer (eds), The Common European Sales Law in Context (OUP 2013); DiMatteo & Hogg (eds), Comparative Contract Law: British and American Perspectives (OUP 2015); DiMatteo & Lei (eds), Chinese Contract Law: Civil and Common Law Perspectives (CUP 2017); Farnsworth, Farnsworth on Contracts (3 rd edn, Wolters Kluwer 2004) 3 volumes; Jansen & Zimmermann (eds), Commentaries on European Contract Laws (OUP 2018); Lando & Beale (eds), Principles of European Contract Law, Parts I and II (Kluwer 2000); Peel, Treitel on The Law of Contract (14th edn, Sweet & Maxwell 2015); Schwenzer & Hachem in Schlechtriem & Schwenzer (eds), Commentary on the UN Convention on the International Sale of Goods (CISG) (3rd edn, OUP 2010); Spark, Vitiation of Contracts – International Contractual Principles and English Law (2013); Zweigert & Kötz, Einführung in die Rechtsvergleichung auf dem Gebiet des Privatrechts (3rd edn, Mohr Siebeck 1996).

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CHAPTER 27 AGENCY AND DISTRIBUTION AGREEMENTS Séverine Saintier A. Topics Covered . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B. Introductory Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C. Statement of Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . D. International Sales Transaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . E. Sampling of Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. UNIDROIT Principles of International Commercial Contracts . . . . . . . . . . . . . . II. Principles of European Contract Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Principles of European Law on Mandate Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . IV. EU Commercial Agency Directive . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. German Bürgerliches Gesetzbuch and German Handelsgesetzbuch . . . . . . . . . VI. French Code civil and French Code de Commerce . . . . . . . . . . . . . . . . . . . . . . . . . . . VII. English Common Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VIII. US Restatement (Third) of Agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IX. Chinese Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F. Commentary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 5 9 10 13 13 14 15 16 17 18 19 20 21 23

Part 1: Agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Mandate and Agency: Scope and Preliminary Definitions . . . . . . . . . . . . . . . . . . . II. External Relationship: Principal-Third Party . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Disclosed Agencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Ratification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Apparent Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Undisclosed Agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Internal Relation: The Agent and Principal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Obligations of the Principal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Obligations of the Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

23 23 26 27 28 32 39 49 52 53 55

Part 2: Commercial Agency and Distribution Agreements . . . . . . . . . . . . . . . . . 58 I. Commercial Agency Revisited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 II. Commercial Agents and Distributors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 III. Competition Law Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 IV. Agents and Distributors: Definitions and Scope . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 1. Self-Employed Intermediary: An Independent Contractor . . . . . . . . . . . . . . . 68 2. Continuing Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 3. Negotiation and Conclusion of Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 4. Goods versus Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71 5. Express Exclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 6. Forms, Procedure and Registration of the Commercial Agent . . . . . . . . . . . . 73 V. General Obligations of the Parties and Duty of Good Faith . . . . . . . . . . . . . . . . . . 74 1. Contractual Obligations of Agents and Distributors . . . . . . . . . . . . . . . . . . . . . . 74 2. Obligations of Principal-Supplier . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77 3. Good Faith in Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78 4. Good Faith in Commercial Agency Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79 VI. Ending the Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81 1. Fixed and Indefinite Duration Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81 2. Termination for Breach and Good Faith . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84 3. Failure of Commercial Agent to Reach Sales Target . . . . . . . . . . . . . . . . . . . . . . . 87 4. Termination and Consequences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 a) Application to Distributors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91 b) Calculation of Termination Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92 VII. Non-Competition Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95 VIII. Drafting International Distribution Agreements: Practitioner Tips . . . . . . . . . . 97 1. Nature of Relationship . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98 2. Sample Contract Clauses and Restrictions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100 a) General Conditions of Sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101 b) Best Efforts Clause . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102

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A. Topics Covered c) Products Liability and Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d) Intellectual Property Protection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . e) Default and Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . f) Post-Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . G. Illustrations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Commission Agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Changing the Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Termination and Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . H. Cross References & Additional Commentary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Practitioner Tips . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Agency Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Distribution Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Good Faith . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . J. Additional Sources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

104 105 106 109 110 110 114 115 117 118 118 120 121 122

A. Topics Covered This Chapter explores the law relating to two areas which are fundamental for the 1 international law of sales, namely agency and distribution agreements. Such agreements undoubtedly share common ground since both agents and distributors are crucial marketing tools for many businesses looking to market, sell or distribute goods internationally. Despite some commonality, the legal framework for each agreement is nevertheless different and the two will therefore be covered separately within this Chapter. The concept of an agent as an intermediary, a middleman in the sale of goods 2 (and services), ‘is recognized in all modern legal systems’.1 Without agents ‘commerce would literally grind to a halt’2 and ‘the web of agency enmeshes us all’.3 Although agency as a concept is broad and flexible,4 this Chapter will explore agency within the commercial sales context. Within the confine of commercial sales, agency as a concept is difficult to define since unlike most contracts, which require two parties, agency relationships involve three parties, namely, the agent, the principal, and the third party. The essence of agency is the power of the agent to contractually bind the principal to third parties.5 As a three-party relationship, the agency relationships create several scenarios for analysis (principal-agent, principal-third party, agent-third party). The two most important relationships are the internal one between the principal and agent (the 1 Orts, Business Persons, A Legal Theory of the Firm (OUP 2013) p. 55. See also, Müller-Freinfels, ‘Law of agency’ (1957) 6 Am J Comp L 165 (overview of the differences between civil and Common Law). 2 Markesinis & Munday, An Outline of the Law of Agency (4th edn, Butterworth Law 1998) p. 4. 3 Issacharoff & Ortiz, ‘Governing through intermediaries’ (1999) 85 Virginia Law Review 1627, 1635. 4 Due to its flexibility, agency, as a concept, is therefore sometimes ‘employed by the courts to produce commercially desirable results whilst distorting the law as little as possible’: Bradgate, Commercial law (3rd ed, OUP, 2001) p. 126. See generally, New Zealand Shipping Co Ltd v AM Satterthwaite & Co Ltd [1975] AC 154; Aluminium Industrie Vaasen BV v Romalpa Aluminium Ltd [1976] 2 All ER 552; Welsh Development Agency v Export Finance Co [1992] BCC 270. 5 For French law, it is to be noted that following the 2016 reform of the civil code (ordonnance No 2016-131 of 10-2-2016, JO 11-2-2016), aside the rules on mandate, the civil code also contains rules pertaining to ‘la représentation’ (Articles 1153 CC to 1161 CC). It is important to point out that those rules only apply at the stage of the formation of the contract, they are not meant to replace the rules pertaining to the mandate, yet, they are bound to have an impact, the extent of which is however still as yet unknown. Article 1984-1 French CC defines the mandate as ‘a transaction by which a person gives to another the power (authority) to do something for the principal and in his name’. In Civ 14-4-1886, DP 1886, 1 221 the court held ‘the essential characteristic of the contract is the power given to the agent to represent the principal’. The same is true in the UK and the US. See Watts, Bowstead and Reynolds on agency (21st edn, Sweet & Maxwell 2019) (UK law) Art 1; Seavey, ‘The rationale of agency’ (1920) Yale LJ 859, Leow, ‘Understanding agency: a proxy power definition’ (2019) 78 CLJ 100–123 and American Law Institute, Restatements of Agency, s 1.01 (US law) (hereinafter, Restatement).

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‘mandate’) and the principal-third party one between the principal and the third party. The scholarship in agency law tends to concentrate on either the internal6 or on the external relationship.7 This Chapter will consider each of these two relations in turn. Under exceptional circumstances, legal relationships can arise between the agent and the third party, but to consider those would be beyond the scope of this Chapter. 3 Distribution agreements involve only two parties and therefore appear more straightforward. And yet, the law on distribution is more complex because of the different types of distribution arrangements and a lack of clarity in the law relating to the distribution relationship. Indeed, the supply chain includes a wide variety of ‘distribution contracts.’ It is therefore not entirely clear what distribution as a topic precisely involves. Indeed, not all countries recognize it as a topic in its own right and those that do, do not necessarily have distinct rules covering all types of distribution agreements. 8 This is due to the nature of distribution, which varies depending on the goods or services being supplied and the manner in which they are being supplied. In order to try to make some sense of this difficult topic, two main areas will be considered. First the various methods by which one can distribute goods and second, the most important rules that apply to the various methods. 4 Although different, agency and distribution contracts are linked because of their complex natures and in certain cases they may overlap each other. The agency relationship is usually limited to the contract that arises between the principal and the third party. The essence of such a relation is therefore that of a commercial exchange, which lies at the core of the distribution contract, but the story is more complex because agency principles apply to many different types of situations.9 The same dual nature is found in distribution contracts since they involve a series of linked relations and therefore often go beyond a simple contractual exchange between two parties. Because many distribution contracts are international in nature, they ‘have become vehicles for the implementation of transnational regulations giving rise to new contractual architectures,’ 10 which are continuously changing in nature and scope.

B. Introductory Note 5

Agency is widely recognized and accepted in common and Civil Law countries. Most laws try to strike a balance between the often-conflicting interests of the principal, agent, and the third party.11 However, across legal systems, the manner in which the 6 In relation to the specific category of commercial agents, the main text to be reviewed is EU 86/653 (self-employed commercial agents) (hereinafter, Directive), [1986] OJ L382/17, infra Part 2 of this Chapter. 7 The external relationship is covered in PECL (Article 3:101); UNIDROIT Principles of International Commercial Contracts 2010 (PICC) (section 2). The DCFR covers both the internal and external relationships, but distinguish the internal (book IV, part D: Mandate) and external aspects (Book II, Chap. 6 deals with representation). 8 The UK for instance has no franchise-specific legislation. See A Rosenberg et al., ‘International Commercial Transactions, Franchising and Distribution’ (2010) 44 Int’l L 229, 237. France and Germany have no specific legislation on distribution agreements. They are therefore governed by the Common Law rules of contract law and competition law. 9 Orts (n 1) p. 58. 10 Cafaggi, ‘The regulatory functions of transnational commercial contracts: new architectures’ (2013) Fordham Int’l LJ 1558, 1616. 11 See Ghestin, Huet, Lecoq, Grimaldi, Lécuyer et la participation de Morel-Maroger, Traité de droit civil: les principaux contrats spéciaux (3rd edn, LGDJ, 2012) para. 31.301; Schmidt-Kessel & Baide, ‘Unauthorised agency in German law’ in Busch and McGregor (eds), The Unauthorised Agent (CUP 2009) pp. 11, 102.

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B. Introductory Note

problem of the balance is considered differs significantly. In Civil Law countries such as France and Germany, the rules of agency are based on the Roman law concept of ‘mandate,’ which distinguishes, on the one hand, the principal-agent relationship and, on the other hand, the agent-third party relationship12 (‘theory of separation’).13 This is a restrictive approach since the principal will only be bound when he consents to the agent acting on his behalf within the limits defined by the terms of the mandate.14 The essence of the internal relationship determines the power of the agent relative to representation of the principal to third parties. The mechanism of representation was seen at least in French law, as a means of facilitating the legal life of the principal.15 Following the recent modification of the civil code, this has changed somewhat.16 In most Civil Law countries, including China,17 the law of agency isolates different types of agents depending on the extent of their authority and their power.18 In Common Law countries such as England and the US, the position is different since 6 the rules are of a general nature and apply to a wide category of agents. There seems to be more of a fusion of the agent and the principal. Even though the extent of the agent’s authority usually depends on what has been agreed to with the principal, as emphasized previously, it is now widely acknowledged that the essence of the agency relation is the ‘power’ (express, implied or apparent) that the agent has to bind the principal. The agent can therefore bind the principal even when the latter does not wish to be bound, under apparent authority. This explains why the Common Law rationale in the UK is that principals are the weaker party within the relationship and are in need of protection.19 This protection primarily comes in the form of fiduciary duties imposed on the agent, which vary across Common Law countries. Over the years however, the differences between the two legal families have some- 7 what diminished. First, the courts in most civilian countries have created rules to supplement the civil code so as to achieve a better balance between the rights of the

12 Müller-Freinfels, ‘Legal relations in the law of agency: power of the agent and commercial certainty’ (1964) 13 Am J Comp L 193. 13 Pothier, Traité sur les obligations (1810). 14 Saintier ‘The unauthorised agent in French law’ in Bush and Macgregor (eds), The unauthorised agent (CUP 2009) pp. 17, 18. This is now confirmed by the (new) Article 1153 CC. It is however claimed that the notion of power is enlarged since it includes imperfect representation. G Wicker ‘Le nouveau droit commun de la représentation dans le code civil’, D 2016, p 1942. 15 Chen, Apparence et représentation en droit positif français (LGDJ, 2000) p. 1. 16 The French civil code, aside the rules on mandate (Article 1984 CC-2010 CC) also has rules on ‘representation’ (Articles 1153-1161 CC), which are deemed applicable to all forms of representation. They are however only applicable to determine the external relations between the principal and the third party. The impact of this change is therefore especially important in relation to acts done by the agent without authority or beyond authority (Articles 1156-1157 CC). For the impact of this change, see G Wicker ‘Le nouveau droit commun de la représentation dans le code civil’, n 15; J Francois ‘L’acte accompli par le mandataire en dehors de ses pouvoirs et le mecanisme du contrat de mandat’, D 2018, p 1215. A Danis-Fatome ‘Proposition de modification de l’article 1156 du code civil: le défaut de pouvoir du représentant’ RDC 2017 177. 17 China recently changed its civil code. It contains rules pertaining to agency in general, agency as applicable to company directors, commission agents and partnerships. The new code enters into force on January 1, 2021. 18 In France, In addition, there are certain recognized categories of intermediaries such as distributors, employed sales representatives, commission agent, brokers and franchisees. 19 McCardie in Armstrong v Jackson [1917] 2 KB 822, at 826 stated that ‘the position of principal and agent gives rise to particular and onerous duties on the part of the agent and the high standard of conduct required from him springs from the fiduciary relationship between his employer and himself. His position is confidential’.

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principal and the interests of third parties.20 Second, although the UK and the US do not have categories of agency with specific statuses, in the European Union, self-employed commercial agents have their own special status.21 Although civil and Common Law rules are undeniably closer, the two sets of rules nevertheless still contain marked differences in two areas, that of undisclosed principals and direct representation, and commission agency, and in relation to the fact that in most civilian systems, the principal has a duty to cooperate with the agent. Such differences undoubtedly explain the numerous attempts at harmonization in this field, attempts that have used two forms of harmonization. As explained by Professor Twigg-Flesner, there are broadly, two forms of harmonization. The first one is through the adoption of measures which are designed for transnational contracts only and which are separate from national laws, such as through international conventions. The second is through measures intended to change national laws, such as through directives.22 The most recent efforts have all been in the form of ‘non-statutory codes,’ such as, the PECL, PECL on mandate (PEL MC), DCFR, and PICC. In spite of such efforts, it is not clear whether greater commonality has been achieved even where, as is the case for commercial agency agreements where the EU rules are mandatory. For example, the PECL and DCFR on the European side and the PICC on the international side, differ between themselves. Indeed, PECL and the DCFR distinguish between direct and indirect representation, a topic that is completely overlooked by the PICC. The field of agency would therefore seem to prove right the proposition that ‘harmonization targeted at identified problems has much better prospects of success’.23 8 In relation to the field of distribution, given the lack of national legislation in the field, harmonization has proven difficult. Interestingly however, it is in relation to competition law that the rules are closer between Europe and the US. It is perhaps through transnational private regulations that some degree of harmonization will be achieved.

C. Statement of Issues 9

The comparative analysis undertaken here will highlight the commonalities and differences pertaining to the rules on agency and distribution across a sample of national legal systems. In spite of increasing commonalities, three issues raise significant distinctions between the civil and Common Law systems – undisclosed agency, indirect representation, and the scope of apparent authority). The last one relates to the internal relationship, namely the principal’s obligation of cooperation which is most relevant in the distribution field.

20 For French law, most rules appear to have been given statutory value in Article 1156 CC (new). For details, see French authors’ references in n 16. 21 It is as yet unclear whether the rules will change in the UK post Brexit. 22 See Twigg-Flesner, ‘Some thoughts on the harmonisation of commercial law and the impact on cross-border transaction’ in Villalta Puig and Twigg-Flesner (eds), Boundaries of Commercial and Trade Law (Sellier 2011) p. 103. See 1983 Geneva Convention on Agency in the International Sale of Goods (has not yet come into force) and the Directive on self-employed commercial agents (n 6). 23 Twigg-Flesner (above) p. 125; see also, Hobhouse, ‘International conventions and commercial law: the pursuit of uniformity’ (1990) 106 LQR 530, 533 (critical of the idea of achieving harmonization by convention).

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D. International Sales Transaction

D. International Sales Transaction Agency and distribution agreements are marketing tools and can therefore be used 10 for domestic as well as international transactions. Yet, given the specificity of the needs of a business wishing to access or expand its market share abroad, agency and distribution agreements are particularly suited to international trade. Although the primary role of an agent is to negotiate and conclude contracts on behalf of their principal, as mentioned above, there are a variety of agent types, bearing different names in different systems. For instance, commission agents are very common in Civil Law countries but their status in Common Law is unclear.24 A related problem in international trade is the fact that the term ‘agent’ tends to 11 be used indiscriminately in certain professions crucial to international sales such as confirming houses;25 shipping agents, custom brokers, and freight forwarders. This belies the complexity of the situations involved. For instance, freight forwarders can either procure or provide services in the field of transport.26 Confirming houses undeniably play a crucial role in the field of commodity trading since they usually act on behalf of overseas clients. Yet, a confirming house will play a different role depending on the instructions of the client. A confirming house may simply buy goods and resell them to the client, in which case, there is no agency but a simple contract of sale. A confirming house may also act as an agent, be it disclosed or undisclosed. Finally, a confirming house can, in addition to acting as an agent for the overseas principal, guarantee (confirm) that the buyer will indeed perform his obligations. For other types of goods (primarily consumer), commercial agents play a crucial role for any manufacturer wishing to create a clientele abroad. Distribution agreements, given their varied nature, are also well suited to interna- 12 tional sales. They provide a low-cost method of entering foreign markets since the distributor buys and resells in its own name. Depending on the type of goods, certain agreements are preferred. For example, exclusive distributorships are particularly suited for luxury goods and motor vehicles. One legal concern relating to distribution agreements is they are scrutinized under competition law. However, in some countries, the difference between distribution and (some) agency agreements in this regard has become indistinguishable. For example, numerous European countries (including, Germany, Greece and Sweden) apply the EU Commercial Agency Directive (Directive) to distributors by analogy. In the UK, certain rules on payment, which were traditionally applicable to distributors rather than agents are now applied to both.27

24 It is possible to have an agency where the agent alone is liable: see Triffits Nurseries v Salads Etcetera Ltd [1999] 1 All ER (Comm) 110. 25 A confirming house is a specialized UK agency that purchases and arranges the export of goods on the behalf of overseas buyers. They finance the movement of goods into the country by offering short-term credit to importers and guaranteeing, or confirming, payment to the suppliers. The confirming house usually negotiates the price with the suppliers, ships, insures and provides information on the goods on the overseas buyers’ behalf. If the overseas buyer is unable to pay for the goods the suppliers are generally liable to repay the confirming house. See Rusholme & Bolton & Roberts Hadfield Ltd v SG Read & Co (London) Ltd [1955] 1 WLR 146. Scottish & Newcastle International Ltd v Othon Ghalanos Ltd [2008] UKHL 11, [2008] 1 Lloyd’s LR 462. 26 See Glass, freight forwarding and multimodal transport contracts (2 nd edn, Informa Routledge 2012) paras 2-45 to 2-94. 27 See Mercantile International Group Plc v Chuan Soon Huat Industrial Group Ltd [2002] EWCA Civ 288; [2002] 1 All ER (Comm) 788 (mark-up is no longer the exclusive territory of distributors). It is now even possible for different transactions to have effect on different legal bases; see Angove Pty Ltd v Bailey [2013] EWHC 215 (Ch).

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E. Sampling of Laws I. UNIDROIT Principles of International Commercial Contracts 13 Article 2.2.1 Scope of the section (1) This Section governs the authority of a person (“the agent”) to affect the legal relations of another person (“the principal”) by or with respect to a contract with a third party, whether the agent acts in its own name or in that of the principal. (2) It governs only the relations between the principal or the agent on the one hand, and the third party on the other. (3) It does not govern an agent’s authority conferred by law or the authority of an agent appointed by a public or judicial authority. Article 2.2.2 Establishment and scope of the authority of the agent (1) The principal’s grant of authority to an agent may be express or implied (2) The agent has authority to perform all acts necessary in the circumstances to achieve the proper purposes for which the authority was granted. Article 2.2.3 Agency disclosed (1) Where an agent acts within the scope of its authority and the third party knew or ought to have known that the agent was acting as an agent, the acts of the agent shall directly affect the legal relations between the principal and the third party and no legal relation is created between the agent and the third party. (2) However, the acts of the agent shall affect only the relations between the agent and the third party, where the agent with the consent of the principal undertakes to become the party to the contract Article 2.2.4 Agency undisclosed (1) Where an agent acts within the scope of its authority and the third party neither knew nor ought to have known that the agent was acting as an agent, the acts of the agent shall affect only the relations between the agent and the third party. (2) However, where such an agent, when contracting with the third party on behalf of a business, represents itself to be the owner of that business, the third party, upon discovery of the real owner of the business, may exercise also against the latter the rights it has against the agent. Article 2.2.5 Agent acting without or exceeding its authority (1) Where an agent acts without its authority or exceeds its authority, its acts do not affect the legal relations between the principal and the third party. (2) However, where the principal causes the third party reasonably to believe that the agent has authority to act on behalf of the principal and that the agent is acting within the scope of that authority, the principal may not invoke against the third party the lack of authority of the agent. Article 2.2.7 Conflict of interests (1) If a contract concluded by an agent involves the agent in a conflict of interests with the principal of which the third party knew or ought to have known, the principal may avoid the contract. The right to avoid is subject to articles 3.2.9 and 3.2.11 to 3.2.15. (2) However, the principal may not avoid the contract: (a) if the principal has consented to, or knew or ought to have known of, the agent’s involvement in the conflict of interest; or (b) if the agent has disclosed the conflict of interests to the principal and the latter had not objected within a reasonable time. Article 2.2.9 Ratification (1) An act by an agent that acts without authority or exceeds its authority may be ratified by the principal. On ratification the act produces the same effects as if it had initially been carried out with authority. (2) The third party may by notice to the principal specify a reasonable period of time for ratification. If the principal does not ratify within that period of time it can no longer do so.

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E. Sampling of Laws (3) If, at the time of the agent’s act, the third party neither knew nor ought to have known of the lack of authority, it may, at any time before ratification, by notice to the principal indicate its refusal to become bound by a ratification. Article 2.2.10 Termination of authority (1) Termination of authority is not effective in relation to the third party unless the third party knew or ought to have known of it. (2) Notwithstanding the termination of its authority, an agent remains authorised to perform the acts that are necessary to prevent harm to the principal’s interests.

II. Principles of European Contract Law 14

Article 3.101 Scope of the Chapter (1) This Chapter governs the authority of an agent or other intermediary to bind its principal in relation to a contract with a third party. Article 3.102 Categories of Representation (1) Where an agent acts in the name of a principal, the rules on direct representation apply. It is irrelevant whether the principal's identity is revealed at the time the agent acts or is to be revealed later. (2) Where an intermediary acts on instructions and on behalf of, but not in the name of, a principal, or where the third party neither knows nor has reason to know that the intermediary acts as an agent, the rules on indirect representation apply. Article 3:201 Express, implied and apparent authority (1) The principal’s grant of authority to an agent to act in its name may be express or may be implied from the circumstances. (2) The agent has authority to perform all acts necessary in the circumstances to achieve the purpose for which the authority was granted. (3) A person is to be treated as having granted authority to an apparent agent if the person’s statements or conduct induce the third party reasonably and in good faith to believe that the apparent agent has been granted authority for the act performed by it. Article 3.202 Agent acting in exercise of his authority Where an agent is acting within its authority as defined by article 3.201, its acts bind the principal and the third party directly to each other. The agent itself is not bound to the third party. Article 3.203 Unidentified Principal If an agent enters into a contract in the name of a principal whose identity is to be revealed later, but fails to reveal that identity within a reasonable time after a request by the third party, the agent itself is bound by the contract. Article 3:207 Ratification by the principal (1) Where a person acting as an agent acts without authority or outside its authority, the principal may ratify the agent’s acts. (2) Upon ratification, the agent’s acts are considered as having been authorised, without prejudice to the rights of other persons Article 3:208 Third party’s right with respect to confirmation of authority (1) An agent’s authority continues until the third party knows or ought to know that: the agent’s authority has been brought to an end by the principal, the agent or both. (2) However, the agent remains authorised for a reasonable time to perform those acts, which are necessary to protect the interests of the principal or its successors.

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III. Principles of European Law on Mandate Contracts 15 Article 1:101 (1) These principles apply to contracts and other juridical acts under which a person, the agent, is authorised and instructed (mandated) by another person, the principal: (a) to conclude a contract between the principal and a third party or otherwise directly affect the legal position of the principal in relation to a third party (b) to conclude a contract with a third party, or do another juridical act in relation to a third party but in such a way that the agent and not the principal is a party to the contract or other juridical act. Article 2:101 The obligation to cooperate under article 1:202 PECL requires the principal in particular to: (a) answer requests by the agent for information in so far as such information is needed to allow the agent to perform the obligations under the mandate contracts (b) give a direction regarding the performance of the obligations in so far as this is required under the mandate contract or follows from a request for a direction under article 4:102 (request for direction). Article 2:102 (1) the principal must pay a price if the agent performs the obligations under the mandate contract in the course of a business, unless the principal expected and could reasonably have expected the agent to perform the obligations otherwise than in exchange for a price. Article 2:103 (1) when the agent is entitled to a price, the price is presumed to include the reimbursement of the expenses the agent has incurred in the performance of the obligations under the mandate contract. (2) the agent is entitled to reimbursement of expenses. Article 5:101 (1) The agent may not become the principal’s counterparty to the prospective contract. (2) The agent may nevertheless become the counterparty if: (a) this is agreed by the parties in the mandate contract; (b) the agent has disclosed an intention to become the counterparty and (i) the principal subsequently expresses consent, or (ii) if the principal does not object to the agent becoming the counterparty after having been requested to indicate consent or a refusal of consent (c) the principal otherwise knew, or could reasonably be expected to have known, of the agent becoming the counterparty and the principal did not object within a reasonable time.

IV. EU Commercial Agency Directive 16 Article 1(2) for the purpose of this directive, ‘commercial agent’ shall mean a self-employed intermediary who has continuing authority to negotiate the sale or purchase of goods on behalf of another person, hereinafter called ‘the principal’, or to negotiate and conclude the sale or purchase of goods on behalf of and in the name of that principal. Article 3 (1) In performing his activities a commercial agent must look after the interests of his principal and act dutifully and in good faith. (2) In particular, a commercial agent must— (a) make proper efforts to negotiate and, where appropriate, conclude the transactions he is instructed to take care of; (b) communicate to his principal all the necessary information available to him; (c) comply with reasonable instructions given by his principal. Article 4 (1) In his relations with his commercial agent a principal must act dutifully and in good faith.

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E. Sampling of Laws (2) In particular, a principal must— (a) provide his commercial agent with the necessary documentation relating to the goods concerned; (b) obtain for his commercial agent the information necessary for the performance of the agency contract, and in particular notify his commercial agent within a reasonable period once he anticipates that the volume of commercial transactions will be significantly lower than that which the commercial agent could normally have expected. (3) A principal must, in addition, inform his commercial agent within a reasonable period of his acceptance or refusal of, and of any non-execution by him of, a commercial transaction which the commercial agent has procured for him. Article 17 (2) (a) The commercial agent shall be entitled to an indemnity if and to the extent that: – he has brought the principal new customers or has significantly increased the volume of business with existing customers and the principal continues to derive substantial benefits from the business with such customers; and – the payment of this indemnity is equitable having regard to all the circumstances and, in particular, the commission lost by the commercial agent on the business transacted with such customers. (b) The amount of the indemnity may not exceed a figure equivalent to an indemnity for one year calculated from the commercial agent’s average annual remuneration over the preceding five years and if the contract goes back less than five years the indemnity shall be calculated on the average for the period in question; (c) The grant of an indemnity as mentioned above shall not prevent the commercial agent from seeking damages. (3) the commercial agent shall be entitled to compensation for the damage he suffers as a result of the termination of his relations with his principal. Such damage shall be deemed to occur particularly when the termination takes place in circumstances: Depriving the commercial agent of the commission which proper performance of the agency contract would have procured him whilst providing his principal with substantial benefits linked to the activities of the commercial agent; and/or which have not enabled the commercial agent to amortize the costs and expenses that he had incurred in the performance of the agency contract on the advice of his principal. (4) Entitlement to the indemnity as provided for in paragraph 2 or to compensation for damage as provided for under paragraph 3, shall also arise where the agency contract is terminated as a result of the commercial agent’s death. Article 18 The indemnity or compensation referred to in Article 17 shall not be payable: (a) where the principal has terminated the agency contract because of default attributable to the commercial agent which would justify immediate termination of the agency contract under national law; (b) where the commercial agent has terminated the agency contract, unless such termination is justified by circumstances attributable to the principal or on grounds of age, infirmity or illness of the commercial agent in consequence of which he cannot reasonably be required to continue his activities (c) where, with the agreement of the principal, the commercial agent assigns his rights and duties under the agency contract to another person. Article 20 2. A restraint of trade clause shall be valid only if and to the extent that— (a) it is concluded in writing; and (b) it relates to the geographical area or the group of customers and the geographical area entrusted to the commercial agent and to the kind of goods covered by his agency under the contract. 3. A restraint of trade clause shall be valid for not more than two years after termination of the agency contract.

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V. German Bürgerliches Gesetzbuch and German Handelsgesetzbuch 17 § 179 BGB (1) A person who has entered into a contract as an agent is, if he has not furnished proof of his authority, bound to the other party at his choice either to perform the contract or to pay damages to him, if the principal refuses to ratify the contract (2) The agent is not liable, if the other party knew or ought to have known of the lack of authority. The agent is not liable if he had limited capacity to contract unless he acted with the consent of his legal representative § 84 HGB (1) A commercial agent is a person who is as an independent businessmen continuously entrusted to procure business transactions for another businessman (the principal) or to conclude business transactions in his name. A person is independent if he is essentially free to organise his activities and to determine his hours of work. (2) The principal may also be a commercial agent. § 89 HGB (1) After termination of the contractual relationship the commercial agent may demand from the principal reasonable compensation if and insofar as: 1. substantial advantages accrue to the principal even after termination of the contractual relationship from business relations with new customers recruited by the agent, and 2. by reason of termination of the contract the commercial agent loses rights to commission which, had it continued, he would have had from business transactions already concluded or to be concluded in the future with customers recruited by him, and 3. payment of compensation is equitable taking all the circumstances into account. A customer can be said to have been recruited if the commercial agent has so significantly increased business relations with a customer that this corresponds in commercial terms to the recruitment of a new customer. § 92 b HGB (1) Section 90 and sections 89 b do not apply to part-time commercial agents. (3) whether the commercial agent is merely a part-time commercial agent is to be determined by reference to the expectations of persons trading in the sector.

VI. French Code civil and French Code de Commerce 18 Article 1153 A representative authorised by legislation, by a court or by a contract is justified in acting only within the limits of the authority conferred upon him. Article 1154 Where a representative acts within his authority and in the name and on behalf of the person whom he represents, only the latter is bound to the undertaking so contracted. Where a representative states that he is acting on behalf of another person but contracts in his own name, he alone is bound towards the other contracting party. Article 1155 Where the authority of a representative is defined in general terms, it covers only acts of conservation or management. Where his authority is specifically defined, a representative may conclude only those acts for which he is empowered and any accessory acts. Article 1156 An act made by a representative without authority or beyond his authority cannot be set up against13 the person whom he represents, unless the third party with whom he contracts legitimately believed that he had that person’s authority, notably by reason of the latter’s behaviour or statements. Where a third party with whom a representative contracts was unaware that the act was concluded by the representative

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E. Sampling of Laws without authority or beyond his authority, the third party may invoke its nullity. Neither an inability to set up an act against another person nor its nullity can be invoked once the person represented has ratified it. Article 1157 Where a representative abuses his authority to the detriment of the person whom he represents, the latter may invoke the nullity of any act concluded if the third party was aware of the abuse of authority or could not have been unaware of it. Article 1158 A third party who, at the time of an act which he is about to conclude, doubts the extent of the authority of a representative appointed by contract may in writing request the person represented to confirm to him within a time which he may fix and which must be reasonable, that the representative is empowered to conclude the act in question. The written request must set out that, in the absence of a timely reply, the representative is deemed to be empowered to conclude the act. Article 1159 The establishing of representation by legislation or by a court deprives the person represented of the powers transferred to the representative for the period of the representation. Representation established by contract leaves the person represented in possession of his ability to exercise his own rights. Article 1160 The authority of a representative ceases if he becomes affected by a lack of capacity or is subject to a prohibition. Article 1161 A representative cannot act on behalf of both parties to a contract nor can he contract on his own behalf with the person whom he represents. Where he does so, any act which is concluded is a nullity unless legislation authorises it or the person represented has authorised or ratified it. Article1301-3 Ratification of the management by the principal is equivalent to conferring the authority of an agent. Article L 134-1 Code de Commerce Commercial agents are agents who, as independent professionals not linked by contracts for services, shall be permanently entrusted with negotiating and possibly concluding sale, purchase, rental or service provision contracts for and on behalf of producers, industrialists, traders or other commercial agents. Commercial agents may be natural or legal persons. Article L 134-4 Code de Commerce The contracts concluded between commercial agents and their principals shall be in the common interest of the parties Article L 134-15 Code de Commerce When the activity of the commercial agent is carried out under a written contract, signed by the parties, which is principally for another purpose, the parties may decide in writing that the provisions of this chapter do not apply to the part corresponding to the commercial agency activity.

VII. English Common Law As highlighted earlier, this area of English Common Law has changed since although 19 the bulk of the rules are still Common Law-based and applicable to all agency relationships, rules specific to a particular type of agent have also developed.28 Of particular relevance for this Chapter are the Agency Regulations 1993, which implement Directive 86/653.

28

Such as estate agents and solicitors.

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Chapter 27 Agency and Distribution Agreements Regulation 2(1) ‘Commercial agent’ means a self-employed intermediary who has continuing authority to negotiate the sale or purchase of goods on behalf of another person (the ‘principal’), or to negotiate and conclude the sale or purchase of goods on behalf of and in the name of that principal. Regulation 3 (1) In performing his activities a commercial agent must look after the interests of his principal and act dutifully and in good faith (2) In particular, a commercial agent must— (a) make proper efforts to negotiate and, where appropriate, conclude the transactions he is instructed to take care of; (b) communicate to his principal all the necessary information available to him; (c) comply with reasonable instructions given by his principal. Regulation 4 (1) In his relations with his commercial agent a principal must act dutifully and in good faith. (2) In particular, a principal must— (a) provide his commercial agent with the necessary documentation relating to the goods concerned; (b) obtain for his commercial agent the information necessary for the performance of the agency contract, and in particular notify his commercial agent within a reasonable period once he anticipates that the volume of commercial transactions will be significantly lower than that which the commercial agent could normally have expected. (3) A principal shall, in addition, inform his commercial agent within a reasonable period of his acceptance or refusal of, and of any non-execution by him of, a commercial transaction which the commercial agent has procured for him. Regulation 17 (1) This regulation has effect for the purpose of ensuring that the commercial agent is, after termination of the agency contract, indemnified in accordance with paragraphs (3) to (5) below or compensated for damage in accordance with paragraphs (6) and (7) below. (2) Except where the agency contact otherwise provides, the commercial agent shall be entitled to be compensated rather than indemnified. (3) Subject to paragraph (9) and to regulation 18 below, the commercial agent shall be entitled to an indemnity if and to the extent that— (a) he has brought the principal new customers or has significantly increased the volume of business with existing customers and the principal continues to derive substantial benefits from the business with such customers; and (b) the payment of this indemnity is equitable having regard to all the circumstances and, in particular, the commission lost by the commercial agent on the business transacted with such customers. (4) The amount of the indemnity shall not exceed a figure equivalent to an indemnity for one year calculated from the commercial agent’s average annual remuneration over the preceding five years and if the contract goes back less than five years the indemnity shall be calculated on the average for the period in question. (5) The grant of an indemnity as mentioned above shall not prevent the commercial agent from seeking damages. (6) Subject to paragraph (9) and to regulation 18 below, the commercial agent shall be entitled to compensation for the damage he suffers as a result of the termination of his relations with his principal. (7) For the purpose of these Regulations such damage shall be deemed to occur particularly when the termination takes place in either or both of the following circumstances, namely circumstances which— (a) deprive the commercial agent of the commission which proper performance of the agency contract would have procured for him whilst providing his principal with substantial benefits linked to the activities of the commercial agent; or (b) have not enabled the commercial agent to amortize the costs and expenses that he had incurred in the performance of the agency contract on the advice of his principal. (8) Entitlement to the indemnity or compensation for damage as provided for under paragraphs (2) to (7) above shall also arise where the agency contract is terminated as a result of the death of the commercial agent. (9) The commercial agent shall lose his entitlement to the indemnity or compensation for damage in the instances provided for in paragraphs (2) to (8) above if within one year following termination of his agency contract he has not notified his principal that he intends pursuing his entitlement.

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E. Sampling of Laws Regulation 18 The compensation referred to in regulation 17 above shall not be payable to the commercial agent where— (a) the principal has terminated the agency contract because of default attributable to the commercial agent which would justify immediate termination of the agency contract pursuant to regulation 16 above; or (b) the commercial agent has himself terminated the agency contract, unless such termination is justified— (i) by circumstances attributable to the principal, or (ii) on grounds of the age, infirmity or illness of the commercial agent in consequence of which he cannot reasonably be required to continue his activities; or (c) the commercial agent, with the agreement of his principal, assigns his rights and duties under the agency contract to another person. Regulation 20 (1) A restraint of trade clause shall be valid only if and to the extent that— (a) it is concluded in writing; and (b) it relates to the geographical area or the group of customers and the geographical area entrusted to the commercial agent and to the kind of goods covered by his agency under the contract. (2) A restraint of trade clause shall be valid for not more than two years after termination of the agency contract.

VIII. US Restatement (Third) of Agency 20

§ 2.02 Scope of actual authority (1) An agent has actual authority to take action designated or implied in the principal’s manifestations to the agent and acts necessary or incidental to achieving the principal’s objectives, as the agent reasonably understands the principal’s manifestations and objectives when the agent determines how to act. (2) An agent’s interpretation of the principal’s manifestation is reasonable if it reflects any meaning known by the agent to be ascribed by the principal and, in the absence of any meaning known to the agent, as reasonable person in the agent’s position would interpret the manifestations in light of the context, including circumstances of which the agent has notice and the agent’s fiduciary duty to the principal. (3) An agent’s understanding of the principal’s objectives is reasonable if it accords with the principal’s manifestations and the inferences that a reasonable person in the agent’s position would draw form the circumstances creating the agency. § 2.03 Apparent authority Apparent authority is the power held by an agent or other factor to affect a principal’s legal relations with third parties when the third party reasonably believes the actor has authority to act on behalf of the principal and that belief is traceable to the principal’s manifestations. § 2.06 Liability of undisclosed principal (1) An undisclosed principal is subject to liability to a third party who is justifiably induced to make a detrimental change in position by an agent acting on the principal's behalf and without actual authority if the principal, having notice of the agent's conduct and that it might induce others to change their positions, did not take reasonable steps to notify them of the facts. (2) An undisclosed principal may not rely on instructions given an agent that qualify or reduce the agent's authority to less than the authority a third party would reasonably believe the agent to have under the same circumstances if the principal had been disclosed. § 3.03 Creation of apparent authority Apparent authority, as defined in § 2.03, is created by a person's manifestation that another has authority to act with legal consequences for the person who makes the manifestation, when a third party reasonably believes the actor to be authorized and the belief is traceable to the manifestation. § 8.01 General fiduciary principle An agent has a fiduciary duty to act loyally for the principal's benefit in all matters connected with the agency relationship.

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IX. Chinese Law 21 Article 161 A civil subject may perform civil juristic acts through agents. Civil juristic acts that shall be performed by the principal himself or herself pursuant to legal provisions or an agreement between the parties or the nature of such civil juristic acts, shall not be performed through an agent. Article 162 Civil juristic acts that are performed by an agent in the name of the principal within the scope of the power of agency shall have binding force on the principal. Article 163 1. Agency shall include entrusted agency and statutory agency. 2. An entrusted agent shall exercise the power of agency as entrusted by the principal. The legal agent shall exercise the agency right in accordance with the law. Article 168 1. An agent shall not perform a civil juristic act in the name of the principal with himself or herself, unless otherwise with the consent or acknowledgment of the principal.

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E. Sampling of Laws 2. An agent shall not perform a civil juristic act in the name of the principal with any other party who entrusts such agent simultaneously, unless otherwise with the consent or acknowledgment of both principals. Article 171 1. Any act of agency continually performed by an actor without the power of agency, beyond the scope of his or her power of agency or after his or her power of agency has expired shall not be binding on the principal without the acknowledgment of such principal. 2. The other party may urge the principal to make acknowledgment within one month from the date of receipt of the notice. Where the principal does not respond, subsequent confirmation shall be deemed to have been refused. Before the acknowledgment of the acts performed by an actor, the bona fide other party has the right of revocation. The revocation shall be affected by notification. 3. Where the conducts of persons of civil conduct have not been confirmed, the counterparties in good faith have the rights to request such persons of civil conduct to perform their obligations or to compensate for their damages. However, the scope of compensation shall not exceed the interests that can be acquired by the other party at the time of confirmation by the principal. 4. Where the other party knows or should have known that the actor has no power of agency, the other party and the actor shall respectively bear the liability according to their own faults. Article 172 For any acts of agency continually performed by an actor without the power of agency, beyond the scope of his or her power of agency or after his or her power of agency has expired, such acts of agency shall be valid if the other party has reasons to believe that the actor has the power of agency. Article 925 Where the agent, acting within the scope of authority granted by the principal, enter into a contract in its own name with a third party who is aware of the agency relationship between the agent and the principal at the time of entering into the contract, the contract is directly binding upon the principal and such third party, except where there is evidence establishing that the contract is only binding upon the agent and such third party. Article 926 1. Where the agent concludes a contract in its own name with a third party, and the third party does not know of the agency relationship between the agent and the principal, if the agent fails to perform its obligation to the principal due to any reason attributable to the third party, the agent shall disclose the third party to the principal, and the principal may exercise the rights of the agent against the third party. Except that the third party would not have entered into a contract with the principal if it had known of the principal at the time of entering into the contract 2. Where the agent fails to perform its obligation toward the third party due to any reason attributable to the principal, the agent shall disclose the principal to the third party, and the third party may then choose either the agent or the principal as the other party to assert its rights. However, the third party may not alter its choice of the other party 3. Where the principal exercises the agent's rights against the third party, the third party may set up against the principal the defenses it has against the agent. Where the third party chooses the principal as the relevant party against whom it asserts its rights, the principal may raise, with the third party, its own counterclaims and its defences to the claims of the agent as well as the counterclaims and defences of the agent to the claims of the third party. Article 933 Either the principal or the agent may terminate the agency appointment contract at any time. Where the other party sustains any loss due to the termination of the entrustment contract, except for causes not attributable to the terminating party, the terminating party of the entrustment contract without compensation shall compensate the other party for direct losses caused by the improper time of termination, and the terminating party of the entrustment contract with compensation shall compensate the other party for direct losses and anticipated benefits Article 934 A commission contract shall be terminated by the death, loss of capacity of civil conduct or termination of the principal or the agent, except as otherwise agreed by the parties or where termination is inappropriate in light of the nature of the commissioned affair.

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F. Commentary

Part 1: Agency I. Mandate and Agency: Scope and Preliminary Definitions As previously mentioned, in civilian countries, the law of agency isolates different types of agents depending on the task they are asked to perform, which impacts the extent of their authority and power. Most civilian texts therefore do not define the ‘agent’ (see example, France, Germany and China) and simply tend to start with the nature and form of agency, namely that a mandate is created when the agent accepts the mandate that the principal has given him expressly29 or by a description of the main role of the agent with an emphasis on the importance of authority.30 In contrast, in Common Law jurisdictions such as the UK and the US, agency rules are of a general nature since they apply to a wide category of intermediaries. In such jurisdictions, the agent is defined as a fiduciary,31 with an assortment of fiduciary duties. No such a notion exists in civilian jurisdictions. And yet, as most civilian jurisdictions impose a requirement of good faith, the duties the agent owes his principal are remarkably similar.32 Substantial differences can, however, be seen in the duties that the principal owes to the agent. 24 The European and international texts vary depending on whether they focus on the internal principal-agent relationship (PEL MC) or external relationship (PECL, PICC). The vocabulary used in each text is important. PECL on mandate is quite detailed in its scope by making it clear that it applies to direct and indirect representation. 33 The vocabulary is therefore clearly civilian. The PICC adopts a more uniform concept of agency by stating that ‘it governs the authority of a person (the agent) to affect the legal relations of another (the principal) by or with respect to a third party whether the agent acts in his own name or in that of the principal’.34 The vocabulary is therefore much more in the Common Law style and the PICC covers disclosed and undisclosed agency. 25 The international texts adopt a similar scope and start by stating to whom the text does not apply to first and then moves onto the issue of authority. All the texts only apply to agency in the conclusion of contracts35 and do not govern an agent’s authority conferred by law or the authority of an agent appointed by a public or judicial authority.36 23

§ 662 BGB; Article 1984-2 French CC. Article 162 of Chinese Civil Code 2021. See too Article 163 which differentiates between entrusted agency and statutory agency (the latter appears to refer to company law and directors’ powers). Article 1156 new French CC. 31 Restatement § 1.01; Armstrong v Jackson [1917] 2 KB 822. 32 China has an interesting position. Under its civil code, there is a general obligation of good faith for all civil acts (Article 7), as well as an obligation to perform contracts in good faith (Article 509), but no explicit obligations in agency. However, Article 168 has a rule similar to the fiduciary principle of no-conflict of interest). 33 Article 1:101(1) PEL MC. 34 Article 2.2.1(1) PICC. 35 Article 2.2.1(1) PICC; Article 3:101 PECL; Article 1:101(1) PEL MC. 36 Article 2.2.1(3) PICC; Article 3:101(2) PECL. 29

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F. Commentary

II. External Relationship: Principal-Third Party The above sampling of laws shows a great deal of commonality on the fact that as 26 agency brings into contact three people, the principal, agent and the third party, the core issue for the law in this area is to try to achieve a balance between protecting the interests of the two people who are at opposite ends, namely, the principal and the third party. The laws vary this balance depending on whether the agency is disclosed or not.

1. Disclosed Agencies The agency is disclosed when the third party is aware that he is dealing with an 27 intermediary. In such a situation, the main question is whether the agent has the authority to bind the principal. The two linked issues in this area are determining the authority of the agent and the personal liability of the agent. There are two distinct types of authority: actual authority and apparent authority. The distinction is made because the former emanates from the consent of the principal, the other from the power of the agent to bind the principal and therefore arises by law. Actual authority can be either express (authority defined within the mandate, e.g express authority) or implied from actual authority e.g. implied authority. within this category, we also consider what can be termed as retroactive authority (authority given by the principal who chooses to ratify an unauthorized act of the agent). Apparent authority, as shall be seen, is no real authority, but the authority as it appears to the third party. a) Authority A key issue is determining the extent of the agent’s authority. For example, whether 28 the agent has authority only to negotiate (canvassing agent) or authority to negotiate and conclude contracts. This is important for numerous reasons, such as the payment of taxes. An agent that can conclude a contract may be regarded as carrying on a permanent business in the territory of the sale.37 Although the question of authority raises a distinction between the civilian and the 29 Common Law approaches, the two systems reach similar solutions. The main characteristic of a mandate in Civil Law is that the agent is both allowed and required to conclude a contract. The agent can only bind the principal when he has specific authority to do so (but this can be a general authority to act or a very specific mandate to cover a task, (for French law, see Article 1154 new French CC)). The agency contract emphasizes the task (‘mandate’) for which the agent has been appointed, namely, whether he has authority to conclude contracts for the principal and whether he does so in the principal’s name (direct representation) or in his own name (indirect representation). In the CCC 2021, direct and indirect representations are also covered in separate parts. Direct representation is covered in the main section on agency (Chapter 7, Articles 161-164) and indirect representation (contracts of commission agency) is covered in Chapter 25 (Articles 951–960). At Common Law, the distinction between direct and indirect representation is not 30 made, instead, the issue becomes whether the authority is either actual or apparent. Actual authority is the authority that the agent possesses either as defined in the contract or as implied by the law.38 In the UK, Lord Diplock, in Freeman & Lockyer (a firm) v 37 Christou, International agency, distribution and licensing agreements (6 th edn, Sweet and Maxwell 2011) para. 2.10, p. 72. 38 Restatement § 2.02; Howard v Bailliee (1796) 2 H Bl 618; Pole v Leask (1860) 28 Beav 562.

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Buckurst Park Properties (Mangal) Ltd,39 states that the scope of actual authority ‘is to be ascertained by applying ordinary principles of construction of contracts, including any proper implications from the express words used, the usages of trade or the course of business between the parties’.40 Implied authority is actual authority seen as necessary or incidental to the express authority (to achieve the task at hand).41 This also includes customary authority 42 and what is sometimes termed as ‘usual authority’ (authority derived from the usual incidents of the agent’s professional activities).43 The latter is of crucial importance since anything that is regarded as within the normal range of activities of an agent of that sort binds the principal.44 In the US, the terminology is that ‘actual authority’ includes express and implied authorities. In the US and the UK the manner in which the agent interprets the instructions of the principal is important. Provided that the interpretation is reasonable, its exercise will bind the principal.45 In the US, it is of crucial importance for the manufacturer or supplier to give clear instructions to its agents. 31 The European and international texts try to reach a compromise between the two positions. Most recognize the creation of an agency relationship through the granting of authority. The texts adopt the civilian distinction between authority to directly conclude a contract (mandate) and indirect authority (‘intermediation’, such as real estate agents).46 However, most texts also stipulate that the agent’s authority can be express or implied47 and that the main form of implied authority is that of incidental authority, namely, the ability for the agent to perform all acts necessary to achieve the purpose for which the agent was engaged.48 Most national laws also accept the importance of the law being flexible by recognizing that authority need not be express.49 In the international context, however, the principal must be aware of local customs, which can expand the authority of the agent. b) Ratification 32

Ratification occurs when the principal chooses to be bound by a previously unauthorized act of the agent. Ratification is a unilateral act by the principal and it is a widely accepted principle of agency law.50 For most civilian countries, ratification is used as a

[1964] 2 QB 480. Id. at 502–503 per Diplock LJ. 41 Restatement § 2.02(1); see Amoutzas v Tattersalls [2010] EWHC 1696, [2010] 1 P&CR 7. 42 Dingle v Hare (1859) 7 CBNS 145. 43 Munday, Agency Law and Principles (3rd edn, OUP 2016) p. 51. In the UK, the expression ‘usual authority’ has created problems as to what precisely it means since it is also used in relation to apparent authority (First Energy v Hungarian International Bank [1993] 2 Lloyds Rep 194). It is however clear that this does not amount to a third category of authority. The decision is confirmed by the Privy Council in Kelly v Fraser [2012] 3 WLR 1008. 44 See United Bank of Kuwait Ltd v Hammoud [1988] 3 All ER 418 (fraud). 45 Restatement § 2.02(2); Ireland v Livingston (1871) LR 5 HL 395 (commission agents). This has been clarified in recent cases however that this requires the agent to act reasonably: European Asian Bank AG v Punjab & Sind Bank [1983] 1 WLR 642 and Patel v Standard Chartered Bank [2001] Lloyd’s Rep. 46 Article 2.2.1 PICC; Article 1.101 PEL MC; Article 3:102 PECL. 47 Article 2.2.2(1) PICC; Article 3:201(1) PECL. 48 Article 2.2.2(2) PICC; Article 3:201(2) PECL. 49 Article 1985 French CC; the Chinese Civil Code 2021 implies this by making the distinction between statutory and entrusted agency (Article 163); Yasuda Fire & Marine Insurance Co of Europe Ltd v Marine Insurance Underwriting Agency Ltd [1995] QB 174, 185 (‘although in modern commercial transactions agencies are almost invariably founded upon a contract between principal and agent, there is no necessity for such a contract to exist’). 50 Article 2.2.9-1 PICC; Article 3:207 PECL; Article 3.202 PEL MC; Article 1998-2 French CC and also Article 1156 CC, Restatement § 4.01; Bolton & Partners v Lambert (1889) 41 Ch D 295. 39

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tool to protect the autonomy of the principal who cannot be bound against his will.51 In such systems, the default rule is that barring ratification, a principal is not bound by an unauthorized act of the agent.52, The same position is adopted in the European and international texts,53 but the emphasis may differ depending on whether the texts focus on the internal or external relationships. In PECL, the agent will be liable for damages to the third party if the principal does not ratify54 provided of course that the third party did not know of the agent’s lack of authority. It is worth emphasizing that the role and importance of ratification as a tool varies. In US law and PECL, apparent authority gives the agent the power to create a binding contract between the principal and the third party. In such cases, ratification will be of limited importance.55 The same applies for French law, which, following the 2016 reform gives statutory value to apparent authority in the civil code.56 Most countries allow the principal to ratify regardless of whether the agent simply 33 exceeded his authority or whether he had no authority at all.57 In the UK, an illegal act or a nullity58 cannot be ratified. Yet, what precisely constitutes a nullity is not entirely clear. Ratification is possible in Germany through the principle of schwebende Unwirksamkeit. This principle considers that the contract is neither void nor enforceable, but floating until it has either been ratified or rejected by the principal or revoked by the third party.59 The scope of ratification in the US is limited60 but its function is wider since even an undisclosed principal can ratify.61 Professor Demott explains that this is due to the very wide application of apparent authority, and that ratification ‘often serves the function of clarifying situations in which it is ambiguous or unclear whether an agent acted with actual authority’. In the UK, an undisclosed principal cannot ratify.62 Yet, where the agent purports to act for a principal but in fact intends to act on his own

51 In France, an agent acting outside his mandate does not have the power to act on behalf of or bind the principal. Ch Req 30-12-1931, DH 1932, 65, but now see the addition of the recognition of the apparent authority under (new) Article 1156-1 CC. 52 Article 1998-2 French CC and also now Article 1156 French CC; § 177(1) BGB; the Chinese Civil Code 2021 does not use the term ratification, but see Article 171(1) Chinese Civil Code 2021 which requires ‘acknowledgement of the principal’ for him/her to be bound when the agent acted beyond the granted authority or with no authority at all. 53 Article 3:204(1) PECL; Article 2.2.5 (1) PICC. 54 Article 3:204(2) PECL. 55 Bennett, Principles of the Law of Agency (Hart 2014) p. 67. 56 Article 1156-1 French CC (new) and it adopts the estoppel basis since it is based on the legitimacy of the third part’s belief on the representation of the principal. 57 The restrictive approach of Article 1998-2 French CC has been broadened by the French courts, which have allowed the principal to ratify a much wider variety of acts, such as acts without authority or simply an act where the agent exceeded his authority. Following the reform, this is now also covered by (new) article 1156 French CC. See Saintier (n 11). Bolton v Lambert (1889) LR 41 Ch D 295, Restatement third, § 4.01(1), Article 171(1) Chinese Civil Code 2021 and fn 54 ante; Article 2.2.9(1) PICC; Article 3:207 PECL. 58 Bedford Insurance Co Ltd v Instituto de Resseguros dp Brasil [1985] QB 966 (illegal act); Watson v Davies [1931] 1 Ch 455 (nullity). Causwell v General Legal Council [2019] UKPC 2019 for disciplinary proceedings commenced under the Legal Profession Act being considered as capable of ratification. 59 Schmidt-Kessel and Baide (n 11) pp. 120–21. 60 Demott ‘The Restatement (Third) of Agency and the unauthorised agent in US law’ in Busch and McGregor (n 11) pp. 235–36. 61 Restatement § 4.03. 62 Keighley Maxsted v Durant [1901] AC 240, 247 (‘civil obligations are not to be created by undisclosed intentions’). This raises the difficult question, in relation to insurance contracts, about unidentified principals and the distinction between identifying the person who can sue on the insurance and identifying the interests protected by the insurance. Indeed an unnamed but ascertainable principal can ratify, see National Oilwell (UK) Ltd v Davy Offshore Ltd [1993] 2 Lloyd’s LR, 582.

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behalf the principal can ratify.63 In France the courts allow ratification when the agent purports to act in his own name.64 34 Ratification is a unilateral act of the principal, the central issue being one of consent. As long as it is clear that the principal consents to the act, the form that ratification takes does not matter.65 Consent is established only when the principal has full knowledge of the unauthorized acts and makes clear a willingness to ratify.66 On the question whether silence can amount to ratification, there is also consensus. Apart from Germany, which expressly stipulates that silence can be a ground for ratification in commercial contracts;67 other legal systems hold that whether silence amount to ratification depends on the circumstances.68 35 In the UK, France, and the US, there is no requirement that the principal has to communicate the ratification to the third party.69 Comment 1 to Article 2.2.9 PICC states that ratification is not subject to any form and that although it is usually communicated to the agent, it does not have to be communicated to anyone provided that ‘it is manifested in some way and can therefore be ascertained by probative material’. However, Article 2.2.9(3) PECL allows a third party to withdraw prior to ratification and, more generally, Article 10.2 PECL provides a general limitation period of three years. PECL, comment A to Article 3:207 PECL states that ‘ratification may be made by express declaration’ but it ‘may also be implied from acts of the principal which unambiguously demonstrate its intention to adopt the contract made by the agent’.70 Finally, in most legal systems the principal must be in existence and have capacity for ratification; there are differences as to when such requirements apply. This is most relevant in relation to acts done on behalf of a company before it is properly incorporated. In France and the UK, the principal must have legal capacity at the time of ratification.71 In the US and the UK, the principal must exist and have legal capacity at the time of the unauthorized act.72 36 It is important to distinguish the effect of ratification on the parties directly concerned by the agency situation (the agent, the principal and the third party) and other parties. Few countries or international texts expressly stipulate that ratification is not effective as against the rights (or other interests) accrued by persons not concerned with

Re Tiedermann and Ledermann Frères [1899] 2 QB 66. Cass Civ 1ère, 28 April 1980 Cauvin v Société Flammarion, Bull Civ 1980, I, No. 129. 65 The French Supreme Court stated that since ratification of an unauthorized act was regulated by Article 1998 CC and not Article 1338 CC, ratification could result from ‘any act, fact of circumstance’. It can be tacit from the voluntary performance of the contract by the person who was irregularly represented: Cass Civ 1ère, 2-7-2014, No 13-19.626, D 2015, 529 obs Amrani-Mekki and Mekki. See also, § 182(2) BGB; Restatement § 4.01(2)(b)). In the UK, there is no prescribed form for ratification Watts, Bowstead and Reynolds (n 5) p. 84 at 2-071. 66 Cass Re 6 December 1893, DP 1893, 1 352; Lewis v Read (1845) 13 M&W 834; De Bussche v Alt (1878) 8 Ch D 286; BGH in (2002) NJW 2325, 2327; Restatement § 4.06 and § 1.02 comment b (burden of establishing principal’s knowledge is on the party claiming ratification). 67 § 177 BGB. 68 Bank Melli Iran v Barclays Bank (Dominion Colonial and Overseas) [1951] 2 Lloyd’s LR 367. In France, silence alone is not sufficient, but it can be if the principal knows of all the facts. See Cass Civ 27 July 1863 Lerestif des Tertres v Thomas, D 1863, 457. 69 Shell Co of Australia Ltd v NAT Shipping and Bagging Services (The Kilmun) [1988] 2 Lloyd’s LR 1. For Francehowever this is so unless ratification is prejudicial to the third party, in which case, it is only valid if revealed to the third party, Cass Civ, 4-3-1891, DP 1891, 1, 313); Restatement § 4.01(2) and comment b (ratification need not be communicated to anyone). 70 Lando and Beale, Principles of European Contract Law (Part I and II) (1998) p. 213. 71 Bird v Brown (1850) 4 Exch 786. 72 Kelner v Baxter (1866) LR 2 CP 174. Restatement § 4.04. 63

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the transaction in question.73 The same applies in France.74 In relation to the parties involved in the transaction, there is consensus that ratification is retroactive, 75 and that a partial ratification is not possible.76 Comment 2 to Article 2.2.9 PICC stipulates that the third party may refuse a partial ratification as this would, in effect, allow the principal to modify the contract. However, a third party may have to accept a partial ratification in order to mitigate damages under Article 7.4.8 PICC.77 The PECL is silent on the issue. It is widely agreed that the principal’s decision to ratify must be balanced against the interests of third parties. In the UK and US, the rules state that ratification cannot damage the third party’s interests.78 In Germany, the unauthorized act is treated as being in suspension until the principal ratifies. Until then, the third party is consequently free to withdraw from the contract.79 In the UK, the third party cannot withdraw once the principal has ratified even though withdrawal precedes ratification by the principal.80 As an attempt to temper this rule, ratification must take place within a reasonable time. What is a reasonable time will depend on the circumstances but once a time has been set, the principal cannot ratify after that time.81 The English courts have considerable discretion to decide what amounts to a reasonable time. An important factor that the courts consider is whether the third party suffers an unfair prejudice.82 In Germany, the right of the third party to withdraw is very limited.83 The European and international texts do not stipulate a specific period. Under the 37 PICC, the principal must ratify by a certain period84 and the third party in good faith can withdraw unilaterally prior to ratification.85 According to the comments, this protects the third party by allowing it to speculate on the market as well as the principal.86 However, if the third party knows or suspects that the agent has no authority, he has the right to set a certain time by which the principal must ratify. In PECL, the rules are somewhat different. If statements or conduct of the principal gives the third party reason to believe the agent’s act was authorized, but is unsure, the third party may send a written confirmation to the principal or request ratification. If the principal does not object or answer in a timely manner the act will be regarded as having been authorized. In the case of ratification, the issue becomes whether the agent has any remaining 38 liability due to acting outside of its authority. Under French law, ratification has the same effect between the parties, as would be the case if a proper mandate had been granted. Restatement § 402(2)(c); Article 3:207(2) PECL; Article 2.2.9 comment 5 PICC. De Quenaudon, ‘Le mandat’, Fasc 20, paras 56–58. 75 Koenigsblatt v Sweet [1923] 2 Ch 314, 325 (ratification is ‘equivalent to an antecedent authority’). § 184(1) BGB; Cass 14 March 1860 Société Tastevin et Co DP 1860, I, 258; Cass Civ 14 January 1868, S 1868, 1, 136 (‘ratification amounts to mandate’); Article 2.2.9(1) PICC; Article 3:207(2) PECL. 76 Smith v Henniker-Major and Co [2002] EWCA Civ 762, [2003] Ch 182. Restatement § 4.07. See too § 4.02, comment b. Demott explains that this would allow the principal to speculate at the expense of the agent. Demott in Busch and McGregor (n 11) p. 236. 77 Busch and McGregor (n 11) p. 374. 78 Restatement § 4.02-2(c); Smith v Henniker-Major and Co [2002] EWCA Civ 762, [2003] Ch 182. 79 The procedure to follow will depend whether the third party knew that the agent’s actions are subject to ratification (§ 178 BGB) or not (§ 177(2) BGB). 80 Bolton v Partners Ltd v Lambert (1889) 41 Ch D 295. 81 Dibbins v Dibbins [1896] 2 Ch 348. But see, Presentaciones Musicales SA v Secunda [1994] (Ch 271, proceedings had been started without authority, ratification was allowed even though ratification had taken place after the expiration of the limitation period; Smith v Henniker-Major & Co [2003] Ch 182. 82 Watts Bowstead and Reynolds on agency (n 5) para. 2-087. 83 See Schmidt-Kessel and Baide (n 11) (clarification procedure mitigate in some way the harshness of the rules). 84 Article 2.2.9(2) PICC. 85 Article 2.2.9(3) PICC. 86 See comment 4 to Article 2.2.9 PICC. 73

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Ratification retroactively validates the acts of the agent releasing him from liability to the principal and entitling the agent to compensation,87 unless the principal expressly reserves the right to bring a claim against the agent in the act of ratification.88 PECL coverage is from the viewpoint of the principal who, in spite of ratification, may reserve the right to sue the agent for non-performance.89 Both PECL and PICC stipulate that when the principal does not ratify, the agent will be liable to the third party, unless the third party knew of the limitation of authority.90 c) Apparent Authority Apparent authority is recognized widely in both common and civilian systems as the second method by which the third party can bind the principal even where the agent was not authorized to act. Its primary role is to protect the third party or at the very least, ‘to redress the balance between the legitimate interests of the principal and those of the third party’.91 There are however slight variations in the legal basis of apparent authority, as well as, its scope and consequences. It is important for the principal involved in international sales to be aware of national rules on the subject, so as not to be exposed to unexpected liability for acts done without its consent. 40 In France, apparent authority arises because of a belief of the third party that the agent is authorized and is now formally recognized in the French civil code (Article 1156-1 new CC). In Germany and in France, the emphasis is on the reliance or reasonable belief of the third party.92 In the UK, estoppel is the basis of the doctrine of apparent authority,93 and the belief of the third party has to be linked to the principal’s representation that the agent has authority to act. In the US, there are two bases for attribution of liability to the principal – reasonable belief and the doctrine of estoppel.94 However, in France, the doctrine of mandat apparent was based primarily on the legitimate belief of the third party that the agent has authority to act,95 but the behaviour of the principal is also relevant, a point formally recognized following the 2016 reform.96 Chinese law does not have the concept of apparent authority as such as it appears in other jurisdictions. Yet, it is clear that if a third party has reason to believe that an agent 39

Cass Req 14 March 1860, DP 1860, 1, 258. Cass Civ 9 May 1853, DP 1853, 1, 293. 89 Article 3:202 PEL MC. 90 Article 3:294(2) PECL; Article 226 PICC. 91 Busch and McGregor (n 11) p. 388. 92 German view is based on the more general principle of ‘constructive notice’ (Anscheinsvollmacht, Duldungsvollmacht), see Schmidt-Kessel and Baide (n 11). In France, this is pursuant to (new) Article 1156-1 CC. 93 Rama Corporation v Proved Tin and General Investment Ltd [1955] 2 QB 147 defines the 3 necessary conditions; ING Re (UK) Ltd v R&V Versicherung [2007] 1 BCLC 108 and again Business Mortgage Finance 6 Plc v Roundstone Technologies Ltd [2019] EWHC 2917 and East Asia Co Ltd v PT Satria Tictama Energindo [2019] UKPC 20 (all reiterating that apparent authority is based upon the principal’s representation). 94 Restatement § 159 (reasonable belief) and § 2.03, comment c. (estoppel). See Demott (n 11) p. 235. 95 Apparent authority evolved from the doctrine of tort, therefore, requiring fault from the principal, but now seen as an independent concept. See Banque Canadienne Nationale (Cass Ass Plén 13 December 1962, D 1963, J 277). This is now formally recognized in Article 1156-1 new CC which was recently applied in This was applied in Civ 1ère, 4-5-2017 No 16-16.853 Société X v Société D, Gaz Pal 20-6-2017, p 66 where the court reiterated that it is not enough for the third party to say that he believed the agent had authority, it has to be a genuine belief. 96 (new) Article 1156-1 CC. The mention of role of the principal is criticized by Danis-Fatome, n 16. 87 88

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has authority, the principal will be bound.97 However, common sense rules of reason are usually applied.98 The PECL follows the reasonable belief in the agent’s authority, while the PICC links apparent authority to the prohibition of inconsistent behaviour, which is close to estoppel and dependent on the conduct of the principal.99 Most systems agree that this is particularly applicable when the principal is an organization. The differences between the systems are small; the differences are mostly on the rationales given then on actual outcomes. The differences highlight the tension between ‘the desire to impose liability on the principal only where the erroneous impression of authority was created through his actions and a recognition that liability must extend wider in order to achieve the ultimate goal of third party protection’.100 Apparent authority applies widely since it covers cases where the agent simply acts 41 outside of his authority to cases where he has no authority at all (for French law, see Article 1156 (new) CC). In the US, Germany, and the PECL, the scope is even wider since it goes beyond the conclusion of contracts.101 It seems therefore that in most systems, it is linked to the question of the duration of authority where the need to balance the conflicting interests of the principal and the third party is at its highest. Indeed, apparent authority can therefore protect the third party when the authority has been terminated following the death (or insanity) of the principal, which is not known to the third party.102 In China, the new civil code talks of expiration of authority.103 The PECL also views the matter from the principal’s viewpoint by stipulating that the agent remains authorized for a reasonable time to perform acts ‘which are necessary to protect the interests of the principal’.104 In relation to the international texts, the PICC and the PECL also consider apparent 42 authority in the specific situation where the authority of the agent has already ended.105 In this situation, PICC considers the interests of the principal and third party in one article as it stipulates that termination of authority is not effective unless the third party knew or ought to have known about it106 and adds that ‘notwithstanding the termination of authority, an agent remains authorized to perform the acts that are necessary to prevent harm to the principal’s interests’.107 A similar rule applies in the PECL where comments make it clear that apparent authority will apply where express (or implied authority) is extinct.108 In all systems, the primary effect of apparent authority is to bind the principal to 43 an act by allowing the third party to sue him in spite of the lack of express or implied 97 Article 172 Chinese Civil Code 2021. To be read however in conjunction with Article 171 which puts as a rule that the principal is not bound by acts done without his authority. A similar notion applies within company law, (Article 504 Chinese Civil Code 2021). 98 Christou (n 37) 1003-04, paras 22–43. 99 Article 225(2) PICC (in the light of good faith in Article 1.7 PICC and the prohibition of inconsistent behaviour in 1.8 PICC). 100 Busch and McGregor (n 11) p. 395. 101 Restatement § 2.03, Article 3:201(3) read in conjunction with Article 1:107 PECL; German Duldungsvollmacht and Anscheinsvollmacht (Schmidt-Kessel and Baide (n 11) pp. 109–120). 102 Article 2005 French CC; Drew v Nunn (1879) 4 QBD 661. §§ 170–171 BGB. 103 Article 172 Chinese Civil Code 2021; for companies, apparent authority only covers situations where the agent has acted outside its authority but also applies for unincorporated companies, Article 504 Chinese Civil Code 2021). The language is slightly different since it says it is binding, ‘unless the counterparty knew or ought to have known’. 104 Article 3:209 PECL. 105 Article 2.2.10 PICC; Article 3:209 PECL. 106 Article 2.2.10(1) PICC. 107 Article 2.2.10(2) PICC (allows the courts’ discretion as to whether the third party knew or ought to have known). Busch and McGregor (n 11) p. 392. 108 Lando and Beale, Principles of European Contract Law (Parts I and II) (1998) p. 217.

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authority.109 Yet, this must be appreciated in the light of the legal basis of the doctrine. In the UK, which is based on estoppel, the third party alone can use it to prevent the principal from denying that there was authority.110 The same applies in the PICC.111 In the US and the PECL112 however both the third party and the principal can invoke apparent authority. In France, it is clear that the third party can sue, but the reverse is not clear.113 It has been remarked that in practical terms, there is probably no significant difference between the approaches since even when the principal sues the third party this is likely be on the basis of an implied ratification.114 44 Although the policy basis for apparent authority is to protect the third party,115 the latter does not evade scrutiny since the courts will consider whether the third party is acting in good faith and whether his beliefs relating to the agent’s authority are reasonable or legitimate. Reviewing the rules in the various countries, two issues must be considered. The first one relates to the conduct of the principal. In the UK, Germany, the PECL and the PICC, the appearance of authority is traced back to words or conduct of the principal.116 The US rules appear wider since the belief of the third party that the agent is authorized is traceable to a ‘manifestation’ made by the principal.117 A ‘manifestation’ is conduct by a person ‘observable by others that express a certain meaning’.118 In Germany, apparent authority also applies where there is no pre-existing relation between the agent and the principal. This is the case where for instance, the principal knowingly tolerates the behaviour of the agent.119 45 Germany and the UK accept that the mere appointment of the agent to a position by the principal where it is usual to have certain authority will be regarded as a conduct of the principal.120 In France, the principal’s behaviour is important when the principal’s conduct has created or contributed to the third party’s erroneous belief that the agent had authority.121 Comments to the PECL and PICC indicate that although the conduct of the principal is important, so are other circumstances, especially when dealing with organizations. Comment D to Article 3:201 PECL refers to ‘the risk principle’ whereby the surrounding circumstances indicate that the ambit of the risks was for the principal to bear. Comment 2 to Article 2.2.5 PICC makes it clear that conduct, as well the

109 Restatement § 6.01 and 6.02; Article 1156 French CC (new) and Article 1998-2 French Code of Commerce. 110 Rama Corporation v Proved Tin and General Investments Ltd. [1952] 2 QB 147. 111 Article 2.2.5(2) PICC. 112 Article 3:201(3) PECL in cases of apparent authority, the principal is ‘to be treated as having granted authority’. Busch and McGregor (n 11) p. 347. 113 Saintier (n 11) p. 13. The 2016 reform remains silent on that point and therefore offers no help. 114 Busch and McGregor (n 11) p. 395. 115 In France, under the new rules, the form of action differs depending on whether there is a détournement de pouvoir (breach of authority) or défaut de pouvoir (no authority at all). 116 The test for apparent authority or Anscheinsvollmacht in German is whether there is a reasonable inference from the third party that the agent was acting with authority and that the inference was caused by the principal’s words or actions. See Larenz and Wolf, Allgemeiner Teil des Bürgerlichen Rechts, § 48, para. 26. In the UK, apparent authority comes from a representation by the principal; Freeman & Lockyer (a firm) v Buckurst Park Properties (Mangal) Ltd [1964] 2 QB 480; Article 3:201(3) PECL; Article 2.2.5(2) PICC. 117 Restatement §§ 2.03, 3.03. 118 Restatement § 1.03, comment b. 119 Schmidt-Kessel and Baide (n 11) p. 120. 120 § 54(3); § 56 HGB for employees in stores and warehouses; First Energy (UK) Ltd v Hungarian International Bank Ltd [1993] 2 Lloyd’s LR 194 approved by the Privy Council in Kelly v Fraser [2012] UKPC 25, [2012] 3 WLR 1008. 121 Cass Com 5 December 1989, Bull Civ IV, No. 309.

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surrounding circumstances, especially when the principal is an organization, are of crucial importance. Although the systems may, at first sight, appear radically different, this is not demon- 46 strated by case outcomes. Even in systems where the focus is on the principal, the third party’s behaviour is still relevant. Although the countries articulate this in slightly different ways, in essence, the third party must have acted in a reasonable manner in assuming that the agent had authority and the third party must have actually relied on the principal’s representation. This is therefore part of causation. In France, the belief must be legitimate122 but the legitimacy is heavily influenced by good faith.123 In Germany, the reasonableness test applies; whether it was reasonable for the agent to infer that the agent had authority. The reasonable inference must be directly caused by the principal’s words or actions.124 In the UK, the third party must have relied upon the representation by the principal that the agent had authority. The crucial element is that the third party is aware and believes in the representation.125 When assessing this belief, the courts also pay attention to the circumstances surrounding the transaction. If such circumstances indicate that the third party should have been suspicious, then the third party is required to make enquiries.126 In the US, although the focus is also on the reliance of the third party, what reliance 47 amounts to is unclear.127 The PECL and the PICC appear motivated by principles of fairness and reasonableness. In the PECL, actual reliance is required since the third party must be ‘entitled to rely upon the impression that the principal had in fact granted authority’.128 In the PICC, the third party must reasonably believe that the agent had authority and the comments add that what is reasonable will vary depending on the circumstances of the case.129 It is not clear whether evidence of actual belief is required. It has also been remarked that the PECL and PICC do not appear to draw a parallel with the general law of misrepresentation.130 The final point to consider in relation to the conditions required to support a finding 48 of apparent authority is that of loss since there is less agreement on this point. In France and the PECL, there is no separate requirement for loss; it is sufficient for the agent to have believed that there was authority. The same applies in the US where an

122 Cass Ass Plén 13 December 1962 Banque Canadienne Nationale, D 1963, J 277, note Calais-Auloy. This means that the third party must have had good reasons to be mistaken, by for instance being influence by words or the behaviour of the agent (a jurisprudence constante : Cass Com 5-3-1980, No 77-15991, Bull Civ IV No 116). 123 Cass Civ 1ère, 12 November 1998 Commune de Moulin v Mme Henriques, D 1999, IR 39. 124 Schmidt-Kessel and Baide (n 11) p. 117. See also, Spiro v Lintern [1973] 3 All ER 319. 125 Armagas Ltd v Mundogas SA [1986] AC 717. However, the third party, a consumer in this case, does not have to consider the representation with due diligence: Quinn v CC Automotive Group t/a Carcraft [2010] EWCA Civ 1412, [2011] 2 All ER (Comm) 584. 126 Hopkins v TL Dallas Group Ltd [2005] 1 BCLC 543. In recent cases, the courts appear to be more demanding when assessing the honesty of the belief of the third party. See Criterion Properties plc v Stratford UK Properties LLC [2004] 1 WLR 1846 (‘if a person dealing with an A knows or has reason to believe that the contract is contrary to the commercial interests of [the P], it is likely to be very difficult for the person to assert with any credibility that he believed that the A did have actual authority’). In a similar vein, see Stavrinides v Bank of Cyprus Public Ltd Co [2019] EWHC 1328, where it was held that the third party who was very familiar with the bank’s procedure could not establish that their belief in the manager’s authority was honest). 127 Demott, (n 11) p. 230. 128 Comment D for Article 3:201 PECL. 129 Comment 2 to Article 2.2.5 PICC. 130 Bennett (n 53) p. 55.

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objective theory applies.131 In the UK loss is relevant but evidence of loss can be as little as merely entering into the contract (estoppel theory).132 In the PICC, the situation is somewhat complex. Apparent authority must be considered in the light of the principle of prohibiting inconsistent behaviour,133 which is close to estoppel. Detrimental reliance is not required in cases involving apparent authority.

2. Undisclosed Agency Undisclosed agency is a useful tool where the principal wishes to remain hidden. It is therefore particularly applicable to international sales. This is the area where the civil and Common Laws have substantial differences. In the US and the UK, there is no obligation to disclose the existence or the identity of the principal. Both jurisdictions therefore allow a principal who has remained hidden to make claims relating to the contract, provided that there was prior authority134 and that the right is not excluded by contract.135 This rule is subject to exceptions, which are strictly enforced in order to protect the third party. For example, the principal will be prevented from intervening if there is an express or implied exclusion to the contract.136 However, the third party can set the beneficial assumption (exception) aside if it establishes that it has good reasons to contract with the agent rather than the principal.137 Civilian countries do not make that distinction but differentiate between direct and indirect representation. Representation is direct when the agent acts on behalf of and in the name of the principal. Representation is indirect when the agent acts on behalf but not in the name of the principal. Indirect representation is wider than undisclosed agency since indirect representation can be disclosed or undisclosed.138 Yet, the crucial difference with undisclosed agency is that in indirect representation, the rule is that the principal has no rights against the third party. The CCC 2021’s rules are however somewhat different from their civilian and Common Law counterparts.139 50 The PECL, PEL MC and PICC appear to be at odds in their coverage of indirect and undisclosed agency, but this is more due to differences in terminology than of substance. They can nevertheless be reconciled and provide a pragmatic compromise between the different national approaches.140Whereas the PECL refers to direct and indirect representation,141 the PICC adopts the Common Law terminology of disclosed and undisclosed agency.142 In all three texts, the general position is that there is no direct relationship between the principal and the third party (and therefore no rights 49

131 Restatement § 2.03. Comment e (third party must reasonably believe that the agent had authority; if the third party acted upon the manifestation of the principal helps to establish the reasonable belief). 132 Freeman & Lockyer v Buckurst Park Properties Mangal Ltd [1964] 2 QB 480. See Watts, Bowstead and Reynolds on Agency (n 5) 8-029 (criticizing the estoppel approach). 133 Article 1.8 PICC. 134 Keighley Maxsted v Durant [1901] AC 240. 135 Siu Yin Kwan v Eastern Insurance Co Ltd [1994] 2 AC 199; [1994] 1 Lloyd’s LR 616; Ferryways NV v Associated British ports [2008] EWHC 225, [2008] 1 Lloyds Rep 353: Restatement § 6.03. 136 Whether there is an implied exclusion is a matter of contract interpretation (Siu Yin Kwan v Easter Insurance Co, above). 137 Novasen SA v Alimenta SA [2013] EWHC 345, [2013] 1 Lloyd’s LR 648. 138 See Gregoraci and Saintier ‘Indirect representation and undisclosed agency in English, French and Spanish law: a comparative analysis’ (2009) ERPL 25. For French law, see now Article 1154 new CC. 139 Articles 925 and 926 Chinese Civil Code 2021. 140 Id. (the texts do not define the rationales underlying indirect representation and undisclosed agency). 141 For PECL section 2 is on direct representation and section 3 on indirect representation; for PEL on mandate contracts, see Article 1.101(1 a–b). 142 Articles 2.2.3 and 2.2.4 PICC.

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against each other) where: (a) the agency is undisclosed and (b) although the agency is disclosed, the agent acts in his own name (indirect representation) (Articles 2.2.3(1)–(2) PICC). In all three texts, the agent must have the principal’s authority to create privity and must act within the scope of that authority. Commentary on Article 2.2.1 PICC states that the section ‘only deals with agents who have authority to conclude contracts on behalf of their principals’. Article 3.101 PECL stipulates that the Chapter governs the authority of an agent or other intermediary to bind its principal in relation to a contract with a third party. Yet, in all three texts, the above rule is subject to exceptions. The PICC approach is 51 narrower than that of the PECL. In the PICC, the exception is only applicable to undisclosed situations, where the agent agrees with the third party that they are contractually bound through indirect representation, in which case the principal cannot sue or be sued by the third party. Secondly, there is only one exception to the lack of direct rights between the undisclosed principal and the third party, namely when the agent represents itself to be the owner of the principal’s business and the third party discovers the real owner.143 In PECL, the two relationships, between principal and agent and between agent and third party are kept separate. The third party can only sue the agent, and the principal has no privity to intervene. PECL allows the principal and third party to have direct rights against each other where not to do so would leave the principal or the third party unprotected, such as in the case of bankruptcy of the agent or by breach of the agent.144 a) Internal Relation: The Agent and Principal The main issue here is the extent of the obligations that the agent and the principal 52 owe each other. There is a good deal of commonality across various countries on the obligations of the agent; the same however cannot be said about the obligations of the principal to the agent. In both common and Civil Law countries, the rules tend to favour the principal, although they do so for different reasons. In civilian circles, the mandate is seen as entered into primarily for the principal’s interest and the rules primarily focus on his benefit. 145 In Common Law circles, given the power that the agent has to bind the principal, the latter is therefore viewed as the party in need of protection.146 As the agent is in a fiduciary position he owes additional (fiduciary) duties to his principal based in equity. Although no such additional duties exist in civilian systems, the requirement of good faith serves a similar purpose. However, the interests of the agent must not be disregarded (PECL on mandate provides some safeguards precisely for that reason). 147 b) Obligations of the Principal There is wide consensus that the main obligations of the principal are primarily 53 financial in nature, namely to pay the agent the commission due, as well as to reimburse the agent for expenses incurred on behalf of the principal.148 The same obligations are recognized in the PECL. Article 2:102(1) PECL mandate requires payment of compensation (price) and Article 2:103 payment for expenses. Therefore, the principal must Article 2.2.4(2) PICC. Articles 3:302 and 3:303 PECL. 145 The PEL mandate states that a professional agent is capable of taking care of his own interests. See PEL MC, p. 113. 146 Restatement § 8.01; Armstrong v Jackson [1917] 2 KB 822. 147 PEL MC, p. 113. 148 Article 1999-1 French CC; Restatement § 8.14, Articles 921 and 928 Chinese Civil Code 2021 for respectively expenses and remuneration. 143

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pay the price unless the principal reasonably believes the agency was gratuitous. Article 1986 French CC stipulates that ‘an agency is gratuitous unless there is an agreement to the contrary’.149 However, the French Supreme Court has held that when the agent acts in a professional capacity, it is presumed that the agent will be paid (Cass Civ 2ème, 24-10-1958, Bull Civ II, No 653). English law is in accord. In Miller v Beale (1879) 27 WR 403, the court stated that there is a presumption that when the contract of a professional agent remains silent, the agent will be paid for his services This was later codified in s 15 of the Supply of Goods and Services Act 1982. Gratuitous contracts rarely arise in commercial settings and are therefore unlikely to be found in international sales. 54 In France and in the UK, similarities arise in the limited obligations of the principal towards his agent. Of note however is the general obligation of good faith in both countries, which imposes on the principal a duty to cooperate in the context of the commercial agency relationship, which also exists in the UK (this is of particular significance in field of distribution, which will be discussed in Part II of this Chapter). This requires him to allow the agent to perform its duties and requires the principal to give the agent the relevant tools for the job. The obligation is particularly onerous if the principal is a professional. Interestingly, a similar obligation appears in PECL on mandate, Article 2:101(1) PEL MC imposes on the principal an obligation to cooperate. It also places a specific duty on the principal to give direction to the agent. PECL also imposes a general duty to co-operate in all types of contracts (Article 1:202 PECL). In the US, Restatement § 8.15 requires the principal to deal with the agent fairly and in good faith. No such a specific obligation exists in the CCC 2021, which nevertheless imposes a general obligation to perform in good faith for all contracts. c) Obligations of the Agent The obligations of the agent are much more extensive in both civilian and common legal systems. At Common Law, an agent owes two types of obligations, those defined by contract (mandate) and those defined by equity (fiduciary obligations). Although the Civil Law does not recognize fiduciary duties per se, the outcome is similar because the agent is bound by the general obligation of good faith, with the exception of the CCC 2021. 56 The agent must perform his duties150 by following instructions and acting with due care.151 Under Restatement § 8.09, the agent must not exceed his authority, must comply with his principal’s instructions, as long as they are lawful. For the UK, in the case of Ireland v Livingstone (1872) LR 5 HL, the court held that if the instructions are ambiguous, the principal will be bound as long as the interpretation by the agent is reasonable and that the agent also acted reasonably.152 It is of utmost importance for the principal to be as precise as possible in its instructions, especially when he is acting for an overseas client. Similar obligations arise in China.153 55

149 For a reiteration of this as a matter of principle, see Civ 1ère, 4-5-2012, No 11-10.943, Bull Civ I, No 100. 150 Article 1991 French CC, Restatement § 8.07, Article 3:101 PEL MC; Article IV.–D 3:101 DCFR. 151 Restatement § 8.08, s 15 UK Sale of Goods and Services Act 1982; Article 3:103 PEL MC. 152 See references in fn 45. 153 Article 922 Chinese Civil Code 2021 stipulates that the agent shall handle the commissioned affair in accordance with the instruction of the principal. Where it is necessary to alter the principal's instructions, the principal's consent shall be obtained; where an emergency arises and it is difficult to establish contact with the principal, the agent shall handle the delegated affairs in an appropriate manner, but shall report the matter to the principal promptly thereafter.

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The fiduciary obligations are very specific to Common Law countries; they require an 57 obligation of utmost loyalty from the agent to the principal. In the UK, the duty of loyalty is based upon the view that the agent is in a position of power over the principal.154 In the US and the UK, this requires the agent never to place himself in a position where his personal interests may conflict with those of the principal.155 In the UK, the crucial element is whether the agent knowingly acted in breach of his duties. Mere incompetence is not enough. This entails a whole variety of interdictions in both countries In the UK; the agent cannot personally benefit from the transaction, take advantage of his position or take a bribe or secret commission.156 Restatement states an agent cannot benefit materially (§ 8.02), compete with the principal (§ 8.04), or use the principal’s property (§ 8.05). Restatement § 8.12 allows the agent to personally benefit from his relationships to third parties if he provides full disclosure and receives the consent of the principal. UK courts require informed consent and place the burden of proof on the agent (Murad v Al-Saraj [2005] EWCA Civ 959). In English law, fiduciary obligations are imposed in equity and apply even to commercial relations where they cannot be varied by contract (Rossetti Marketing Ltd v Diamond Sofa Co Ltd [2012] EWCA Civ 1021). This has particular relevance in the field of distribution. Given the obligation of good faith157 in the Civil Law, the positions between the civil and Common Laws are reasonably similar. The agent must act in the interests of the principal158 and must be free of conflicts of interest unless the principal knows about the conflicts and gives informed consent.159

Part 2: Commercial Agency and Distribution Agreements The most important predictor of success in the export-import of goods is the selec- 58 tion of a reputable and competent distributor. Because of the differences in the legal treatment of the exporter-distributor relationship, it is important to negotiate a detailed distribution agreement. Special attention should be on the drafting of customized default and termination clauses.

I. Commercial Agency Revisited Any trader looking to sell, market or distribute its goods will have to choose the 59 marketing method that is the most appropriate to its needs.160 The two most common methods are commercial agency distributorship. The choice between both will generally depend on the type of goods being supplied. Commercial agency is defined and regulat-

154 See Conaglen Fiduciary loyalty (Hart 2011); Imageview Management Ltd v Jack [2009] 1 Lloyd’s LR 436. 155 Boardman v Phipps [1967] 2 AC 46, 124, per Lord Upjohn. 156 See Imageview Management Ltd v Jack [2009] 1 Lloyd’s LR 436; Lamb v Evans [1893] 1 Ch 218; Anangel Atlas Compania Naviera SA v Ishikawajima-Harima Heavy Industries Co Ltd [1990] 1 Lloyd’s LR 167. 157 Article 1134-3 French CC (now Article 1101 new French CC); § 242 BGB. 158 Cass Civ 1ère 29 November 1988 Bull Civ I, No. 341 (agent in France is under a general obligation of fair dealing); Article 3:102 PEL MC. 159 See also, Article 5:101 PEL MC; Article 3:205 PECL. 160 See Christou (n 37) Chap. 23.

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ed by the European Directive of 1986.161 The focus on the commercial agent in this part rather than the previous one is necessary for three reasons. First, although the commercial agent is first and foremost an agent since he acts on behalf of and in the name of the principal, but when an agent specializes in the sale of goods, he has a distinct status under the Directive. Second, although traditional rules of agency are still relevant for commercial agents, the Directive’s rationale is significantly different from that applicable to agents in general. Third, the Directive was enacted in order to facilitate cross border trade, thus, commercial agency is of particular importance to the law of distribution. 60 The focus here is between the countries where the Directive is in effect 162 and countries where it does not apply. For the latter, the relationship will simply be covered by the agency rules discussed in Part 1. The sample of laws, which will be considered, is consequently much narrower than in Part 1. It is important to note however the wide scope of the Directive. The Directive’s mandatory termination rights apply to foreign principals (outside of EU-European Economic Area or EEA) if the place or places of performance of the commercial agent is within EU-EEA countries. The Directive is applicable, even where the applicable law is other than European; the agent’s termination rights cannot be excluded by contract. These rights take precedence over choice of law, arbitration,163 and jurisdiction (forum selection) clauses.164 For example, the Ingmar Ltd v Eaton Leonard Technologies Inc case, C-381/98 [2001] 1 CMLR 9, involved an American principal who appointed a commercial agent to represent him in the UK and Ireland. Their agreement included a choice of law clause stipulating California law would apply. Upon termination, the commercial agent claimed to be entitled to the protection of the Directive. The ECJ held that since termination rights were mandatory, the Agency Regulations applied. 61 Since most countries do not have specialized rules for distribution agreements, instead, national contract law principles apply. The lack of specialized contract rules has shifted efforts at harmonization to the application of competition (antitrust) law to distribution agreements. The same can be said about the franchise agreement, where there is a great deal of divergence in national laws, despite its increasing importance as a global distribution method. ‘Franchising’ is not a technical legal term and it appears to be used differently depending on the country.165 English law, for instance, has no legislation dealing with the franchise method of doing business, but some courts have cited bulletins issued by the British Franchise Association. In Europe there is a soft law instrument called the Principles of European Law on Commercial Agency, Franchising and Distribution Agreements.166

161 Council Directive of 18 December 1986 on the coordination of the laws of the member states relating to self-employed commercial agents (86/653) was reviewed in 2015 (17 July 2015, SWD (1015)146 final), no changes were made. In the UK, by the Commercial Agents (Council Directive) Regulations 1993, SI1993/3053 as amended (hereafter, the Agency Regulations). 162 EEA includes EU Member States as well as Iceland, Liechtenstein and Norway. Also Swiss nationals have the same rights as EEA nationals. 163 Accentuate Ltd v Asigra Inc [2009] EWHC 2665, [2010] 2 All ER (Comm) 738. 164 Fern Computer Consultancy Ltd v Integraph Cadworx & Analysis Solution Inc [2014] EWHC 2908 available on BAILII at http://www.bailii.org/ew/cases/EWHC/Ch/2014/2908.html (right to termination payments does not arise in contract but by virtue of law; commercial agent is entitled to pursue a claim in the UK in spite of a choice of Texas law). Following the UK exiting the EU, this will change of course. 165 Goyder, EU Distribution Law (5th edn, Hart 2011) p. 176. 166 Principles of European Law on Commercial Agency, Franchising and Distribution Agreements (Sellier 2006).

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II. Commercial Agents and Distributors A distributor buys the goods from a supplier or manufacturer on its own account for 62 resale to customers for a profit. The distributor therefore has no authority to bind the supplier. An agent, however, is an intermediary who acts in the name and on behalf of the manufacturer-supplier (principal). In choosing between an agency or distribution arrangement, two commercial considerations relate to the product and financial risk. If the manufacturer wishes to retain a high level of control over various aspects of the marketing and selling of its products the preferred choice is a commercial agency agreement. This avoids potential violations of competition law in cases where the manufacturer places resale price maintenance requirements in a distribution agreement. 167 In addition, the ability of a supplier to place territorial restrictions on its distributors can be challenged under EU competition law, unless the agreement comes within a block exemption. If brand image is an important factor, the supplier will prefer commercial agency over the distributorship since this will allow it to control the marketing of its products. Financially however, appointing a commercial agent means that the manufacturer retains the risk of ownership including collections and credit risks. The distribution agreement allows the manufacturer to shift or share the risk and expenses related to marketing and sales to end users with the distributor. In addition, the distribution agreement insulates the manufacturer-exporter from national income, sales, or other taxes. A commercial agency agreement may expose the principal to foreign tax liabilities. In other ways, the differences between distributors and commercial agents have been 63 diminishing. First, one of the differences between the two relates to the method of payment. Distributors are usually paid through a mark-up of the price and commercial agents by commission. In the UK, however, commercial agents can be paid by a mark-up and not lose their commercial agency status.168 Second, although commercial agents are entitled to a lump sum payment on termination, there is no such entitlement for distributors. As will be seen, several Member States of the European Union nevertheless protect distributors by applying the law on commercial agents by analogy to distributors.

III. Competition Law Issues Competition (antitrust) law is of crucial importance in the law of trade. It is beyond 64 the scope of this Chapter to deal with competition law issues in any depth. Only a brief overview of some issues will be given here. Agency and distribution agreements are called ‘vertical agreements’ because they are made between parties operating at different levels of the supply chain.169 Although such contracts tend to be viewed as ‘benign’170 from the viewpoint of competition law, competition rules are nevertheless still relevant. Commercial agency agreements are the least affected by competition law rules. This is because the commercial agent does not act for himself but for the principal and as such is not regarded as an independent economic entity or business.171 Yet, although competition law is of primary importance for distribution agreements (especially when

European Commission Guidelines on vertical restraint [2010] OJ C130/1. In Mercantile International Group plc v Chuan Soon Huat Industrial Group Ltd [2001] 2 All ER 632, Rix LJ stated that the existence of a mark-up was only one factor to take into consideration. 169 Goyder, (n 165) p. 73. 170 Id. p. 74. 171 Case T-325 /01 Daimler Chrysler v Commission [2005] ECR II–3319, [2007] 4 CMLR 15. 167

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they are exclusive), commercial agency agreements are nevertheless captured by the rules on post-termination restraint of trade. 65 Europe has been particularly active in this field and has come closer to the US approach. Article 101(1) of the Treaty of the Functioning of the European Union (TFEU) prohibits agreements between undertakings, which may affect trade between EU Member States. Such agreements are automatically void, unless they fall within an exemption or have been notified or exempted by the European Commission. Special rules also apply to manufacturers wishing to set up a network of distributors.172 First, if the goods being supplied are intended for consumer use, a manufacturer, or importer appointing an agent or anyone acting as a distributor must be aware of protective measures for consumers in Europe, such as the Consumer Rights Directive 2011/83/EU. 173 Second, the rapid expansion of Internet marketing and online selling has impacted distribution agreements, as parallel imports have become a much larger problem for manufacturers and suppliers. In addition, ‘free-riding’174 highlights the inadequacy of the current tools.175 For example, in a 2014 French case, a company was fined €900,000, but appealed by claiming that they qualified for an individual exemption stressing that the prohibition of online marketing allowed a network to protect itself against free riding. The Paris Court of Appeal reduced the fine by more than ninety per cent arguing that the law was not settled in this area.

IV. Agents and Distributors: Definitions and Scope Although ‘agents’ and ‘distributors’ are significantly different, the terms tend to be used interchangeably. However, given that commercial agents have their own status defined by the 1986 Directive, it is of crucial importance to understand its scope. Although very few countries specifically regulate the profession of distributors, all agree on the fact that distributors buy and resell goods for a profit in their own name and on their own account. The fact that distributors act for themselves is the major difference between them and commercial agents. 67 For the purpose of the Directive, a commercial agent is defined as ‘a self-employed intermediary who has continuing authority to negotiate the sale or purchase of goods on behalf of another person or to negotiate and conclude such transactions on behalf of that principal’ (Article 1(2) Directive). Under this definition, four issues become apparent. 66

1. Self-Employed Intermediary: An Independent Contractor 68

The commercial agent, as a self-employed intermediary, is a separate entity from the principal (not an employee). There is widespread consensus in EU-EEA Member States that whether the intermediary is truly independent or not depends on the freedom to organize his/her activities as s/he sees fit.176 As a self-employed businessperson, s/he is free to choose the form of business that is appropriate to his/her needs. A commercial 172 Goyder, (n 165) ch 3, 4 and 5 (rules applying to distribution agreements, selective distribution and franchising). 173 [2011] OJ L 304/64. 174 Goyder (n 165) gives the example of a consumer investigating goods in a shop and then buying them on line at a cheaper price. 175 CA Paris 13 March 2014, Case No.13/00714. 176 CA Versailles 16 December 2004, BICC 2005, No. 633 (for a mobile phone distributor), § 84 II HGB; Ready Mixed Concrete (South East) Ltd v Minister of Pensions & National Insurance [1968] 2 QB 497 as applied in Smith v Reliance Water Controls Ltd [2003] EWCA Civ 1153, [2004] ECC 38.

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agent established as a legal entity is still protected by the Directive.177 S/he is also free to represent other principals, as long as they are not competing companies.178 S/he is free to work for him/herself alongside the agency, as long as such other commercial activities do not compete with those of the principal.

2. Continuing Authority Commercial agents are distinct from brokers since they represent the principal on a 69 continuous basis over a certain period of time and not simply act occasionally.179 The fact that the authority must be continuing does not depend on the number of customers or the number of contracts concluded since the constant and successive renewal of a single contract amounts to continuing authority.180

3. Negotiation and Conclusion of Contracts The Directive covers commercial agents who have no authority to conclude a con- 70 tract (negotiating agents) as well as those who can contract for the principal. As previously mentioned, the difference is relevant for tax purposes but also, within the EU-EEA Member States for the application of private international (conflict of law) rules. 181 For example, the Brussels Regulation prescribes that if the agent has authority to bind the principal, the third party may bring an action against the principal in the state where the agent is registered or carries on business. The minimum threshold for the negotiation is whether the commercial agent contributes to the creation of goodwill for the principal. It is also of crucial importance that the commercial agent acts for and on behalf of the principal, and not on its own behalf, to be protected under the Directive and to be entitled to compensation.182 In German law, the indemnity depends on the commercial agent bringing in new clients183 or substantially increasing the business conducted with existing ones. The same applies to all the Member States, which have opted for the indemnity option.184

177 § 84 HGB; AMB Imballagi Plastici SRL v Pacflex Ltd [1999] 17 Tr LR 557; Article L 134-4 al 1 French Code de Commerce (entities protected by the Commercial Agency Directive). 178 the UK, see Rossetti and Anor v Diamond Sofa Company Ltd [2012] EWCA Civ 1021; [2013] Bus LR 543; Article L 134-3 French Code de Commerce Cass Com 15-5-2007, D 2007 AJ 1592. 179 Cass Com 27 April 2011, D 2011, 1279; Duncan Moore v Piretta Ltd [1999] 1 All ER 174. 180 Case C 3/04 Poseidon Chartering BV v Marianne Zeeschip VOF [2006] All ER (D) 250. 181 See Article 5, Council Regulation 44/2001 on the Jurisdiction and the Recognition and Enforcement of Judgments in Civil and Commercial Matters. See C-420/97 Leathertex Divisione Sintetici SpA v Bodetex BVBA [1999] 2 All ER (Comm) 769. For more details on this, see Watts, Bowstead and Reynolds on Agency (n 5), ch 12. 182 Article L 134-4 al 1 French Code de Commerce, Sagal (t/a Bunz UK) v Atelier Bunz GmbH [2009] EWCA (Civ) 700, (2009) Bus LR 1527. 183 For the meaning of this however, see Case C-315/14 Marchon Germany GmbH v Karaszkiewicz, EU:C:2016:211, [2016] Bus LR 694. The court held that the notion of ’new customers’ could not be interpreted restrictively. The court added that whether a customer is new or existing within the meaning of Article 17(2) of the Directive must be construed in relation to the goods that the commercial agent was asked to negotiate and /or sale. The fact that the customer had already bought comparable goods from the principal is therefore not sufficient to say that those customers are pre-existing (at [37]). After referring to the crucial role of the commercial agent as a negotiator, the court concluded that ‘customers brought in by the commercial agent for the goods that he has been assigned to sell must be regarded as new customers within the meaning of that provision even though those customers already had business relations with the principal in relation to other goods’ (at [44]). 184 Cass Com 21 June 2011 SFR (No. 10-18.577 (merely advising potential clients); Nigel Fryer Joinery Services Ltd & Anor v Ian Firth Hardware Ltd [2008] EWHC 767 (Ch); [2008] 2 Lloyd’s LR 108.

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4. Goods versus Services 71

The Directive only covers contracts for the sale (or purchase) of goods, but it does not preclude Member States from widening their implementation of the Directive to include services as well, which several member states have done (Germany, Austria, Belgium, Spain, France, Italy, Luxembourg, Holland and Portugal). As the Directive is silent as to what constitutes goods, there may well be differences of interpretations between Member States. Of particular interest is the field of energy and software contracts. On the former, the European Court of Justice held that electricity constitutes goods. 185 In the UK, gas constitutes goods for the purposes of the Directive.186 The status of software raises problems because although the sale of software alone is covered, not the licence of software.187 However, a supply of software with a perpetual licence is treated as a sale of goods.188 The discrepancy was highlighted in Software Incubator Ltd v Computer Associates Ltd [2018] EWCA Civ 518. Leave to appeal to the Supreme Court was granted and the Supreme Court referred the matter to the CJEU in March 2019. At the time of writing, the CJEU has yet to hear the matter.

5. Express Exclusions 72

The Directive gives Member States the option to stipulate that commercial agents whose activities are secondary will not be protected.189 France, the UK and Germany have elected to opt-out, but have different interpretations as to what amounts to a secondary activity and have done so for different reasons.190 For the UK, the Agency Regulations only apply to the sale of goods.191 This raises a problem for mixed contracts (supply of goods and services). The English and Scottish courts apply the rules to secondary activities, if the primary activity generates goodwill.192

6. Forms, Procedure and Registration of the Commercial Agent 73

The Directive applies even when no formal contract is signed except for Greece and Ireland where a written agreement is still required.193 Under the law of Luxembourg, a written contract is preferred, but proof can be established through various means. Although in most Member States the commercial agent will be protected even when there is no contract in writing, it is nevertheless advised to do so for ensuring the validity of non-competition clauses in France, Germany, and the UK. In addition, in France, the exemption from protection of the legislation when the activities of the commercial agent are secondary must be in writing.194 Several Member States require commercial agents to register in order to trade as such. In the case of Caprini v CCIA (Case C-485/01), Case C-393/92 Almelo v Energiebedriif Ijsselmij [1994] ECR I-1477. Tamarind International Ltd v Easter Natural gas (Retail) Ltd [2000] CLC 1397. 187 London Borough of Southwark v IBM UK Ltd [2011] EWHC 549, (2011) 135 Con LR 136. 188 Fern Computer Consultancy Ltd v Integraph Cadworx & Analysis Solution Inc [2014] EWHC 2908 (Ch); (2014) Bus LR 1397. 189 Article 2(2) Directive. 190 Article L 134-15 French Code de Commerce; § 92 HGB and for the UK, regulation 2(3) and the schedule. See Saintier, ‘The interpretation of Directives to suit commercial needs: a further threat to coherence’ (2012) JBL 130 (France did so to protect motor agents and Germany did so to protect the insurance agents). 191 Regulation 2(1). 192 Lloyd Gailey v Environmental Waste Control [2004] EuLR 423. Followed in Crane v Sky In-Home Services Ltd [2007] EWHC 66 (Ch), [2007] All ER (D) 220. 193 Article 13(1) Directive. 194 Article L 134-15 French Code de Commerce. 185

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the European Court of Justice upheld the appropriateness of registration requirements when it stated that as long as non-registration does not ‘affect the validity of an agency contract’ and that the consequences of a non-registration does not ‘adversely affect in any other way the protection which the Directive confers on commercial agents’.

V. General Obligations of the Parties and Duty of Good Faith 1. Contractual Obligations of Agents and Distributors Commercial agency and distributorship agreements are, for the majority, long term 74 contracts. As marketing tools, agents and distributors share certain obligations such as a duty to promote the sales, a duty to account, a duty not to sell competing products, a duty to report on market information, a duty to maintain offices and other facilities as appropriate. When the relationship ends, both agents and distributor will have to return anything that was provided by the principal that relates to the goods (promotional literature, samples, unsold stock for the commercial agent). They also have obligations specific to their status. For the commercial agent, this includes all the obligations arising from his status as 75 an agent defined in the previous section (duty to comply with authority, due diligence). The commercial agent may undertake other tasks aside the main one such as acting as a factor for the principal, in which case, he will have an obligation to maintain separate account or even be under a del credere obligation. In relation to the specific obligations as defined by the directive, the most important one is the obligation to act in good faith and for the interest of the principal.195 This is an immutable rule that cannot be excluded. For distributors, as they distribute the goods of the supplier, they must not change the 76 packaging or appearance of the goods, they must comply with the supplier’s marketing policies, they must ensure there is sufficient stock of the goods. The supplier can dictate specific terms of sales to the distributors in relation to terms and means of payment as well as the question of limitations of liability. When the relationship ends, the supplier must stop using trademarks, if relevant. It is of utmost importance to decide what happens to the unsold stock.

2. Obligations of Principal-Supplier As seen in the previous section, the primary obligation of the principal is to pay the 77 agent’s commission and expenses. Such obligations are strictly regulated in the Directive by stipulating when and on which conditions the right will arise.196 Such rules are important since they provide commercial agents with a right to be paid. For the supplier, his primary obligation is to supply the goods. Given the increasing importance of good faith as a regulatory implement in most Member States, the obligations of the principal and the supplier must be considered in the light of good faith, to which we turn.

195 196

Article 3 Directive. Articles 6–12 Directive.

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3. Good Faith in Distribution 78

Good faith is used as a tool by the courts in several countries to ensure that the relationship is profitable to both parties, rather than the supplier alone.197 A number of French cases held that there is an obligation to renegotiate the terms of the distribution contract so as to allow the distributor to remain competitive.198 In the area of franchise agreements, German courts have held that a franchise agreement based on pyramid selling was contrary to good faith; it is contrary to good faith when the franchisor’s obligations are discretionary; and an obligation that the franchisee was to buy overpriced goods was contrary to good faith.199 Although the UK does not expressly recognize good faith, in franchise cases, comparable outcomes can be seen. For example, in Fleet Mobile Tyres Ltd v Stone and another ([2006] EWCA Civ) 1209, the court held that the franchisor’s decision to change the line of business and forcing a rebranding was held to be an unlawful repudiation of the franchise agreement. More dramatically, the English High Court recently stated that good faith could be implied in distribution contracts.200 Although the impact of the case as a precedent is as yet unclear, ‘the idea that good faith is not part of English law in business-to-business contracting is now outdated’.201 At the very least, the supplier has a duty of cooperation.

4. Good Faith in Commercial Agency Contracts 79

Under the Directive (Articles 3–4), commercial agents and the principals have respective duties of good faith and cooperation. These duties cannot be excluded by contract (Article 5). For the UK, this is a significant change since principals, at Common Law, are not under any such duties. This also seems to require cooperation from the principal. In practice, this means that the principal cannot simply stop paying a commission and a principal cannot force the commercial agent into committing a breach of contract with another principal.202 It has however no influence in relation to termination.203

197 See the French Cass Ass Plén December 1995, No. 01-19.653, Bulletin 1995 AP, No. 8, p. 15 (franchise agreement). See Abell and Hobbs, ‘The duty of good faith in franchise agreements’ (2013) International Journal of Franchising Law 1–16. 198 Cass Com 3 November 1992, Huard, CCC 1993, No. 45 (distribution contract for the supply of fuel); Cass Com 24 November1998, RTD Civ 1999, 98 (commercial agency agreement). For the duty to renegotiate see generally: Cass Ass Plén 1 December 1995, No 01-19.653, Bulletin 1995 AP, No 8, p. 15 (franchise agreement); Abell and Hobbs (n 197). 199 See Germany: OLG Munich in (1986) NJW 1880 et seq. BGH in (2000) NJW-RR 1159 et seq.; Giesler, Franchiseverträge, No. 60. 200 Yam Seng Pte Limited v International Trade Corporation Ltd [2013] EWHC 111 (QB), [2013] 1 Lloyd’s LR 526. For a commentary, see Saintier, ‘The elusive notion of good faith in the performance of a contract, why still a bête noire for the civil and the Common Law’ [2017] JBL 441–460. The notion appears to have an impact in ‘relational contracts’, for one of the most positive recent iterations, see Bates v post Office Ltd No 3 [2019] EWHC 606 (QB). For criticisms however on the lack doctrinal impact of the notion in the UK, see ZX Tan ‘Disrupting doctrine? Revisiting the doctrinal impact of relational contract theory’ (2019) 39 Legal Studies 98-119. For negative judicial reactions to it, see (as non-exhaustive examples) UTB LLC v Sheffield United Ltd [2019] EWHC 2322 (Ch), Russell v Cartwright [2020] EWHC 41 (Ch), Morley v The Royal Bank of Scotland plc [2020] EWHC 88 (Ch). 201 Abell and Hobbs (n 197) p. 15. 202 In the UK, Bell Electric v Aweco Ltd [2002] EWHC 872 (refusing to pay commission); Cooper v Pure Fishing (UK) Ltd [2004] EWCA Civ 375 (coercing breach). See also, Page v CST Ltd [1997] 3 All ER 656; Janet Mann v Flair (2005) (unreported); Npower Direct Ltd v South of Scotland Power Ltd [2005] EWHC 2123 (Comm). For academic comment see Saintier, ‘Good faith as an overriding requirement in commercial agency contracts: “legal irritant” or “successful transformation”’ (2014) ZVertriebsR 166. 203 Monks v Largo Foods Ltd [2016] EWHC 1837 (Comm).

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France and Germany have implemented the Directive so as to follow their respective 80 legal tradition since good faith is not mentioned in German agency law204 and the French commercial code stipulates that the relation is entered into for the ‘common interest of the parties’.205 In consequence, the principal cannot himself act in competition with the commercial agent.206 There is a clear consensus in most European Member States on the importance of good faith at the stage of the performance of the contract. This is however not the sole importance of the role of good faith. which extends at the stage of termination, to which we turn.

VI. Ending the Contract 1. Fixed and Indefinite Duration Contracts Commercial agency and distribution agreements can be entered into for a fixed or 81 for an indefinite period of time. When a commercial agency contract is entered for a fixed period, it will end with the expiry of a term (unless renewed). In such a case, termination payments are still due.207 To end a commercial agency contract entered into for an indefinite period of time, notice must be given as prescribed by the Directive. 208 The notice is of one month per year, with a maximum of three months. However, a number of Member States provide for a maximum of six months (Austria, Belgium, Denmark, France, Finland, Germany, Italy, Spain and Sweden). Distribution contracts entered into for an indefinite period can too be terminated by 82 notice. In France, this can be done without cause.209 However, if the termination (or a non-renewal) is regarded as abusive, compensation will be granted.210 A termination is considered abusive when the distributor is not given opportunity to recoup his investment.211 This right to re-coup relates to the obligation of cooperation discussed earlier. Distribution agreements entered into for a fixed term can usually not be terminated 83 before the expiry of the term in the UK unless there is a breach. In France however, it is possible for the parties to enter a clause allowing early termination of the contract. Once again, termination must not be abusive. In Germany, as the law relating to distribution agreements are not specifically regulated, there is still a reasonable amount of freedom.

2. Termination for Breach and Good Faith Both commercial agency and distributorship contract can be terminated immediately 84 if one party fails to perform their obligations. For distribution agreements, given the lack of specific legislation, freedom of contract prevails, but good faith is nevertheless relevant. In Italy, the right to terminate must be used legitimately. For example, an Italian court (Cassation, 18-9-2009, No 20106) noted that even a termination with notice must be measured against the notion of good faith and fair dealing to ensure that the right to end the contract is used legitimately and without abuse.

§ 86 and § 86 a HGB. Article L 134-4 al1 French Code de Commerce. 206 Cass Com 14 June 2005, No. 03-19-150. 207 Cass Com, 23 April 2003, D 2003, AJ 1362, Stuart Light and others v Ty Europe [2003] EWCA Civ 1238, [2004] 1 Lloyd’s LR 693. 208 Article 15 of the Direcitve. 209 Article L 442-6 para. 5 French Code de Commerce. 210 Article L 442-6 I.5 French Code de Commerce. 211 Cass Com, 3 November 1992 Huard, JCP 1993, II, 2264. 204 205

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For commercial agents, the Directive expressly allows summary termination (Article 16), and the relevant laws of the Member States apply. There is consensus in most Member States that only a serious breach will allow the other party to terminate the contract. In the UK, in Crocs Europe BV v Craig Lee Anderson, t/a Spectrum Agencies (a partnership) ([2013] 1 Lloyd’s LR 1), the Court of Appeal unanimously rejected the proposal whereby good faith could imply a ‘condition’ in the contract, a breach of which would always be repudiatory. Lord Justice Mummery reiterated that termination by breach was to be determined by general principles of the governing law of contract. The courts will therefore assess what amounts to a repudiatory breach. This question is particularly important since the right to terminate is linked to termination payments. Articles 18(a) of the Directive allows the principal to terminate summarily and not have to pay termination payments for ‘a default attributable to the commercial agent’. Conversely, Article 18(b) of the Directive allows the commercial agent to terminate and claim termination payments if the termination is justified by ‘circumstances attributable to the principal’. 86 There is consensus that a ‘serious’ breach is required for termination of commercial agents and avoiding paying termination payments.212 Failing to pay the commission is regarded as a valid reason for the commercial agent to terminate in France and in the UK.213 In France, acting for a competing party without checking first is a breach of loyalty allowing the principal to terminate without owing compensation.214 In the UK, the position is not entirely clear; in Rossetti Marketing Ltd v Diamond Sofa Company Ltd,215 the Court of Appeal made it clear that a commercial agent cannot act for two competing principals without consent. However, as the court was dealing with preliminary issues, it did not decide whether this would allow the principal to terminate and avoid termination payments. The ECJ decision in Volvo car Germany GmbH v Autohof Weidensdorf GmbH216 made clear that the breach must be invoked by the principal before terminating the contract without paying termination payment (indemnity in this case). 85

3. Failure of Commercial Agent to Reach Sales Target 87

The crucial question is whether failing to reach the quotas/sales target allows the principal to terminate. In France, failing to reach the target alone is not sufficient and the principal cannot stipulate in the contract that the failure to reach the target will allow him to terminate the contract.217 The principal can only do so provided that he positively shows that this is due to the commercial agent’s fault. This will be the case if the commercial agent remains inert and does not do anything to prospect potential clients, which will allow the principal to terminate without having to pay compensation.218 In the UK, although it has been made clear in Bell Electric Ltd v Aweco Appliance Systems GmbH & Co KG, [2002] EWHC 872, that regulation 18(a) and (b) are the ‘reverse of the 212 Cass Com 15 October 2002 Lenne v Haudebault Case No. 00-18.122 in (2002) CCC No. 19, p. 12. OLG Munich in (1995) BB 168, (1997) NJW-RR 1187. Bell Electric Ltd v Aweco Appliance Systems GmbH & Co KG. [2002] EWHC 872, [2002] All ER (D) 99. For discussion, see Saintier and Scholes, Commercial agents and the law (LLP, 2005) pp. 149–150. 213 Cass Com 5 October 2004, RJDA 2005, No. 373 on the P failing to comply with payment of commission following exclusivity. Bell Electric Ltd v Aweco Appliance Systems GmbH & Co KG. [2002] EWHC 872, above, n 203. 214 Cass Com 7 January 2014 RJDA 2014, N 324. 215 [2012] EWCA Civ 1021. 216 Case C-203/09, [2010] ECR I-10721. 217 Cass Com 15 October 2002, Lenne v Haudebault. Above n 203. 218 Cass Com 9 December 2014, No. 13–28.170; BRDA 2014, No. 24, p. 9.

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same coins’, it is also clear that normal English contract law rules apply for immediate termination (Regulation 16). This is important since it is thought that even if a clause in the contract allowing termination should the commercial agent fail to reach a particular quota, the courts would still have to assess whether the failing to reach the quota is due to a repudiatory breach (to assess whether this is a breach of due skill and care for instance). There is remarkable consensus on the fact that the right to terminate must be 88 exercised cautiously.

4. Termination and Consequences Articles 17 and 18 of the Directive provide commercial agents with a right to claim 89 termination payments. This right is mandatory and is not fault-based, and therefore it can only be excluded in circumstances as defined within the Directive. As mentioned previously, the mandatory nature of such a right is of crucial importance for any principal outside the EU/EEA in deciding whether to hire a commercial agent within the EU.219 Termination is broadly construed to include expiry of a fixed term contract, termination due to the retirement of the commercial agent, and death.220 On termination, the commercial agent has a right to claim a ‘termination payment’. 90 The Directive left the choice to Member States between French-based compensation and German-based indemnity. It is therefore not surprising that France and Germany have kept their own systems.221 The UK has opted for both (regulation 17), but compensation will apply if the parties remain silent (regulation 17(2)). In the UK, it was made clear that it was impossible for the contract to stipulate that the commercial agent would be entitled to either compensation or indemnity whichever method resulted in the lower amount.222 A clear choice has to be made and the rules cannot therefore be used by the principal as an attempt to find the cheapest solution. The other Member States have opted for indemnity. a) Application to Distributors In spite of the clear distinction between commercial agent and distributors, some 91 member states apply the rules on commercial agency to distributors by analogy. This is the case in Germany, Sweden223 and Greece. The Greek Supreme Court also held that the commercial agency legislation applies to maritime as well as commission agents.224 Following an amendment to its commercial agency law in 2007 (Article 14 § 3L/ 3557/2007), the law now applies to exclusive distributors. Although France does not do so, distributors can nevertheless get substantial compensation when there is an abrupt termination of the contract without prior notice.225

See Ingmar Ltd v Eaton Leonard Technologies Inc C-381/98 [2001] 1 CMLR 9. Light v Ty Europe Ltd [2004] 1 Lloyd’s LR 693 (expiration of contract); Abbott v Condici [2005] 2 Lloyd’s LR 450 (retirement); Article L 134-15 French Code de Commerce, Regulation 17(8) (death). 221 § 89 b HGB; Article L 134-12 French Code de Commerce. 222 Charles Shearman v Hunter Boot Ltd [2014] EWHC 47 (QB), available on BAILII at http://www.baili i.org/ew/cases/EWHC/QB/2014/47.html. 223 For more information, see International Commercial Transactions, Franchising and Distribution, (2010) 44 International Law 229, at 241–244. 224 Supreme Court 15/2013; 16/2013. 225 Article L 442-6 I (5) French Code de Commerce. 219

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b) Calculation of Termination Payment Although the Directive provides some indication of the manner in which to calculate indemnity (Article 17(2)), it is silent on how to calculate compensation. In relation to indemnity, the European Court of Justice (ECJ) has made it clear that there is considerable freedom for Member States in this respect as long as the calculation adopted is not less advantageous to the commercial agent than the one defined under the Directive. 226 In consequence, in Turgay Semen v Deutsche Tamoil GmbH,227 the ECJ nevertheless censured the German authorities for being too restrictive in their calculation by simply measuring the agent’s lost commissions. The German code has since been changed to reflect this.228 In Italy, the method of calculation is set by collective agreement between associations of agents and principals.229 The calculation of an indemnity is a three-stage process as discussed in Semen v Deutsche Tamoil GmbH. Indemnity does not prevent the commercial agent from also suing for damages (regulation 17(5)). An indemnity payment cannot exceed one year of commissions, which, following Turgay Semen, tends to be the norm. 93 In France, the compensation is usually calculated at two years gross commission,230 something, which has clearly been rejected in the UK in Lonsdale v Howard & Hallam Ltd.231 The English courts take the view that compensation is based on what a hypothetical purchaser would pay for the agency. In Warren (t/a On-line Cartons and Print) v Drukkerij Flach BV232 involving the ending of a contract following the retirement of the commercial agent, the Court of Appeal held that in order to be entitled to compensation, the commercial agent must show that ‘the agency has a value of some kind’ regardless of whether there was an actual purchaser. There are therefore considerable differences between France and the UK in the manner in which the courts approach the calculation of compensation. As there is clear freedom of the member states in this area, 233 these differences are allowed. 94 Following the Directive, only a serious breach by the commercial agent will cause him to lose his right to compensation234 or when the commercial agent sells the agency without the consent of the principal.235 92

VII. Non-Competition Clauses 95

The agency or distribution contracts should have a clause that prohibits commercial agents and distributors from competing with the principal during the term of their contract. By law, the commercial agent is required to act in the best interests of his Case C-465/04 Honyvem Informazioni Commerciali Srl v Mariella de Zotti [2006] All ER(D) 343. Case C-348/07, [2009] ECR I–2341. 228 § 89 HGB. 229 See International Distribution Institute, at http://www.idiproject.com/documents/news_archive (1 September 2014). 230 A practice which has been in existence for a very long time. For more details of the manner in which the French courts deal with this matter, see JM Leloup Les agents commerciaux, statut juridique, stratégies professionnelles Delmas, 2017, 7th edn. 231 [2007] UKHL 32, [2007] 1 WLR 2055. Although the method is not entirely sorted, the English courts follow the idea of an ‘hypothetical purchaser’ and are devising their own methods to assess the loss. See for example, Monk v Largo Ltd [2016] EWHC 1837, Green deal marketing Southern Ltd v Eco Energy Trading Ltd & Ors [2019] EWHC 507 (HC). 232 [2014] EWCA Civ 993. 233 Case C-465/04 Honyvem Informazioni Commerciali Srl v Mariella de Zotti, above, n 217. 234 Article L 134-13 French Comm C; § 89b(3)(2) HGB. 235 Article L 134-13 al 3 French Comm C; § 89b(3)(3) HGB. 226

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principal. There is widespread consensus that to act for a competing principal, without the knowledge and consent of the principal, is a breach of loyalty.236 For distributors, a non-competition clause must comply with the exemptions under Regulation 330/2010. Post-termination non-compete clauses are common in commercial agents and dis- 96 tributor contracts. For the commercial agents, the Directive expressly allows post-contract restrictions on certain conditions.237 In a dispute involving a franchise agreement (La Retoucherie de Manuela SL v La Retoucherie de Burgos, Case C-117/12) the ECJ held that since the legislation only allows such clauses if they have limited geographical scope, a non-compete clause that prevents the buyer, after the expiry of the contract, from selling similar goods away from the site from which the buyer performed the contract was overly broad. The same applies in franchise agreements in France where it was held that a non-compete clause is only valid if it is proportionate to the interest being protected.238

VIII. Drafting International Distribution Agreements: Practitioner Tips First a disclaimer, which is a bit of fact and a bit of philosophy, is needed here. The 97 clauses discussed in this part may not be enforceable under some laws, such as the EU Directive and some national laws. Those laws need to be consulted, especially in areas such as territorial restrictions, termination, and non-competition clauses. That is the fact; the philosophy is that many of these clauses are enforceable in other national legal systems, and where they are unenforceable there is strategic value in inserting them into the contract. First, the other party may comply voluntarily to such restrictions, especially when profiting from the relationship. Second, clauses may have an en terrorem effect on another party who is unaware of their unenforceability or, more likely, may want to avoid the costs of disputing their enforceability. Third, customized drafting may make unclear whether a clause is enforceable or not enforceable. Here is another fact: parties and their lawyer’s commonly insert unenforceable clauses for strategic reasons given that most agreements result in performance and not breach; those that are breached include cases were the breach is not litigated or arbitrated; and of those that are disputed many are settled. In case of settlement, the negotiations will be anchored by the terms of agreement. For example, in an unenforceable post-termination, non-competition clause, the parties may negotiate a modification or lessening of the clause’s restrictions. The modified clause may still prove to be unenforceable if brought before a court.

1. Nature of Relationship A party may act as both a distributor and as a sales agent, but in such a case the 98 distributor is a special type of sales agent. Even though the distributor buys the goods on its own account, it still acts as a representative of the exporter-manufacturer. As noted earlier, the manufacturer-exporter often wants to control how its products are marketed. This is due to the fact that many goods sold through distribution contracts are branded products. As such, it was suggested that the commercial agency arrangement is preferred 236 Cass Com 15 October 2002 Lenne v Haudebault, OLG Munich 9 November 1994, Rossetti Marketing Ltd v Diamond Sofa Company Ltd [2012] EWCA Civ 1021, [2013] Bus LR 543. 237 Article 20 of the Directive. 238 Case No. 11-27.068, Cass Com 18 December 2002 (clause prohibiting two franchisees from being affiliated with other nationally and regionally-known stores within a 5KM radius was not proportionate to the franchisor’s legitimate interests).

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because the principal is able to exert more control. However, as an alternative, the exporter may insert contract clauses that place additional responsibilities and restrictions on the distributor. Common provisions include the granting the distributor an exclusive right to sell within a geographical area and for an extended duration. The relationship, especially an exclusive one, places a higher level of loyalty upon the distributor, including the obligation not to compete against the exporter, along with a duty to use best efforts in the marketing and selling of the exporters goods. 99 General contract law is the core law that regulates the distribution agreement since it is a private contract. In the US, there are no regulatory laws that particularly target commercial agents or distributors (but for a few exceptions related to the termination of franchise and automobile, and gasoline sales distributorships), as are found in Europe and elsewhere. Some countries, such as Saudi Arabia, require that distributors register with the government and be nationals. Restricting distributors sales to specific territorial areas potentially violate competition law. In Europe, competition law provides a number of block exemptions that act as defences against prosecutions. However, in the area of exclusive distributorships, EU Regulation 1582/97 disfavours outright prohibitions on sale of goods by a distributor in another’s distributor’s territory. The exporter may be able to diminish such cross over sales by contractual limiting the amount of products sold to a given distributor.

2. Sample Contract Clauses and Restrictions 100

This analysis is aimed at looking at contract clauses that protect the interests of the exporter. From this perspective, certain issues should be clearly resolved by the contract, such as, (1) the assignability of the distribution contract (exporter will want to prohibit the distributors ability to assign the contract), (2) exporter should list any key personnel of the distributor and provide a right to terminate the contract if such personnel leave the employment of the distributor, (3) the contract should authorize or preclude the distributor from hiring sub-distributors or sub-dealers, (4) the contract should provide a detailed list of products that will be the subject of the contract, the product lines that are excluded, distributor rights to sell future products, and the rights of the exporter to terminate product lines. In the later instance, European law is sensitive to sudden disruptions of supplies, so the exporter should give advance notice and, if requested by the distributor, provide alternative product lines. a) General Conditions of Sale

101

Conditions of sale can refer to the sale between the exporter and distributor or between the distributor and the ultimate purchaser. This section focuses on the latter with the caveat that a provision setting the price of the product at resale is an illegal price maintenance and should be avoided. In order to ensure conformity in the marketing and sale of its products by different distributors, the exporter should attach ‘General Conditions of Sale’ to the distribution contract and incorporate them by reference. To ensure their inclusion by a court, the best practice is to place them within the body of the contract. If placed in a separate document, then a provision should be included prioritizing the documents in case of conflict. Generally, the clause would state that the distribution agreement prevails over the General Conditions (if a separate document) and any other separate documents, such as future purchase orders. Since the exporter’s generic conditions may not be enforceable in some countries, the exporter may require the distributor to ensure their enforceability under host country (country of import) regulations, such as health, safety, marketing, and packaging laws.

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b) Best Efforts Clause In cases of exclusive distributorships, the efforts of the distributor in selling the 102 exporter’s products are key. If the distributor does not use reasonable efforts to sell the products, such as focusing on the sale of other companies’ products, the exporter’s goal of penetrating a foreign market will fail. The solution is to include a ‘best efforts clause’ in the contract. However, a boilerplate best efforts clause (distributor shall use best efforts to market and sell exporter’s products) does little more than restate the law. U.S. Common Law has long recognized that an agent in an exclusive dealings contract owes an implied duty of best or reasonable efforts in acting on the principal’s behalf. The Civil Law’s principle of good faith would also require an agent and an exclusive distributor to use reasonable efforts in the sale of the principal’s goods. The best efforts clause should concretize the good faith or best efforts concept with 103 detailed benchmarks and measures that would specify the duties of the distributor and allow for termination if the distributor fails to meet certain thresholds. The distributor should be required to spend a minimum amount on the advertising and marketing of the products. The best efforts clause should benchmark the exporter’s expectations by fixing minimum sales quotas. Again, the best efforts clause can be highly detailed and can include requiring the distributor to maintain suitable offices, warehouse facilities, and sales staff; an adequate supply of brochures, catalogues, and sales materials; and minimal levels of marketing efforts, which could include advertising campaigns (print, television, Internet, and/ or radio). The distributor should also be required to maintain a quality website advertising the exporter’s products. The contract should also require that promotional materials and marketing campaigns be subject to the approval of the exporter including the approval of metatags related to websites associated with the exporter’s products. c) Products Liability and Warranties Another key issue is the exporter’s exposure to end purchasers’ product liability 104 claims. Technically, there should be none since the distributor buys on its own account and the distribution agreement can allocate the after sales service of warranties and the liability for product-related claims to the distributor. However, national products liability laws may give the third party purchaser a claim against the manufacturer-exporter. The exporter should not only allocate the risks of product liability claims to the distributor, but also require the distributor to obtain a minimum amount of products liability insurance, with the exporter being endorsed as an additional named insured. If warranty liability is also allocated to the distributor, then the insurance policy should also insure against warranty claims. d) Intellectual Property Protection Associated with the sale of brand goods in foreign countries, are concerns over 105 protecting intellectual property rights (IPR) linked to the goods. There has been a great deal of harmonization of intellectual property protection law throughout the world, largely due to the WTO’s Agreement of Trade-Related Aspects of Intellectual Property Rights. Despite the similarity of national intellectual property laws, there remains a great deal of inconsistency in the enforcement of such laws and the adequacy of the remedies provided in cases of infringement. This makes the inclusion of IPR protection clauses vital in order to protect the IPR of the manufacturer-exporter. Such clauses allow for protection through breach of contract claims. When there is a licensing of rights the manufacturer-exporter is the licensor and the distributor as the licensee. The types Séverine Saintier

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of clauses used to protect IPR rights include: (1) requirement that distributor ensure that exporter’s trademarks are affixed to the goods and their packaging and prohibiting the attachment of the trademarks to other parties’ products, (2) prohibition against distributor altering the goods or packaging, (3) manufacturer-exporter’s IPR, trade secrets, and know-how remain the property of the exporter, (4) ‘no contest’ provision prohibiting the distributor-licensee from challenging the validity of the licensor’s IPR, (5) prohibition against sublicensing or assigning the IPR, know-how, and other confidential information, (6) reservation of rights restricts the use of the IPR to uses detailed in the distribution contract and any rights or uses not expressly granted remain with the licensor, (7) confidentiality requirements that prohibit the disclosure of any ‘confidential information’ provided by the licensor (includes information protected by intellectual property law and any other information not in the public domain, including customers lists and databases, technical information, techniques, methods, financial data, and so forth), the confidential nature of the information must be made known to employees, the information should be restricted to key personnel (which should be listed by name or job description in the contract), and the clause should require that the distributor to obtain signed confidentiality agreements from its employees, and (8) protection against third party infringement is supported by requiring the distributor to promptly inform the licensor of third party infringement; the most pro-licensor provision requires the distributor to bring suit against infringers, but a more common provision only requires distributor to assist the licensor in any such actions or proceedings. e) Default and Termination The default and termination clauses are closely interconnected, with the default provisions listing the types of actions or non-actions that are considered grounds for termination. The termination clause provides a procedure for terminating the contract. The key component of the termination clause is the provision for notice of termination. The notice period should be no less than that required under host country laws. The length of the notice period will depend on whether the distribution contract is being terminated ‘for cause’ (occurrences or non-occurrences listed in the default clause) or without cause (option to terminate, expiration of fixed duration, non-renewal). If the conduct of the distributor is causing continuing harm to the exporter, then termination may be made immediately. In any event, the termination clause should require the distributor to direct any future customer inquiries, correspondences and orders to the exporter. In the area of renewal, the contract should require both parties to provide advance notice of renewal or non-renewal. 107 It is in the best interest of the exporter to provide a detailed list of defaults to support termination based on cause and which provides itself a defence against bad faith or abusive termination. Causes for Termination include: 106

– – – – – – – – – – 962

Failure to use best efforts; Failure to meet sales quotas; Failure to adequately market the products (minimum advertising expenditures); Failure to comply with General Conditions; Failure to protect the confidentiality of licensor’s information; Failure to provide notice and lend assistance in cases of third party infringement; Insolvency, bankruptcy, and loss of credit rating; Continuously late in making payment; Falsifying records or reports; Marketing of products of competitor;

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– –

Failure to provide proof of insurance; Failure to provide required after sale services.

The list should be as detailed and long as possible depending on the type of product, 108 the duration of the distributorship, and the country of import. The default ‘triggers’ are subject to attack under the claim that they provide undue discretionary power to the exporter and where utilized to support a bad faith termination. The length of time the contract was in force, the sunk costs (investments) made by the distributor, and if there is a history of breaches or defaults will factor in a court’s decision whether the termination was reasonable and whether the exporter should pay damages. The fact that the parties expressly agreed to the defaults is a powerful element in favour of the exporter. f) Post-Termination It is important for the exporter to protect its interests subsequent to the termination 109 of the distribution contract. The contract should provide for the return (buy back) or disposal of goods, and associated parts and promotional materials, remaining in the distributor’s inventory at the time of termination. The protection of IPR, know-how, and other types of confidential information must be insured through the confidentiality clause, return or destruction of such information, prohibition against further use, and cancellation of any user registrations. Also, the distributor should be required to transfer after sales services agreements to the exporter or to a new distributor. For a more detailed review of post-termination duties see Chapter 29 on ‘Post-Contract Obligations’.

G. Illustrations I. Commission Agency In most Civil Law countries, indirect representation covers what are referred to as 110 commission agents.239 In China, commission agents are covered by the new civil code.240 A commission agent acts on behalf of the principal but in his own name. A commission agent has no authority to create privity between the principal and the third party.241 As the rules are not very extensive, normal mandate rules apply in Germany,242 France, and China.243 Article L 132-1(2) of the French Commercial code stipulates that the rules on mandate apply to the principal-agent relationship. As previously mentioned,

239 For France and Germany, such agents are covered by the commercial code, §§ 383–406 HGB; Articles L 132-1 to L132-2 French Code de Commerce. 240 Articles 951-960 Chinese Civil Code 2021 (contracts of commission agency). The rules are however somewhat confusing since although they mostly refer to the agent as the “commission agent”, they also refer to a ‘broker‘. The last article (Article 960) stipulates that ‘matters not provided for in this Chapter are governed by the relevant provisions on commission contracts’. 241 Article 958 Chinese Civil Code 2021 stipulates that when the agent enters into a contract with the third party, he ‘directly enjoys the rights and assumes the obligations thereunder’. 242 Häuser, in MüKoBGB (2004) § 383 para. 28. 243 Somewhat confusingly, the Chinese Civil Code 2021 has 2 Chapters for commission contracts, Chapter 23 and Chapter 26. Chapter 23 appears to be replacing the rules on mandate since Article 919 refers to the commission agent as being ‘entrusted with the handling of the principal’s affairs’ and Article 920 appears to distinguish between a general (all of its affairs) and a specific mandate (one or more of its affairs).

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commission agents existed at one time in the UK, but their status is now unclear. Confirming houses play a similar role.244 111 Commission agency is important for international sales, and yet, there is no international rules dealing with commission agency specifically. In France, they are used principally for contracts for the sale or purchase of goods as well as transport. There are specialized rules for transport as defined by Article L-132-3 to L 132-9 of the French Commercial code. The one exception is Article 3:102(2) PECL, which appears to assimilate undisclosed agency to commission agency under the concept of indirect representation (undisclosed agency). Comment 4 to PICC Article 2.2.3 stipulates that the commission agent acquires direct rights vis-à-vis the third party, while the principal has no such rights. Commission agents are heavily used in international trade activities, especially in France and China.245 112 In France and China, the commission agent acts on behalf of the principal, but does so in his own name. The third party has no direct action against the principal who similarly acquires no right and liability toward the third party.246 The lack of direct rights between the principal and the third party in French law is motivated by the fact that the principal chooses to remain hidden. In Banque Marmorosch Blank et Cie v Piano (Cass Civ 29-12-1930), the court held that ‘the principal, who, in being hidden and in showing only the commission agent, has renounced to any action against third parties, in the same way, third parties have no action against him’. The commission agent is therefore primarily liable in law.247 The only exceptions in France are where the third party knows that the commission agent is acting in breach of his obligations and when the third party is insolvent.248 113 Another issue relates to the right of the principal-supplier to change the terms of the contract during performance. Good faith has been used as a tool to ensure that the relationship between the principal-supplier and distributor-agent is mutually beneficial. In this respect, can the principal-seller, faced with supply problems or raising prices, unilaterally decrease supply or raise prices to protect its business. It again appears that good faith is taken into consideration, to determine the reasonableness of the principal’s changes. However, as will be seen in the next section, in some countries the principal remains liable for the lost commissions of the agent-distributor.

II. Changing the Products 114

In the English case of Guy Turner v Steinhoff furniture Ltd ([2006] Eu LR 50), the principal unilaterally reduced the range of products provided to its commercial agent. The commercial agent sued the principal for compensation on the ground that his actions were ‘circumstances attributable to the principal’ pursuant to regulation 18(b)(i) of the Commercial Agency Directive. The court agreed with the claimant and held 244 See Scottish & Newcastle International Ltd v Othon Ghalanos Ltd [2008] UKHL 11, [2008] 1 Lloyd’s LR 462. 245 Article L 132-2 French Code de Commerce and also now Article 1154-2 French (new) CC; Article 951 Chinese Civil Code 2021 defines the commission as conducting ‘trading activities’. 246 Article 958(1) Chinese Civil Code 2021. 247 Cass Com 7 May 1962, SARL HG Topakian v Sté Armé Baboin et Cie, Bull Civ III, No. 240. For china, the principle is the same, but the parties can however decide otherwise as per Article 958(2) Chinese Civil Code 2021. 248 Cass Civ 20 July 1871, Banque de la Martinique c Thomas, Lachambre et Cie et autres, DP 1871, 1, 232 (conflict of interest); Article 121-122 of Loi 25-1-1985; Articles L 621-122 and 621-124 of new commercial code (insolvency).

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that ‘a contract of agency cannot be performed affectively without the cooperation of the parties’. The cooperation required that ‘both parties will do all that is necessary on their part to enable the contract to be performed’. This duty requires the principal to provide ‘an adequate volume of goods’, the adequacy of which would need to be judged ‘by reference to the volume required to provide the agent a fair and reasonable remuneration’. Although good faith is not referred to here, the specific ‘relational’ aspect of the contract was recognized, which requires a higher level of duties.249 Even in cases where the reduction in the volume or range of products was due to viable commercial reasons, the principal’s duty to its agent is unchanged. In the UK case of Janet Mann v Flair,250 a principal in reorganizing its business sold an existing product line to a competitor, depriving its commercial agent of a large amount of commissions. The court held that although there was a good commercial reason for what the principal did, the principal nevertheless remained liable to the agent for lost commissions.251

III. Termination and Notice252 Four situations result in a termination by operation of law, independently of the will 115 of the parties: death, incapacity, insolvency and frustration. Given the personal nature of an agency relationship, death (or insanity) of either party will end the contract.253 Interestingly, Articles 6:103 and 6:105 PEL MC stipulate that death or incapacity of the agent or principal do not automatically terminate the contract, but they can be the basis for termination as extraordinary and serious events. However, death or incapacity does not terminate contracts with third parties,254 since apparent authority can bind the contract, unless the third party knew of the incapacity.255 If the principal or agents are commercial entities, then insolvency, bankruptcy or dissolution may terminate the relationship. Bankruptcy amounts to legal incapacity and automatically terminates the contract. Distribution agreements will also be terminated in similar situations. The distribution contract should stipulate how unsold goods are to be disposed (or retrieved). Some agent-distributor authority may continue after the termination. For example, the PICC and PECL provide that the agent is authorized to take measures necessary to prevent harm to the principal’s interests.256 The principal and agent or distributor may terminate their contract by mutual con- 116 sent or unilaterally.257 One common scenario is when one of the parties decides to sell its business. The commercial agent may assign its business contracts, but not without the consent of the principal. It is a prima facie right of the commercial agent, which is 249 As mentioned earlier, the notion of ‘relational’ contracts appears to take hold in commercial cases in the UK more widely than in the distribution sector. The notion is however still divisive post Bates v Post Office Ltd (No 3) [2019] EWHC (606) where Fraser J held that such contracts require good faith. 250 See Randolph and Davey, The European Law of Commercial Agency (3rd edn, Hart 2010) p. 64. 251 For an interesting contrast, see NPower Direct Ltd v South of Scotland Power Ltd [2005] EWHC 2123 (Comm); [2005] All ER(D) 73 where the principal significantly increased the price of energy. Cresswel J held that the rise was justified by the wholesale price of gas and electricity and there was consequently no breach. 252 In CA Douai 2008, Jurisdata No. 2008-371074, a reduction of 60% of products to a distributor was held to be a breach amounting to an abusive termination. 253 Article 934 Chinese Civil Code 2021. 254 Article 7:101 PEL MC. For a similar possibility in Chinese law, see Article 935 Chinese Civil Code 2021. 255 Drew v Nunn (1879) 4 QB 661. 256 Article 3:209(3) PECL; Article 2.2.10(2) PICC. 257 Article 933 Chinese Civil Code 2021.

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also an exception to his right to claim termination payments.258 There is very little case law but it is thought that the principal can only refuse the assignment for a valid reason. When the principal sells his business, it is thought that in the light of the reciprocal obligation of good faith in the Commercial Agency Directive, this should in itself not terminate the contract or trigger the obligation to pay termination payments.259 For indefinite period contracts, a notice is required prior to a unilateral termination.260 The length of appropriate notice required of a principle is shortened in cases of fault or breach if the breach is serious or material. If the breach is minor in nature, then termination may be determined to be ‘abusive’. Also, a drastic decrease of goods provided by the principle to the distributor can be grounds for constructive termination. The agent is also required to give reasonable notice.

H. Cross References & Additional Commentary 117

See Chapter 28’s coverage of ‘Long-Term Contracts: Installment and Supply Contracts’ since distribution and agency agreements are often long-term in nature. Other Chapters of interest include: Chapter 15 on ‘Sales and Intellectual Property Rights’, Chapter 22 on ‘Excuse: Force Majeure and Hardship’, Chapter 24 on ‘Products Liability’, and Chapter 29 on ‘Post-: Continuing Obligations and Rights’.

I. Practitioner Tips I. Agency Agreements Different scenarios call for different advice. A foreign manufacturer-exporter to the EU who hires a commercial agent whose place of business is within the EU or EEA will be obligated to adhere to the agency protections mandated by Directive 86/653, even if there is no written contract. If the principal appoints the commercial agent in the UK, it is strongly advised that he obtain a written contract with an agreement on a particular termination payment. The exporter should also obtain an opinion on the enforceability of its non-compete clauses under EU competition law. 119 If the principal is an overseas buyer wishing the agent to buy goods on its behalf, then the most important issue will be that of authority. The buyer, being overseas will have to ensure that he gives clear instructions to the agent. If the sellers are known or other methods are available, such as notice in trade journals, the restrictions placed on the buyer’s agent should be communicated to prospective sellers. If the principal wishes to remain hidden it is important to determine whether rules applying to indirect representation or undisclosed agency are applicable. The agent’s authority should be clearly detailed. 118

Article 18(c) of the Directive. Saintier and Scholes (n 212) p. 131. 260 Article 15 of the Directive; Article 1:302 PECL commercial agency, franchising and distribution agreements. 258

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II. Distribution Agreements Distribution agreements are exchange contracts and as long term agreements are 120 relational contracts. However, their impact is so wide that they create networks in goods and services. The architecture of such agreements is therefore complex and yet, the law does not, as yet, fully appreciate the complexity since the notion of ‘network’ is not formally recognized.261

III. Good Faith In agency and distribution contracts, the duty of good faith is the most important 121 regulator of the parties’ conduct. This is even true in the UK, which although noted as being reluctant to recognize a general duty of good faith in contract law, appears to have moved on with the seemingly accepted notion of relational contracts. The strong impact of good faith in agency and distribution agreements appears to be due to the courts recognition of such contracts as being long-term in nature (sui generis). Thus, decisions made on a commercial basis by the principal are measured in the context of their impact on the business of the agent. Central to this idea is the notion of loyalty and honesty. Finally, there has been a blurring of the line between distribution and agency agreements with the application of agency rules, such as good faith and fiduciary duties, by analogy to distribution contracts.

J. Additional Sources Albaric and Dickstein (eds), International Agency and Distribution Agreements: Case Law and Contract Clauses (Kluwer 2011); Busch, Indirect Representation in European Contract Law (Kluwer 2005); Christou, International Agency, Distribution and Licensing Agreements (7th edn, Sweet & Maxwell 2018); Conaglen, Fiduciary Loyalty (Hart 2011); Glass, Freight Forwarding and Multimodal Transport Contracts (Informa/Routledge 2012); Grundmann, Cafaggi & Vettori (eds), The Organisational Contract (Ashgate 2013); Goodhart & Hamson, ‘The Undisclosed Principal in Contract’ (1932) 4 CLJ 320; Hesselink (ed), Commercial Agency, Franchise and Distribution Contracts (Sellier 2006); Herold & Knoll, ‘Negotiating and Drafting International Distribution, Agency and Representative Agreements: The United States Exporter’s Perspective’ (1987) 21 Int’l L 939; International Chamber of Commerce, Model Contract Commercial Agency (2015) ICC Pub. No. 766E; International Chamber of Commerce, Model Distributorship Contract (2002) ICC Pub. No. 646E; International Chamber of Commerce, Model Selective Distributorship Contract (2004) ICC Pub. No. 657E; Krebbs, ‘Harmonisation and how not to do it: Agency in the UNIDROIT Principles of International Commercial Contracts 2004’ [2009] LMCLQ 57; Mallet-Bricout & Mazeaud (eds), Les conflits d’intérêts (Dalloz 2013); McGregor, Busch and Watts (eds) Agency law in commercial practice (OUP 2016) ; Martinek & Flohr (eds), European Distribution Law: A Commentary (Hart 2011); Munday, ‘A legal history of the factor’ [1977] Anglo-Am L Review 221–260; Singleton, Commercial Agency Agreements (4th edn, Bloomsbury 2020).

261 See Grundmann, Cafaggi and Vettori (eds), The Organisational Contract (Edward Elgar 2013); Teubner, Network as Connected Contracts (Hart 2011); Cafaggi, Contractual Networks, Inter-Firm Cooperation and Economic Growth (Edward Elgar 2011).

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CHAPTER 28 LONG-TERM CONTRACTS: INSTALLMENT AND SUPPLY CONTRACTS Larry A. DiMatteo and Giuditta Cordero-Moss A. Topics Covered . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B. Introductory Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C. Statement of Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . D. International Sales Transaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . E. Sampling of Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. CISG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. UNIDROIT Principles of International Commercial Contracts . . . . . . . . . . . . . . III. Principles of European Contract Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Common European Sales Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. German Bürgerliches Gesetzbuch . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI. French Code Civil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VII. Spanish Código Civil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VIII. American Uniform Commercial Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IX. United Kingdom Sale of Goods Act 1979 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . X. English Common Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XI. American Restatements (Second) of Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XII. Chinese Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XIII. Summary of Law in Relation to Long-Term Contracts . . . . . . . . . . . . . . . . . . . . . . . F. Commentary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Common Sales Clauses and Long-Term Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Hardship . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Force Majeure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Negotiation in Good Faith . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. Early Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5. Duty of Loyalty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6. Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7. Boilerplate Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8. Arbitration and Mediation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Price Escalation Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Inflation, Costs Changes, and Commodity Markets . . . . . . . . . . . . . . . . . . . . . . 2. Output and Requirements Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Renegotiation Clause . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Triggering Events . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Concretizing the Renegotiation Obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Distinguishing between Renegotiation and Force Majeure Clauses . . . . . . . G. Illustrations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Collaborative Strategic Contracting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Force Majeure as Surrogate Renegotiation Clause . . . . . . . . . . . . . . . . . . . . . . . . . . . . H. Cross References & Additional Commentary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Practitioner Tips & Contract Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Indexing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Price Adjustments and Hardship . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Gross Inequities Clause and Market Reopener Clauses . . . . . . . . . . . . . . . . . . . . . . . IV. Strategic Use of Recitals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. Defining Material and Minor Breaches . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI. Long-Term Just-in-Time Contracting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VII. Brexit and Long-Term Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . J. Additional Sources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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1 5 8 11 12 12 13 14 15 16 17 18 19 20 21 22 23 24 30 31 31 34 37 39 40 42 43 44 47 48 50 53 56 59 62 63 63 64 65 66 66 68 69 71 73 74 75 77

B. Introductory Note

A. Topics Covered This Chapter explains the most important aspects that should be taken into consideration when drafting long-term contracts. This Chapter will place these common issues in contract drafting in the context of long-term contracts and thus highlight their particular relevance in this respect. Long-term contracts are characterized by the necessity to take into consideration that the legal relationship between the parties will continue for a long period of time. During the duration of the contract, circumstances may change and events may occur that have an impact on the obligations of the parties towards each other, on the interpretation of the contract, on the interest of one or both parties in the continued performance of the contract, and so forth. Legal systems regulate the consequences of these changes, more so in the Civil Law than the Common Law. Many of these aspects are important in most types of contracts. However, even in those legal systems willing to adapt or adjust contracts for changes in circumstances, a great deal of uncertainty remains in the nature of the unforeseeable events that may occur over the length of the contract and how the law will respond. Also, the various laws that could apply to international contracts are not consistent with how future events affect the parties’ contractual obligations. To avoid this uncertainty, international contract practice has developed a number of clauses aimed at regulating foreseeable and unforeseeable events that may surface during the course of a long-term contract and to preempt the application of the unpredictable legal rules in this area. This Chapter will focus on the type of rules and clauses that are most closely aligned with regulating long-term contracts. After defining long-term contracts, and providing an overview of the issues that are particularly relevant to such contracts, the Chapter will examine a key issue common in long-term contracting of how to fix or adjust the contract price over the term of the contract. The importance of a carefully drafted price escalation clause will be examined, as well as the role played by renegotiation clauses and other clauses that infuse a degree of flexibility in the performance of long-term contracts. This Chapter is complementary to Chapter 27’s coverage of ‘Agency and Distribution Agreements’. The not completely accurate distinction is this Chapter deals with ‘direct sales’ between the manufacturer-export and a customer. Chapter 27 focuses on the unique, often fiduciary, relationship between exporter as principal and an intermediary party (agent or distributor) where there is no direct sale from the exporter to the ultimate customer, at least in the case of the distribution contract.

1

2

3

4

B. Introductory Note Sale contracts may be entered into for the purpose of transferring title to goods from 5 the buyer to the seller in one specific occasion, or they may regulate the transfer of goods on more than one occasion, over a longer period of time. The former contracts are often defined as spot, discrete, or one-shot contracts, whereas the latter ones are considered as long-term or supply contracts. Long-term contracts come in different variants. For example, the parties may enter into a contract that regulates all aspects of their transaction, and that specifies that the goods shall be delivered in separate installments over a determined period of time. Alternatively, the parties may enter into a framework agreement regulating general aspects of their relationship, such as conditions for delivery and for payment, the procedures to be followed for issuing and accepting orders, the quality of the goods, the criteria for determining the price, the distribution of liability

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between the parties, choice of law, and for dispute resolution – while each of the specific deliveries of goods will be regulated in a specific exchange of order and acceptance, that is in turn subject to the conditions contained in the framework agreement. Some court decisions have found that separate contracts between two parties having an ongoing relationship may be considered as unitary contracts with installments.1 6 Contracts for the sale of goods that have to be manufactured may be considered as sales contracts, but there is a line after which a relationship may no longer be considered to be a sales contract, but a contract for services, such as when a seller provides equipment or materials followed by additional engineering, installment or construction services. Thus, the sale of goods to be manufactured may be considered to be a service agreement if the buyer supplies a substantial part of the material. For example, Article 3.1 of the CISG excludes the applicability of the CISG in such cases. In one case, a French court held that a contract where the buyer merely provided the design and detailed specifications was not a sales contract pursuant to the CISG.2 Also, contracts where the predominant value consists in labour or services are not sales contracts, even if they result in the transfer of title to goods. See, CISG Article 3.2. Hence, a contract where the seller of equipment also agrees to install or assemble the equipment is most likely a sales contract,3 whereas a turnkey contract of a similar nature may be construed as outside the scope of a sales agreement.4 7 It is not uncommon for long-term contracts, especially involving computerized or highly technical types of goods, to be mixed transactions involving the sale of goods, licensing of intellectual property rights, and the sale of after sales services, such as maintenance and training services. In such cases, it may be determined that the long-term contract is not one for the sale of goods. Nonetheless, there is a sale of goods component and the issues relating to such transactions are likely to be similar to long-term supply contracts. The issues and clauses reviewed in this Chapter have application in sales and non-sales contracts.

C. Statement of Issues 8

As the overview made above showed, parties drafting a long-term contract should take into consideration various aspects that may need specific regulation as a consequence of the duration of the relationship. Many of these aspects, however, are not peculiar to long-term contracts, but common to most types of contracts. Their relevance, however, may be enhanced when the contract has a long-term duration. Common issues relating to long-term contracts include: (1) is a breach of a portion of the contract a breach of the entire contract? (2) Along the lines of the first question, should there be a distinction between minor and major breaches in long-term contracts, especially in cases where due to the length of the contract the parties have expended substantial 1 See, for references, UNCITRAL Digest of Case Law on the United Nations Conventions on Contracts for the International Sales of Goods (2012 edition) Article 73, notes 9, 10 and 11. 2 UNCITRAL Digest of case law on the United Nations Convention on the International Sale of Goods (2012), Article 3, note 7, referencing CLOUT Case No. 157 [Cour d'appel de Chambéry 25 May 1993]. 3 2012 UNCITRAL Digest of case law on the United Nations Convention on the International Sale of Goods, Article 3, note 16, referencing KG Zug 14 December 2009; Tribunale di Padova 10 January 2006; CLOUT Case No. 890 Tribunale d'appello Lugano 29 October 2003; KG Schaffhausen 25 February 2002; LG Munich 16 November 2000. For a case where the installation obligation was preponderant and thus led to the Convention's inapplicability, see Foreign Trade Court of Arbitration attached to the Yugoslav Chamber of Commerce 9 May 2003. 4 UNCITRAL Digest of case law on the United Nations Convention on the International Sale of Goods (2012), Article 3, note 24, referencing Obergericht Aargau 3 March 2009.

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D. International Sales Transaction

amounts of funds in contract-specific investments or sunk costs? (3) Can a termination of a long-term contract due to breach be considered an act of bad faith? (4) Do parties to a long-term contract have a duty to renegotiate contract terms due to unforeseen events in order to maintain the contractual equilibrium? The answer to this latter question in the Common Law is a resounding no, while in some Civil Law countries the principle of hardship and other rules answer this question in the affirmative in certain types of situations. It is best to assume that in most cases the law will not come to the rescue if a long- 9 term contract becomes imbalanced, leaving the party with un unsatisfactory bargain (burden) with the choice of continuing to perform, possibly at a loss, or to breach and suffer the costs of litigation and negative reputational effects. The solution to the issue of subsequent contract imbalance is to draft such contracts with care and with customized clauses to protect the parties in case of unforeseen events that disrupt the contractual equilibrium. A handful of such clauses include: price escalation, currency fluctuation, force majeure, renegotiation, default, and dispute resolution clauses. Again, some of these clauses are common in most sales contracts, but they should be negotiated and customized in cases of long-term contracts. An alternative way of viewing the long-term contract is that it should balance fixed, detailed clauses found in one-shot contracts with broader more principle-like, open, or general clauses that provide the flexibility needed to regulate performances of an extended period of time. A discussion paper related to a proposed revision of Australian contract law states: Introducing increased elasticity into the law may help support relational contracts; that is, longterm contracts which support successful continuing relationships. Many contracts involve complex projects, which rely on cooperation between the parties over a significant period of time. The uses of flexible, gap-filling concepts like good faith, reasonableness or adaptation for hardship may be needed to help these contracts work as time passes and circumstances change. 5

Even though the above quotation refers to the need for flexible rules or principles in 10 contract law, the same rationale applies to drafting long-term contracts. This Chapter will focus on one type of flexible clause – the price escalation clause. A carefully written price escalation clause preserves the expected benefits that of both parties had when entering into the contract. A poorly written clause invariably leads to breach.

D. International Sales Transaction The need for adjusting the price in a long-term contract arises both in domestic and 11 in international contracts. However, language and cultural factors may make it more difficult to write a clear clause that captures all the variables that might affect the costs to the seller and the price to the buyer.

5 Attorney-General Department, Improving Australia’s Law Justice Framework: A Discussion Paper to explore the scope of reforming Australian Contract Law para. 2.9 (April 2012).

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E. Sampling of Laws I. CISG 12 Article 25 A breach of contract committed by one of the parties is fundamental if it results in such a detriment to the other party as substantially to deprive him of what he is entitled to expect under the contract. Article 51 If the seller delivers only a part of the goods … the buyer may declare the contract avoided in its entirety only if the failure to make delivery amounts to a fundamental breach of the contract. Article 73 (1) In the case of a contract for delivery of goods by installments, if the failure of one party to perform any of its obligations in respect of any installment constitutes a fundamental breach with respect to that installment, the other party may declare the contract avoided with respect to that installment. (2) If one party’s failure to perform any of his obligations in respect of any installment gives the other party good grounds to conclude that a fundamental breach will occur with respect to future installments, he may declare the contract avoided for the future. Article 79 A party is not liable for a failure to perform any of his obligations if he proves the 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 it or its consequences. Article 80 A party may not rely on a failure of the other party to perform to the extent failure was caused by the first party’s act or omission.

II. UNIDROIT Principles of International Commercial Contracts 13 Article 1.7 Good Faith and Fair Dealing Each party must act in accordance with good faith and fair dealing in international trade. Article 5.3 Co-operation between the parties Each party shall co-operate with the other party when such co-operation may reasonably be expected for the performance of that party’s obligations. Article 5.7.3 Price determination Where the price is to be fixed by reference to factors, which do not exist or have ceased to exist or to be accessible, the nearest equivalent factor shall be treated as a substitute. Article 6.2.2 Definition of Hardship There is a hardship where the occurrence of events fundamentally alters the equilibrium of the contract either because the cost of a party’s performance has increased or because the value of the performance a party receives has diminished, and: (a) the events occur or become known to the disadvantaged party after the conclusion of the contract; (b) the events could not reasonably have been taken into account by the disadvantaged party at the time of the conclusion of the contract; (c) the events are beyond the control of the disadvantages party; and (d) the risk of the events was not assumed by the disadvantaged party. Article 6.2.3 Effects of Hardship (1) In the case of hardship the disadvantaged party is entitled to request renegotiations. (3) Upon failure to reach agreement within a reasonable time either party may resort to the court. (4) If the court finds hardship it may, if reasonable, terminate the contract or adapt the contract with a view to restoring its equilibrium.

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E. Sampling of Laws

III. Principles of European Contract Law 14

Article 1.202 Duty to Co-operate Each party owes to the other a duty to co-operate in order to give full effect to the contract. Article 6.111 Change of Circumstances If performance of the contract becomes excessively onerous because of a change of circumstances, the parties are bound to enter into negotiations with a view to adapting the contract or terminating it. Article 9.302 Contract to be performed in parts The aggrieved party may exercise its right to terminate under this Section in relation to the part concerned. It may terminate the contract as a whole only if the non-performance is fundamental to the contract as a whole.

IV. Common European Sales Law 15

Article 3 Co-operation The parties are obligated to co-operate with each other to the extent that this can be expected for the performance of their contractual obligations. Article 74 Unilateral determination by a party Where the price or any other contract term is to be determined by one party and that party’s determination is grossly unreasonable then the price normally charged or term normally used in comparable circumstances at the time of the conclusion of the contract or, if no such price or term is available, a reasonable price or a reasonable term is substituted. Article 77: Contracts for indeterminate duration Where, in a case involving continuous or repeated performance of a contractual obligation, the contract terms do not stipulate when the contractual relationship is to end or provide for it to be terminated upon giving notice to that effect, it may be terminated by either party by giving a reasonable period of notice not exceeding two months.

V. German Bürgerliches Gesetzbuch § 242 Performance in good faith An obligor has a duty to perform according to the requirements of good faith, taking customary practice into consideration. § 275(2) Exclusion of the duty of performance 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. § 313 Interference with the basis of the contract If circumstances which became the basis of a contract have significantly 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 specific case, in particular the contractual or statutory distribution of risk, one of the parties cannot reasonably be expected to uphold the contract without alteration. § 314 Termination, a compelling reason, contracts for performance of a continuing obligation (1) Each party may terminate a contract for the performance of a continuing obligation for a compelling reason without a notice period. There is a compelling reason if the terminating party, taking into account all the circumstances of the specific case and weighing the interests of both parties, cannot reasonably

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Chapter 28 Long-Term Contracts: Installment and Supply Contracts be expected to continue the contractual relationship until the agreed end or until the expiry of a notice period. (2) If the compelling reason consists in the breach of a duty under the contract, the contract may be terminated only after the expiry without result of a period specified for relief or after a warning notice without result. (3) The person entitled may give notice only within a reasonable period after obtaining knowledge of the reason for termination. (4) The right to demand damages is not excluded by the termination. § 323 Withdrawal for nonperformance or for performance not in conformity with the contract (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 withdraw from the contract, if he has specified, without result, an additional period for performance or cure. (5) If the obligor has performed in part, the obligee may withdraw from 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 withdraw from the contract if the breach of duty is trivial.

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The adaption or adjustment of contracts is also found in the doctrine of Geschäftsgrundlage, which is grounded on the idea that any contract has a basic aim and emanates from a basic intention of the parties, which is based upon the continuing existence of the environment that existed at the time of the conclusion of the contract. Thus, if the environment changes, then the parties’ expectations and intent are no longer aligned with the contract. As such, the contract should be re-aligned to the parties’ original intent.

VI. French Code Civil 17

French law is, in principle, one of the most reluctant to recognize the possibility of judicial adaptation of contracts, as is demonstrated in this statement by the Cour de cassation: ‘in no case do the courts have the right, however equitable may appear to be their decision, to take into account the time and the circumstances, to modify existing contracts and substitute new provisions for those which have been freely accepted by the contracting parties.’6 The exception is the doctrine of imprévision, which requires unforeseeability and which has been narrowly construed. Furthermore, the obligation to negotiate in case of hardship or change of circumstances does not exist in French law. Article 1104 Contracts must be negotiated, formed and performed in good faith. Article 1163 An act of performance is capable of being determined where it can be deduced from the contract or by reference to usage or the previous dealings of the parties, without the need for further agreement. Article 1186 Where the performance of several contracts is necessary for the putting into effect of one and the same operation and one of them disappears, those contracts whose performance is rendered impossible by this disappearance lapse, as do those for which the performance of the contract which has disappeared was a decisive condition of the consent of one of its parties. Article 1191 Where a contract term is capable of bearing two meanings, the one which gives it some effect is to be preferred to the one which makes it produce no effect.

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E. Sampling of Laws Article 1211 Where a contract is concluded for an indefinite duration, each party may put an end to it at any time, subject to respecting any period of notice provided by the contract or, in its absence, a reasonable notice. Article 1215 Where, on the expiry of the term of a contract concluded for a definite duration, the contracting parties continue to perform their obligations, there is an implied continuation of the contract. The latter produces the same effects as a renewal of such a contract. Article 1225 Termination may take place only after service of a notice to perform which has not been complied with, unless it was agreed that termination may arise from the mere act of non-performance. The notice to perform takes effect only if it refers expressly to the termination clause. Article 1230 Termination does not affect contract terms relating to dispute-resolution, nor those intended to take effect even in the case of termination, such as confidentiality or non-competition clauses. Article 1231-5 Where a contract stipulates that the person who fails to perform shall pay a certain sum of money by way of damages, the other party may be awarded neither a higher nor a lower sum. Nevertheless, a court may, even of its own initiative, moderate or increase the penalty so agreed if it is manifestly excessive or derisory. Article1320 Where an act of performance is indivisible, either by its nature or by the terms of the contract, each creditor of the obligation may require and receive satisfaction in full, subject to a duty to account to the others. Article 1342 A creditor may refuse to accept partial satisfaction, even if the act of performance is divisible.

VII. Spanish Código Civil 18

Article 1,105 Outside the cases expressly mentioned in the law, and those in which the obligation should require it, no one shall be liable for events which cannot be foreseen or which, being foreseen, should be inevitable. Article 1,131 The obligor alternatively obliged to perform several undertakings must perform in full one of them. The creditor cannot be compelled to receive part of one part of the other. Article 1,151 For the purposes of the preceding articles, obligations to give a specific thing ad corpus and all those, which are not capable of partial performance, shall be deemed to be indivisible. Obligations to do something shall be divisible when their subject matter is the provisions of a number of days’ work, the performance of works by metric units, or other analogous things, which, by their nature, are capable of partial performance. The divisibility or indivisibility of obligations not to do something shall be decided pursuant to the nature of the undertaking in each specific case. Article 1,286 Words, which may have different meanings, shall be understood in the meaning, which is most in accordance with the nature and subject matter of the agreement.

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VIII. American Uniform Commercial Code 19

The Uniform Commercial Code (UCC) contains a number of provisions that can be seen as directed to longer-term contracts. § 2-305 Open price term (1) The 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, if (a) Nothing is said as to price; or (b) The price is left to be agreed by the parties and they fail to agree; or (c) The price is to be fixed in terms of some agreed market or other standard as set or recorded by a third person or agency and it is not so set or recorded. (2) A price to be fixed by the seller or by the buyer means a price for him to fix in good faith. (3) When a price left to be fixed otherwise than by agreement of the parties fails to be fixed through fault of one party the other may at his option treat the contract as cancelled or himself fix a reasonable price. § 2-306(2) Exclusive dealings A lawful agreement by either the seller or the buyer for exclusive dealing in the kind of goods concerned imposes unless otherwise agreed an obligation by the seller to use best efforts to supply the goods and by the buyer to use best efforts to promote their sale. § 2-311 Options and cooperation respecting performance An agreement for sale that is otherwise sufficiently definite to be a contract is not made invalid by the fact that it leaves particulars of performance to be specified by one of the parties. Any such specification must be made in good faith and within limits set by commercial reasonableness. § 2-612 Installment contract; breach (1) An installment contract is one which requires or authorizes the delivery of goods in separate lots to be separately accepted, even though the contract contains a clause ‘each delivery is a separate contract’ or its equivalent. (2) The buyer may reject any installment which is nonconforming if the nonconformity substantially impairs the value of that installment and cannot be cured or if the nonconformity is a defect in the required documents; but if the nonconformity does not fall within subsection (3) and the seller gives adequate assurance of its cure the buyer must accept that installment. (3) Whenever nonconformity or default with respect to one or more installments substantially impairs the value of the whole contract there is a breach of the whole. But the aggrieved party reinstates the contract if he accepts a nonconforming installment without seasonably notifying of cancellation or if he brings an action with respect only to past installments or demands performance as to future installments.

IX. United Kingdom Sale of Goods Act 1979 20

English Common Law of contracts and the United Kingdom Sale of Goods Act 1979 (SGA) do not have rules specific to long-term contracts. The English Common Law has diverged from other Common Law countries, such as the United States and Australia, in holding to a strict enforcement of obligations and a formal interpretation of contract terms. English law continues to reject the principle of good faith, focuses on the words of the contract and is less likely to take a contextual approach to contract interpretation, and it retains impossibility and frustration of purpose as its excuse doctrines and rejects hardship (German law) or impracticability (US law) as alternative grounds for terminating or reforming onerous contract terms. These are, of course, generalizations based upon black letter law, while in practice English courts have used interpretation and other covert means to prevent injustice. Recently, an English court rejected a general duty of good faith (implied by law), but recognized that in particular cases a court may imply a duty of good faith in fact (implied in fact).7 7

Yam Seng Pte Ltd v International Trade Corporation Ltd [2013] EWHC 111.

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E. Sampling of Laws Section 31 Instalment Sales It is a question in each case depending on the terms of the contract and the circumstances of the case whether the breach of contract is a repudiation of the whole contract or whether it is a severable breach giving rise to a claim for compensation but not to a right to treat the whole contract as repudiated. Section 62(2) Supplementary Law The rules of the common law, including the law merchant apply to contracts for the sale of goods.

X. English Common Law Other than being descriptive of a particular contract situation, long-term contracts 21 have no technical or specific meaning under the Common Law. Ian Macneil’s theory of relational contracting provides some insight into the different norms and expectations that parties bring to certain types of long-term contracts, such as joint venture, research and development, global alliances, and long-term supply contracts. In such contracts, it is difficult to express the parties’ obligations with a high degree of specificity. Thus, when a contract becomes burdensome to one of the parties due to the passage of time and due to the occurrence of an unexpected event or the non-occurrence of an expected event, the contract terms may not provide the flexibility to adjust the contract. Instead, the party encumbered with a burdensome long-term contract may decide to breach. In seeking help from the court, the breaching party may ask for an excuse for hardship to terminate the contract, a reformation of the contract to make it more balanced, or claim the contract is so one-sided that it should be voided or reformed under the doctrine of unconscionability (United States). The judicial response has been a resounding rejection of such arguments under two rationales – the parties expressly or implicitly allocated the risk to the party incurring the burden or the party seeking relief should have written a better contract. Australia is currently in the process of reviewing the need to reform its contract law. A revised Draft Australian Law of Contract published March 3, 2014. Some of the suggested changes include: Article 9 Good Faith and Conscience The parties must act in good faith and conscience in negotiating, making, altering, performing, enforcing or terminating a contract. To act in good faith and conscience, a party must behave honestly, observe reasonable standards of dealing, and consider the legitimate interests of the other party. Article 49 Duty to Co-operate Unless the parties agree otherwise, a term is to be implied in every contract that a party will co-operate with the other party to the extent that co-operation can reasonably be expected by that other party. Article 77 Time extension A party is not entitled to terminate a contract for failure to perform on time unless: the delay continues for an unreasonable time; or the party gives notice requiring performance within a specified reasonable time, and that time expires. Article 90 Change of circumstances If a party claims to be excused from performance by a change of circumstances, the parties must negotiate in good faith and conscience with a view to adapting their contract to the changed circumstances, or terminating it. If an agreement cannot be reached within a reasonable time, either party is entitled to ask the court to adapt or terminate the contract on appropriate terms. A request for an excuse for frustration of contract ‘requires notice and negotiations before a party can ask a court to terminate or adapt the contract.’ The term ‘change of circumstances’ replaces the legal terms ‘frustration’ and force majeure. The term ‘change of circumstances’ is used in its ordinary meaning as applying to any post-contractual event that makes it against good faith and conscience to require performance.

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XI. American Restatements (Second) of Contracts 22 § 240 Part performance of an agreed equivalent If the performances to be exchanged can be apportioned into corresponding pairs of part performances so that the parts of each pair are properly regarded as agreed equivalents, a party’s performance of his part of such a pair has the same effect on the other’s duties to render performance of the agreed equivalent as it would have if only that pair of performances had been promised. § 241 Circumstances significant in determining whether a failure is material The following circumstances are significant: (a) the extent to which the injured party will be deprived of the benefit which he reasonably expected; (b) the extent to which the injured party can be adequately compensated; (c) the extent to which the party failing to perform will suffer forfeiture; (d) the likelihood that the party failing to perform will cure his failure; (e) the extent to which the behavior of the party failing to perform comports with standards of good faith and fair dealing. § 247 Effect of acceptance of part performance Comment a. Acceptance or retention of part Where, for example, there have been successive acceptances of defective installments, the obligee may be justified in believing that subsequent installments will be accepted in spite of similar defects. § 261 Discharge by supervening impracticability Where, after a contract is made, a party’s performance is made impracticable without his fault by the occurrence of an event of which was a basic assumption on which the contract was made, his duty to render performance is discharged, unless the language or circumstances indicate the contrary. Comment f. Alternative performances A contract may permit a party to choose to perform in one of several different ways. The fact that one or more of the alternatives has become impracticable will not discharge the party’s duty to perform if at least one of them remains practicable. § 271 Partial impracticability Where only part of an obligor’s performance is impracticable, his duty to render the remaining part is unaffected if: (a) it is still practicable for him to render performance that is substantial, taking into account of any reasonable substitute performance that he is under a duty to render or (b) the obligee, within a reasonable time, agrees to render any remaining performance in full and to allow obligor to retain any performance that has already been rendered.

XII. Chinese Law 23 Article 6 All civil subjects engaging in civil activities shall observe the principle of fairness to determine reasonably the rights and obligations of all parties concerned. Article 7 All civil subjects engaging in civil activities shall observe the principle of good faith, adhere to honesty and keep their commitments. Article 558 After the termination of the claims and debts, the parties shall observe the principles of good faith and perform obligations such as notification, assistance, confidentiality and recovery of used items in accordance with transaction practices. Article 563 A non-fixed-term contract with the obligation of continuous performance as the content may be rescinded after the party notifies the other party in advance of a reasonable time limit.

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E. Sampling of Laws Article 567 The termination of rights and obligations under the Agreements shall not affect the validity of clauses that related to the final settlement of accounts and winding-up. Article 631 Where a contract is terminated due to non-compliance of any main component of the subject matter, the effect of termination extends to the ancillary components. Where the contract is terminated due to non-compliance of any ancillary component of the subject matter, the effect of termination does not extend to the principal component. Article 632 Where the subject matter comprises of a number of components, one of which does not comply with the terms of the contract, the buyer may terminate the portion of the contract in respect of such component. However, if the value of the subject matter is obviously impaired as a result of the separation of the subject matter from any other subject matter, the parties may terminate the contract in respect of the number of subject matters. Article 633 Where the seller delivers the subject matter in installments, if the seller fails to deliver one installment of the subject matter or the delivery fails to satisfy the terms of the contract so that the said installment cannot fulfil the contract purpose, the buyer may terminate the portion of the contract in respect thereof. If the seller fails to deliver one installment of the subject matter or the delivery fails to satisfy the terms of the contract so that the delivery of the subsequent installments of the subject matter cannot realize the purpose of the contract, the buyer may terminate the portion of the contract in respect of such installment as well as any subsequent installments. Interpretation of the Supreme People's Court on Issues Concerning the Application of Law for the Trial of Cases of Disputes over Sales Contracts (May 10, 2012) Article 38 The term ‘installment payment’ means that the buyer pays the total price payable to the seller in at least three payments within a prescribed time limit.

XIII. Summary of Law in Relation to Long-Term Contracts National laws are consistent in indirectly dealing with issues particular to long-term contracts. For example, provisions dealing with defective installments under a single contract implicitly recognize the long-term supply contract. The general rule is that a defective part performance or installment is considered a breach only of that installment and not of the whole contract, unless the breach of an installment ‘substantially impairs the value of the whole contract is there is a breach of the whole.’ The issue of whether the parts of a contract can be treated as independent contracts is in some laws determined by the ‘divisibility’ of the contract parts. For example, Article 1320 of the French Code civil states: ‘Where an act of performance is indivisible, either by its nature or by the terms of the contract.’ Another factor noted in Chinese Civil Code is whether the parts or installments are of the same goods (fungible) or vary in their content. Article 633 states: ‘Where the seller delivers the subject matter in installments, if the seller fails to deliver one installment of the subject matter or the delivery fails to satisfy the terms of the contract so that the said installment cannot fulfil the contract purpose, the buyer may terminate the portion of the contract in respect thereof. If the seller fails to deliver one installment of the subject matter or the delivery fails to satisfy the terms of the contract so that the delivery of the subsequent installments of the subject matter cannot realize the purpose of the contract, the buyer may terminate the portion of the contract in respect of such installment as well as any subsequent installments.’ Divisibility that does not involve shipments of the same subject matter is also recognized under the Chinese Civil Code. Article 632 states: Where the subject matter comprises of a number of components, one of which does not comply with the terms of the contract, the buyer may terminate the portion of the contract in respect of such component. However, if the value of the subject matter is obviously impaired as a result of the separation of the subject matter from any other subject matter, the parties may terminate the contract in respect of the number of subject matters.’ Components may simply be referring to installments, but the word component may also indicate different types of goods that only have value when they are all delivered. For example, parties enter into a supply contract to provide

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Chapter 28 Long-Term Contracts: Installment and Supply Contracts replacement parts for a complicated piece of equipment. If the first part or subsequent part delivered is defective then the follow-up parts will have no value to the buyer.

The sampling above also provides examples of general clauses and excuse of liability rules. Although, these provisions are generic, the greater their flexibility the better they are able to regulate long-term contracts. For example, under English and American law there is no duty to cooperate, unless the contract specifically requires a party to do something to enable the other party to perform, such as a buyer’s duty to provide specifications to the seller. Article 80 of the CISG states that: ‘A party may not rely on a failure of the other party to perform to the extent failure was caused by the first party’s act or omission.’ This particularized form of non-cooperation may also be regulated as an act of bad faith. The PICC, PECL, CESL, and the Draft Australian Law of Contract all have express duties to cooperate. 26 The nature of the excuse doctrines and the ability of courts to adapt or reform contracts under different laws has direct significance to long-term contracts that become imbalanced (one-sided) over time due to external events. Crudely stated, French law is the most unforgiving in providing excuse based upon a narrow view of force majeure. English law allows excuse for impossibility and frustration of purpose. American law is more liberalized in that it recognizes excuse based upon impossibility, frustration, and impracticability. Impracticability is akin to the Civil Law notion of hardship. But, in practice, claims of impracticability are rarely successful. Article 79 of the CISG provides an exemption for unforeseeable impediments. This has been strictly construed as not including an exemption or excuse for hardship. In the case of China, a claim under Article 79 is almost never successful even in cases involving the traditional category of ‘acts of God.’ In Chinese CISG jurisprudence, mostly in arbitral decisions issued by CIETAC, natural disasters are held to be foreseeable events. 27 German law seems best structured to deal with the regulation or adjustment of longterm contracts. First, its broad use of the principle of good faith could be applied to determine that a party’s refusal to negotiate an adjustment as an act of bad faith. Second, § 313 of the BGB recognizes the principle of the ‘basis of the contract’ as set at the time of contract formation: ‘If circumstances which became the basis of a contract have significantly changed since the contract was entered into adaptation of the contract may be demanded to the extent that, taking account of all the circumstances of the specific case, in particular the contractual or statutory distribution of risk, one of the parties cannot reasonably be expected to uphold the contract without alteration.’ Third, there is a longstanding doctrine of Geschäftsgrundlage, which is grounded on the idea that any contract has a basic aim and based upon the continuing existence of the environment that existed at the time of the conclusion of the contract. If the environment changes than the adaptation or adjustment of the contract may be required. 28 Fourth, German law provides relief in cases of hardship. BGB § 275(2) states: ‘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.’ Thus, if there is a change of circumstances during the length of the contract, then the parties are required to negotiate an adjustment to re-establish the contractual balance or equilibrium. If the negotiations fail, then a party may ask a court to adapt the contract. It is interesting to see that the Draft Australian Law of Contract adopts the civilian concept of a duty to negotiate, which is not found in other Common Law countries. It states before a party can claim the excuse of frustration, the party is required to give notice and undertake ‘negotiations before a party can ask a court to terminate or adapt the contract.’ 25

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F. Commentary

Anecdotally, there are principles in some of the sampled laws that are rather unique 29 and may be applied to provide relief for long-term contracts, such as: (1) CCC’s principle of fairness (The parties shall abide by the principle of fairness in prescribing their respective rights and obligations); (2) German law’s notion of maintaining contractual equilibrium; (3) PICC’s definition of hardship as when there is an ‘occurrence of events that fundamentally alters the equilibrium of the contract’; and (4) the Civil Law principle of time extensions (Nachfrist notice). Courts also provide relief through the interpretation of the contract. If a contract term is vague, ambiguous, or open a court may interpret or imply a term that has the effect of rebalancing the contract. Articles 1191 of the French Civil Code and 1,286 of the Spanish Código civil have provisions that instructs courts that when faced with contract terms with multiple meanings they should apply the meaning ‘which best suits the subject matter of the contract’ or ‘which is most in accordance with the nature and subject matter of the agreement.’

F. Commentary Spot contracts and long-term supply contracts are both sales agreements and are 30 subject to the same rules. Generally, there is no need to devote specific attention to the duration of the contract, when analyzing the law of sales. Rules on formation of contract, performance and remedies for non-performance will be applicable to a sales contract irrespective of whether it is a spot sale or not. There are, however, some contexts in which the duration of the relationship regulated in the contract may have an impact on the interpretation and implementation of the contract. These areas justify specific regulation in the law of sales and, to the extent that such regulation is not to be found, the parties will want to negotiate specific provisions into their contracts. This commentary has three parts. Part I will examine important issues that are common to all sales contracts irrespective of their duration, but acquire particular significance in long-term contracts These issues are covered more thoroughly in other Chapters of this book, and will therefore not be analyzed in detail here. Part II examines the price escalation clause that is peculiar to long-term contracts. Part III reviews the role of the renegotiation clause in long-term contracts.

I. Common Sales Clauses and Long-Term Contracts 1. Hardship In a long-term contract, the parties are exposed to changes that may occur with 31 the lapse of time. For example, after a long-term supply contract is signed the political situation in the country of the seller-exporter becomes destabilized, leading to security concerns, as well as concerns on the reliability of transportation and the predictability of government regulations. This, in turn, results in an increase in freight rates and a rise in the price of raw materials. These changes are likely to negatively affect the position of one or both of the contracting parties. For example, the unexpected raise in the costs of raw materials makes the contract price a burden on the seller. In another scenario an economic crisis and recession ensues during the production of the goods and devalues the market price for the goods. The buyer-reseller is now encumbered to a contract price and quantity far above market price and market demand. Many more examples of changed circumstances may be imagined. In the above scenarios, the disadvantaged party may seek to adjust its obligations so that the change in circumstances does not

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severely impact the equilibrium (expected benefits) of the contract. The other party will have the opposite interest and will claim that the contract terms should be honored as written and the increase in costs of production inputs or the change of market conditions were allocated risks. The risk allocation rationale argues that when a risk materializes, it should be borne by the party that is affected because the risk was internalized in the contract price. 32 In some legal systems, under certain circumstances hardship may entitle the affected party to request renegotiation of the contract; if the renegotiation is not successful, the affected party may request a judge to evaluate the situation and adjust the terms of the contract. The legal issue is in what scenarios does a change of circumstances move from a legally inexcusable implied allocation of risk to an excusable hardship? In other legal systems, the mere circumstance that performance has become more onerous for one party does not allow the person to demand renegotiation or to request a reformation of the contract by a court. See Chapter 22 on ‘Excuse: Impossibility and Hardship.’ 33 The plurality of legal solutions in the various legal systems, as well as the fact that many of these solutions (contract rules) give a considerable degree of discretion to the judge, creates uncertainty for international contract parties. It is not uncommon that international contracts attempt to regulate the matter of changed circumstances in a uniform way that is not affected by the governing law or by the legal tradition of the interpreter. Hardship clauses are commonly used in international contracts. However, regulating the consequences of hardship in a contract does not necessarily exclude that the governing law’s rules on hardship are applied. The interaction between the hardship clause and the governing law may lead to the same contract clause having different legal effects under different national laws.8 Hardship and hardship clauses are examined in-depth in Chapter 22.

2. Force Majeure Long-term relationships are also exposed to eventualities where performance has not only become more onerous due to changed circumstances, but is prevented by external supervening events. For example, the parties may have entered into a contract for the delivery of fish feed from a specific geographic area, according to agreed volumes and time schedules. If unforeseen climate conditions in that particular area make it impossible to harvest the feed in the agreed volume, the question arises whether the affected party shall be liable for its non-performance of the contractual obligations, or whether it shall be excused? 35 Chapter 22 examines when a party is excused for its non-performance and the effects that such an exemption from liability has on the other party’s rights and obligations. The definition of what constitutes a force majeure event may vary considerably from legal system to legal system, and is often left to the discretion of the court. International contract practice seeks to avoid this uncertainty by the insertion of detailed force majeure clauses. These clauses aim at defining in detail what constitutes a force majeure event, and they regulate the consequences of the occurrence of any such event. In this way, a party who is particularly interested in including or excluding particular events may negotiate a broader or narrower clause. For example, unforeseen weather conditions such as a storm, are generally considered to fall under the scope of force majeure. The recognition of weather as an ‘Act of God’ would normally support an excuse from liability for non-performance. However, the unique impact of weather on 34

8 See Cordero-Moss, Boilerplate clauses, international commercial contracts and the applicable law (CUP 2011) p. 367 and further references therein.

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electricity production (availability and cost) in this particular region may be viewed as a foreseeable event and as an implied risk allocation to the party disadvantaged by such a change. Conversely, a party may wish to include in the list of force majeure events circum- 36 stances that are not regularly recognized as such. For example, it may be uncertain whether certain regulatory changes affecting the ability or costs of exporting or importing the goods qualify as force majeure. Some systems may consider this to be within the sphere of the risk allocated to the affected party, and therefore not a sufficient ground for excusing the party’s non-performance. A seller or buyer who does not want to bear the risk of regulatory change should insert explicit language listing the types of regulatory change that would allow it to claim an exemption from liability for non-performance. By including certain events in the list of force majeure events, the parties are able to regulate the consequences of those particular events over the duration of the contract. A force majeure clause, however, is subject to interpretation, and the legal tradition of the interpreter may influence how the clause is understood.9

3. Negotiation in Good Faith A long duration term of a contract creates uncertainty regarding the possibility that 37 circumstances may change and render the terms of the contract unsuitable for their intended purposes. The contract should include an adjustment mechanism for this type of eventuality. Without such a mechanism, the contract may become so unbalanced that the applicable law’s rules on hardship (if any) become applicable or failing a legal adjustment the disadvantaged party may decide to terminate (breach) the contract. There are two common approaches for providing an adjustment mechanism in a contract. The first approach is for the contract to provide an objective standard for adjusting the contract without the need for the parties to renegotiate. An example of this approach is the price escalation clause. Escalation clauses will be examined in section F II. In the second approach, the contract may contain an open-ended mechanism that encourages the parties to renegotiate the terms of the contract. The renegotiation clause will be examined later in this Chapter. Both approaches may be present in the same contract, as they are appropriate for 38 different types of changed circumstances. The mechanical approach is adequate for objective terms, such as quantity or price. These are terms that may be modified on the basis of fixed criteria that can be determined in advance, such as by referencing price or cost indexes. The open-ended approach is adequate for other aspects of the performance that cannot be adjusted on the basis of pre-determined criteria, such as when the time frame for the performance has to be adjusted because of a shortage of certain raw materials or for unforeseen changes. The two approaches may also be combined in the same term, such as when a change in circumstances is so dramatic, such as an ahistorical change in the cost of an input, application of the mechanical approach would have an excessive impact on the contract. Escalation clauses can address this issue by containing a floor or a cap; if the adjustment of the price pursuant to the index exceeds a certain percentage value of the original price, the parties may terminate or renegotiate the contract. Open-ended adjustment clauses often contain an obligation to negotiate in good faith for the purpose of reaching an agreement on the adjustment. The obligation to negotiate in good faith, the obligation to perform the contract in good faith, and the duty of loyalty between the contract parties is assumed in some legal systems, whereas such general clauses or duties are rejected by other legal systems. 9

See Cordero-Moss, International Commercial Contracts (CUP 2014) pp. 110 et seq.

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The enforceability of contract provisions requiring the parties to negotiate in good faith also varies from system to system. Therefore, depending on applicable law, the objective approach is preferred, but an express duty to renegotiate should also be incorporated in long-term supply contracts. If the contract term requiring renegotiation is not enforced it still places pressure on the parties to voluntarily renegotiate (preserving relationships or reputations) and, in some legal systems that do not generally recognize a duty to renegotiate the failure to renegotiate may still be seen as an act of bad faith.

4. Early Termination 39

Long-term relationships are particularly dependent on the continued existence of trust between the parties and on the continued ability of each of the parties to comply with its obligations under the contract. During the course of performance, one party may encounter financial difficulties, become insolvent or otherwise its ability to perform under the contract is negatively affected. This may be sufficient reason for the other party to terminate the contractual relationship. However, under some laws, these are not considered to be sufficient grounds to terminate a contract. Therefore, long-term contracts should incorporate an early termination clause, to allow a party to terminate the contract for specified circumstances, such as insolvency or bankruptcy. These clauses should describe in detail which events or circumstances trigger early termination, and regulate the procedure for termination of the contract, as well as state the effects of the termination, such as requiring restitution for past performances. Termination clauses should also include other ‘triggers’ (events) that the parties belief should provide an option to terminate, such as changes in tax laws or the imposition of new import-export restrictions. Such diligence in drafting the long-term contract avoids the uncertainty of hardship claims and the finding that such changes are allocated risks. Put simply, the termination (or default) clause should be customized to include changes that would normally be considered as allocated risks.

5. Duty of Loyalty Numerous countries have laws that intervene in the termination of long-term contracts, some of these laws are specific to particular types of long-term contracts and others are best described as general principles of contract law. In the former category, EU laws dealing with the termination of commercial agents and distributorships require a minimal level of notice and possible payments of damages. In the United States, individual states have passed laws to protect franchisees in the context of the termination of certain types of franchise contracts. 41 The general principle of good faith may be used to support a claim of bad faith termination. However, the more specific general principle that is a good fit for the ending of long-term contracts is Nordic law’s duty of loyalty. The duty of loyalty has been defined in the literature ‘as an obligation to consider, or even to care for, the interests of the counterparty.’10 In combination with the Nordic law’s general clauses on unfair contracts, termination of a long-term contracts or contracts that involve large amounts of sunk costs are likely to be highly scrutinized by the courts. Contracts Acts § 36 allows the courts to make adjustments, as well as, to interpret them ‘opposite to the wording, if a party’s application seems to be a misuse, especially in cases of unilateral rights to adjust or apply contract clauses.’ A unilateral termination on short notice in a long-term con40

10 J. Munukka, ‘The Contractual Duty of Loyalty: Good Faith in the Performance and Enforcement of Contracts’ in D. Håstad, The Nordic Contracts Act: Essays in Celebration of its One Hundredth Anniversary (Djoef Publishing 2015), 203–215.

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tract, even if such notice is stipulated in the contract, is likely to violate the duty of loyalty. Jori Munukka notes that: ‘The duty of loyalty has gathered an increasing amount of momentum within the Nordic legal orders since the beginning of the 1990s’ and that in ‘commercial cooperation contracts, such as partnership agreements, joint ventures, R&D projects, licensing agreements and franchising agreements, the requirements of loyal behaviour are considered to be rather high.’

6. Events of Default In long-term contracts the parties’ performance extends over a long period of time. 42 The question that may arise is what impact a default in performing a certain part of the contract should have on the contract as a whole. Different solutions may be found in different legal systems, ranging from allowing the innocent party to withhold its part of the performance to the right to declare a fundamental breach and terminate the contract. The uncertainty deriving from the variety of solutions among legal systems, and not least the difficulty to foresee whether a certain default will be considered by a court as a fundamental breach has resulted in commercial contract practice to develop detailed default clauses. These clauses describe in detail which circumstances entitle the innocent party to which remedies. The effect of a defective installment on the installment or supply contract as a whole is dealt with in most laws as demonstrated in Part E’s ‘Sampling of Laws’ and as discussed earlier in Part E. VIII’s ‘Summary of Law in Relation to Long-Term Contracts’ See also Chapter 17 on ‘Performance and Breach’ and Chapter 20 on ‘Avoidance of Contract’.

7. Boilerplate Clauses The parties’ desire to steer the effects of the contract irrespective of the governing law 43 has led to the almost universal use of standard or boilerplate clauses. These clauses are meant to regulate the general operation of the contract and its interpretation. However, many of them, such as a standardized force majeure clauses often simply restate the law and serve no real purpose since they fail to reflect the uniqueness of the specific transaction and fail to adapt (derogate) from the governing law. This is a missed opportunity, especially in long-term contracts, where many terms that are standardized in one-shot transactions should be customized in long-term contracts, such as default, force majeure, hardship, and termination clauses. The use of ‘Standard terms’ is the topic of Chapter 9. The standard ‘entire agreement’ or ‘merger clause’ and the ‘no waiver clause’ are meant to regulate the interpretation of the contract, the effects of the parties’ conduct and the availability of contractual remedies, independently from the rules and principles of general contract law. The desire of detaching the contract from the governing law may turn out to be moot, as the governing law determines the effects of these clauses. 11 However, a more detailed customized clause is more likely to affect judicial or arbitral interpretations of the contract. Chapter 23 on ‘Contract Interpretation’ discusses the merger clause in-depth.

8. Arbitration and Mediation The arbitration clause is one of the most common clauses found in international con- 44 tracts. The most significant advantage of arbitration compared to judicial proceedings 11 See Cordero-Moss, Boilerplate clauses, international commercial contracts and the applicable law (CUP 2011) pp. 353 et seq. and further references therein. See also Cordero-Moss, International Commercial Contracts (CUP 2014) pp. 91 et seq.

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is the ability to enforce the arbitral award in more than 160 countries that have ratified the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. For court decisions, a similar regime of enforceability is available on a regional basis, such as in Europe due to the Brussels I Regulation; however, none of the existing instruments on recognition and enforcement of foreign court decisions have been widely adopted. The 2005 Hague Convention on Choice of Courts Agreements has the potential of becoming widely adopted but, at the time of this writing, it has entered into force only n the European Union and in Mexico (the USA and Singapore having signed it, but not ratified or acceded). For the foreseeable future, arbitration will remain the preferred means of dispute resolution in international business contracts. 45 Arbitration once enjoyed a reputation as a speedy method of alternative dispute resolution, based on the will of the parties and tailored to the parties’ needs, and thus, more likely to preserve the relationship between the parties. Arbitration, has, however, increasingly become formalized and regulated, and arbitral proceedings have become more time consuming and adversarial in nature. In long-term relationships, initiating an arbitration proceeding negatively impacts mutual trust and prejudices the future of the relationship. To prevent these negative consequences, long-term contracts increasingly use dispute resolution clauses that provide a combination of dispute resolution mechanisms with arbitration being the mechanism of last resort. These alternative mechanisms include structured negotiations, mediation, and conciliation. These methods are nonadversarial in nature and encourage the parties to reach a mutually acceptable contract adjustments or settlements. The hope is that such a process will enable the contract to proceed and will preserve the long-term relationship of the parties. Choice of Law is discussed in detail in → Chapter 30. 46 A more sensible means of preserving a long-term relationship is the appointment of a permanent contract referee. The referee is essentially a single arbiter who can minimize both information and enforcement problems on an ongoing basis. Indeed, a skillful referee can serve both conventional arbitration and mediation goals. Ideally, the contract referee would be authorized to investigate, inspect or discover facts; to require the parties to make necessary adjustments; and to issue a final and binding judgment when a disagreement cannot be resolved cooperatively. Such a mechanism has the advantage of complementing rather than undermining the social or relational controls that promote patterns of cooperation.12

II. Price Escalation Clauses 47

Long-term contracts will most likely be exposed to cost and market price fluctuations that will impact the value of the contract; most of these fluctuations, however, will not have such an impact as to trigger a claim of hardship or force majeure. Many legal systems do not contain rules for adjustment of contract prices; the parties are given the sole responsibility for regulating or negotiating adjustments to their contracts. One strategy would be to avoid long-term supply contracts and satisfy needs on the spot or through the commodity markets. However, certain contracts need to be made on a long-term basis, such as contracts to produce goods according to the buyer’s specifications and which require the seller to invest in dedicated equipment for the production of the goods. One approach to the issue of price adjustment is to leave the price open in a contract or set a price for a short period of time with future price adjustments made unilaterally by the seller or by agreement of the parties. This creates 12

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uncertainty as to future prices and the potential for disagreement over the fixing of an appropriate price change. If the parties have to embark in new negotiations for every adjustment there is higher risk of disagreement and non-performance. Even assuming that the parties reach an agreement on the size of the adjustment, it is time consuming and costly to continuously renegotiate the price. The common solution is to negotiate an escalation clause that provides for automatic adjustments of the price. The adjustment could be based upon the seller or manufacturer submitting evidence of the increase costs of production or more preferably linking price adjustments to objective third-party indexes.

1. Inflation, Costs Changes, and Commodity Markets One generic cause of cost and price changes is inflation. Over time, the general 48 increase in the costs of items, such as transportation, raw materials and wages, will result in higher prices for end or manufactured products. A price adjustment clause tied to an inflation index would serve to help maintain the seller’s profit margin. The price of commodities is subject to constant fluctuations. A long-term contract quoting a fixed price for goods whose market price is often volatile is risky for both of the parties, as the price agreed upon at the formation of contract may differ considerably from future market prices. Such risk or speculation as to future costs or prices has created a market based on derivative products, consisting of buying or selling rights to certain products at today’s price for delivery at a determined time in the future. These contracts speculate on the increase or decrease of prices, and serve mainly a financial function. For these contracts, the price fluctuation is not a risk to be avoided or hedged, since predicting price fluctuations is the whole purpose of the contact. The contracts that are considered in this Chapter, however, are not financial con- 49 tracts, but contracts where the parties’ purpose is to actually sell and to purchase goods. In these contracts, price fluctuations are an unwelcomed risk. For example, one scenario involves a producer of car components that enters into a long-term contract for the sale of aluminum bumpers to a car producer. Aluminum is a commodity traded in the commodities markets, such as the London Metal Exchange. The price of aluminum is volatile, and is influenced by international factors such as recessions or economic growth that may decrease or increase consumption, or sector-specific factors such as tariffs or strikes. The component producer will have to purchase aluminum continuously throughout the duration of the contract; if the sale price of the bumpers is fixed, the component producer may see its profit margin reduced or destroyed if there is a substantial increase in the price of aluminum. Conversely, the car producer may have to pay more for its bumpers than the market requires, if the aluminum price decreases. A price adjustment clause indexed to the market price of aluminum would serve both parties’ interests.

2. Output and Requirements Contracts The expectation of a continuing relationship may cause one party to incur significant 50 sunk costs. A variation of this phenomenon is when the stability and growth of a relationship causes one party to re-structure or re-focus its business to accommodate a single party. This produces a dependency effect in which the termination of the relationship would prove to be catastrophic to that dependent party’s business. This type of strategic advantage is seen in the area of output or requirement contracts where one company’s business is entirely tied to the fortunes of the other party. A classic example is a smaller company who sells all of its output to a larger company. The larger

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company has multiple suppliers and can gain strategic advantages through the threat of reallocating its purchases to another supplier. The same can be said of requirement contracts where one party agrees to supply all the requirements of the other party. In the case of non-fungible goods the threat of non-supply may allow the supplier to gain a strategic advantage. 51 The uniqueness of output and requirements contracts, inherently long-term in nature, is recognized in some national laws. There uniqueness is that they do not have a fixed quantity term so, theoretically a supplier may set its output at zero and a buyer may fix its requirements at zero. Under the Common Law, such contracts would be illusory and not binding. However, such contracts are longstanding since they serve important economic purposes. Thus, the Common Law has recognized such contracts as an exception to the rule that a contract needs to fix the consideration being exchanged on the rationale that it is unreasonable or in bad faith to enter a zero into the quantity term. The American UCC § 2-306(1) states: A term which measures the quantity by the output of the seller or the requirements of the buyer means such actual output or the 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.

52

The long-term output or requirements contract should not leave it for a future court or arbitral panel to determine a ‘good faith quantity’ or ‘an unreasonably disproportionate quantity.’ The contract should provide parameters that limit the range of the quantity amount that can be supplied or demanded. This would prevent opportunistic behavior, such as when a buyer demands a disproportionate quantity to take advantage of an increase in the market price (profiting by reselling the surplus goods on the market) or a seller who increases output to take advantage of the contract price when market prices decrease below the contract price.

III. Renegotiation Clause One commentator characterizes the long-term contract as ‘obsolescing bargains in which the perceptions of the parties regarding the usefulness and profitability of the venture and their relative bargaining strengths undergo constant changes.’13 Subsequent changes in the economic context affect the profitability of transactions; this problem is of paramount importance in the context of long-term supply contracts. A solution to this problem, which is often resorted to in commercial contract practice, is the insertion of a renegotiation clause into the supply contract. As stated previously, parties also draft price indexation clauses as a means to allow for automatic adaptation of the contract price. These two types of clauses may also be combined, and the price indexation clause may itself be subject to renegotiation.14 54 Sample Clause: 53

It is hereby agreed that if during the term of this Agreement there should occur such changes in the financial and economic circumstances relating to the precious elements or materials industry, operating conditions in Australia and marketing conditions generally as to materially affect the fundamental economic and financial basis of this Agreement, then the provisions of this Agreement may be reviewed or renegotiated with a view to making such adjustments and modifications as

Sornarajah, ‘Supremacy of the Renegotiation Clause’ (1988) 5 J Int’l Arb 97, 108. Russi, ‘Chronicles of a Failure: From a Renegotiation Clause to Arbitration of a Transnational Contracts’ (2009) 3 available at http://works.bepress.com/bocconi_legal_papers/10. 13

14

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F. Commentary may be reasonable having regard to the supplier’s capital investment and the risks incurred by the supplier.

The renegotiation clause differs from the price escalation clause or ‘correction clauses’ 55 (Korrekturklausel). The latter clause automatically adjusts a contract term by relying on external, objective indexes or input variables. Also, the renegotiation clause is more of a procedural provision in that at its best it establishes a structure or framework for the negotiations. Both clauses are necessary because they often serve different functions with the price escalation clauses relating to typical or ordinary fluctuations in prices and costs, while the renegotiation clause captures the extraordinary event that was not quantifiable at the time of contract formation. The renegotiation clause, if properly drafted, sends a strong signal to judges and arbitrators that there was no implied allocation of risk on such matters.

1. Triggering Events An overly broad renegotiation clause may signal to the parties that they have a right 56 to renegotiate in response to any change of circumstances. This type of attitude is likely to disrupt the contract relationship, instead of preserving it. Therefore, it is important to set a threshold or provide a list of the types of occurrences that would trigger the right or duty to renegotiate. The easiest way to accomplish the fine-tuning of the scope of the renegotiation clause is to restrict its reach to only certain enumerated provisions in the contract, such as price and quantity.15 Another method of limiting the scope of the renegotiation clause is by tying it to 57 duration of time and not to triggering events. The clause could provide that the contract is open for ‘review’ for a certain period of time every one or two years. The criteria for such a review should also be provided in the clause, such as readjustment based upon fairness or re-establishing the contractual equilibrium. It should be noted that renegotiation is not to be used because of one of the parties’ new found bargaining power. For example, one party has invested substantially more funds in contract specific equipment and thus has more to lose if the contract is terminated. The other party may use fear of termination to leverage the imbalance in sunk costs to renegotiate a better bargain. This abuse of the renegotiation or review clause should be considered as an act of bad faith. 58 Sample Clause: The parties shall co-operate with each other in carrying out the purpose of this Agreement and shall meet together during the third year after the Agreement’s commencement date or three years after any adjustment or amendment to the Agreement. They shall use their best endeavors to agree upon such changes in the Agreement as may be necessary.

2. Concretizing the Renegotiation Obligation The best that can be done regarding a substantive standard for measuring the sincer- 59 ity of an attempt to renegotiate is that the parties must negotiate in good faith. This can be enforced as a purely objective standard if a party can provide empirical evidence of the impact of a change of circumstances and the other party rejects all proposals to adjust the contract. However, simply proving an increase in the costs of manufacture does not necessarily obligate the other party to allow a price increase. Cost is just one side of the equilibrium equation; the benefit to the other party must also be factored into the equation. If the increase to the costs of the seller equates to an equal increase in 15

Russi (n 13) p. 7.

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the market price, then the equity in adjusting the contract price upward is strengthened. On the other hand, if the costs of the goods increase, but the price or value of the goods on the market has remained the same or has decreased, then a strong case for not increasing the price may be made. In the later case, there is no surplus being generated that needs to be redistributed. Both parties may actually suffer similar decreases in expected benefits – an increase in costs by the seller and a decrease in the value of the goods to the buyer. 60 The other objective tool that can be used to analyze the good faith nature of a renegotiation is trade usage. For example, in some businesses a seller may have a duty to price protect the buyer for certain periods of time. A long-term supply contract may include a price escalation clause or it may set a fixed price for a certain period of time and then allow the seller a unilateral right to increase the price periodically over the length of the contract. However, in certain contexts such an expressly granted right to increase the price at seller’s discretion may be limited by a business custom or trade usage. In some industries, the seller sells products or raw materials that are used in calculating a bid. If it changes the price before the bid is awarded, then the buyer stands to suffer or lose the profits on the second contract. So, in some businesses, the seller must hold the price (price protection) for a reasonable period of time. This means that the seller must give advance notice of an increase in price even through such notice is not required under the contract. 61 The renegotiation clause should also detail the process, which must be followed in conducting the renegotiation in order to enhance the chances for success and that the renegotiation is performed in good faith. The process may call for a certain period of time for negotiations, the involvement of senior management, the use of third parties (mediators), use of experts, and so forth.

3. Distinguishing between Renegotiation and Force Majeure Clauses 62

Force majeure clauses are generally tied to unforeseeable events that render it impossible for a party to perform, thus, triggering a termination of the contract. Renegotiation clauses, much like hardship clauses, aims to preserve the contract through adaptation. The latter two clauses strategically increase in importance the longer the duration of a contract and the higher the sunk or invested costs involved in building the contractual relationship. Renegotiation, whether through a rule of law, a hardship clause, or by way of a renegotiation clause, aims to restore the contractual equilibrium distorted by supervening events.

G. Illustrations I. Collaborative Strategic Contracting 63

Because of the uncertainty that is inherent in long-term contracting, it is important that the contract provide a process or governance structure to manage uncertainty over the duration of the contract. Strategic collaboration involves a number of areas of law including, contract law and the law of business organizations. Strategic contracts may be used in place of vertical integration to obtain needed supplies and services. In order, to align the parties’ interests and deter opportunistic behavior in long-term contracts, the parties should consider using the contract to create a mutual hostage situation. The mutual hostage scenario, whether created through reciprocal penalties, reciprocal bene-

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fits (bonuses), or by the strategic investment of mutual sunk costs, reduces the risk of breach and encourages renegotiation in its place. At times, strategic contracting focuses on a discrete transaction, other times on strategic collaboration aimed at developing a long-term, evolving relationship.16

II. Force Majeure as Surrogate Renegotiation Clause A force majeure clause may provide an excuse for any eventuality expressly designat- 64 ed in the clause, such as transportation problems, government interference, currency fluctuations, and increases in the costs of production. Broad force majeure clauses may act as a surrogate for a renegotiation clause. The force majeure clause should be customized to reflect the particulars of the specific parties and the specific type of contract. It can be expanded to events that are not considered to be force majeure events or that constitute an undue hardship. Along with hardship clauses, such a broad force majeure clause incentivizes the parties to renegotiate in order to salvage the contract.

H. Cross References & Additional Commentary All Chapters of this book are relevant to the topic of long-term contracts in involv- 65 ing the sale of goods; however the following ones are especially pertinent: Chapter 8 (Formation of Contract); Chapter 9 (Incorporation of Standard Terms); Chapter 17 (Performance and Breach of Contract); Chapter 20 (Avoidance of Contract); Chapter 22 (Excuse: Impossibility and Hardship); Chapter 23 (Contract Interpretation); and Chapter 30 (Choice of Law).

I. Practitioner Tips & Contract Clauses I. Indexing A price escalation clause allows the adjustment of the contract price pursuant to ob- 66 jective parameters that are determined in advance, such as the consumer price index, a producer price index or some other relevant index compiled by government authorities, a commodity exchange, or independent institutions monitoring markets or production. To function properly, an escalation clause must select an index that is relevant to the particular contract and identify it by providing the entire title and any codes that specify the product or area to which the index refers. The contract should clearly specify the base price that is subject to adjustment on 67 the basis of the chosen index, it should specify how long the base price will remain in effect before it is adjusted, and how often the adjustment will take place (when the indexes are to be referenced). Sometimes escalation clauses identify the index by making reference to a particular source, for example a certain table number or table title in a given publication that is generally considered to be reliable in the relevant sector. This practice may create problems if the publication is discontinued or if the table number or title is changed. Therefore, it is preferable to make reference directly to the source of the index, rather than to a publication reproducing it. It is possible that the data is not 16 See DiMatteo, ‘Strategic Contracting: Contract Law as a Source of Competitive Advantage’ (2010) 47 Am Bus LJ 727.

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available on the date selected for the adjustment. The escalation clause should provide for these eventualities, for example by giving a default index or specifying the procedure according to which the parties may identify a successor index. Linking the contract price to an index means that the parties will be bound by their respective obligations irrespective of how high or low the price becomes as a consequence of the indexing procedure.

II. Price Adjustments and Hardship 68

Since the parties elected to a price adjustment clause, the conditions for invoking a hardship provision do not exist, which assumes unforeseen events beyond the control of the parties that could not be overcome. An escalation clause, therefore, may be considered as a substitute for a hardship provision in respect to price or cost fluctuations. This may potentially expose the parties to the risk of being bound by a contract that, due to the escalation clause, they no longer want or can afford. To avoid this risk, the contract may specify that a party may terminate the contract if the price escalates (cap) or decreases beyond certain limits (floor). Another approach is not termination, but to allow price fluctuations within a certain price-range and that any fluctuations that exceed those limits will be at the risk of the affected party. However, substantial fluctuations in excess of the agreed price-range may be a ground for renegotiation under a hardship provision.

III. Gross Inequities Clause and Market Reopener Clauses 69

The following is a typical ‘gross inequities clause’ found in a long-term coal supply agreement: Any gross inequity that may result in unusual economic conditions not contemplated by the parties at the time of the execution of this agreement may be corrected by mutual consent. Each party shall in the case of a claim of gross inequity furnish the other with whatever documentary evidence may be necessary to assist in effecting a settlement. Nothing contained in this provision shall be construed as relieving either the purchaser or seller from any of its respective obligations hereunder solely because of the existence of a claim of inequity or the failure of the parties to reach an agreement with respect thereto.17

70

The gross inequities clause allows a party to request equitable adjustments over the length of the contract. The market reopener clause normally sets a fixed period of time before a party may request renegotiation of certain terms in the contract. These clauses generally serve the same function as renegotiation and/or price adjustment clauses. The term used is dependent on the type of contract. For example, the market reopener clause is mostly found in wage and collective bargaining contracts.

IV. Strategic Use of Recitals 71

Recitals are found at the beginning of contracts and set the background or context of the contract. They are general statements of fact and representations describing the parties, circumstances leading to the contract, and the purpose of the contract. A recital 17 Young, ‘Construction and Enforcement of Long-Term Coal Supply Agreements: Coping with Conditions Arising from Foreseeable and Unforeseeable Events – Force Majeure and Gross Inequities Clauses’ (1980) 27 Rocky Mountain Mineral Law Institute 127, 143.

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is sometimes signaled as ‘whereas’ clauses that precede the main text of a contract. The first paragraph in the body of the contract can incorporate the recitals by reference and state that they are true and correct in order to avoid any later argument relating to the legality of the contract. The recitals do not contain rights or obligations of the parties, but merely explain or introduces the nature of the contract. However, a recital based upon a misrepresentation of one of the parties can be the basis of a future claim of misrepresentation or fraud. In the long-term contract where a change of circumstances is likely during its dura- 72 tion, it is important to ‘document’ the circumstances existing at the time of contract formation. In long-term contracts the recitals should be more detailed in describing the facts leading to the contract and the purposes of the contract. For example, they should be used proactively to describe the basis and expected benefits of the contract for both parties (equilibrium point). The parties can use the recitals to create a benchmark to measure how changed circumstances impact the basis, expectations, and balance of the contract as intended at the time of contract formation.

V. Defining Material and Minor Breaches In some laws, a ‘breach is a breach’ that allows a party to reject goods and terminate a 73 contract. An example is the American perfect tender rule, which allows a buyer to reject goods for minor defects. UCC § 2-601 states that: ‘if the goods or tender of delivery fail in any respect to conform to the contract the buyer may reject the whole.’ Contracts usually do a poor job of differentiating types of breaches. In short-term or one-shot transactions, the termination of a contract due to a minor breach is not likely to cause catastrophic-types of damages or harm. However, in long-term, complex sales contracts involving substantial investment of funds, a termination based on a minor defect of performance produces substantial amounts of harm. Therefore, such contracts should determine which types of breach are to be considered material and grounds for termination and which types of breaches are considered minor and not grounds for termination. The contract should provide the consequences and remedies for each type of breach. For minor breaches, the contract may provide for an extended period to cure the breach, a price adjustment, or the payment of liquidated damages. The clause should also provide for the case where there is an accumulation of minor breaches. The non-breaching party could be allowed to treat minor breaches as cumulative in nature and allow for the right to terminate the contract at a certain threshold of accumulated breaches.

VI. Long-Term Just-in-Time Contracting Many supply contracts are premised on a just-in-time supply chain, in which goods 74 must be delivered expeditiously when ordered because the buyer maintains low inventories of the goods, which are often raw materials or component parts used by the buyer to produce its products. Just-in-time contracting has been characterized as the supply of goods ‘in exactly the quantity needed and sending them to where they are needed, when they are needed.’18 A disruption in the supply chain can have catastrophic consequences including a shut down in the buyer’s manufacturing operation and numerous breaches of downstream contracts (buyer is unable to supply its customers). It is imperative 18 Bennett, Jr., ‘Just-In-Time Purchasing and the Problem of Consequential Damages’ (1994) UCC LJ 332, 335.

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that the supplier negotiates protections in the contract to minimize the risk of liability for large consequential damages. First, the supplier should customize standard clauses, such as force majeure and hardship clauses, to exempt it from liability for more types of occurrences, such as supply shortages and in-house strikes. Second, the supplier should negotiate targeted clauses that deal with issues of just-in-time contracting. For example, requiring the buyer to maintain a minimum level of ‘buffer inventory’ to prevent damages in cases of short-term disruptions in supply.19

VII. Brexit and Long-Term Contracts 75

The uncertainty brought by Brexit requires using and reconsidering a number of standard clauses20 including: –

Governing law clause (post-Brexit): The companies should explicitly state which law should govern the contract post-Brexit. Change of Law Clause may be modified to allow a party to either terminate or change its terms in the event of a change in law resulting from Brexit that makes performance of the contract illegal or extraordinarily expensive. Adaptation clause: This clause may be modified to include the allocation of costs associated with Brexit. Insolvency Clause – If Brexit is likely to affect the solvency of a party, inter-company guarantees or restructuring of payment terms should be considered. A party may want to require that sale of goods contracts include a retention of title clause. Force majeure clause: Generally, cases where Brexit may make a contract less profitable or more expensive to perform will not qualify as force majeure. A British court recently held that Brexit is not such an extraordinary event, triggering the doctrine of “Frustration”.21 Companies may consider including certain consequences of Brexit affecting their ability to perform a contract in a force majeure clause. For example, the clause may also provide a right to terminate the contract in the event of exchange rate volatility, change in tax rates and the introduction of new tariffs following Brexit (within certain defined parameters). Renegotiation clause: Due to the unpredictability if the consequences of Brexit, the renegotiation clause should provide a procedure for re-negotiating particular terms in the event that specific consequences occur due to Brexit-related events. Termination clause: The termination clause may be expanded to include specific Brexit-related termination rights in the event that post-Brexit occurrences render the contract impractical or uneconomical. Standard terms and conditions: Standard terms or general conditions should be updated to take account of Brexit.

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These clauses should be negotiated in detail according to the nature and requirements of a particular business or trade. Modification of current clauses should show intent to trigger future amendments of the contract. In such cases, the clause must detail under what specific circumstances the right to modify should be allowed.

DiMatteo, International Contracting: Law and Practice (3rd edn., Wolters Kluwer 2013). Kumar, ‘The Impact of Brexit on Commercial Contracts’ (29 April 2019), https://www.linkedin.com/ pulse/impact-brexit-commercial-contracts-mrityunjay-kumar. 21 Canary Wharf v European Medicines Agency [2019] EWHC 335(Ch). 19

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J. Additional Sources Dharmananda & Firios (eds), Long Term Contracts (Federation Press 2013); Hillman, ‘Court Adjustment of Long-Term Contracts: An Analysis Under Modern Contract Law’ (1987) Duke Law Journal 1; Munukka, ‘The Contractual Duty of Loyalty: Good Faith in the Performance and Enforcement of Contract’ in The Nordic Contracts Act (DJØF Publishing, 2015); Narisimhan, ‘Of Expectations, Incomplete Contracting, and the Bargain Principle’ (1986) 74 California L. Rev. 1123; Soili Nysten-Haarala, The Long-Term Contract (Kauppakaari Oy 1998); Robertson, ‘Symposium Paper: Long-Term Relational Contracts and the UNIDROIT Principles of International Commercial Contracts’ (2011) 17 Australian International Law Journal 185; Young, ‘Construction and Enforcement of Long-Term Coal Supply Agreements-Coping With Conditions Arising From Foreseeable and Unforeseeable Events-Force Majeure and Gross Inequities Clauses’ (1980) 27 Rocky Mountain Mineral Law Institute 127.

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CHAPTER 29 POST-CONTRACT: CONTINUING OBLIGATIONS & RIGHTS Larry A. DiMatteo A. Topics Covered . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 B. Introductory Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 I. Post-Contractual Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 II. Law and Practice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 C. Statement of Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 D. International Sales Transaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 E. Sampling of Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 I. CISG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 1. Distribution and Commercial Agency Contracts . . . . . . . . . . . . . . . . . . . . . . . . . 14 2. Intellectual Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 II. UNIDROIT Principles of International Commercial Contracts . . . . . . . . . . . . . . 18 III. Principles of European Contract Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 IV. Common European Sales Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 1. Warranty of Quality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 2. Warranty of Title . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 3. Restitution Upon Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 V. German Bürgerliches Gesetzbuch . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 VI. German Handelsgesetzbuch . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 VII. French Code Civil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 VIII. Spanish Código Civil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 IX. American Uniform Commercial Code and English-American Common Law of Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 1. UCC Warranty Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 a) Implied Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 b) Express Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 2. Disclaimer Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 3. Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 X. United Kingdom Sale of Goods Act 1979 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 XI. Common Law of Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 XII. American Restatement (Second) of Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 XIII. Chinese Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 1. General Contract Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 2. Warranty of Title . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 3. Warranty of Quality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 4. Express Warranty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 5. Confidentiality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 6. Intellectual Property Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 F. Commentary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 I. Warranties and Representations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 1. Warranty of Title . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 2. Express Warranties of Quality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 3. Duration of Warranty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 4. Allocation of Warranty Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 5. Limitation of Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 6. Extension of Manufacturer or Seller Warranties to Downstream Purchasers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71 7. Product Alterations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 8. Seller’s Intellectual Property Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 9. Products Liability Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80 10. Consignment of Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81 II. Confidentiality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82 1. Confidentiality Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83 2. Proprietary Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96 3. Contractual Restrictions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98 4. Post-Termination Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101

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A. Topics Covered 5. Information Provided by Buyer to Seller . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6. Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Intellectual Property Rights Protection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Grant-back of Rights to Buyer Improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Patent and Copyright Indemnities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Mixed Sale Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. Data Protection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Competition Restrictions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Territorial and Quantity Restrictions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Non-Compete Agreements (Covenant Not-to-Compete) . . . . . . . . . . . . . . . . . 3. Anti-Solicitation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. Post-Contract Obligations in Foreign Representation, Commercial Agency, and Distribution Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Employment: Evergreen Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Independent Contract Status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Commercial Agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. Distribution Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5. Distribution Agreement and Evergreen Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . G. Cross References & Additional Commentary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . H. Practitioner Tips & Contract Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Continuing Nature of Post-Contract Obligations: Survivability Clause . . . . . . II. Confidentiality Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Severance of Post-contractual Obligations and Ancillary Clauses . . . . . . . . . . . . IV. Ownership of Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. Intellectual Property Indemnities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI. Products Liability Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VII. Duty to Prevent Waste . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Additional Sources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

103 108 109 113 116 118 119 120 120 121 132 134 135 137 144 152 156 159 160 160 162 163 164 167 168 169 170

A. Topics Covered Post-contractual obligations are binding promises that survive the expiration or termination of the contract. For every obligation there is, of course, a reciprocal right of enforcement. But, exactly what the post-contractual obligations entail and their duration are often centers for dispute. The most common and traditional of post-contract obligations are warranties, which are either express or implied. Other post-contractual obligations relate to the sharing or giving of information between the contracting parties. Post-contractual rights and obligations come in two varieties – those between parties that are privy to a contract and those that may include parties not privy to a contract (third-party to the contract). These obligations and rights often stem from business relationships (distributorship, joint venture, alliances). The most common contract provisions and independent covenants that survive the primary contract include covenants not-to-compete, anti-solicitation and confidentiality agreements, and warranties. There are a large variety of post-contractual obligations and numerous contract clauses used to create these obligations. This Chapter will provide selective examples of such clauses. Sometimes post-contractual obligations are implied in law, such as implied warranties. This Chapter will focus on three general areas of post-contract obligations – Warranties, Intellectual Property and Confidential Information Protection, and Competition Restrictions. The Chapter will also briefly review warranties, confidentiality, and intellectual property protections in the context of foreign representation, commercial agency, and distribution contracts. It is important to note here the ubiquitousness of mixed sales transactions. Such transactions often blur the line between the sale and licensing of goods. The fact is that many sales of goods contracts now contain post-sale restrictions similar to those found in licensing agreements. Licensing contracts, which may be part of a mixed Larry A. DiMatteo

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sale transaction that includes the sale of goods, often provide for the post-termination protection of intellectual property rights, trade secrets, know-how, databases, customer lists, and so forth. Confidentiality and non-disclosure provisions continue to be binding after the termination of the contract. These provisions will be examined later in this Chapter.

B. Introductory Notes I. Post-Contractual Obligations Most of contract law works within a chronology starting with the formation or conclusion of contracts to their termination by way of performance, breach, force majeure, or agreement of the parties. As seen in Chapters 3 and 4’s coverage (pre-contractual liability) elements of contract law and associated elements of tort or delict law impact the negotiation phase of contracts. In this Chapter we will examine obligations that survive the termination of the contract. The area of post-contractual obligations is a bit of a misnomer in that the obligations are generally created by way of contract. The idea of post-contract is rooted in the idea that both parties have fully performed on the primary obligations of the contract (delivery and payment of goods), but a number of obligations survive the termination of the sales contract. The obligations may be considered tangential or ancillary to the main contract. They also are conditional in nature in that a situation (intellectual property infringement; warranty claims) may not present itself in order to trigger the obligations. 6 This area is especially important in international sales law where the manufacturer, seller, importer, and ultimate purchasers are often great distances apart. These post-contract obligations are strongest in licensing and mixed sales transactions, where the goods may include components of intellectual property, trade secrets, know-how, and other types of confidential information. Thus, in a mixed sale involving the sale of high-tech goods, post-contract obligations to protect the intellectual property and confidential information of the owner-seller are essential. 7 In the area of warranty law, contract clauses are needed to best characterize the interrelationships between an exporter, importer, and downstream purchasers. Chapter 14 covers the substantive law of warranties including types of warranties, as well as the buyer’s duties of inspection-notice, while this Chapter’s review of warranties as post-contractual obligations is taken from a broader perspective. For example, is the manufacturer of goods liable for breach of warranty claims of downstream purchasers that were not in privity (party to) to the original contract between the manufacturer-seller and the importer-distributor-wholesaler? The answer is often found in the primary contract of sale as to whether the importer-distributor-wholesaler replaces the manufacturer-seller once the goods are sold to an ultimate purchaser. The issue of the allocation of warranty obligations is discussed in a latter section. The web or network of interrelationships are acute in long-term supply contracts, discussed in Chapter 28, and distribution and commercial agency agreements, discussed in Chapter 27. 8 At times, an exporter will import directly into a foreign market. In order to do so, the exporter often hires independent contractors, usually foreign based, to act as a foreign sales representative, commercial agent or distributor. The more ‘dense’ relationship involves the use of a foreign distributor. It is estimated that over half of world 5

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trade is handled through sales representatives and distributors.1 The hiring of a quality representative or distributor is one of the most important business decisions, which a manufacturer-exporter will make. The success of exporting goods is mostly dependent on the abilities of these foreign parties. It is, therefore, important for the exporter to negotiate contract provisions to protect its intellectual property and confidential information during the contract and after the termination of the contract. A manufacturerexporter’s worst-case scenario is where the foreign representative or distributor uses confidential information to compete against the exporting party. Restrictions against such direct competition or indirect competition are common in such contracts. However, certain countries’ competition or antitrust laws may challenge the enforceability of these restrictions. Foreign competition laws need to be researched to see if exclusivity in a distribution agreement will be enforceable. European Union (EU) law has been used at times to challenge territorial restrictions as restrictive trade practices. However, certain ‘block exemptions’ can be utilized to defend against such challenges. EU Regulation 1983/83 deals with the legality of exclusive distribution agreements. For example, it generally disfavors clauses that prohibit a distributor from selling within the territory of another distributor. Because of the complexity of EU competition law, it is advisable to have a specialist review your distribution agreement. Later in this Chapter, the nature of anti-competition restrictions and geographical descriptions will be discussed.

II. Law and Practice A more in-depth analysis of the law on many of the issues are found elsewhere in this 9 book: – – – –

Conformity of Goods (warranty law), Chapter 14 Intellectual Property Claims (warranty of title), Chapter 15 Products Liability, Chapter 24 Post-contractual Obligations in Agency and Distribution Contracts, Chapter 27

This Chapter provides a sampling of laws in some of the above areas, but this 10 Chapter is primarily a practice oriented one. Given the idiosyncrasies of the national laws in these areas, the Chapter is based upon only a selective sampling of national laws. Legal counsel should seek the aid of foreign counsel in tailoring any of the sample clauses provided here to meet the requirements of the laws of the foreign country of import. That said, many of the clauses are used strategically. By strategically, the clauses may be used: (1) even if not enforceable under a given law, but as a guide to the appropriate behavior of the parties that in most cases will be voluntarily adhered to and (2) In certain areas, such as intellectual property rights, almost all national laws provide sufficient legal protection, but the problem may be one of enforcement, lack of judicial expertise, and lack of sufficient remedies, therefore, many provisions are inserted (that mimic protections already found in the law) in order to allow for the alternative of a breach of contract claim in place of an infringement claim.

1 See Fisher, ‘Product Distribution in Canada’ (1986) 45 Int'l L 20; King, ‘Legal Aspects of Appointment and Termination of Foreign Distributors and Representatives’ (1985) 91 Case W Res J Int'l L 17.

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C. Statement of Issues 11

The importance of this Chapter is to review business and legal issues that transpire after the termination of a contract. It is important that contracting parties deal with these issues in their contracts. The Chapter reviews some of the contract provisions that are used to create post-contractual liability, as well as when they should be used. The creation of post-contractual obligations will depend on the type of products being sold and the countries of the two contracting parties. In cases of mixed sales, where the goods include the sharing of intellectual property, confidential information or specialized training, such post-contractual obligations will be important in order to protect the owner-seller of these proprietary assets. Post-contractual obligations are also vitally important in long-term contracts, distribution contracts, and commercial agency contracts. For a more detailed analysis of the interface of sales of goods and intellectual property rights see, Chapter 15 (‘Sales and Intellectual Property Rights’).

D. International Sales Transaction 12

The complexity of international sales transactions require a much more sophisticated approach than in domestic sales. This is partially due to the fact that even with express choice of law and forum selection provisions, transborder transactions will likely implicate laws from more than one country. As mentioned above, competition or antitrust laws vary widely across jurisdictions, especially in the area of territorial restrictions. These are mandatory rules for transactions transpiring within a given country that will preempt the working of a contract’s choice of law clause. Therefore, clauses and restrictions employed within a given country may not be enforceable in another country. Therefore, the sophisticated manufacturer-exporter will customize post-contractual obligations to comply with individual country laws. A different scenario is found where a country is lax in the enforcement and remedying violations of its own laws, such as the recognition and enforcement of intellectual property rights. Therefore, post-contractual obligations are especially important to protect the interests of the manufacturer-seller. When use of the protections afforded by the public laws of the country of import is not a practical option, then contract clauses creating post-contractual obligations provide the avenue of breach of contract that may prove a more fruitful method of protecting the exporter’s proprietary rights.

E. Sampling of Laws 13

Unfortunately, the scattered nature of the issues found in the area of post-contractual obligations does not lend itself to providing a sampling of laws on each of the issues dealt with in this Chapter. A discussion of the enforcement of intellectual property protections and the restrictions found in various legal systems would take an enormous amount of space that a single volume treatise on international sales is unable to afford. These issues are especially difficult to analyze since the international and regional harmonization laws and instruments do not cover many of the issues featured in this Chapter. For purposes of brevity, the sampling is not comprehensive as to all the issues raised in the Chapter. In sum, the Chapter seeks to recognize some of the issues posed by the creation of post-contractual obligations without an in-depth analysis. For the practitioner, that analysis should come from foreign counsel. The following sampling gives examples of laws that relate to the major areas of coverage in this Chapter: warran1000

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ty of title, warranty of quality, confidentiality agreements, intellectual property claims, territorial restrictions and agreements not-to-compete, as well as issues that relate to distribution and commercial agency contracts, restitution and other remedies, and third party claims.

I. CISG 1. Distribution and Commercial Agency Contracts The scope of the CISG does not include rules for commercial agency contracts. The 14 issue of whether a distribution contract is within the scope of the CISG is debatable. What is not debatable is that long-term supply or installment contracts are clearly within the scope of the CISG. Whether a distribution contract is covered by the CISG hinges on the terms of the contract. If the distribution contract requires the distributor to advertise and market the exporter’s products or require approval of the exporter to enter into binding contracts, then the contract is likely to be characterized as one for services, than a sale of goods transaction. However, if the distributor buys the goods on its own account, than that contract is covered by the CISG. But, it is not as simple as the above dichotomy would suggest, because the latter scenarios are likely to include numerous restrictions on the distributor’s ability to re-sale goods, after sale services, as well as numerous post-contractual obligations. Such an arrangement for the sale of goods to a distributor often looks like a mixed sales contract – part sale of goods, services, intellectual property licensing, and the use of confidential information. Most likely, distribution contracts where the distributor buys the goods (exported by the seller) for its own account would be considered a sale of goods contract, much like an installment contract, under CISG Article 3 since the predominate part of the contract would be the sale of goods. Thus, at least some distribution contracts are governed by the CISG. The issue then 15 becomes whether the CISG provides rules governing post-contractual obligations. The CISG does not provide specific rules on the enforceability of covenants not-to-compete, post-contract confidentiality and intellectual property protection. These would be considered ‘external gaps’ in the CISG that would be covered under applicable national law. Warranty obligations are covered under CISG Article 35. But, again more restrictive consumer protection laws in national laws would remain in effect.

2. Intellectual Property CISG Articles 41–43 deal with the issue of claims of ownership or infringements 16 of intellectual property by third parties in the sale of goods. Chapter 15 (‘Sales and Intellectual Property Rights’) reviews in detail the coverage of these provisions. This section briefly summarizes those provisions as they relate to post-contract obligations. CISG Article 41 requires the seller to provide goods that are free of third party claims. Two general areas of third-party claims include those relating to financing (liens) and those relating to title (infringement). The later type of claim can be further divided into two areas – claims dealing with the actual ownership or title to goods (fraud) and those dealing with rights that the goods somehow infringe upon. The later type generally relates to the violation of a third-party’s industrial or intellectual property rights, such as, patents, copyrights, trademarks, trade secrets, and, in the European Union, databases. Another area of post-contract protection relates to the protection of a party’s proprietary or property interests, which may or may not include intellectual property rights.

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Article 41 does not apply to intellectual property claims, which is covered under Article 42. Article 42 requires the seller to deliver goods free of any claims relating to intellectual property rights that the ‘seller knew or could not have been unaware.’ However, the seller’s obligations only relate to a subset of intellectual property claims. Article 42(1)(a) (title) applies to claims based on the law of a country that the parties contemplated that the goods would be used or resold. If no such place was contemplated, then the goods have to be free of such claims under the law of the buyer’s country. The buyer’ country being where the buyer has his ‘place of business.’ Under, Article 43 the buyer must give notice to the seller within a reasonable time from the time the buyer became or should of became aware of the nature of the right or claim of a third party. However, the reasonable notice requirement is waived if the seller already was aware of the third party claim and its nature.

II. UNIDROIT Principles of International Commercial Contracts 18 Article 2.16 Duty of Confidentiality Where information is given as confidential by one party in the course of negotiations the other party is under a duty not to disclose that information or to use it improperly for its own purposes, whether or not a contract is subsequently concluded. Where appropriate, the remedy for breach of that duty may include compensation based on the benefit received by the other party. Article 5.6 Determination of Quality of Performance Where the quality of performance is neither fixed by, nor determinable from, the contract a party is bound to render a performance of a quality that is reasonable and not less than average in the circumstances. Article 7.2.3 Repair and Replacement of Defective Performance The right to performance includes in appropriate cases the right to require repair, replacement, or other cure for defective performance. Article 7.3.6 Restitution On termination of the contract either party may claim restitution of whatever it has supplied, provided that such party concurrently makes restitution of whatever it has received. If restitution in kind is not possible or appropriate allowance should be made in money whenever reasonable.

III. Principles of European Contract Law 19 Article 3.201 Agent Authority A person is to be treated as having granted authority to an apparent agent of the person’s statements or conduct induce the third party reasonably and in good faith to believe that the apparent agent has been granted authority for the act performed by it. Article 3.209 Duration of Authority An agent’s authority continues until the third party knows or ought to know that [agent’s authority has been brought to an end].

IV. Common European Sales Law 1. Warranty of Quality 20 Article 99 Conformity with the Contract In order to conform with the contract, the goods or digital content must: (a) be of the quantity, quality and description required by the contract; (b) be contained or packaged in the manner required by the

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E. Sampling of Laws contract; and (c) be supplied along with any accessories, installation, instructions or other instructions required by the contract. Article 100 Criteria for Conformity of the Goods and Digital Content The goods or digital content must: (a) be fit for any particular purpose 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 the buyer to rely, on the seller’s skill and judgement; (b) be fit for the purposes for which goods or digital content of the same description would ordinarily be used; (c) possess the qualities of goods or digital content which the seller held out to the buyer as a sample or model; (d) 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; (e) be supplied along with such accessories, installation instructions or other instructions as the buyer may expect to receive; (f) possess the qualities and performance capabilities indicated in any pre-contractual statement which forms part of the contract terms; and (g) possess such qualities and performance capabilities as the buyer may expect. When determining what the consumer may expect of the digital content regard is to be had to whether or not the digital content was supplied in exchange for the payment of a price. Article 122 Return of Replaced Item (1) Where the seller has remedied the lack of conformity by replacement, the seller has a right and an obligation to take back the replaced item at the seller’s expense. (2) The buyer is not liable to pay for any use made of the replaced item in the period prior to the replacement.

2. Warranty of Title 21

Article 102 Third Party Rights or Claims (1) The goods must be free from and the digital content must be cleared of any right or not obviously unfounded claim of a third party. (2) As regards rights or claims based on intellectual property, subject to paragraphs 3 and 4, the goods must be free from and the digital content must be cleared of any right or not obviously unfounded claim of a third party: (a) under the law of the state where the goods or digital content will be used according to the contract or, in the absence of such an agreement, under the law of the state of the buyer's place of business or in contracts between a trader and a consumer the consumer's place of residence indicated by the consumer at the time of the conclusion of the contract; and (b) which the seller knew of or could be expected to have known of at the time of the conclusion of the contract. (3) In contracts between businesses, paragraph 2 does not apply where the buyer knew or could be expected to have known of the rights or claims based on intellectual property at the time of the conclusion of the contract.

3. Restitution Upon Termination 22

Article 172 Restitution on avoidance or termination (1) Where a contract is avoided or terminated by either party, each party is obliged to return what that party (“the recipient”) has received from the other party. (2) The obligation to return what was received includes any natural and legal fruits derived from what was received. Article 175 Compensation for Expenditures (1) Where a recipient has incurred expenditure on goods or digital content, the recipient is entitled to compensation to the extent that the expenditure benefited the other party provided that the expenditure was made when the recipient did not know and could not be expected to know of the ground for avoidance or termination

V. German Bürgerliches Gesetzbuch § 434 Material Defects (1) The thing is free from material defects if, upon the passing of the risk, the thing has the agreed quality. To the extent that the quality has not been agreed, the thing is free of material defects: 1. if it is

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Quality under sentence 2 no. 2 above includes characteristics which the buyer can expect from the public statements on specific characteristics of the thing that are made by the seller or the producer (§ 4(1) and (2) of the German Product Liability Act [Produkthaftungsgesetz]) or his assistant, including without limitation in advertising or in identification, unless the seller was not aware of the statement and also had no duty to be aware of it, or at the time when the contract was entered into it had been corrected in a manner of equal value, or it did not influence the decision to purchase the thing.

VI. German Handelsgesetzbuch §§ 74 to 75 d Post-Contractual Non-Competes The agreement needs to be in writing; binding if necessary to protect commercial interests of employer; must be reasonable as to subject (type of work) duration, and geographical scope so as to not to be an unreasonable obstacle to ex-employee’s career; duration of the restriction cannot exceed two years.

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Ex-employer must compensate ex-employee for the duration of the covenant. § 74 states that the minimum compensation of one-half of the compensation and benefits received by the employee at the time of termination with possible set-off from compensation received by new employer.

VII. French Code Civil 25 Article 1222 Having given notice to perform, a creditor may also himself, within a reasonable time and at a reasonable cost, have an obligation performed or, with the prior authorisation of the court, may have something which has been done in breach of an obligation destroyed. He may claim reimbursement of sums of money employed for this purpose from the debtor. He may also bring proceedings in order to require the debtor to advance a sum necessary for this performance or destruction. Article 1230 Termination does not affect contract terms relating to dispute-resolution, nor those intended to take effect even in the case of termination, such as confidentiality or non-competition clauses.

VIII. Spanish Código Civil 26 Article 1461 The seller is bound to perform delivery of and provide warranty over the thing constituting the subject matter of the sale. Article 1474 Pursuant to the warranty mentioned in article 1461, the seller shall be liable to the purchaser: (1) For the lawful and peaceful possession of the things sold and (2) For any hidden faults or defects it should have. Article 1484 The seller shall be obliged to provide a warranty for hidden defects of the things sold, if they render it unsuitable for the use to which it is destined, or if they reduce such use in such a way that, if the purchaser had known them, he would not have acquired it or would have given a lower price for it; but he shall not be liable for manifest defects or those which are in plain sight, nor for those which are not, if the purchaser is an expert who, as a result of his trade or profession, ought easily to have been aware of them.

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E. Sampling of Laws Article 1485 This provision shall not apply when it has been stipulated otherwise and the seller should be unaware of the hidden defects or flaws of the thing sold. Article 1490 Actions resulting from the provisions of the five preceding articles shall be extinguished after six months, counting from delivery of the thing sold.

IX. American Uniform Commercial Code and English-American Common Law of Contracts 1. UCC Warranty Law a) Implied Warranties American Common Law recognizes the implied warranties of merchantability and 27 for a particular purpose in the sale of goods. Warranty law is codified in UCC Article 2, §§ 2-312 to 2-316. § 2-312 provides an implied warranty of title in which the seller warrants that it possess good title, free of any security interests, liens, encumbrances, and free of any third-party claims of infringement (intellectual property rights). The warranty of title may be excluded as follows: Express language: Seller does not warrant that the title to the goods conveyed to buyer is good; nor that the transfer of the goods to buyer is rightful; nor that the goods are delivered to the buyer free from any security interest or other lien or encumbrance. By circumstances: buyer had reason to know that the person selling did not claim title in himself or that he is purporting to sell any such right or title as he or a third person may have; examples include; sale by legal authority or by foreclosing lienors).2

b) Express Warranties § 2-313 provides a broad definition of express warranties that includes oral or written 28 statements, description of goods, specifications, samples, and models or prototypes. § 2-314 creates the general implied warranty of merchantability that applies to all sales transactions. It defines merchantable goods as those that would pass without objection in the trade; fit for their ordinary purpose such goods are used; are within the variations provided in the contract; adequately contained, packaged, and labeled as the agreement requires; and conform to the statement of facts placed upon the label or container. The implied warranty for a particular purpose does not automatically adhere to the sale of goods, as does the implied warranty of merchantability. Specific requirements must be made for the creation of the warranty: seller had reason to know of the particular purpose the buyer intended for the goods and the buyer relied on seller’s skill or judgment to furnish suitable goods. Along with the UCC, there are consumer protection laws that may allow for a right to rescission and other remedies. These are mostly found at the level of individual state law.

2. Disclaimer Law For purposes of restricting post-contract warranty obligations, the UCC provides 29 rules on disclaimer of warranties. UCC § 2-316 provides the rules for how a manufacturer or seller may disclaim certain warranties. Its most important rule is that a manufacturer-seller may disclaim the implied warranties. In order to disclaim the warranty of 2

Stone, Uniform Commercial Code (4th edn., St. Paul, MN: West Publishing 1995) p. 64.

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merchantability, the disclaimer must be in writing, be conspicuously shown, and must use the word merchantability. § 2-101(10) defines ‘A term or clause is conspicuous when it is so written that a reasonable person against whom it is to operate ought to have noticed it. A printed heading in capitals (as: limited express warranty) is conspicuous. Language in the body of a form is conspicuous if it is in larger or other contrasting type or color. Whether a term or clause is “conspicuous” or not is for the court to decide.’ 30 A disclaimer of the implied warranty for a particular purpose needs to be in writing and conspicuous, but need not contain any specific type of language. § 2-315 suggests that the following statement would serve the purpose of disclaiming the particular purpose warranty: ‘There are no warranties which extend beyond the description on the face thereof.’ § 2-316 (3) recognizes disclaimers used in the Common Law as sufficient to disclaim all implied warranting including, the goods are being sold ‘as is’, ‘with all faults’, or similar language. The implied warranties can also be removed if the buyer inspected the goods prior to purchase ‘as fully as he desired’ or refused to examine them where such an examination which would have revealed certain defects. Finally, implied warranties may be excluded in fact through prior dealings between the parties, the performance of the contract, or trade usage. 31 UCC § 2-317 provides rules of interpretation in cases involving conflicting warranties or numerous warranty types. First, an implied warranty can never disclaim an express warranty. A manufacturer-seller cannot provide an express warranty in one part of the contract and then disclaim that warranty in another part of the contract. Second, all warranties should be interpreted as consistent as is reasonably possible. Third, in cases of a conflict of warranties, specific or detailed specifications or description are to be recognized over inconsistent general descriptions, models, or samples; samples from existing inventory are recognized over inconsistent general descriptions; and express warranties are recognized over inconsistent implied warranties except for the warranty for a particular purpose. 32 There are also a few minor Federal laws that deal with the sale of goods. The most relevant is the Magnuson-Moss Act, which applies only to the sale of ‘durable goods’, such as kitchen appliances. It does not provide any substantive protections beyond the UCC, but merely provides the form requirements for providing a ‘Limited Express Warranty’ (disclaimer).

3. Remedies 33

The UCC allows the manufacturer-seller of goods to limit the remedies available to the purchaser in cases of breach of warranty. UCC § 2-719 allows the manufacturer-seller to limit the remedies available to the purchaser to one or all of the following: return of the goods and repayment of the price and/or repair or replacement of the non-conforming goods or parts. However, a court may void such a limitation if it deems the remedies provided to ‘fail of the essential purpose’. This can be understood as when, under certain circumstances, the limited remedy proves to be no (reasonable) remedy at all. Consequential damages may be limited or excluded unless such an exclusion or limitation is deemed to be unconscionable; such an exclusion or limitation in consumer sales is per se unconscionable. § 2-718 deals with the issue of restitutionary damages. It provides that in cases of buyer’s breach, the buyer has a right to restitution for payments made that exceed the price of the goods delivered with some limitations, such as an off-set.

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X. United Kingdom Sale of Goods Act 1979 34

Section 12 Implied Terms About Title There is an implied warranty that the buyer will enjoy quiet possession of the goods except so far as it may be disturbed by the owner or other person entitled to the benefit of any charge or encumbrance so disclosed or known. Section 14 Implied Terms about Quality or Fitness Where a seller sells goods in the course of a business, there is an implied condition that the goods supplied under the contract are of merchantable quality. Section 55 Exclusion of Implied Terms Where a right, duty or liability would arise under a contract of sale of goods by implication of law, it may be negatived or varied by express agreement.

XI. Common Law of Contracts Before the advent of formalized legal processes to register and protect inventions, the 35 Common Law had developed a body of trade secrets law. A company that developed products, know-how, formulas, and so forth – that provided them competitive advantages over their competitors – could keep such materials and information as trade secrets. If a company takes adequate steps to maintain the confidentiality of such information, then they are protected under trade secrets law. Those who steal and use trade secrets are subject to injunctive and monetary claims for the infringement or stealing of trade secrets. The key issue is what is considered ‘adequate steps’ needed to obtain the protection of 36 trade secrets law? As noted above, something is only a trade secret is if it has some utility – gives the owner a competitive advantage. The short answer is the steps that someone would take to keep information confidential in a secure manner, allowing access to only key (need to know) personnel, and having all such personnel sign confidentiality agreements.

XII. American Restatement (Second) of Contracts 37

§ 186 Promise in Restraint of Trade (1) A promise is unreasonable on grounds of public policy if it is unreasonably in restraint of trade. (2) A promise is in restraint of trade if its performance would limit competition in any business … § 188 Ancillary Restraints on Competition (1) A promise to refrain from competition that imposes a restraint that is ancillary to an otherwise valid transaction or relationship is unreasonable in restraint of trade if: (a) the restraint is greater than is needed to protect the promisee’s legitimate interest, or (b) the promisee’s need is outweighed by the hardship to the promisor and the likely injury to the public.

XIII. Chinese Law 1. General Contract Rules 38

Article 9 All civil subjects engaging in civil activities shall help save resources and protect the ecological environment.

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Chapter 29 Post-Contract: Continuing Obligations & Rights Article 558 After the termination of the claims and debts, the parties shall observe the principles of good faith and perform obligations such as notification, assistance, confidentiality and recovery of used items in accordance with transaction practices. Article 507 Where a contract is invalid, void, rescinded or terminated, this shall not affect the validity of the relevant dispute resolution clauses in the contract.

2. Warranty of Title 39 Article 576 Where the rights and obligations are assumed by the same person, the said rights and obligations shall be terminated, except that the interests of a third party are prejudiced. Article 612 The seller has the obligation to warrant that no third party has any rights to the subject matter delivered, except as otherwise provided by law.

3. Warranty of Quality 40 Article 511 If quality requirements are unclear, the contract shall be performed in accordance with the mandatory national standards; if there are no mandatory national standards, the contract shall be performed in accordance with the recommended national standards; if there are no recommended national standards, the contract shall be performed in accordance with the industrial standards; if there are no national standards or industrial standards, the contract shall be performed in accordance with the usual standards or specific standards that conform to the purpose of the contract. Article 621 Where the buyer fails to give notice within a reasonable period or fails to notify the seller within two years of receipt of the subject matter, the quantity or quality of the subject matter shall be deemed to be in conformity with the terms of the contract; however, if there is a warranty period in respect of the subject matter, the warranty period applies and the two-year provision does not apply. Where the seller knows or ought to know that the subject matter to be provided does not conform to the terms of the contract, the buyer is not subject to the time limits for notification prescribed.

4. Express Warranty 41 Article 635 In a sale by sample, the parties shall place the sample under seal, and may specify the quality of the sample. The subject matter delivered by the seller shall comply with the sample as well as the quality specifications.

5. Confidentiality 42 Article 501 Trade secrets known by the contracting parties in the course of concluding the contract; or other confidential information shall not be disclosed or improperly used, no matter the contract has been concluded or not. Whoever discloses or improperly uses such trade secrets or information and thus causes losses to the other party shall be liable for compensation. Article 785 The contractor shall keep the relevant information confidential as required by the ordering party and may not retain any replica or technical material without permission of the ordering party.

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6. Intellectual Property Rights 43

Article 501 Trade secrets known by the contracting parties in the course of concluding the contract; or Other confidential information shall not be disclosed or improperly used, no matter the contract has been concluded or not. Whoever discloses or improperly uses such trade secrets or information and thus causes losses to the other party shall be liable for compensation. Article 594 The limitation period for bringing an action or applying for arbitration regarding disputes over contracts for international sales of goods and contracts for technology imports and exports shall be four years. Article 600 With regard to the sale of a subject matter with intellectual property rights, the intellectual property rights to the subject matter shall not belong to the buyer, unless otherwise provided by law or agreed upon by the parties.

F. Commentary The above sampling of laws is a selective mix of different legal areas of post-con- 44 tractual liability – warranty, intellectual property protection and trade secrets, and competition restrictions (covenants not-to-compete). The CISG coverage in these areas ranges from tangential to no coverage. Its coverage is limited to the warranty of quality provisions of Articles 35–36 and the warranty of title (intellectual property claims) provisions of Articles 41–43. Article 35 recognizes the largely generic implied warranties of merchantability (merchantable quality) and for a particular purpose (buyer’s reliance on seller’s superior knowledge and expertise). However, much of the law in this area is found in a multitude of nation-specific laws, specifically in the area of consumer protection laws, some relating to the quality of the goods. A significant degree of harmonization has been obtained through numerous EU Directives focused on consumer sales. But, on the whole, warranty law is highly idiosyncratic and nation dependent. Therefore, the focus here will be on general issues and common contract provisions found in the area of warranty. The importer of goods will need to become knowledgeable on the nation specific laws of the country of import. In the area of warranty of title, CISG Article 41 states that the seller must provide 45 ‘goods which are free from any right or claim of a third party’. The key issues here are what types of claims are covered by this warranty. The Article 41 makes it clear that it does not pertain to intellectual property claims by referring the reader to Article 42. Also, Article 41 allows for the exclusion of the warranty of clear title if ‘the buyer agreed to take the goods subject to’ such claims or rights. The issue here is how can the seller protect itself from any warranties of title claims under Article 41. Various examples of disclaimer language will be examined later in this Chapter. Article 42 deals with the issue of intellectual property rights or claims relating to 46 the goods being sold. Again, the general rule is that the seller must provide goods free of any such third party rights or claims. However, Article 42 qualifies this warranty by requiring that the warranty only relates to claims recognized or based under the country in which the goods are to be resold or used. The seller can only benefit from this limitation on the warranty of clear title when it was clear at the time of contracting that the goods would only be used or resold in a particular countries or countries. If there was no such contemplation as to a particular countries of resale or use, then the good need only be free of claims based upon the law of the country where the buyer has its place of business. Article 43 notes that the buyer losses its claim of defective title

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if he fails to give ‘notice to the seller specifying the nature of the right or claim of the third party within a reasonable time after he became aware or ought to have become aware of the right or claim’ unless the seller already knew of the right to claim. Issues here include: (1) how particularized must the buyer notice be, (2) what is a reasonable time for the buyer to give notice, and (3) can the seller disclaim knowledge of any such claims in the contract? Specific contract provisions can and should be used to answer these questions. Provisions may provide how specified the notice must be and the time period in which the buyer must give notice. The seller may place disclaimer language (representation) stating that it has no knowledge of any third party claims or rights or potential claims. But, his does not protect the seller of misrepresentation in cases where the seller has such knowledge. The better approach is to simply disclaim the warranty, such as the goods are being sold ‘as is’ relative to any such claims or rights of third-parties. 47 In the area of covenants not-to-compete or territorial restrictions, national completion or antitrust laws govern. It is outside the scope of this book to review such laws given their variances and complexity. Territorial restrictions and covenants not-to-compete may cover the time of the contract, as well as, a period of time post-contract. As a broad statement, it can be said that in relation to the sale of goods, EU competition laws are stricter than American antitrust laws. Territorial restrictions placed on an importer of goods or on a foreign distributor of goods are less likely to be enforced under EU law. The EU perspective is more consumer-friendly in that the transshipment of goods from a lower cost country to a higher cost country provides the consumer with greater choice and lower prices. The fact that the sale in other countries may undercut the prices or market share of the seller or another one of the seller’s distributors or licensees is beside the point. That said, the seller may insert contractual provisions, such as purchase limitations or production limitations, to make such parallel imports difficult. A number of such provisions will be provided below. The legality of such provisions should be determined with the aid of foreign counsel.

I. Warranties and Representations 48

Representations and warranties are statements of facts and often can be used interchangeably. A recital or representation of fact at the beginning of the contract can be characterized as implied warranties. Both provide post-contractual rights to bring claims of breach of warranty or misrepresentation. If they prove to be false after the termination of the contract one of the contracting parties may bring a claim of misrepresentation. A statement of opinion or a statement of a non-material fact will not support such a claim unless the opinion is of an expert upon which the other party relies upon. Technically, representations are statement of facts that a party relies upon at the time of the formation of the contract. A warranty is a party’s assurance with an implied duty of indemnification. However, if the contract expressly provides separate remedies for ‘representations and warranties’, then they both serve the same function. To insure the continuing nature of a representation it is best to include a ‘survival clause’ expressly stating that the representations or some of the representations (making the representation into a binding, independent covenant) that will survive he termination of the contract. If a seller wants to avoid post-contractual liability it would negotiate a provision stating that the representations merge or terminate upon the transfer of title or delivery of the goods. This would turn the sale into an ‘as is’ contract. Under Common

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Law ‘as is’ terminology serves to disclaim or exclude any warranties implied by law, but would not terminate any express warranties provided by the seller.

1. Warranty of Title As noted above, the CISG, as well as other laws, imply a warranty of title that requires 49 the seller to provide clear title. Unclear title includes liens placed on the goods by lending institutions. Also, the goods may trigger claims of intellectual property rights infringement. To bring certainty to the warranty of title it is best to provide an express provision of its scope, especially in the area of intellectual property rights. 50

Example: Title to Intellectual Property: (a) Intellectual property means inventions, technology, designs, works of authorship, mask works, technical information, computer software, business information and other information conceived, developed or otherwise generated in the performance of this Contract by or on behalf of Seller; (b) Seller warrants that the goods performed or delivered under this Contract for the use of Buyer or its customers of any such goods will not infringe or otherwise violate the intellectual property rights of any third party in Buyer’s country [or any foreign country that buyer does business]. Seller agrees to defend, indemnify, and hold harmless Buyer and its customers from and against any claims, damages, losses, costs, and expenses, including reasonable attorneys’ fees, arising out of any action by a third party that is based upon a claim that the goods performed or delivered under this Contract infringes or otherwise violates the intellectual property rights of any person or entity.

The seller may specifically want to list the countries that it is willing to indemnify 51 the buyer and buyer’s customers. Obviously, the rights of the buyer and its customer’s survive the termination of the contract. The question is for how long? The seller would want to limit the period of the warranty; the buyer would want an extended period of time, possibly for the duration of the intellectual property rights protections listed by the seller or until such information enters the public domain. If the goods are complex or based a numerous intellectual property rights, then it is 52 best for the parties to enter into ‘proprietary information agreement’ that lists all such rights and their durations. The title warranty in the contract should cross reference the property information agreement. Such warranties and proprietary agreements can run in both directions. The clause below provides protection to the buyer who provides proprietary information to the seller. 53

Example: Buyer’s Information: Information provided by Buyer to Seller remains the property of Buyer. Seller agrees to comply with the terms of the proprietary information agreement [See Appendix B to this Contract] and shall comply with all proprietary information markings and restrictive legends required by the Buyer. Seller agrees not to use any Buyer provided information for any purpose except to perform this Contract and agrees not to disclose such information to third parties without the prior written consent of Buyer.

The terms or proprietary information agreement should also require the seller [or 54 buyer] to take sufficient security measures to protect the confidentiality of the proprietary information. Seller shall maintain data protection processes and systems sufficient to adequately protect Buyer’s information and comply with any law or regulation applicable to such information. If Seller becomes aware of any compromise of buyer information Seller will take appropriate immediate actions to investigate and contain the breach and any associated risks, including prompt notification to Buyer. Seller will also cooperate with Buyer in any investigation Buyer may conduct regarding the nature and scope of any such breach. Seller shall pay any costs incurred for remedial actions caused by a breach.

Given that much of the information provided by sellers or buyers is in electronic 55 form, extra precautions should be required to ensure the security of electronic records.

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Chapter 29 Post-Contract: Continuing Obligations & Rights Any Buyer provided information identified as proprietary or subject to restrictions on public disclosure by law or regulation shall be encrypted (i) if transmitted via the Internet, or (ii) during electronic storage if potentially accessible by the Internet or otherwise by non‐authorized users. The provisions set forth above are in addition to and do not alter, change or supersede any obligations contained in the proprietary information agreement.

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The following clauses deal with the issue of the sale of goods that may be subject to patent infringement claims. In the first provision, the seller provides an express warranty of any knowledge of existing or potential infringement claims. The second clause provides a ‘patent indemnity’ aimed at protecting the buyer from such claims. The patent indemnity clause consists of continuing obligations that survive the initial sale of the goods. Patents – Representation of Non-Infringement: Seller represents and warrants that it has no knowledge that any items supplied under this Contract are or will be subject to any claim or allegation of infringement of any patent. Seller makes no other warranty regarding patent infringement. Patent Indemnity: Seller shall, at its own expense, defend any suit or proceeding brought against Buyer based on any valid or rightful claim, brought within … years of the effective date of the contract, that any product manufactured by Seller infringes a patent of the Seller or Buyer’s countries, which patent existed prior to the effective date of the contract. In lieu of the foregoing, Seller may, at its expense and sole option, either (1) procure for Buyer the right to continue using the product; (2) modify the product so that it becomes non-infringing; or (3) replace the product with a non-infringing product. Seller’s obligations are conditioned upon Buyer giving to Seller written notification of any such claim (including claims which have not matured into suits or proceedings) within 15 days of Buyer’s gaining knowledge of such claim. Seller’s indemnity does not apply to (a) any product which is manufactured to Buyer's design or parts supplied or specified by Buyer pursuant to this Contract; (b) the use of any product in combination with any apparatus or material not furnished by Seller or (c) if the product is changed or modified by any person other than Seller. Seller liability for patent infringement of any product furnished under this Contract is further subject to the limitation of total liability in the Limitation of Liability clause.

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The above patent indemnity clause does a number of things of interest. First, it acknowledges that the Seller is liable on patent infringement claims stemming from the patent law of the country of manufacturer (Seller) and the country of the buyer. This makes it clear that the seller should perform due diligence before exporting to a foreign country. At the minimum, it should do a patent search of the patents registered in the foreign country to determine the likelihood of infringement. The best insurance against such claims is to register its patents prior to entering s exporting sales contract. The clause also provides a number of exceptions to its indemnity obligations including: (1) built in statute of limitations upon which the buyer can bring a claim, (2) a strict notice provision (the buyer would want a much longer time than 15 days to provide notice), (3) rights to modify or replace the infringing products with non-infringing products (this seems to give too much discretion to the seller; the buyer would want to have a right of consent to any such changes), (4) no liability if the design, or specification of component parts are provided by buyer or if the goods are subsequently modified by the buyer, and (5) the liability of the seller is capped by reference to a Limitation of Liability clause.

2. Express Warranties of Quality 58

It is good practice for the seller to provide a ‘limited’ express warranty, as well as incorporating a limitation of remedy clause into the sales contract. It is also good practiced to have these clauses and other risk allocation clauses individually signed. This provides evidence that the purchaser or distributor was aware and specifically consented to the 1012

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clauses. Such particularized consent may increase the likelihood of enforceability in some national legal systems. In American law, there are conspicuousness requirements that aim at preventing limitation of warranties, limitation of remedy, and disclaimer of warranties provisions from being ‘lost’ in the fine print of the sales contract. These conspicuousness requirements are found in the Federal Magnuson-Moss Act (durable goods) and in the UCC (all goods). 59

Examples: Limited Warranty: The Company warrants only that the Products shall comply with Company's quality control system specifications for finished goods. This is a limited warranty. Company makes no other warranties and expressly disclaims all other warranties, express or implied, including but not limited to any implied warranty of merchantability or fitness for a particular purpose. This warranty is personal to distributor and may not be assigned or transferred to any other person. Limitation of Remedy: With respect to any non-conforming goods, Distributor shall notify Company in writing of the non-conformity promptly after obtaining knowledge of its existence. Distributor's sole and entire remedy with respect to such non-conformity shall be replacement of Products, or refund of the purchase price, at the Company's option. In no event shall company be liable for any incidental or consequential losses or damages (including but not limited to economic loss or loss of profits) suffered or incurred by distributor as a result of or in connection with any breach of this agreement by company or in connection with any tort (including but not limited to strict liability or negligence) whether allegedly committed by company in connection with this agreement or alleged by any person to have resulted from the usage of any product.

The above wide-ranging disclaimer-type of Limited Warranty and Limitation of Remedy clauses are not totally enforceable under some national or regional laws (e.g., EU), especially the disclaimer of implied warranties.

3. Duration of Warranty The contract should state that seller’s warranty provisions commence at the comple- 60 tion of performance, which should be described – upon deliver, upon sale to ultimate purchaser, at installation, at the time the goods are put into use, and so forth. The contract provision should expressly state what warranties survive the termination of the contract: ‘Warranties – express or implied – shall survive the delivery of the goods, the inspection of the goods, acceptance, payment or early termination of the contract’. Other issues beyond commencement of the warranty period, is the length of the warranty period, whether the warranty period can be ‘tolled’ (extended) such as for the period of time that the goods need to be repaired or replaced.

4. Allocation of Warranty Obligations In cases, where the exporter is selling to a foreign wholesaler, distributor, or retailer 61 the parties may negotiate an allocation of warranty and liability. In the primary sale (exporter-importer), the exporter provides or the parties negotiate an express warranty. 62

Example: Express Warranty: Seller warrants that all goods furnished shall strictly conform to applicable specifications, drawings, samples, descriptions, and other requirements of this contract and are free from defects in design, material, and workmanship and shall be fit for purpose and of satisfactory quality. This warranty shall begin upon the acceptance of the goods and extend for a period of … year(s). If any nonconforming goods are identified by the buyer seller shall promptly repair or replace the goods. Transportation of replacement goods and return of nonconforming goods shall be at seller's expense. If repair or replacement is not carried out promptly, buyer may elect to return, repair, replace, or purchase substituted goods at seller’s expense.

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The key issue is whether the manufacturer-seller-exporter’s warranty extends to subsequent purchasers. The importer would want the warranty provision to extend to downstream purchasers.

64 Example: Ultimate Purchasers: All warranties shall inure to the benefit of both BUYER and its customers.

65

The buyer would also want the seller to agree to hold harmless the buyer from any claims including associated expenses.

66 Example: Hold Harmless Clause: Seller shall be responsible for and hold harmless buyer and its customers from and against all losses, costs, claims, causes of action, damages, liabilities, and expenses, including attorneys’ fees, all expenses of litigation or settlement, and court costs, arising from any act or omission of seller, its officers, employees, agents, suppliers, or subcontractors at any level of the chain of title, in the performance of any of its obligations under this Contract.

It should be noted that a clause allowing for the recovery of attorney’s fees and litigation expenses is unlikely to be enforced under American law. 67 If the buyer has sufficient bargaining power than it may want to negotiate a guaranty of the warranty. This guaranty or bond would provide a pool of funds to satisfy warranty claims in the event the seller proves unreliable or goes out of business. One avenue is to require the seller to procure a Warranty Bond. A Warranty Bond is a bond issued by a bank on seller’s behalf, in favor of the buyer as security to guarantee seller’s warranty obligations. Warranty Bonds are issued at the time of shipment and are usually issued in amounts equal to 5% to 10% of the price of the goods. 68 Provisions in export-import, distributorship, or agency contracts may attempt to limit the manufacturer-exporter’s warranty obligations to ultimate purchasers, including consumers by transferring responsibility for after sales service or warranty obligations to the importer-distributor-buyer. This allocation or responsibility should be supported by a ‘hold harmless’ clause in which the importer assumes liability for warranty claims and agrees to protect the exporter. The exporter may want to guarantee that protection by requiring the importer-distributor-wholesaler to obtain liability insurance with the manufacturer-export as an additional insured party.

5. Limitation of Liability 69

The disclaimer of warranty is sometimes conflated with a limitation of liability clause. In fact, a single clause may include a disclaimer of warranty and a limitation of liability. As will be discussed later, the sale of goods is sometimes ‘mixed’ with a transfer of confidential information that the seller or provider of the information will want to disclaim liability. The following clause attempts to disclaim all warranties and all liability for the supply of goods and confidential information. The all ‘capital letters’ presentation aims at making the clause more conspicuous in order to support a future argument that the buyer knew or should have known of its incorporation into the contract. Limitation of Liability Except as set forth elsewhere in the contract between the parties, there are no warranties, express or implied, whether oral or written, with respect to the confidential information and any other goods and services covered by or furnished pursuant to this sale, including, but not limited to any implied warranties od merchantability, or of fitness for a particular purpose, or arising from a course of performance or dealing, or from usage or trade.

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In no event shall seller or its suppliers have any liability to buyer- or any third party for damages resulting from buyer’s use or possession of the confidential information. In no event shall seller be liable for any loss of profit or revenue by buyer or for any consequential, indirect, incidental, special, punitive or exemplary damages incurred or suffered by buyer. The reference to punitive or exemplary damages is aimed mostly at American law 70 where such damages are recognized. In the area of consumer sales, China also allows for the awarding of punitive damages.

6. Extension of Manufacturer or Seller Warranties to Downstream Purchasers The product warranty provisions provided by the distributor to downstream pur- 71 chasers should be consistent with those of the exporter. The manufacturer-exporter, of course, selling to a distributor, wholesaler, or retailer in a foreign country the manufacturer-seller would want to insulate itself from claims by ultimate purchasers or consumers. The below example disclaims the manufacturer-export’s liability to subsequent purchasers. 72

Example: No Warranties to Distributor's Customers: Except as specified in writing on the packaging of the Products, Company makes no warranties to Distributor's customers concerning the Products. Distributor agrees to make only such representations with respect to the performance and other characteristics of the Products, as shall be communicated to it by the Company in writing.

7. Product Alterations The seller will want to expressly protect itself from alterations made to its goods by 73 other parties. For example, if the distributor or importer makes changes, modifications, or alterations in the seller’s product, then the seller would want to be relieved of any liability claims for defective goods brought by the initial purchaser or by downstream purchasers. Of course, these modifications may be undertaken in order to conform to the laws of the country of import. Nonetheless, a prudent seller would want to be relived of liability whether such modifications were necessary or not. 74

Example: Product Alterations: Distributor agrees that it will not change or alter the Products in any manner prior to resale by it and that all Products sold by Distributor will conform to the Company's specifications in effect at the time of delivery to carrier at point of manufacture.

8. Seller’s Intellectual Property Rights As Professor Zheng discusses in Chapter 15 third-party rights or claims may be 75 based on general property interests, such as ownership rights or liens, or may arise under intellectual property laws. And, while the former claims are relatively uniform across legal systems (lien law or secured transactions law), he notes that ‘due to the non-uniformity of intellectual property laws across jurisdictions, the scope of intellectual property rights that may restrict a buyer’s use or resale of the purchased goods may differ from jurisdiction to jurisdiction.’ The buyer’s interest is that it will not be able to resale or use the goods because of 76 third-party claims. The seller’s interest is to avoid being subject to buyer and third-party claims based on the infringement of intellectual property rights. Professor Zheng explores the following issues: ‘When a seller contracts to sell goods to a buyer, does

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the buyer assume an obligation to the buyer for third-party rights and claims based on intellectual property in all jurisdictions where the goods may be used or resold? Or will the seller be obligated for third-party intellectual property rights and claims in only one jurisdiction?’ Please refer to Chapter 15 for a discussion on these issues. 77 The other major seller concern is the maintenance of the confidentiality of the information being provided to the buyer or distributor. It is especially important, for the seller, in international sale of goods and distribution contracts to provide for the protection of intellectual property rights, trade secrets, and know-how. That is, the seller wants to protect itself from claims by its purchaser or ultimate purchasers challenging its intellectual property rights relating to the goods. The seller does this by inserting a non-challenge or validity clause into the contract. However, such clauses are not enforceable under some national laws. 78 A vitally important clause for the seller aims at protecting any intellectual property rights that are tied to its goods including, patents, copyrights, and trademarks. The provision below aims at placing responsibilities for protection of the rights, including appropriate marking requirements, on the purchaser or distributor during the performance of the contract and after the termination of the contract. 79 Example: Proprietary Rights (intellectual property): Distributor agrees to offer the Products for sale only under the trade names and trademarks and utilizing the label content and literature designated by the Company. Distributor further agrees not to alter or add to such trade names, trademarks, labels or literature in any way or to take any other action detrimental to the Company's proprietary rights. Distributor shall cease to display or use the Company's trade names, trademarks, labels or literature upon termination or expiration of this Agreement and shall not do any act or thing which might injure the reputation of the Company or dilute, diminish or otherwise adversely affect the Company's exclusive proprietary rights.

9. Products Liability Claims 80

Chapter 24 deals with the issue of products liability claims. In American law, it is generally understood that a purchaser of goods may pursue a claim for personal injury (caused by a good) against any or all parties in the supply chain or chain of title (manufacturer-wholesaler-retailer) for the total damages incurred due to a defect in the good (‘joint and several liability’). Therefore the seller-exporter may want to place a clause in the agreement assigning the risk of product liability claims to the distributor-purchaser. However, foreign national laws may impose such liability on both the manufacturer-exporter and the distributor-purchaser (e.g., EU Product Liability Directive 85/374/EEC of 25 July 1985). Instead, the parties may agree to obtain a proscribed level of products liability insurance to minimize their product liability risks. The seller may require that the distributor-importer purchase such insurance and add the seller as an additional insured on the policy. The seller-exporter would also want to insert an indemnification or hold harmless clause requiring the distributor-importer to defend the seller against any such claims and to pay all damages or to indemnify the seller for damages paid out by the seller. Alternatively, both parties may require the other to procure a specific minimum amount of product liability insurance. Responsibility for transportation charges on warranty claims should be specified. Also, a specific limitation on special or consequential damages should be set.

10. Consignment of Goods 81

In cases of consignment contracts, or any contract in which the seller retains title to the goods, the parties should agree in detail on the terms to govern all matters relating to consigned goods. They should specify whether the principal (seller) can demand to 1016

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take back the whole inventory or part of it and whether the consignee will be allowed to send back unsold goods. It is essential that the consigned goods be properly insured. The contract should also provide that the consignee shall take all necessary safeguards to protect the seller’s right of ownership. Note, in some countries the creation of a consignment relationship may lead to the seller being taxed as a resident.

II. Confidentiality The sale of goods, especially in mixed-sales transactions, may include the transfer 82 of confidential information. The seller would want to protect against other parties, including competitors, from obtaining this information or against the purchaser from using the information to compete against the seller in the future. Three generic clauses are used to protect the seller’s confidential information: confidentiality, non-solicitation, and covenants not-to-compete clauses.

1. Confidentiality Obligations A duty of confidentially may begin during the negotiations stage and continue if the 83 parties consummate a contract. In the negotiation of contracts, the parties may exchange confidential information. If it is reasonable to imply that the receiving party should have known the information was confidential, then a duty of confidentiality may be implied making that party liable for a breach of confidentiality if it uses the information outside of the negotiations or discloses it to a third party. It is best that the parties enter into a formal ‘negotiation agreement’ or confidentiality agreement outlining the rights and obligations of the parties during the negotiations. Confidentiality agreements may be made unilaterally or bilaterally. The standard 84 confidentiality or non-disclosure agreement contains a statement of purpose; definition of the information subject to confidentiality; promise by one or both parties to not disclose the information for a specified time, in perpetuity or until a certain condition is met; and whether there are limits on the information that is deemed confidential. Breach of a confidentiality agreement is the basis for a lawsuit for breach of contract. Without an express agreement, the duty of confidentiality may be implied in law. For example, breach of confidentiality is a Common Law tort, which means the harmed party may seek the remedies of injunction and damages. Of course, not all information is protected simply because it is labeled as confidential. The court in Tax Track Sys. Corp. v. New Investor World, Inc.3 asserted that courts ‘will enforce [confidentiality] agreements only when the information sought to be protected is actually confidential and reasonable efforts were made to keep it confidential.’ In short, the information needs to be protected as a trade secret by the owner and by the party receiving the information (only accessible to key employees; heightened security). The information subject to confidentiality protection should be exhaustively and precisely detailed in the contract. Confidentiality obligations can be perpetual, unless the parties agree to an express period of time following the completion of the contract or if the information enters the public domain. Beyond a duty not to disclose the confidential information, the confidentiality provisions may require the party receiving the information to take certain actions to protect the information. Other issues that should be dealt with include the specified relief if the duty is breached, such as a liquidated damages clause, and any exceptions to the non-disclosure obligation. Permitted use or disclosure 3

478 F.3 d 783, 787 (7th Cir.2007).

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of the information should be precisely detailed in the contract. See Chapters 3 and 4 for more discussion on this subject in the area of contract negotiations. This Chapter focuses on confidentiality obligations that survive the termination of the contract. 85 Confidentiality clauses are found in all sorts of contracts – employment, distribution of goods, licensing, commercial agency, and so forth. They are enforced under most legal systems.4 Often, in more complex transactions, such as franchise contracts, the parties will execute a separate confidentiality contract. Confidentiality agreements make clear that the post-contract confidentiality obligations are independent from the primary contract. A clearly written confidentiality clause in the primary contract serves the same function. The enforceability and litigation over the breach of confidentiality clauses or agreements are common. The case law on the subject in the Common Law is extensive. The cases are less extensive under the Civil Law because the Civil Law ‘imposes an obligation to be discrete, with contractual or at least delictual (tort) remedies.’ 5 86 Confidentiality and Non-Disclosure Clause: The Parties acknowledge that the existence and the terms of this Agreement and any oral or written information exchanged between the Parties in connection with the preparation and performance this Agreement are regarded as confidential information. Each Party shall maintain confidentiality of all such confidential information, and without obtaining the written consent of the other Party, it shall not disclose any relevant confidential information to any third parties, except for the information that: (a) is or will be in the public domain (other than through the receiving Party’s unauthorized disclosure); (b) is under the obligation to be disclosed pursuant to the applicable laws or regulations or court orders or other government authorities. Disclosure of any confidential information by any company or person hired by any Party shall be deemed disclosure of such confidential information by such Party, which Party shall be held liable for breach of this Agreement. This Clause shall survive the termination of this Agreement for any reason. 87 The problem with this clause is the phrase that ‘any oral or written information exchanged’ is confidential. As noted above, not all information can be designated as confidential. A better approach is to list the types of proprietary information (trade secrets, know-how, customer databases, market research, and so forth) that are within the scope of the confidentiality clause. Example: Confidentiality Obligations After Termination: Distributor agrees that its obligations relating to Trade Secrets and Confidential Information shall apply indefinitely after the termination of the relationship.

Confidentiality agreements are considered perpetual unless less the confidential information enters the public domain without the fault of the promisor. 89 The confidentiality provision should state expressly that the party providing information considers the information to be confidential and proprietary property. It should then clearly state the obligations of the party receiving the information. 88

90 Example: Confidentiality and Non-Use Clause: The disclosing party considers its Information to be confidential and proprietary property. The disclosing party is willing to disclose certain confidential information and the receiving party is willing to receive such Information subject to the following terms and conditions: (1) The receiving party shall hold the Information disclosed to it in confidence and shall use the same level of care to prevent any unauthorized use or disclosure of such Information as it exercises in

See, for example, French Labor Code, Article L.152-7. Fontaine & De Ly, Drafting International Contracts: An Analysis of Contract Clauses (Ardsley, NY: Transnational Publishers 2006) p. 599. 4

5

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F. Commentary protecting its own information of a similar nature. Information disclosed shall at all times remain the property of the disclosing party. (2) The receiving party shall not, without the prior written consent of the disclosing party, make use of the Information disclosed to it other than for the purpose of this contract only and shall not disclose the Information to any third party except to such of the receiving party's officers, employees and consultants who have been made aware that the Information is confidential and are bound to treat it as such and to whom disclosure is necessary for the purpose of performing this contract.

The contract should also state the buyer or distributor’s obligations upon completion.

91 92

Example: In the absence of any further agreement between the parties, the receiving party shall cease all use and make no further use of the Information disclosed to it and shall upon written request from the disclosing party promptly return to the other party all of the Information which is in tangible form, except that each party shall be permitted to retain one copy of the other party's Information so that any continuing legal obligations may be determined.

The contract should also provide any exceptions that would limit or extinguish the 93 buyer-receiving party’s obligations of confidentiality. 94

Example: The confidentiality and non-use obligations of this Confidentiality Agreement shall not apply to: (a) Information which at the time of disclosure is in the public domain; or (b) Information which, after its disclosure hereunder, becomes part of the public domain by publication or otherwise, except in breach of this Confidentiality Agreement; or (c) Information which the receiving party can establish by reasonable proof was in its possession at the time of disclosure or was subsequently and independently developed by its employees who had no knowledge of the Information disclosed; or (d) Information which the receiving party receives from a third party provided however that such information was not obtained by the said third party, directly or indirectly, from the disclosing party under conditions of confidentiality; or (e) Information which is required by law, regulation or order of a competent authority to be disclosed by the receiving party, provided that, where practicable, the disclosing party is given reasonable advance notice of the intended disclosure.

The clause can also provide for remedies in case of breach. A ‘special’ remedy for 95 breach of confidentiality agreements is ‘disgorgement or accounting of profits.’ This remedy sometimes referred to disgorgement is not generally found in contract remedies. An English court has recognized the use of this remedy for breach of confidentiality or infringement of intellectual property rights and trade secrets. The Court in Peter Pan Manufacturing Corporation v Corsets Silhouette Ltd6 held that a party who makes a profit from a breach of confidence maybe liable to account for this profit to the obligee. This is illustrated by where the breaching party had manufactured and sold goods knowingly using confidential information, which it had obtained from the disclosing party.

2. Proprietary Information Exactly, what is considered protected proprietary information is debatable. A general 96 definition is that it is confidential information that gives a company a competitive advantage (over its competitors). A restrictive view would limit the definition to trade secrets. In some laws, if a party retains information as a trade secret, then the receiving party is required to treat the information as confidential. Under American Trade Secrets Law this usually entails keeping the information in a secured location, allowing assess to only key employees, and obtaining confidentiality agreements from any employee or 6

[1964] 1 WLR 96.

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independent contract who is given access to the information. China’s Anti-Unfair Competition Law defines ‘commercial secrets’ as information not known by the public (not in public domain); that can bring about economic benefit to the owner; has practical utility; and the owner has adopted measures to keep the information as a secret.7 97 Some types of ‘confidential’ information may be less susceptible to security protections. An example is customer lists or databases that may need to be accessed by a large group of parties. Nonetheless, the outright expropriation of such lists may be restricted and subject the taking party to liability. A broader view would include skills training and knowledge imparted from a company to its employees, independent contractors, and other contracting parties, such as a distributor. One useful distinction is between specialized knowledge or skills acquired d at a company and general knowledge and skills, which becomes a part of a person’s human capital that cannot be restricted. The first may be considered confidential and protected under covenants not-to-compete; the other as the improvement of a party’s knowledge base that she is free to use after termination of the contract.

3. Contractual Restrictions Contractual restrictions on the use of confidential information by importers or distributors are dealt with in a number of different ways under national laws. The developing countries look with skepticism on any such restrictions and generally will not enforce restrictive contract provisions in their courts. Other countries prohibit only certain types of clauses such as non-reciprocal grant-back clauses (improvement of technology or product by licensee or distributor). Most developed countries allow the contracting parties full freedom to contract and will enforce most restrictive clauses. The main exception is that certain restrictions will be scrutinized under antitrust or competition laws. Some forms of exclusivity may be deemed to be anti-competitive. In addition, EU agency laws are highly protective of their citizens that act as commercial agents. These laws should be consulted before drafting agency contracts.8 The following clauses need to be carefully drafted to be legally enforceable in certain countries: Grant back, Price-fixing, Non-competition, No-Challenge, Quantity Limitations, Field-of-Use restrictions, Quality Controls and Tying clauses. 99 Non-competition and validity or no-challenge clauses are also susceptible to non-enforcement. Generally, a distribution or sales contract cannot prohibit the agent or representative from also selling the products of another company. Validity or no challenge clauses prohibit the importer-purchaser from challenging the exclusiveness or validity of the seller’s intellectual property rights. No-challenge clauses are unenforceable under antitrust or competition law because of the notion that a party should have a right to challenge a patent that it believes to be fraudulent or inappropriate. 100 Exporters often attempt to prevent gray market problems by negotiating field-ofuse and quantity restrictions into distribution agreements. An example is Japan's Antimonopoly Act Guidelines for International Licensing Agreements. It expressly permits such restrictions as a proper exercise of statutory patent, copyright and trademark rights. The Guidelines permit limitations on field of technology and limited fields of sales. It also allows the licensor to ‘restrict the amount of output or the amount of sales of patented 98

7 Lagesse & Norrbom, Restrictive Covenants in Employment Contracts and other Mechanisms for Protection of Corporate Confidential Information (Kluwer Law International 2006) p. 214. 8 See, EU Council Directive 86/653/EEC relating to self-employed commercial agents [1986] OJ L382/17.

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goods'.9 The EU provides a block exemption that allows for such limitations. The distributor can be prohibited from ‘actively’ selling outside of its contractual territory. However, it cannot be prohibited from filling orders ‘passively’ acquired. These restrictions may carry over to the post-contract phase when the importer-distributor retains an inventory of the goods at the time of termination. The next section discusses the importance of post-termination restrictions.

4. Post-Termination Provisions The contract should provide for the disposition of distributor's inventory of products 101 or spare parts. It should provide for the price to be paid by the manufacturer if it is required to buy back stock (French law). Another clause should deal with the termination of the distributor's use of the manufacturer's intellectual property rights. The distributor should be required, on termination of the agreement, to cease using the name and trademarks of the exporter and to cooperate in the cancellation of any user registrations. This clause should provide for a return of any sensitive materials and post-termination confidentiality. Another provision may require the terminated distributor to cooperate in the transfer of after-sales service (supplying parts, technical assistance and guarantee servicing) to a new distributor. The provision below deals with the issues of outstanding orders and inventory at the time of termination. It requires the Seller to owner certain orders, for the seller to repurchasing inventory held by the distributor, and for the distributor to destroy any goods not in good condition. 102

Example: Orders, Repurchase, and Set-Off upon Termination: Upon termination of this Agreement, the Seller will honour all orders accepted and acknowledged by Seller that remain unfulfilled as of the effective date of termination. The Seller may refuse to accept any other orders pending as of such date. In addition, at the option of the Seller and upon notice to Distributor, Distributor shall resell to the Seller and the Seller shall repurchase from Distributor, all or any portion of the Products then in good condition at the net purchase price actually paid by Distributor to the Seller for such inventory, and the Distributor shall thereupon ship such inventory as the Seller may request to whomever the Company shall designate F.O.B. to the designated location. The Seller may set-off all or any part of said sales price against all sums owed by Distributor to the Seller and shall pay the balance within thirty (30) days. All Products in Distributor's possession upon termination of this Agreement, which are not in good condition shall be destroyed by Distributor at Distributor’s cost.

5. Information Provided by Buyer to Seller The sharing of confidential information is sometimes a two-way process. The materi- 103 al above focused on protecting information provided by the seller to the buyer. But, in some cases, such as in the production of specially manufactured goods, the buyer shares information (designs, specifications, intellectual property rights) with the seller. In such cases, the buyer has the same concerns that the seller had in the above discussion – protecting the confidentiality of its proprietary information from disclosure to third parties or it being used against its interests. Therefore, the buyer would want to bind the sellermanufacturer to obligations of confidentiality during and after the completion of the contract. One approach is to enter a separate confidentiality agreement, which should also be cross-referenced in the main contract. This separate agreement or appendix to the contract should provide detailed descriptions of the protected information being shared by the buyer. The agreement or clause should make clear that the proprietary information remains solely owned by the buyer and that no rights of ownership or use 9

See, August, International Business Law (2nd edn., 1997) p. 484.

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are being transferred to the seller except for the temporary use needed to perform on the contract. The provision may also state that the goods are required to have proprietary informational markings of the buyer, such as trademarks. The provision should also make it clear that the seller is obligated to install all necessary protections needed to keep the information confidential. 104 Example: Buyer’s Confidential Information: Information provided by Buyer to Seller remains the property of Buyer. Seller agrees to comply with the terms of any proprietary information agreement with Buyer and to comply with all proprietary information markings and restrictive legends applied by Buyer to anything provided to Seller. Seller agrees not to use any Buyer provided information for any purpose except to perform this Contract and agrees not to disclose such information to third parties without the prior written consent of Buyer. Seller shall maintain data protection processes and systems sufficient to adequately protect Buyer’s information and comply with any law or regulation applicable to such information.

105 Example: Seller shall take all reasonable steps to safeguard from theft, loss, and negligent disclosure to others of all Confidential Information delivered by the Buyer. Seller shall take appropriate action by instruction or agreement with its employees and consultants who are permitted access to the Confidential Information advising such employees and consultants of the confidential nature of the information. Seller shall take appropriate action by agreement [Confidentiality Agreements] with those third parties who are permitted access to the Confidential Information advising such third parties of the restrictions on use and disclosure and Seller's obligations hereunder. Seller shall not re-export or transfer, whether directly or indirectly, the Confidential Information to any country outside the country in which Seller is located or where the goods are to be produced.

106

As noted previously, the sales contract should expressly provide for the protection or destruction of the confidential information following the termination of the contract.

107 Example: Post-Termination Obligation: Within ten (10) days of notice of termination, Seller shall destroy all copies of the Confidential Information, in whatever form, including all copies in any subsequent form, and certify in writing to buyer that all copies of the Confidential Information have been destroyed.

6. Remedies 108

The breach of a post-termination confidentiality clause may support claims in both contract and tort or delict. It is clear that there is a breach in contract since it is an obligation created by contract. However, the breach can also be seen as a ‘wrongdoing’ actionable in tort. This is the case in the Common Law: ‘The equitable jurisdiction in cases of breach of confidence is ancient; confidence is the cousin of trust.’ 10 In American law, the breaching party would be liable for disgorgement of profits (contract or tort) and punitive damages (tort).

III. Intellectual Property Rights Protection 109

Professor Zheng (Chapter 15) discusses the legal issues relating to intellectual property rights and the sale of goods. It is the purpose of this section to provide examples of clauses that have been used to protect intellectual property rights. The enforceability of these clauses, as noted above, is dependent on applicable law. As noted above in 10 Coco v Clark Ltd [1968] FSR 415, 419; See Virgo, ‘Personal and Proprietary Remedies for Breach of Confidence: Nearer to Breach of Fiduciary Duty or Breach of Contract?’ (2014) Legal Studies Research Paper No. 33/2014 (9 May 2014) available at: http://ssrn.com/abstract=2435033. See also, Primary Group (UK) Ltd v Royal Bank of Scotland Plc [2014] EWHC 1082 (Ch).

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the section on proprietary information, it is important that any contract involving intellectual property rights and confidential information state explicitly and in detail list of the rights and information that are intended to be protected. This is often down by the incorporation by reference to an appendix or rider to the contract. 110

Example: Seller’s Intellectual Property and Confidential Information: Buyer understands and agrees that Seller owns valuable property connected to the goods, including patent, copyright, trademarks, as well as designs, trade secrets, databases, and other confidential information (‘intellectual property and confidential material’) listed and described in Appendix A of this contract, which is incorporated into this contract. Buyer shall not represent that it’s the owner of any such intellectual property or disclose any confidential information to any other parties.

In a distribution agreement, the seller should also require the following:

111

Buyer shall represent in all marketing and advertising that Seller is the owner of such property.

In order to protect intellectual property rights in a foreign country, the contract 112 should provide for the registration of such rights. The contract should provide in whose name any such registration is to be made and who will bear the cost. In order to protect its rights, the seller should perform the registration prior to entering any agency or distribution relationship.

1. Grant-back of Rights to Buyer Improvements The contract should also provide a provision dealing with ownership rights and rights 113 to use any improvements to the goods or process made by the distributor-buyer-licensee. A pro-licensee-buyer clause would give ownership to the buyer-licensee and provide a license to the seller. 114

Example: Grant Bank Clause: In the event buyer-licensee develops any improvements, whether or not patentable, to technology covered by the contract, upon the seller-licensor’s written request the buyer-licensee shall grant to seller-licensor a nonexclusive, worldwide license to such improvements. Seller-licensor shall pay buyer-licensee a reasonable royalty for such licenses so requested upon terms to be negotiated in good faith.

This provision can be made more pro-seller-licensor. For example, the seller would 115 be given the right to use the improvement without the need to pay royalties. The more common clause would provide a grant back of ownership to the seller-licensor with a right of use to the buyer-licensee. Of course, these rights survive the termination of the contract, but the contract should expressly deal with the duration of any such rights.

2. Patent and Copyright Indemnities In the previous section, patent infringement claims and patent indemnities were 116 discussed in relationship to the implied warranty of title. The focus here is on the notion of indemnification that extends beyond the termination of the contract. From the seller’s perspective, the indemnification should be limited to claims arising solely because of the seller’s selection of the design, composition and manufacture of the product and not because of any designs, specifications or combinations specified or manufactured by the buyer. The indemnification should be limited to claims brought within a specified number of years and subject to any limitation of liability provisions in the contract. The buyer should be required to provide prompt written notice of any claims and assist the seller in the defense and settlement of any claims.

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From the buyer’s perspective, it should seek protection from potential patent infringement claims by third parties. The buyer would like assurances that the seller of the products will cover all legal costs necessary to defend against any claims, whether or not based on a ‘valid’ claim, as well as paying any damages arising from the claims. The broadest type of indemnity (worldwide) would cover claims against infringement of any patents granted in any country where use or sale of the patented item occurs. The seller would want to limit the indemnity to claims related to home and host-nation patents and not cover infringement claims based upon other countries’ patent or copyright laws. The seller would also would want the buyer to indemnify the seller for any intellectual property rights provided to seller by buyer against third-party infringement claims.

3. Mixed Sale Transactions 118

The complexity of many modern products has resulted in many contracts being a mix of goods, services, and licensing of technology. In such cases, the seller-licensor would want to place a broad definition of confidential-protected property. An issue dealt with in American courts is the enforceability of ‘single-use only’ restrictions. This issue was discussed in the Federal Circuit Court case of Mallinckrodt v Medipart, Inc.11 involving the sale of a medical device. The Court l noted that: ‘express conditions accompanying the sale of a patented product are generally upheld. Such express conditions, however, are contractual in nature and are subject to antitrust, patent, contract, and any other applicable law, as well as equitable considerations such as patent misuse.’12 The enforceability of post-sale restrictions have been rationalized under the conditional sale doctrine, which holds that patent infringement remedies can be preserved through conditioning the sale of a patented product. However, that rationale was placed in question by the Supreme Court’s decision in Quanta Computer, Inc. v LG Elecs, Inc.13

4. Data Protection 119

The sales and licensing of databases and custom lists have become a major example of the commodification of information. Such databases and lists pose some unique problems for their owners. The information product is similar to intellectual property or trade secrets because of its confidential nature and its ability to give its owner a competitive advantage against its competitors. But, unlike intellectual property, most countries do not provide a legal protection regime to allow a party to seek an injunction or damages for its unauthorized use. Also, unlike the widespread enactment of data privacy laws, protections of database as property have not been widely enacted. An exception is found in the European Union’s Directive on database protection.

IV. Competition Restrictions 1. Territorial and Quantity Restrictions 120

As discussed earlier, territorial restrictions that limit a buyer-distributor-agent ability to sale goods to a certain area of country may violate competition law. Nonetheless, export contracts will often have a provision restricting the importing party to sale the goods in a defined country or area (territory). Foreign country laws should be reviewed Mallinckrodt, Inc. v Medipart, Inc., 976 F.2 d 700, 705 (Fed. Cir. 1992). B. Braun Med., Inc. v Abbott Labs., 124 F.3 d 1419 at 1426 (Fed. Cir. 1997). 13 553 U.S. 617 (2008); see Server & Casey. 11

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to see if territorial restrictions will violate competition laws. Another avenue, for preventing the sale of goods by a buyer-distributor into other markets (parallel imports or gray market), other than by strict territorial restricts, is to limit the number of goods that the buyer-distributor may resell to anyone purchaser.14 The parallel important problem is caused by various production (labor) costs in different countries. The problem is when goods produced or imported into a foreign country under a legal sale or license agreement are subsequently reimported to the domestic market of the seller or of one of the seller’s other distributor-buyers. In such cases, the seller or a sub-purchaser in another country’s market may be undercut by the importation of the identical goods.

2. Non-Compete Agreements (Covenant Not-to-Compete) Covenants not-to-compete attempt to restrict a contracting party from competing or going to work for a competitor for a period of time after the termination of the party’s contract. Such restrictions are generally recognized in most countries, as long as they do not violate competition law. They are often found in employment agreements and in the sale of a business or partnership interest. They may also be found in distribution or commercial agency contracts. Unlike confidentiality agreements, covenants not-to-compete are more limited in scope and more highly scrutinized by the courts. In the confidentiality agreement, the duty not to disclose a former contracting party’s may be a perpetual obligation. It obligation only terminates when the confidential information becomes public or at the expiration of intellectual property rights. In the case of covenants not-to-compete, they are only enforced if the can be linked to the protection of legitimate business interests and if the restrictions are reasonable in order to adequately protect those interests.15 Regarding the first requirement, as stated earlier, the business interest would be non-public, proprietary items that give a company a competitive advantage. These proprietary items general include intellectual property rights and confidential information, such as trade secrets and know-how or business methods, and may extend in some jurisdictions to specialized skill training and customer lists or databases. The reasonableness of a covenant is judged by whether it is no more restrictive than it needs to be in order to protect the proprietary or business interests of the former contracting party. The restriction in a covenant in the employment relationship generally restrict the former employee from competing for a certain period of time, within a certain geographical area, and working within a certain area or scope of work. These restrictions must be modest since they encumber the former employee (or agent) from pursuing her livelihood. The enforceability of these covenants varies greatly among national jurisdictions. The reasonableness of restrictions in the covenant will depend on an employee’s level of employment and the degree she had access to confidential information. The maximum duration of a covenant under German law is 2 years (German Commercial Code or HGB, § 74), while Italian law sets the maximum at three years for general employees and five years for executives or dirigenti (Italian Civil Code, Article 2125). In an exclusive agency or distributorship arrangement the seller would want to assure that the agent-distributor will diligently and loyally act on its behalf. A series of clauses can be included in the contract to require and clarify the duties of the commercial agent or distributor including the duty not to engage in prohibited activities. There are various forms of non-compete agreements of covenants (clauses) not-to-compete. The first type 14 15

See, Friedman, ‘Business and Legal Strategies for Combating Grey-Market Imports’ (1998) 27 Int’l L 27. See, for example, Danish Contracts Act, s 38; Common Law.

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122

123

124

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prohibits the agent or distributor from selling goods of a competitor. This prohibition may extend for a reasonable time beyond the term of the contract in order to prevent the use of information obtained from the exporter on behalf of a competitor. The second type of non-compete agreement limits the geographical scope of the agent-distributor activities during and after the termination of the agreement 126 Example: Non-competition Clause: This provision prohibits the agent or distributor from selling the products of a competitor. The contract should list the agency relationships already in place at the time of the signing of the contract. Depending on the country of the agent or distributor’s business, this clause may have to be narrowly drawn so not to violate national laws that view such restrictions harshly.

127

Non-compete agreements attempt to restrict the agent or distributor’s ability to compete against their former principal after the termination of the contract. One form of covenant attempts to restrict the agent-distributor from selling goods outside of its designated territory during the duration of the contract and after its termination.

128 Example: Territorial Restrictions: The distributor-agent shall not market or promote the sale of the goods in an area outside the territorial restrictions of this contract during the term of this contract and for a period of 180 days after its termination, either directly or indirectly, without the written consent of the seller-principal.

It should be noted that the seller, in some countries, would continue to have posttermination obligations. For example, the seller cannot contract out of paying certain commissions mandated by EU law, such as Council Directive 86/653/EEC Relating to Self-Employed Commercial Agents.16 The seller must pay commissions on contracts concluded after the termination of the contract where the subsequent sales were largely due to the efforts of the former distributor-agent and the subsequent contracts were entered into within a reasonable time after the termination of the contract. 130 Upon termination, the contract should provide details of the consequences of termination. 129

131 Example: Post-Termination Obligations:17 Seller is required to buy back any remaining stock of goods held by the distributor-buyer at invoice value including organizing and paying the costs of transport and insurance. The distributor shall return all samples of the goods and material relating to the goods in control of the distributor. Distributor shall stop promoting, marketing, advertising, or selling the goods. Distributor shall cease using the seller’s intellectual property rights including, but not limited to trademarks, copyrights, patents, and trade secrets. The distributor-agent shall, at the instructions of the sellerprincipal, dispose or return all documentation related to the above listed rights. Distributor, at seller’s discretion, must destroy all documents utilizing the seller’s trademarks. Distributor shall provide a list of customers that have purchased seller’s goods.

3. Anti-Solicitation 132

In addition the seller-exporter, would want to prohibit the foreign sales representative, commercial agent or distributor from contacting and soliciting the seller’s customers or employees.

See Commercial Agency Directive Articles 7 and 8. Meiselles, International Commercial Agreements: An Edinburgh Law Guide (Edinburgh University Press 2013) pp. 153–54. 16

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F. Commentary Garden Leave Clause: This clause allows a party to pay another party after the termination of the contract or prior to official termination, but after performance of the other party has ceased. In exchange, the party receiving payment is obligated not to contact the paying parties’ customers or employees. This is generally used in employment contracts, but a similar scenario could be utilized in long-term sales contracts or distribution contracts. An argument can be made that such terms are more easily enforceable then covenants-not-to compete since the refraining party is still being compensated. Anti-Solicitation of Customers: If the agent is expected to sell or service customers that have previously purchased from the seller (or from previous agents or distributors of the seller). The seller should append a list of customers in which the seller or third parties working on seller’s behalf have previously done business within the contract territory.

A covenant in a distribution agreement is even more tenuous in its legality. As noted 133 above, such provisions may violate competition law as illegal restraints on trade. It is best for the manufacturer-seller to craft strong anti-solicitation and confidentiality clauses, as well as clauses that require the return or destruction of products and confidential information.

V. Post-Contract Obligations in Foreign Representation, Commercial Agency, and Distribution Contracts Post-contractual obligations are common in a variety of relationships in which an 134 exporter of goods obtains the assistance of foreign (country of import) specialists to sell, market, service, or distribute its goods. Such relationships involve a different cadre of concerns and obligations then are found in single direct export transactions. These relationships are more complicated since they implicate other areas of law including, employment, agency, and evergreen laws. Evergreen laws, not commonly found in Common Law countries, but are common in European countries and are found in a number of EU directives that regulate termination of employment and agency contracts. These laws place numerous obligations on the principal (exporter), requiring advance notice and the responsibility to make indemnity payments or pay damages. Coverage of agency and distribution contracts relating to the sale of goods is covered in more depth in Chapter 27 (‘Agency and Distribution Agreements’). See also Chapter 28’s coverage of ‘Long-Term Contracts: Installment and Supply Contracts’. This section will briefly review post-contractual obligations related to these relationships. Two sources of post-contract obligations will be explored, government regulation of the termination of such relationships (as noted above) and common contract provisions.

1. Employment: Evergreen Laws The simplest of the three categories of foreign representation noted above is the 135 hiring of a foreign sales representative. For purposes, of avoiding foreign regulations relating to employment or commercial agency, it is best for the exporter to characterize this relationship as an independent contractor relationship. A designation of independent contractor status in the contract does not ensure that foreign courts will treat it as such, but may allow the exporter to avoid the more stringent termination and post-contract obligations that attach to the employment relationship. The decision to hire foreign employees, especially in most European Union (EU) 136 countries, should be made with full knowledge of the obstacles the employer has to overcome under European law in order to terminate the employment relationship. In Germany, the required notice required to discharge an employee may vary from four

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weeks to seven months depending on the longevity of the employment.18 Under the French Labor Code, immediate termination is impossible due to notice requirements and a required meeting with the employee being discharged. A suit for unfair dismissal, like in Germany, is recognized. In order to avoid civil damages for breach of contract, the employer must be able to prove that there were real and serious grounds for the dismissal. In many European employment systems, the employee also has a right to a severance payment based upon seniority. He may waive this right in favour of a statutorily mandated conversion contract. Under the conversion contract, the employee receives, at the cost of the employer, enhanced government unemployment benefits and retraining or educational opportunities.

2. Independent Contract Status 137

The seller-exporter in a contract for sales representation, agency, and distribution would want the contract to state that it is an independent contractor and a non-partnership arrangement.

138 Example: Non-Partnership Clause: The party being hired is to perform as an independent contractor and nothing contained in this agreement should be construed as creating a partnership between the parties to this agreement.

139 Independent Contractor Clause: In making and performing this agreement, the sales representative [agent, distributor] is acting at all times as an independent contractor. The sales representative [agent, distributor] is responsible for performing the work or services relating to the sale of seller’s [exporter] products in a skillful manner and is liable for the consequences of its own acts or omissions, whether made against seller or any third parties. The sales representative [agent, distributor] may hire or subcontract third parties. These parties will not have any contractual relationship with seller.19

A more elaborate independent contractor clause would incorporate the distinctions that characterize an independent contractor versus an employment relationship. The factors often utilized in making the employee-independent contractor distinction should be incorporated into this clause: (1) the consultant is not an employee and is not entitled to any employee-type of benefits; (2) the consultant is to perform his tasks based on his own discretion and skills and will be responsible for any acts or omissions; (3) the consultant is responsible for hiring any sub-agents or assistants; (4) the consultant provides its own tools, equipment, and materials, and pays its own overhead expenses. 141 It is important to note that some country laws, as in Belgium and France, presume that an agent is an employee even if the contract designates the agent as an independent contractor. The easiest way to avoid this presumption is to only deal with agents who are artificial entities (corporations). 142 In cases where the foreign representative may be in a position to make product improvements or ways of marketing exporter’s good, the exporter should insert a ‘work for hire clause’ into its independent contractor or employment agreement giving the exporter ownership of any such materials (advertising; marketing research). This clause makes it clear that all rights to the materials and research are within the scope of the working relationship and are the property of the exporter. 140

18 See, for example, EU Works Council Directive 94/45/EC [1994] OJ L254/64 as amended by Act dated 21 December 2000 (‘Bundesgesetzblatt’). 19 Shippey, International Contracts: Drafting the International Sales Contract – for attorneys and non-attorneys (2nd edn., World Trade Press 2002–2003) pp. 135–137.

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F. Commentary Work for Hire Clause: All inventions, creations, and research of the foreign representative during the term of this contract shall be work for hire and shall be the property of the seller-exporter. The employee or independent contractor shall assign all rights to such materials and information to the seller-exporter.

It is important that the independent contractor status be preserved in both the 143 written contract and in the actual carrying out of the contractual relationship. However, in some countries in order to avoid host country laws, especially income tax laws, the exporter needs to retain control over each sales transaction. In an agency relationship the seller-exporter should retain the right to approve each sales contract and such approval should be recorded at the seller’s home office.

3. Commercial Agency The most difficult laws to avoid are national evergreen laws that pertain to the termination of agency contracts. There are national laws and EU Directives dealing with the commercial agency (independent contractor) relationship. These laws often impose minimum notice requirements for terminating an agent or require the payment of an indemnity upon termination unless the termination is based upon a just cause. In countries like France, a decision not to renew an agency contract is construed as a termination requiring remuneration. EU Directive 86/653 provides that agency contracts should be in writing, expressly state any grants of exclusivity and the agent's marketing area. Termination clauses should provide for a minimum notice of termination. A reasonable notice period is one month per year of service through the sixth year and six months thereafter. A commercial agent will generally be owed an indemnity upon termination to the extent that he has brought new customers to the principal or significantly increased the principal's volume of business.20 The EU Directive also allows national laws to provide for a damage claim to the agent, especially if at the time of termination the agent had not completely amortized its costs and expenses relative to the representation. 21 The best approach is to enter into a fixed term contract with no renewal options. The contract should also provide a detailed list of performance standards upon which termination for just cause may be based. The ICC Guide on Commercial Agency may be used as a guide to writing agency termination provisions. Under some countries’ laws, employment like protections and taxes are affixed to the independent contractor or agency relationship. For example, under Italian law, the principal and the agent pay 5% each on all commissions paid to a national agency (ENASARCO) as social security contributions. The principal is legally obligated to withhold the agent's contribution and remit it to the agency, along with an amount to be used towards the severance indemnity. A certain percentage is paid on a sliding scale based on the amounts of the commissions paid, ranging from 4% to 1% for exclusive and non-exclusive agents. A variation of the foreign sales representative is the foreign consultant. The same issues of foreign country labor laws and agency termination laws apply to the consulting relationship. The consulting contract should be specific as to the scope of the engagement (surveying, advertising, marketing). The independent status of the consultant should be emphasized. The agreement should state that the services are being provided on a non-exclusive basis and that the exporter takes no responsibility for the manner in

Commercial Agency Directive 86/653, Article 17(2). Commercial Agency Directive 86/653, Article 17(3). The agent must notify its principal of a claim for indemnity or damages within one year from the date of termination. See Article 17(5). 20

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146

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which the consultant performs on the contract. Compensation should be structured to highlight the independent basis of the relationship. 148 Because of the existence of various types of evergreen laws, the contract should clearly state the nationality and legal form of the foreign representative. The contract should also state that the foreign entity has the capacity to act as a commercial agent under the laws of its country. For example, in some countries only nationals may act as agents and in others commercial agents must be registered with the government. 149 Other key provisions that should be incorporated into a foreign agency contract include assignment, agent as distributor, confidentiality, and sub-agents clauses. The first clause generally prohibits the assignment of the contract or post-contractual obligations without the consent of the other party. The issue upon assignment is whether the original party remains liable under the contract or is replaced by the new party and released from further liability (novation). 150 Example: Assignments: Generally, the parties intend that their contract is not subject to assignment and thus, the contract should state that it is not to be assigned. If the parties intend to allow assignment, the contract should state the conditions and procedure for making assignments.

151

It is not unusual for a foreign party to act as both a commercial agent and as a distributor. If the parties enter into separate agreements, then it is important that the agreements cross reference each other to make clear the obligations that attach to the agency relationship and those that attach to the distributorship arrangement. As in most exporting-importing agreements involving the sharing of information, agency agreements should include strong confidentiality provisions requiring each party to maintain the secrecy of the other's trade secrets after the termination of the relationship. Finally, a sub-agents clause may stipulate that the agent is responsible for hiring sub-agents and covering any related expenses. It should make clear that there is no intended relationship between the sub-agents and the principal. This provision is important to support the independent contractor status of the relationship.

4. Distribution Agreements The need for post-contractual activities, whether expressed in the contract or implied in fact are especially strong in long-term contractual relationships. Such relationships are found in long-term agency or distributorship contracts. Such relationships include an exchange of a great deal of information – product information, marketing information, customer information, and so forth. As noted earlier, the distributor may also possess an inventory of the exporter’s products at the time of the termination of the contract. The contract should provide rights and obligations relating to transferred information and products. 153 As noted in the section on ‘confidentiality provisions’ the supplier of information related to the sale of its goods generally requires the receiving party to keep the information confidential, not to disclose such information to third parties, or to continue to use it subsequent to the termination of the contract. The exporter should negotiate in the distribution contract the following distributor-agent duties, which survive the termination of the contract: 152

–

Distributor shall enter into confidentiality agreements, on the same terms as found in the distribution contract, with necessary personnel and third parties that will have access to the confidential information.

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– – –

The distributor-agent shall safeguard any confidential information to a degree of care used to protect trade secrets or the distributor-agent’s confidential information. Distributor-agent shall not use the confidential information in any way to compete with the seller-principle during this contract or subsequent to its termination. The obligations created by this provision shall survive the expiration or termination of this contract.

In distribution contract, it is important to use foresight in sketching out the parties’ post-termination obligations, such as, exporter’s duty to fill orders and distributors duties with existing inventory. 154

Example: Post-Contract Obligation to Fulfill Orders: The exporter-seller agrees to fulfil any orders placed with the distributor and remaining outstanding at the time of the termination of the distribution contract. The seller shall indemnify the distributor in respect of any claims arising out of the failure to fulfil such orders.

Alternative: Excluding Obligation to Fulfill Outstanding Orders: At the date of termination, exporter-seller shall have no obligation to further deliver any goods. The distributor shall have no obligation to receive goods to supply unfulfilled orders after the termination of the contract.22

A reasonable notice of termination provision can minimize much of the disruption of 155 the supply chain that the above alternative provision would create. A reasonable notice period that provides sufficient time for the parties to unwind their affairs so that the problem of unfilled orders would be eliminated or minimized. This would also be wise in order to conform to evergreen laws.

5. Distribution Agreement and Evergreen Laws In France, the case law is rich with instances where judges have ordered additional 156 compensation to be paid by the principal when severing a distribution relationship. Germany recognizes a ‘goodwill indemnity’ that is owed to the distributor upon the termination of the distribution agreement. The seller-exporter should consider placing ‘Anti-Evergreen’ clauses in the contract 157 such as fixed duration of the contract, termination clause, benchmarks for sales by the distributor, and a ‘best efforts’ provisions. The last two provisions provide grounds for the termination of the distributorship for just cause. 158

Examples: Dates of Commencement and Expiration: Since there may be a lag between the first and second signature to the contract or between execution and when the relationship is to be commenced, the contract should expressly state the commencement and expiration dates of the contract. Termination: The contract may be for a fixed period or an indefinite time period subject to reasonable notice. Some national laws require that the notice be of a certain length. It may be stipulated that certain events (bankruptcy, merger, assignment, resignation of a key employee) give a party the right to terminate. Some national laws (e.g., Germany, France, Brazil, Switzerland) require the principal to pay compensation for termination. Minimum Sales: The principal may want to negotiate that the agent is required to meet certain minimum sales levels. It should specify the consequences for the failure to meet sales quotas such as termination, reduction of territory, or loss of exclusivity. Alternative or supplementary sales commissions may be provided in the event that the agent meets or fails to meet its sales quotas. Also, the contract should

22 Fontaine & De Ly, Drafting International Contracts: An Analysis of Contract Clauses (Ardsley, NY: Transnational Publishers 2006) p. 602.

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Chapter 29 Post-Contract: Continuing Obligations & Rights provide excuses for failing to meet sales quotas such as changes in economic climate, non-acceptance of orders by the principal, and the imposition of import restrictions. Best Efforts Provision: The principal will want to negotiate a clause that requires the agent to use ‘best efforts’ in marketing and selling the principal's products. The agreement should attempt to define the meaning of ‘best efforts’ by tying them to generally accepted business practices.

G. Cross References & Additional Commentary 159

Numerous Chapters in this Treatise cover the substantive law in the areas covered in this Chapter. For additional coverage of the following issues see: Chapter 11 (Validity of Contract Terms); Chapter 14 (Conformity of Goods); Chapter 15 (Sales and Intellectual Property Rights); Chapter 24 (Products Liability); Chapter 27 (Agency and Distribution Agreements); and Chapter 28 (Long-Term Contracts: Installment and Supply Contracts). Again, the current Chapter has focused on the type of contract clauses used to create post-contractual obligations. Their enforceability is dependent on national and regional laws (EU).

H. Practitioner Tips & Contract Clauses I. Continuing Nature of Post-Contract Obligations: Survivability Clause 160

The international sale contract should make express what is often implied as to the continuing nature of certain obligations. For example, it should have a term that states: Termination of this agreement for whatever reason does not affect the rights or obligations created pursuant to the following clauses (parties shall not be relieved of those obligations contained in the following clauses): (1) anti-solicitation, (2) covenant not-to-compete, (3) protection of intellectual property or confidential information as defined in the contract (or an appendix to the contract), and (4) warranties, (5) independent contractor relationship, (6) rights of third parties, and (7) retention of records.

161

This type of survival clause, which should be cross-referenced to the exact provisions in the contract, makes it absolutely clear that the obligations continue after the termination of the contract.

II. Confidentiality Provisions 162

The definition, description, or scope of the confidential information is the pivotal part of any confidentiality provision. The clause or agreement should provide with clarity and specificity the types of confidential information to be protected under the obligation of confidentiality. The clause may also provide that the contract and its contents, including the information detailed in the confidentiality clause, are to be kept secret. The clause may also provide exceptions within the categories of information subject to confidentiality obligations. The generic exceptions include information that has become part of the public domain. The clause should define that is meant by ‘entering the public domain’. Another exception would be to exclude confidential information obtained from a third-party unless the third-party received that information from the obligee under the confidentiality agreement.

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H. Practitioner Tips & Contract Clauses

III. Severance of Post-contractual Obligations and Ancillary Clauses An issue that is rarely dealt with expressly in post-contractual obligation provisions 163 is whether they completely stand-alone from the rest of the contract or whether general clauses would also survive the contract for purposes of performance and enforceability of post-contractual obligations. These other clauses include arbitration, choice of law, forum selection, anti-infringement, and best efforts. The confidentiality clause should specify all ancillary clauses that survive termination of the contract.

IV. Ownership of Data In the process of marketing and reselling of goods the importer or distributor will ob- 164 tain data or create databases, such as customary lists. The sales or distribution contract should provide for the ownership and use of such data between the two parties. From the seller’s perspective, it would want to obtain ownership or use of that data. 165

Example: Rights in Data Clause: Buyer acknowledges and agrees that all data and information generated, provided or otherwise relating to Seller's products are proprietary to Seller and shall remain the exclusive property of Seller. Buyer agrees (i) to keep in confidence all data and information received directly or indirectly from Seller, whether or not marked ‘Proprietary’; (ii) not to divulge such data or information to any person, firm, or other entity other than those who have a need to know in direct connection with work under this Contract, and (iii) not to use such data and information for any purpose other than fulfilling Buyer's obligations under this Contract. BUYER further agrees to abide by written instructions of Seller concerning any other disclosure of such data and information. Failure to comply with the obligations set forth in this provision shall be regarded as a fundamental breach of contract and Buyer acknowledges that Seller will suffer irreparable harm as a result of the unauthorized use or disclosure of the data or information. Seller shall have the right to claim damages or seek injunctive relief for the unauthorized use or disclosure of the data or information. The provisions of this provision shall survive either termination or cancellation of this Contract.

Furthermore, the clause should make clear that the information or data includes not 166 only of transfers from seller to buyer, but also such data subsequently developed by the buyer in re-selling the goods including, marketing information and customer lists. If the database is protectable under the EU Data Protection Directive, the seller may want to require that the distributor-buyer-agent to obtain such protection on seller’s behalf or to provide the information needed for the seller to directly obtain such protection.

V. Intellectual Property Indemnities Before allowing a client to agree to an indemnity provision of intellectual property 167 rights claims brought against a buyer of its goods, the attorney should advise the client to first conduct patent searches to assure that new products or improvements to existing products do not infringe other parties’ foreign copyrights or patents. This is especially important for products that are first offered for international sale.

VI. Products Liability Insurance Given that warranties continue beyond the performance of the contract, and that 168 they subject the warrantor to tort claims for bodily injury, death, and damage to property, a products liability clause is used to allocate this risk to one of the other parties. Larry A. DiMatteo

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The buyer may require that the seller maintain a products liability insurance policy with the buyer endorsed as an additionally insured party. Because products liability and tort law varies among countries, as well as substantial differences in remedies or damages provided in various legal systems, the seller as a precondition of the contract may require the buyer to obtain products liability insurance with the seller as the additionally insured party. The contract should provide the types of insurance to be provided and the amounts of coverage. As to the first specification, products liability insurance may include comprehensive liability insurance, more specific personal injury protection, contract liability, and operations liability coverages.

VII. Duty to Prevent Waste 169

Articles 9 and 558 of the new CCC raises the issue of implied duties to reduce waste and recycle materials post contract. One of the new general principles of Chinese law is found in Article 9 that states: “All civil subjects engaging in civil activities shall help save resources and protect the ecological environment.” Article 558 also provides after the termination of obligations the parties remain obligated perform obligations such as notification, assistance, confidentiality and recovery of used items in accordance with transaction practices. According to some scholars the new obligation of recycling is an expression of the Chinese environmental policy, which links good faith to s “green duties”. This obligation of green duties seems to be a direct intervention into the idea of private law; linking it to good faith is problematic since good faith is an implied duty which applies to all types of contracts. But there is no case law that makes this connection, likely due to the fact that any such obligation is very vague and would require courts to broadly intervene into private transactions. “In accordance to relevant transaction practices” is also problematic since green policy is the domain of public law and linking it to private parties is implausible.

I. Additional Sources 170 DiMatteo (ed), International Contracting: Law and Practice (4th edn., Wolters Kluwer 2016); Fontaine & De Ly, Drafting International Contracts: An Analysis of Contract Clauses (Transnational Publishers 2006) (Chapter 5: Confidentiality Clauses in International Contracts and Chapter 13: Post-Contractual Obligations in International Contracts); Hesselink, Jacobien, Rutgers, Bueno Diez, Scotton, & Veldman, Principle of European Law: Commercial Agency, Franchise and Distribution Contracts (Sellier 2006); Herold & Knoll, ‘Negotiating and Drafting International Distribution Agency and Representative Agreements: The United States Exporter's Perspective’ (1987) 21 Int'l L 939; Hovenkamp, ‘Post-Sale Restraints and Competitive Harm: The First Sale Doctrine in Perspective’ (2011) 66 NYU Ann Survey Am L 487, 491; ICC, Guide to Drafting International Distribution Agreements, ICC Pub. No. 441 (E) (1988); Klotz, International Sales Agreements (2nd edn., Wolters Kluwer 2008); Lagesse & Norrbom, Restrictive Covenants in Employment Contracts and other Mechanisms for Protection of Corporate Confidential Information (Kluwer Law International 2006) 214; Meiselles, International Commercial Agreements: An Edinburgh Law Guide (Edinburgh University Press 2013); Samuel G, Law of Obligations & Legal Remedies (Cavendish Publishing Limited 2001); Server & Casey, ‘Contract-Based Post-Sale Restrictions on Patented Products After Quanta’ (2013) 64 Hastings Law Journal 561; Stanley, The Law of Confidentiality: A Restatement (Oxford: Hart, 2008).

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CHAPTER 30 CHOICE OF LAW1 Petra Butler A. Topic Covered . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B. Introductory Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C. Statement of Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . D. Choice of Substantive Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Choice of Law in Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. CISG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Article 1(1) CISG: Internationality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Article 1(1)(a) CISG: States of the Place of Business are Contracting States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Article 1(1)(b) CISG: Rules of Private International Law Lead to the Application of the Law of a Contracting State . . . . . . . . . . . . . . . . . . . . . . . . . . . d) Non-contracting States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . e) Direct Choice of the CISG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . f) Article 6 CISG: Contracting Out . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Choice of Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . aa) Conflicting Choice of Law Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . bb) Incorporation by Reference . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Choice of Law: International, Regional & Domestic Rules . . . . . . . . . . . . . . . aa) Rome I Regulation – Articles 3 and 10 (Freedom of Choice), 4 (Applicable Law in the Absence of Choice), 9 (Overriding Mandatory Rules) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . bb) Hague Convention of 1955 on the Law Applicable to International Sale of Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . cc) The Draft Hague Principles on Choice of Law in International Commercial Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . dd) China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ee) United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ff) Common Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. UNIDROIT Principles of International Commercial Contracts . . . . . . . . . . 4. Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Choice of Law in Arbitration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. CISG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Parties Made no Choice in Regard to the Applicable Law . . . . . . . . . . . . . . . aa) Article 1(1)(a) CISG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . bb) Article 1(1)(b) CISG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . cc) CISG as Rules of Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Parties Have Chosen an Applicable Domestic Law . . . . . . . . . . . . . . . . . . . . . . c) Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. UNIDROIT Principles of International Commercial Contracts . . . . . . . . . . 4. Parties Have Not Stipulated Applicable Substantive Law . . . . . . . . . . . . . . . . . . IV. Parties Included Choice of Law Clause in their Contract – Limits . . . . . . . . . . . 1. Mandatory rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Cross Border Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) International Arbitration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Ordre Public . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . E. Cross References & Additional Commentary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F. Matters to Consider . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Interpretation of the Choice of Law Clause . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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1 2 5 9 9 10 11 13 17 19 23 24 26 29 32 32 33 35 36 41 43 45 50 53 54 55 56 58 58 61 63 64 72 73 74 75 76 77 82 83 84 87 90 93 94 94

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Chapter 30 Choice of Law II. Procedural/Substantive Question . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96 III. Burden of Proof . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97 G. Sample Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99 UNIDROIT Principles of International Commercial Contracts . . . . . . . . . . . . . . 99 H. Additional Sources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106

A. Topic Covered This Chapter deals with the following subjects:

1

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Choice of law in litigation in regard to the substantive law of the contract Choice of law in arbitration in regard to the substantive law of the contract

B. Introductory Note Whenever parties enter into an international sales contract there is more than one legal system with which the transaction is connected. Therefore, there is the risk of a conflict of laws: two or more legal systems might offer conflicting answers to the resolution of a dispute arising from the contract. Which court has jurisdiction to determine the dispute, and which law should it apply? The purpose of this Chapter is to outline the latter of these two fundamental questions of the conflict of laws or private international law. The former is discussed in Chapter 6 (Sieg Eiselen). Because cross-border litigation is often inherently uncertain,2 parties are wise to anticipate problems of jurisdiction and choice of law in their contracts, in the form of forum selection (or, alternatively, arbitration clauses) and choice of law clauses. 3 Generally, a common approach in international transactions is preferable. That means, the parties agree upon dispute resolution in a neutral forum, and to the application of the substantive laws of that forum to their underlying dispute. Courts are generally much better placed to apply their own rather than a foreign law. Furthermore, determination or proof of the content of a foreign applicable law is potentially time-consuming and costly. 4 Choosing arbitration as the form of dispute resolution might offer benefits when it comes to the choice of the substance law to a contract.3 Arbitral tribunals, being in existence through the will of the parties, are not bound by particular domestic private international law rules. Many institutional arbitration rules, for example, allow for the direct choice of UNIDROIT Principles by the parties as their governing contract law which is generally not possible under domestic private international law rules.4 2

1 The author wishes to thank Dr Maria Hook for her assistance regarding the previous edition of this Chapter. 2 See European Commission, European contract law in business-to-business transactions: Summary (2011); World Bank and the International Finance Corporation Doing Business 2012 (2012); Butler/Geissler, 'Contractual Realities of SMEs Contractual Realities of SMEs – Access to Commercial Justice’, 2020 Austrian Yearbook on International Arbitration, 466 – all three studies found that clear rules in regard to the applicable law in case of a dispute in cross border situations would enhance trade. 3 See for a more in-depth discussion Cordero Moss, ’Foundation, limits and scope of party autonomy’ in Ferrari and Fernandez Arroyo (eds) Private International Law- Contemporary Challenges and Continuing Relevance (Edgar Elgar 2019) 71, 74 et seq. 4 For example, the UNCITRAL Model Law (2006), Article 28 (1):“The arbitral tribunal shall decide the dispute in accordance with such rules of law as are chosen by the parties as applicable to the substance of the dispute. Any designation of the law or legal system of a given State shall be construed, unless otherwise expressed, as directly referring to the substantive law of that State and not to its conflict of laws rules.“; similar wording can be found, for example, in the International Chamber of Commerce (ICC)

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C. Statement of Issues

C. Statement of Issues This Chapter is differently organized than other Chapters in this treatise. The Chapter is organized in accordance with the two prevalent forms of dispute resolution in international sales law: choice of substantive law in cross border litigation and international arbitration. Party autonomy is the key principle underpinning contract law. That is also true when it comes to the choice of the applicable law to the contract. The Chapter canvasses the importance for the parties of the choice of an applicable law governing their contractual relationship and the law applicable if the parties fail to make such a choice. The import and export of goods are a key component of any economy.5 According to WTO trade statistics, eight of the ten largest export and import nations are UN Convention on Contracts for the International Sale of Goods (CISG) contracting states with the UK and Hong Kong being the exception.6 Those eight countries account for more than 50% of world trade.7 Hence international sale of goods contracts account for the large majority of international contracts related to trade. Particular regard is paid in this Chapter to the application of the CISG as the most widely accepted uniform international sales law.8 This Chapter should be read together with Chapter 6 (Sieg Eiselen) on the choice of jurisdiction. There is a certain synergy between the choice of jurisdiction and the choice of law. For example, parties might find asking an Australian judge to interpret a contract to which German law applies will result in the application of the parol evidence rule even though the German contract law allows for pre-contractual negotiation and post contractual conduct to be considered when interpreting the contract. Therefore, care should be taken that the courts of the jurisdiction chosen are familiar with concepts of the substantive law applicable to the contract to avoid surprises. Choosing arbitration as the preferred method of dispute resolution might allow the parties to choose rules applicable to the contract, like soft law as the UNIDROIT Principles, that are not open to them under domestic private international law rules.9 Some sample choice of law clauses can be found at the end of this Chapter.

Arbitration Rules, Rule 22(1). The UNIDROIT Principles are considered “rules of law”. Importantly, the UN Convention on Contracts for the International Sale of Goods (CISG) is considered “rules of law” which allows parties to directly choose the CISG as the governing law of their contract (see → para 73 below). See below para. 54 regarding the choice of UNIDROIT principles. See regarding the restriction on party autonomy in litigation Cordero Moss, ’Foundation, limits and scope of party autonomy’ in Ferrari and Fernandez Arroyo (eds) Private International Law- Contemporary Challenges and Continuing Relevance (Edgar Elgar 2019) 71, 93. 5 The global merchandise trade was US$19.67 trillion in 2018 (see World Trade Organisation (WTO), World Trade Statistical Review 2019, 8- available at https://www.wto.org/english/res_e/statis_e/wts2019 _e/wts2019_e.pdf (last accessed 22 Feb 2020) The merchandise trade is still more valuable than the trade in commercial services which amounted to US$5.63 trillion in 2018 (see World Trade Statistical Review 2019, 9. 6 WTO, World Trade Statistical Review 2019, 12- available at https://www.wto.org/english/res_e/statis_ e/wts2019_e/wts2019_e.pdf (last accessed 22 Feb 2020). 7 WTO, World Trade Statistical Review 2019, 24- available at https://www.wto.org/english/res_e/statis_ e/wts2019_e/wts2019_e.pdf (last accessed 22 Feb 2020). 8 93 states have ratified the CISG at the point of writing, see: https://uncitral.un.org/en/texts/salegoods/ conventions/sale_of_goods/cisg/status (last accessed 27 Feb 2020). 9 See discussion Cordero Moss, ’Foundation, limits and scope of party autonomy’ in Ferrari and Fernandez Arroyo (eds) Private International Law- Contemporary Challenges and Continuing Relevance (Edgar Elgar 2019) 71, 92 et seq. and below paras 58-60 and para 76.

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Chapter 30 Choice of Law

D. Choice of Substantive Law I. Introduction 9

The last decades have seen a steady growth of international instruments seeking to provide uniform substantive rules for international contracts.10 The benefit of a unified approach to the law applicable to international sales transactions are threefold. Firstly, different domestic (sales) laws can lead to an increase in the parties’ transaction costs. Complicated private international law rules and for example limitation of liability laws can make it difficult for a party to ascertain their legal position. Secondly, the divergence of domestic contract laws can lead to a distortion of competition between businesses in different states. Lastly, many domestic contract laws are not suitable for international transactions.11 In light of the emergence of regional transnational contract law regimes, it may be thought that choice of law rules play, at best, a residual role in the resolution of disputes concerning the international sale of goods. However, even in the case of the CISG, which is the most significant instrument in this area,2 choice of law analysis is far from obsolete.12 It is only through the process of choice of law, after all, that the court or tribunal may determine the applicability of the CISG, or identify the governing law of those matters falling outside of the scope of the Convention.

II. Choice of Law in Litigation 10

International treaties that incorporate private international law rules, such as the CISG, (1.) will override the domestic private international law rules (2.). Soft law instruments, such as the UNIDROIT Principles 2016 (3.) play only a limited role at this point in time in litigation.

1. CISG 11

Perhaps the most fundamental question that parties to an international sales contract face is whether their transaction will be governed by the CISG. There are two principal questions that determine whether the CISG is applicable. The first is whether it is applicable as a matter of choice of law, pursuant to Article 1(1)(a) or (b) CISG, or pursuant to the choice of law rules of a non-contracting state. The second is whether the transaction or the dispute falls within the scope of the Convention as defined by Articles

10 See, for example, Principles of European Contract Law (PECL, 2000); UNIDROIT Principles 2016 (4th revision of the UNIDROIT Principles); OHADA Uniform Act on general Commercial Law 1997, (Draft) Common European Sales Law 2011 (withdrawn 2014); Principles of Asian Contract Law 2009 see Han, ‘Principles of Asian Contract Law: An Endeavor of Regional Harmonization of Contract Law in East Asia’ 58 (2013) Villanova Law Review 589; Principles of Latin American Contract Law 2017; Momberg & Vogenauer, ‘The Principles of Latin American Contract Law: text, translation, and introduction’, 23 (2018) Uniform Law Review, 144. 11 Berger, The Creeping Codification of the Lex Mercatoria (2 nd edn, 2010) pp. 19, 20, 21–26; Cunniberti, ‘Three Theories of Lex Mercatoria’ 52 (2014) Columbia Journal of Transnational Law 369, 384. 2 1See generally Kröll, Mistelis and Perales Viscasillas (eds), UN Convention on Contracts for the International Sale of Goods (2nd ed, 2018) paras 28 et seq. 12 See generally Ferrari, ‘PIL and CISG: Friends or Foes?’ (2012) 3 IHR 89; Schwenzer, in Schwenzer (ed), Schlechtriem & Schwenzer Commentary on the UN Convention on the International Sale of Goods (4 th ed, 2016) Intro to Articles 1-6 CISG, paras 7 et seq.

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D. Choice of Substantive Law

2 to 5 CISG, or whether it raises an issue that is not regulated by the Convention.13 It is the first reason, the question of choice of law, which will be examined here. 12 Article 1 CISG provides: (1) This Convention applies to contracts of sale of goods between parties whose places of business are in different States: (a) when the States are Contracting States; or (b) when the rules of private international law lead to the application of the law of a Contracting State. (2) The fact that the parties have their places of business in different States is to be disregarded whenever this fact does not appear either from the contract or from any dealings between, or from information disclosed by, the parties at any time before or at the conclusion of the contract. (3) Neither the nationality of the parties nor the civil or commercial character of the parties or of the contract is to be taken into consideration in determining the application of this Convention.

a) Article 1(1) CISG: Internationality Article 1(1) CISG requires, as a precondition to its application, that the parties must have their place of business in different states.14 Although not a choice of law rule in the strict sense, Article 1(1) CISG addresses a potentially difficult question that usually falls to be answered by the forum’s private international law rules: whether the dispute is of an international character and thus gives rise to a choice of law issue.15 The provision acts as a filter to the application of the CISG, potentially excluding the Convention in circumstances that will still raise questions of choice of law pursuant to the forum’s private international law rules. The Convention does not define what constitutes a ‘place of business’. Interpreted autonomously, a place of business is generally understood to require ‘a genuine and effective link of the business with a place with at least regular business activity’. 16 Where the identity of the parties to the sales contract is in doubt – as may be the case, for example, where one of the parties is represented by an agent – this question must be determined pursuant to ordinary choice of law rules before the internationality of the contract can be established under Article 1(1) CISG.17 The internationality requirement is not satisfied unless it appears ‘either from the contract or from any dealings between, or from information disclosed by, the parties at any time before the conclusion of the contract’.18 However, it is not necessary for the parties to have had actual knowledge of the fact that their places of business are located in different states.19 It has to be noted that for the application of the CISG it is not determinative whether goods are transferred between countries or between borders or where the place of performance is.20

See Article 7(2) CISG. Regarding the meaning see Schwenzer (n 13) Article 1 CISG, para. 26. 15 See Ferrari (n 13) at Pt IV. 16 Mistelis in Kröll, Mistelis and Perales Viscasillas (n 12) Article 1 CISG, para. 43; Schwenzer (n 13) Article 1 CISG, para. 23. 17 Mistelis in Kröll, Mistelis and Perales Viscasillas (n 12) Article 1 CISG, para. 45; Schwenzer (n 13) Article 1 CISG, para. 27. 18 Article 1(2) CISG. 19 Schwenzer (n 13) Article 1 CISG, para. 3. 20 See, for example, ICC Arbitration Case No. 9781 (2000) in (2005) Ybk Arb 22, 36; Piltz, Internationales Kaufrecht (2nd ed, 2008) para. 2-75; Mankowski in Mankowski (ed), Commercial Law (2019) Article 1 CISG, para. 16. 13

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b) Article 1(1)(a) CISG: States of the Place of Business are Contracting States Article 1(1)(a) CISG provides that the CISG applies to contracts of the sale of goods, between parties whose places of business are in different States, ‘when the States are Contracting States’. This provision can be understood as a unilateral choice of law rule which calls for the application of the CISG as part of the law of the forum.21 Alternatively, when concentrating on its effect the CISG may be characterized as an overriding mandatory law of the forum22 or as a self-executing treaty. Paragraph (a) thus cuts across the choice of law rules that would ordinarily be applicable to international sale of goods contracts by providing for the application of the CISG to all those cases that fall within its scope. To the extent that the dispute is covered by the Convention, there is no need, therefore, to determine the law that would otherwise be applicable. 18 An important exception to the operation of this unilateral forum rule is the principle of party autonomy. Where the parties have their places of business in different contracting states but have chosen the law of a non-contracting state or have explicitly exclude the CISG, this choice will be given effect in accordance with the forum’s rules on party autonomy and Article 6 CISG.23 17

c) Article 1(1)(b) CISG: Rules of Private International Law Lead to the Application of the Law of a Contracting State Article 1(1)(b) CISG provides that the Convention applies ‘when the rules of private international law lead to the application of the law of a Contracting State’. There is some debate whether, where the forum is a contracting state, para. (b) leads to a direct application of the CISG, or whether it designates the CISG as part of the applicable foreign law. Schlechtriem & Schwenzer states that ‘if the forum state is a CISG Contracting State, the Convention is not applied as foreign law, but as law created by an international convention and enacted by the forum State as its own law.’24 Pursuant to this view, para. (b) does not require the forum state to give effect to its rules of private international law at all. 20 The alternative – and, it is submitted, correct – interpretation of para. (b) is as a simple reference to the choice of law rules of the forum. Thus, the forum is required to apply the CISG where its choice of law rules designate the law of a contracting state, and it will do so in the same manner as the foreign court would apply it. This interpretation accords with the wording of para. (b), which calls for the ‘application’ of the law of the contracting state, suggesting that the forum’s choice of law rules are to be given effect. 25 21 The distinction may assume importance in a limited number of cases. For example, where the CISG is not yet in force in the foreign contracting state, application of the forum’s choice of law rules would mean that the CISG should not be given effect as part of the foreign governing law. Of particular significance are those cases where the contracting state has entered a reservation to para. (b) pursuant to Article 95 CISG, which provides that a state may declare that ‘it will not be bound’ by para. (b).26 A num19

21 Schlechtriem, ‘Requirements of Application and Sphere of Applicability of the CISG’ (2005) 36 VUWLR 781 at 784; cf Schwenzer (n 13) Intro to Arts 1–6 CISG, para. 3 & para. 4; cf Fawcett, Harris and Bridge, International Sales in the Conflict of Laws (OUP 2005) at [16.24]–[16.35], [16.104]. 22 Cf the House of Lords’ treatment of the Hague Visby Rules in The Hollandia [1983] 1 AC 565. 23 See below paras 26 et seq. 24 Schwenzer (n 13) Article 1 CISG, para. 35. 25 Mankowski in Mankowski (ed), Commercial Law (2019) Article 1 CISG, para. 37, Mistelis in Kröll, Mistelis and Perales Viscasillas (n 12) Article 1 CISG, para. 51. 26 See for a brief summary of the history of Article 95 CISG-AC Opinion No. 15, Reservations under Articles 95 and 96 CISG, Rapporteur: Prof. Dr. Ulrich G. Schroeter (Beijing 2013) paras 2.1–2.3.

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ber of countries, including the United States and China, have made such a declaration.27 The application of Article 1(1)(b) CISG in regard to Article 95 CISG reservation states is not straightforward and is worth examining more closely. It should be noted that an Article 95 CISG reservation does not mean that the courts of a reservation country cannot apply Article 1(1)(b) CISG. The reservation merely does not compel the courts of a reservation state to apply Article 1(1)(b) CISG. Courts in reservation states that were faced with parties where at least one party had their business in a non-member state but where the parties had agreed on the CISG directly28 or on the law of a CISG contracting state have given full effect to party autonomy.29 It is controversial whether the CISG is regarded as part of the law of an Article 22 95 CISG reservation state if the rules of private international law of a member state, which is forum of a dispute, lead to the application of the law of an Article 95 CISG reservation State. The CISG Advisory Council contends that ‘the Convention applies in accordance with Article 1(1)(b) CISG even when the rules of private international law lead to the application of the law of a Contracting State that has made an Article 95 CISG declaration, because such declaration does not affect the declaring State's status as a 'Contracting State'.’30 A noteworthy number of authors on the other hand reason that, when the private international law rules of the forum, which is located in a member state, as applied under Article 1(1)(b) CISG, lead to the application of the law of an Article 95 CISG reservation state, a court has to apply the domestic law of the reservation State without the CISG. They argue that the law of the state which the rules of private international law refer to should be applied in the same way as a judge in that state would apply his or her domestic law. In the case of a judge in a reservation state that means that he or she would not apply the CISG.31 In the author’s 27 Armenia, Singapore, Slovakia, Lao People's Democratic Republic, St Vincent and the Grenadines also declared a declaration to Article 95 CISG: https://uncitral.un.org/en/texts/salegoods/conventions/sale_of_ goods/cisg/status(last accessed 27 Feb 2020). Singapore’s Singapore Sale of Goods (United Nations Convention) Act s 3(2) explicitly states ‘Sub-paragraph (1)(b) of Article 1 of the Convention shall not have the force of law in Singapore and accordingly the Convention will apply to contracts of sale of goods only between those parties whose places of business are in different States when the States are Contracting States’. Some US courts decided in the same way: Impuls v Psion-Teklogix, US District Court [S.D. Florida], 22 November 2002, 234 F.Supp.2 d 1267, 1272, available at: ; Prime Start v Maher Forest Products, US District Court [W.D. Washington] 17 July 2006 in (2006) IHR 259, 260 , available at: ; Princess d'Isenbourg et Cie Ltd. v Kinder Caviar, Inc., US District Court [E.D. Kentucky] 22 February 2011 available at: http://cisgw3.law.p ace.edu/cases/110222u1.html; Bruno Rimini Furniture Ltd. v. Connor Mktg, 2015 U.S. Dist. (E.D. Cal. July 27, 2015) . 28 See below in which circumstances parties can choose directlyparas 24, 25; Schroeter, ‘Backbone or Backyard of the Convention? The CISG’s Final Provision’ in Andersen & Schroeter (eds), FS Kritzer, Sharing International Commercial Law across National Boundaries (Wildly, Simmonds and Hill Publishing, 2008) p 425, 441. 29 Japan Taiping v Jiangsu Shuntian, Jiangsu Higher People's Court 2001, Case No. Su Jing Zhong Zi (2001) No. 011; Japan Xingsheng v Ningxia Capital Steel, Ningxia Huizu Higher People's Court 2002, Case No. Ning Min Shang Zhong No. 36 cited in CISG-AC Opinion No. 15, Reservations under Articles 95 and 96 CISG, Rapporteur: Prof. Dr. Ulrich G. Schroeter (Beijing 2013) n 29. 30 CISG-AC Opinion No. 15, Reservations under Articles 95 and 96 CISG, Rapporteur: Prof. Dr. Ulrich G. Schroeter (Beijing 2013) paras 3.14, 3.15 with n 39 in regard to a list of authors that support the CISG Advisory Council’s opinion. 31 Mankowski, in MünchKommHGB (4th ed., 2018), Article 1 CISG, paras 55, 56; Magnus in Magnus Staudinger BGB – Wiener UN Kaufrecht – CISG (Sellier, 2018) Article 1 CISG, para. 110; Evans, in Bianca & Bonell (eds), Commentary on the International Sales Law: The 1980 Vienna Sales Convention (1987) Article 95 CISG, para. 3.1 et seq.; Heuzé, La vente internationale de marchandises: Droit uniforme (2000) n 116; Honnold, Uniform Law for International Sales under the 1980 United Nations Convention (4 th ed, 2009) para. 47.5; Maultzsch, ‘Die Rechtsnatur des Article 1 Abs. 1 lit. b CISG zwischen internationaler Abgrenzungsnorm und interner Verteilungsnorm’ in Büchler & Müller-Chen (eds), Private Law: national –

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view the CISG Advisory Council’s reasoning is compelling. Article 1(1)(b) CISG reads: ‘This Convention32 applies to contracts of sale of goods between parties whose places of business are in different States [...] when the rules of private international law lead to the application of the law of a Contracting State’. As the CISG Advisory Council correctly points out: ‘It is therefore 'this Convention' which the judge in a Contracting State has to apply when its forum's rules of private international law lead to the application of the law of a Contracting State, and not 'the law of a Contracting State' (that may or may not have made a declaration under Article 95 CISG).’33 d) Non-contracting States 23

Since the CISG, as an international treaty, only has effect between contracting state parties, a non-state party court does not have to take notice of an Article 95 CISG reservation. Whether a non-contracting state will apply the CISG where its choice of law rules designates the law of a contracting state depends on the status of the CISG within the applicable law. Thus, if the applicable law treats the CISG as forming part of it, the non-contracting forum should usually give effect to it pursuant to its own choice of law rules.34 Such an approach is not contrary to the rejection of renvoi in contract, because the question of whether the CISG forms part of the applicable law is answered by reference to substantive law, rather than the foreign forum’s choice of law rules. 35 However, for the avoidance of doubt, parties who wish to have the CISG applied to their dispute may be wise to select a forum that is a contracting state.36 e) Direct Choice of the CISG

24

A related question is the effect of a direct choice by the parties of the CISG, where Article 1(1)(a) CISG is not satisfied and the otherwise applicable law is not the law of a contracting state. Because, in most legal systems, courts are required to identify and apply the law of a state,37 and the CISG is merely a set of rules of law unless it forms part of the applicable law, a direct choice of the CISG would not usually be an effective choice of law in these circumstances. However, this does not mean that the choice may be disregarded: rather, the CISG should be incorporated into the parties’ contract to the extent permitted by the otherwise applicable law. This ‘incorporation’ takes place

global – comparative, Festschrift für Ingeborg Schwenzer zum 60. Geburtstag (2011) p. 1225; Neumayer & Ming, Convention de Vienne sur les Contrats de Vente internationale de Marchandises (1993) Article 1 CISG, para. 8; Saenger, in Bamberger & Roth (eds), Bürgerliches Gesetzbuch (3rd edn, 2007) Article 1 CISG, para. 19; Schlechtriem, Uniform Sales Law (1986) para. 26-7; Winship, ‘The Scope of the Vienna Convention on International Sales Contracts’, in Galston & Smit (eds), International Sales: The United Nations Convention on Contracts for the International Sale of Goods (1984) pp. 1–27; Witz, ‘Droit uniforme de la vente internationale de marchandises – juillet 2006–décembre 2007’ (2008) Recueil Dalloz 2620, 2621. 32 Emphasis added. 33 CISG-AC Opinion No. 15, Reservations under Articles 95 and 96 CISG, Rapporteur: Prof. Dr. Ulrich G. Schroeter (Beijing 2013) para. 3.16. 34 See Schwenzer (n 13) Article 1 CISG, para. 38; Fawcett, Harris and Bridge (n 22), para. 13.75. 35 See Fawcett, Harris and Bridge (n 22), para. 13.79. 36 See generally Kadner Graziano ‘The CISG before the Courts of Non-Contracting States? Take Foreign Sales Law as You Find It’ (2011) 13 YB PIL 165; Schlechtriem, Peter ‘Requirements of Application and Sphere of Applicability of the CISG’ 36 (2005) VUWLR 781 at 785. 37 Recital 13 and Article 3 Rome I Regulation; Beximco Pharmaceuticals Ltd v Shamil Bank of Bahrain [2004] EWCA Civ 19, [2004] 1 WLR 1784 at [40]; see Collins (ed), Dicey, Morris and Collins on the Conflict of Laws (15th edn, suppl, Sweet & Maxwell 2018) at [32-049]; Hague Conference on Private International Law Draft Commentary on the Draft Hague Principles on Choice of Law in International Contracts (November 2013) at [3.13]. But cf below para 73 (arbitration);

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entirely within the bounds of the applicable law’s law of contract.38 For example, in a dispute governed by the law of England, an English court would give effect to a direct choice of the CISG to the extent that its rules do not conflict with simple mandatory rules of English law (i.e. rules that the parties are unable to contract out of). The proCISG choice approach does not only recognize party autonomy but also implements the thinking of the delegates of the diplomatic conference which had found that the principle of party autonomy was sufficient to allow parties to opt in to the CISG.39 For parties who wish to ensure that their dealings are submitted to the CISG, the 25 safest option is to choose the law of a contracting state, possibly complemented by a direct choice of the CISG to clarify that the parties do not wish to contract out of it. An alternative is to choose international arbitration as the applicable dispute resolution mechanism for the contract.40 f) Article 6 CISG: Contracting Out Article 6 CISG provides that the parties may exclude the application of the Conven- 26 tion or, subject to some limitations, derogate from any of its provisions. This provision operates on two levels:41 first, on the level of choice of law, enabling parties to exclude the application of the CISG by choosing the law of a non-contracting state pursuant to the forum’s party autonomy principle; and second, on a substantive level, allowing parties to exclude the CISG from the operation of the applicable law.42 To the extent that Article 6 CISG raises an issue of choice of law, its primary purpose 27 seems to be to give precedence to the forum’s rules on party autonomy. It does not itself confer a power on the parties to choose the applicable law: the unilateral choice of law rule in Article 1(1)(a) CISG simply does not come into play where the parties have chosen the law of a non-contracting state in accordance with the forum’s choice of law rules. It has been suggested that the exclusion of the CISG must still be determined by Articles 14–24 of the Convention.43 However, it is doubtful whether the CISG is even applicable to choice of law agreements, which are generally considered to be independent from the underlying sales contract;44 and whether Article 6 was ever intended to ‘split’ the law applicable to the choice of law agreement in this way, by cutting across the forum’s choice of law rules. The better view is that the indirect exclusion of the CISG, through choice of law of a non-contracting state, is not governed by the rules of contract contained in the CISG. It is on the second, the substantive, level that Article 6 CISG is of principal signifi- 28 cance. In particular, problems may arise where the parties have not expressed their Recital 13, Rome I Regulation; Fawcett, Harris and Bridge (n 22), para. 13.89. See Official Records of the United Nations Conference on Contracts for the International Sale of Goods (Vienna, 10 March–11 April 1980) United Nations publication, Sales No E.81IV.3, 86, 252, 253. 40 See belowparas 58 et seq. 41 See Mistelis in Kröll, Mistelis and Perales Viscasillas (n 12) Article 6 CISG, paras 12, 13; cf Schwenzer/Hachem in Schwenzer (n 13) Article 6 CISG, paras.4-7; CISG-AC Opinion No. 16, Exclusion of the CISG under Article 6, Rapporteur: Doctor Lisa Spagnolo, Monash University, Australia. Adopted by the CISG Advisory Council following its 19th meeting, in Pretoria, South Africa on 30 May 20. 42 This, in effect, is the opposite of ‘incorporation’, referred to above, paras 24, 25. 43 Schwenzer/Hachem in Schwenzer (n 13) Article 6 CISG, para. 4; Schwenzer, Hachem, Kee, Global Sales and Contract Law (OUP 2012) para. 4.39. 44 Huber and Mullis, The CISG: A new textbook for students and practitioners (Sellier 2007) p. 61. On the independence of choice of law agreements generally, see Reithmann and Martiny, Internationales Vertragsrecht (7th edn, Dr Otto Schmidt Verlag, 2010) at Part I, [88]; see also Fiona Trust Holding Corp v Privalov [2007] UKHL 40, [2008] 1 Lloyd’s LR 254 at [17] and Kabab-Ji SAL (Lebanon) v Kout Food Group (Kuwait) [2020] All ER (D) 79 at [49] & [50] in relation to arbitration agreements. 38

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intention to exclude the CISG with sufficient clarity.45Jurisprudence, arbitral decisions and literature support a high threshold for intent to exclude the CISG.46 However, some uncertainty what meets that high threshold other than expressly excluding the CISG in the contract remains.47.48 Another question that has concerned courts and arbitral tribunals has been whether the CISG’s application is excluded if the parties litigate a dispute solely on the basis of domestic law even though the CISG is applicable to the dispute.49 It is not clear whether it is the CISG or the applicable national law that should be used to determine this question.50 By far the best course of action for parties is to reach an express agreement on whether to include or exclude the CISG.

2. Choice of Law 29

Most cross-border transactions are governed by a domestic contract law, the contract law that is applicable under the respective conflict of law rules. Although rules vary in content, it is widely accepted that parties ought to be free to make a choice of law to govern their contractual dealings.51 This principle of party autonomy was confirmed 45 Compare Schwenzer/Hachem in Schwenzer (n 13) Article 6 CISG para. 3 and para. 20. According to the overwhelming opinion opting-out requires a clear, unequivocal and affirmative agreement between the parties: Cour de cassation 3 November 2009, CLOUT Case No. 1025 ; OLG Linz 23 January 2006, http://cisgw3.law.pace.edu/cases/060123 a.html; US Court of Appeals 5th Cir. 11 June 2003 (corrected on 7 July 2003), CLOUT case No. 575; US District Court, Middle District of Pennsylvania 16 August 2005, http://cisgw3.law.pace.edu/cases/050816u1.html. Against such a strict approach see Schwenzer/Hachem in Schwenzer (n 13) Article CISG, para. 12; CISG Advisory Council Opinion No 16 (no 43), para. 3.1 et seq and para. 4.4. 46 CISG Advisory Council Opinion No 16 (n 41), para. 3.4, cf Mistelis in Kröll, Mistelis and Perales Viscasillas (n 12) Article 6 CISG, para. 12 with examples. See Fawcett, Harris and Bridge (n 22) pp. 683–4; the majority of courts and arbitral tribunals demands an explicit exclusion of the CISG: BGH 11 May 2010, www.globalsaleslaw.com/content/api/cisg/urteile/2125.pdf; OGH 2 April 2009, CLOUT Case No. 1057; Polimeles Protodikio Athinion 2009,http://cisgw3.law.pace.edu/cases/094505gr.htm l#ii2, ICC Award No. 11333 (2002) http://cisgw3.law.pace.edu/cases/021333il.html; especially the tribunals constituted under the Russian Federation Chamber of Commerce and Industry rules and some courts have suggested that that exclusion is possible by merely choosing the law of a contracting state: for example, Tribunal of International Commercial Arbitration at the Russian Federation Chamber of Commerce and Industry 16 March 2005, http://cisgw3.law.pace.edu/cases050316r1.html; Cour d’appel de Colmar 26 September 1995, UNILEX; Tribunal Cantonal du Jura, 3 November 2004, CLOUT Case No. 904. 47 See for an overview, Mistelis in Kröll, Mistelis and Perales Viscasillas (n 12) Article 6 CISG , paras 12 et seq, CISG Advisory Council Opinion No 16 (n 41) , para. 4.2 et seq. 48 CISG-AC Opinion No 16 (n 41), para. 4.4 et seq. 49 See for an overview of the different views: UNCITRAL, Digest of Case Law on the United Nations Convention on Contracts for the International Sale of Goods (United Nations, New York, 2016) Article 6 CISG, para. 14; CISG-AC Opinion No 16 (n 43), para. 5 which states that the failure of one or both parties to base their arguments on the CISG does not mean that the parties have excluded the CISG. However, compare GPL Treatment v. Louisiana-Pacific Corp 894 P. 2 d 470 (Or Ct App 1995) 12 April 1995; aff 'd 914 P. 2 d 682 (Or, 1996), Oregon Court of Appeals, U.S.A. ; (domestic 'in writing' requirement was displaced by the CISG, but counsel for plaintiff failed to raise this until late in the trial, and case was decided on basis of UCC); Rienzi & Sons, Inc. v. N. Puglisi & F. Industria Paste Alimentari S.P.A., 2014 U.S. Dist (EDNY) 08-CV-2540 (DLI) (JMA) Lexis 41478 (27 March 2014) (concluding that by referring expressly to 'State Law' in the pleading the Claimant had consented to the application of New York UCC rather than the CISG) relying on Ho Myung Moolsan, Co. Ltd. v. Manitou Mineral Water,Inc., U.S. District Court (SDNY), 2 December 2010 http://cisgw3.law.pace.edu/cases/10120 2u1.html. 50 Cf Huber and Mullis (n 45) p. 63. 51 Jürgen Basedow, The Law of Open Societies : Private Ordering and Public Regulation in the Conflict of Laws (Brill, 2015) at [183]; Maya Mandery, Party Autonomy in Contractual and Non-Contractual Obligations: A European and Anglo-Common Law perspective on the freedom of choice of law in Rome I Regulation on the law applicable to contractual obligations and the Rome II Regulation on the law applicable

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by the Hague Principles on Choice of Law in International Commercial Contracts.52 Where the parties have not chosen the applicable law, choice of law rules generally designate the law with the closest connection, whether on the basis of a general test of close connection or more specific connecting factors such as the place of performance of the contract.53 Where the issue is not contractual – because the dispute arising out of the contract deals with, for example, property or non-contractual obligations – different choice of law rules may apply.54 Application of a foreign governing law is generally subject to the overriding mandato- 30 ry rules and the fundamental public policy of the forum. Overriding mandatory rules are not simple mandatory rules as these are ordinarily understood in private law (that is, rules that cannot be derogated from by agreement). Similarly, the concept of fundamental public policy is not equivalent with the notion of public policy in substantive law. Rather, the concepts of overriding mandatory rules and fundamental public policy are used to protect significant interests of the forum in circumstances where choice of law rules would otherwise point to the application of a foreign law.55 Article 1(1)(b) CISG instructs to apply the rules of private international law to 31 determine whether CISG applies due to the application of the law of a contracting state. Even if the CISG applies to the contractual relationship between the parties, it is prudent for parties to agree on an applicable domestic law alongside the CISG to avoid a lacuna in regard to matters to which the CISG does not apply. It is therefore often necessary to resolve the question of the applicable law by reference to national choice of law rules on international contracts. a) General aa) Conflicting Choice of Law Rules Where the forum has entered into more than one international agreement purporting 32 to determine the law applicable to contracts for the international sale of goods, there is to non-contractual obligations (Peter Lang, Frankfurt, 2014) at 25; for example, Article 3 Regulation (EC) 593/2008 on the law applicable to contractual obligations [2008] OJ L177/6 [Rome I Regulation]. However, there are exceptions. Saudi Arabia applies Shari’a as its principal source of law. There are no conflict-of-law rules in Shari’a law leading to the application of a foreign law upon the choice of the parties. See Dewidar, T. M., Al Qanun Al Dawli Al Khas Al Saudi, Manshaat Al Maaref (Alexandria, 1997) (English translation: Private International Law in Saudi Arabia) pp. 301–3, Salama, A. A. K., Al Wasit Fel Qanun Al Dawli Al Khas Al Saudi, Gamaet Al Malek Saoud (Al Riyaddh, 1998) (English translation: The Intermediate in Saudi Arabian Private International Law) pp. 515–19. Abdulaziz Saleh Alobud suggests that under Saudi Arabian conflict of law rules a choice of the parties regarding the applicable contract law will be honored in so far as it does not violate Islamic law (Developing Saudi Private International Law to Accommodate E-Commerce Transaction Growth, doctoral thesis, University of Suffolk, May 2019, at p 90) It also has to be noted that party autonomy in regard to the choice of an applicable law to the contract is not readily honored in Latin America: Maria Ignacia Vial Undurraga ‘Party Autonomy in Latin America: A Pending Task’ [2018] 45 Revista Chilena de Derecho 453; Mercedes Albornoz ‘Choice Of Law In International Contracts in Latin American Legal Systems’ (2010) 6 Journal of Private International Law 23;Symeon Symeonides ‘The scope and limits of party autonomy in international contracts: a comparative analysis’ in Franco Ferrari, Diego P Fernandez Arroyo (eds), Private International Law: Contemporary Challenges and Continuing Relevance (Edward Elgar, Cheltenham, 2019) 101 fn 2 stating that in a 2015 only 11 of the 161 countries surveyed did not allow party autonomy. 52 Hague Principles on the Choice of Law in International Contracts (19 March 2015), Article 2. 53 For example, Article 4 Rome I Regulation. 54 See Fawcett, Harris and Bridge (n 22) Chapters 17–19. 55 See, for example, Articles 9 and 21, Rome I Regulation; Inter-American Convention on the Law Applicable to International Contracts, Article 11; Hague Principles on the Choice of Law in International Contracts (19 March 2015), Article 11; see IV below for a more detailed analysis of the limitation through mandatory rules and public policy paras 83-89.

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the potential for a conflict of choice of law rules. An attempt to solve such a potential conflict was made in Article 90CISG, which states that it ‘does not prevail over any international agreement which already has been or may be entered into and which contains provisions concerning the matters governed by this Convention, provided that the parties have their places of business in States parties to such agreement’. The starting point, therefore, is that Article 1(1)(a) CISG is displaced by any international agreement in the same area.56 bb) Incorporation by Reference Choice of law rules are generally confined to the selection of municipal systems of law,57 and thus do not allow for a choice of non-national sources of law. This means that, in order to make a choice of law, parties are required to choose the law of a country. A choice of the UNIDROIT Principles, the Principles of European Contract Law (PECL), 58 or even the direct choice of the CISG,59 for example, is not sufficient.60 34 However, the application of this rule must be distinguished from the separate process of ‘incorporation by reference’, which enables parties to agree on non-national rules of law to the extent permitted by the applicable law.61 Incorporation agreements thus operate within the confines of the applicable law and do not strictly give rise to a choice of law issue. This also has implications for the CISG, because parties may be able to incorporate the CISG into their contract where it would not otherwise be applicable.62 33

b) Choice of Law: International, Regional & Domestic Rules 35

This section is intended to set out the principal choice of law rules for international sales contracts in the European Union, in those states who are members to the Hague Convention of 1955 on the law applicable to international sales of goods (Denmark, Finland, France, Italy, Norway, Sweden, Switzerland, Niger), further in China, US, Singapore, and Canada. Although international contracts may give rise to disputes involving non-contractual obligations or questions of property, the section is confined to choice of law in contract.

See Fawcett, Harris and Bridge (n 22) [16.96] et seq. Beximco Pharmaceuticals Ltd v Shamil Bank of Bahrain [2004] EWCA Civ 19, [2004] 1 WLR 1784 at [40]; see Collins (ed) Dicey, Morris and Collins on the Conflict of Laws (15th edn, suppl, Sweet & Maxwell, London, 2018) [32-049]. Apostolos Tassikas, Dispositives Recht und Rechtswahlfreiheit als Ausnahmebereiche der EG-Grundfreiheiten (Mohr Siebeck, Tübingen, 2004) 22. But compare Article 3 Hague Principles on Choice of Law in International Contracts (text below n 62). See below on the different approach taken to arbitral disputes, paras 58 et seq. 58 Lando and Beale (eds) Principles of European Contract Law (PECL): Parts I and II (Kluwer 2000). 59 See in regard to the direct choice of the CISG above para 24. 60 Recital 13, Rome I Regulation, but Hague Principles on the Choice of Law in International Contracts (19 March 2015), Article 3: “The law chosen by the parties may be rules of law that are generally accepted on an international, supranational or regional level as a neutral and balanced set of rules, unless the law of the forum provides otherwise”. 61 See recital 13, Rome I Regulation; Fawcett, Harris and Bridge, (n 22), para. 13.89. 62 See Mistelis in Kröll, Mistelis and Perales Viscasillas (n 12) Article 6 CISG, paras 26, 27; Schwenzer/Hachem in Schwenzer (n 13) Article 6 CISG, para. 31. 56

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aa) Rome I Regulation – Articles 3 and 10 (Freedom of Choice), 4 (Applicable Law in the Absence of Choice), 9 (Overriding Mandatory Rules)63 The Rome I Regulation, which has replaced the 1980 Rome Convention, provides 36 the choice of law rules for the law applicable to contractual obligations in the European Union. It replaces the domestic choice of law rules for contracts in all of the participating member states.64 Unless the relevant state is also a member to the Hague Convention of 1955 on the law applicable to international sales of goods,65 or Article 1(1)(a) CISG is satisfied,66 the Rome I Regulation will be applicable to designate the law applicable to international sales contracts. One of the cornerstones of the Regulation is the parties’ freedom to choose the 37 applicable law.67 Article 3(1) of the Rome I Regulation provides that ‘[a] contract shall be governed by the law chosen by the parties’. The choice does not need to be express but must be ‘clearly demonstrated by the terms of the contract or the circumstances of the case’. The parties can also choose the law applicable to only a part of their contract (depeçage). However, the parties can only chose national laws; they cannot choose non-State rules of law – such as lex mercatoria, the Principles of European Contract Law, the UNIDROIT Principles of International Commercial Contracts, or the CISG directly.68 However, contracting parties can incorporate non-state rules by reference into their contract.69 The existence and validity of the choice of law agreement is determined in accor- 38 dance with the putative chosen law.70

63 See generally Dicey (n 49) Chap. 32; Magnus, in Staudingers Kommentar zum Bürgerlichen Gesetzbuch: Rom I-VO Article 3 (Sellier 2011). 64 Denmark is the only state to have opted out of the Regulation. 65 Article 25 Rome I Regulation. 66 Schwenzer (n 13) Intro to Arts 1–6 CISG, para. 6. However, the relationship between Rome I Regulation and the CISG is not free from doubt: see Schwenzer (n 13) Intro to Arts 1–6 CISG, n 31. 67 Recital 11 of the Rome I Regulation. 68 Maya Mandery (n 53) at p 31 and p 71; see above para 24 in regard to CISG. 69 Recital 13 of the Rome I Regulation. 70 Article 3. ’1. … The choice shall be made expressly or clearly demonstrated by the terms of the contract or the circumstances of the case. By their choice the parties can select the law applicable to the whole or to part only of the contract. 2. The parties may at any time agree to subject the contract to a law other than that which previously governed it, whether as a result of an earlier choice made under this Article or of other provisions of this Regulation. Any change in the law to be applied that is made after the conclusion of the contract shall not prejudice its formal validity under Article 11 or adversely affect the rights of third parties. 3. Where all other elements relevant to the situation at the time of the choice are located in a country other than the country whose law has been chosen, the choice of the parties shall not prejudice the application of provisions of the law of that other country which cannot be derogated from by agreement. 4. Where all other elements relevant to the situation at the time of the choice are located in one or more Member States, the parties' choice of applicable law other than that of a Member State shall not prejudice the application of provisions of Community law, where appropriate as implemented in the Member State of the forum, which cannot be derogated from by agreement. 5. The existence and validity of the consent of the parties as to the choice of the applicable law shall be determined in accordance with the provisions of Articles 10, 11 and 13.’ Article 10: Consent and material validity 1. The existence and validity of a contract, or of any term of a contract, shall be determined by the law which would govern it under this Regulation if the contract or term were valid. 2. Nevertheless, a party, in order to establish that he did not consent, may rely upon the law of the country in which he has his habitual residence if it appears from the circumstances that it would not be reasonable to determine the effect of his conduct in accordance with the law specified in paragraph 1.

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Where the parties have not chosen the applicable law, a contract for the sale of goods is governed by the law of the country where the seller has his habitual residence71 (or, where the sale proceeds by auction, the law of the country where the auction takes place), unless the contract is manifestly more closely connected with another country. Article 4(1)(a) and (g), Article 4(2), Article 4(3). Article 4(2) of the Rome Convention have been interpreted by the European Court of Justice in Haeger & Schmidt GmbH v Mutuelles du Mans assurances IARD et al regarding the divergence of the closer connection presumption in Article 4 Rome Convention and the party’s submission that a closer connection to another country exists. The Court held that the national court has to compare the connections existing between the contract in question and, on the one hand, the country whose law is designated by the presumption of Article 4 of the Rome Convention and, on the other hand , the country whose law according to the party’s submission has the closer connection to the contract. In doing so, the national court must take account of the circumstances as a whole, including the existence of other contracts connected with the contract in question.72 40 The application of the governing law pursuant to Articles 3 and 4 Rome Convention is subject to any overriding mandatory rules73 or public policy of the forum.74 In United Antwerp Maritime Agencies v Navigation Maritime Bulgare75 the European Court of Justice emphasized that the principle of the freedom of contract of the parties to a contract was the cornerstone of the Rome Convention . The choice freely made by the parties as regards the law applicable to their contractual relationship was respected in accordance with Article 3(1) of the Rome Convention.76 Therefore, the forum member state court can only disregard the parties’ choice of law in accordance with Art 7(2) CISG if the court finds, on the basis of a detailed assessment, that, the legislature of the states of the forum held the law in question to be crucial for the legal order of the forum.77 39

71 The term ‘habitual residence’ is defined in Article 19 as a company’s place of central administration, or a natural person’s principal place of business. 72 Case C-305/13 Haeger & Schmidt GmbH v Mutuelles du Mans assurances IARD et al, [2014] ECR I-nyr para. 52. Note that the case was decided under the Rome Convention. The provisions were not changed in the adoption of the Rome I Regulation. 73 Article 9: Overriding mandatory provisions 1. Overriding mandatory provisions are provisions the respect for which is regarded as crucial by a country for safeguarding its public interests, such as its political, social or economic organisation, to such an extent that they are applicable to any situation falling within their scope, irrespective of the law otherwise applicable to the contract under this Regulation. 2. Nothing in this Regulation shall restrict the application of the overriding mandatory provisions of the law of the forum. 3. Effect may be given to the overriding mandatory provisions of the law of the country where the obligations arising out of the contract have to be or have been performed, in so far as those overriding mandatory provisions render the performance of the contract unlawful. In considering whether to give effect to those provisions, regard shall be had to their nature and purpose and to the consequences of their application or non-application. 74 Article 21: Public policy of the forum The application of a provision of the law of any country specified by this Regulation may be refused only if such application is manifestly incompatible with the public policy (ordre public) of the forum. 75 Case C-184/12 United Antwerp Maritime Agencies (Unamar) NV v Navigation Maritime Bulgare [2013] ECR I-nyr para. 32. 76 Case C-184/12 United Antwerp Maritime Agencies (Unamar) NV v Navigation Maritime Bulgare [2013] ECR I-nyr para. 49. 77 Case C-184/12 United Antwerp Maritime Agencies (Unamar) NV v Navigation Maritime Bulgare [2013] ECR I-nyr para. 53.

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bb) Hague Convention of 1955 on the Law Applicable to International Sale of Goods The Hague Convention of 1955 on the law applicable to international sale of goods 41 (Hague Convention 1955) has been ratified by Denmark, Finland, France, Italy, Norway, Sweden, Switzerland, Niger.78 Like the Rome I Regulation, the Hague Convention 1955 allows for an express or implied choice of law by the parties whose validity is determined by the putative chosen law.79 Where the parties have not made a choice, the law of the vendor’s place of habitual residence is applicable unless the order has been received in the country in which the purchaser has his habitual residence: Article 3 of the Hague Convention 1955. In case of a sale at an exchange or at an auction, the applicable law is the law of the country in which the exchange is situated, or the auction takes place. There is a separate choice of law rule governing inspection of goods (Article 4 of the Hague Convention 1955). Application of the governing law may be excluded on grounds of public policy: 42 Article 6. The Convention does not apply to the form of sales contracts: Article 5(2) of the Hague Convention 1955. cc) The Draft Hague Principles on Choice of Law in International Commercial Contracts Recognizing the importance of the choice of law for commercial parties in interna- 43 tional commercial contracts, the Hague Conference has developed a non-binding set of principles.80 The overarching aim of the Principles is to reinforce party autonomy and to ensure that the law chosen by the parties has the widest scope of application, subject to clearly defined limits.81 The Principles’ aim is to reflect current best practice with respect to the recognition of party autonomy in choice of law in international commercial contracts.82 Like other instruments, discussed beforehand, the choice of the parties in regard to the applicable law is paramount.83 The adoption and incorporation of the Principles by states would bring improvement reflecting commercial reality. An innovation of the Principles is that the parties are able to choose rules of law. Article 3 of the Hague Principles on Choice of Law in International Commercial Contracts provides: The law chosen by the parties may be rules of law that are generally accepted on an international, supranational or regional level as a neutral and balanced set of rules, unless the law of the forum provides otherwise.

Under the Principles parties therefore would be free to choose the CISG, notwith- 44 standing that neither party has its business in a non-contracting state. The Principles also stipulate that the validity of the choice of law agreement is not dependent on

Unofficial translation available in 510 UNTS 149. Article 2 Hague Convention 1955. A sale shall be governed by the domestic law of the country designated by the Contracting Parties. Such designation must be contained in an express clause, or unambiguously result from the provisions of the contract. Conditions affecting the consent of the parties to the law declared applicable shall be determined by such law. 80 Principles on Choice of Law in International Commercial Contracts https://www.hcch.net/en/instru ments/conventions/full-text/?cid=135 (accessed 20 June 2020). 81 Preamble (1). 82 The Hague Principles On Choice of Law In International Commercial Contracts, I.15. 83 The Hague Principles On Choice of Law In International Commercial Contracts, Article 2. 78

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the validity of the underlying contract.84 The Principles thus liken the choice of law agreement between the parties with an arbitration agreement.85 dd) China Party autonomy is also the principle of Chinese private international law in regard to contracts.86 There is jurisprudence which indicated that Chinese courts will accept the choice of lex mercatoria as the applicable law chosen by the parties.87 Courts generally accept the express choice by the parties. However, it seems less clear whether an express choice can be rendered during a hearing with some authors stating that any choice of law by the parties must be explicitly made known before the first hearing of a first instance court.88 Implied choice is not recognized.89 According to Tu dépeçage is possible to a limited extent.90 Interestingly the Supreme People’s Court, in contrast to the Common Law precedent established by Vita Food Products v Unus Shipping Company91 and the Rome I Regulation, places some weight on the connection between the party’s choice of the applicable law and a factual connection to the contract.92 The Court held that if one party claims that the choice of law is invalid on the basis that the choice of law as agreed by the parties has no actual link with the disputed sales contract, the people's court shall not support the claim. If each party has invoked the law of the same country and does not challenge the issue of the application of law, the Chinese courts will commonly recognize that the parties have made the choice on the application of law for foreign-related civil relations and will make a judgment in accordance with that law.93 46 The Law of the People’s Republic of China on the Laws Applicable to Foreign-Related Civil Relations (2011, “LAFCR”) provides that, in the absence of party choice, the law 45

Article 7 of the Hague Principles On Choice of Law In International Commercial Contracts. See in regard to the doctrine of severability of arbitration agreements: Born, International Commercial Arbitration (2nd edn, Wolters Kluwer 2014) Ch. 3. 86 Article 41 of the Law on the Application of Law for Foreign-Related Civil Legal Relationships of the People’s Republic of China (LAL) which states: “The parties, by agreement, can choose the governing law for their contract; if the parties did not make a choice, the applicable law shall be the law of the place where the party who is to effect the characteristic obligation for the contract has his habitual residence or the law of another place which has the closest connection with the contract,” Kong and Minfei ‘The Chinese Practice of Private International Law’ (2002) 3 Melbourne Journal of International Law 414 et seq. 87 Guangjian Tu, Private International Law in China (Springer, Heidelberg, 2015) para. 139. 88 Supreme People’s Court Judicial Interpretation 10 December 2012 cited in Jiang Rongqing ‘The Supreme People's Court clarifies main issues on Law of the Application of Law for Foreign-related Civil Relations of China’ (20 June 2013) https://www.mondaq.com/china/court-procedure/246142/the-suprem e-peoples-court-clarifies-main-issues-on-law-of-the-application-of-law-for-foreign-related-civil-relatio ns-of-china (accessed 23 June 2020); different view Guangjian Tu (n 88) para. 144 suggesting that a valid choice can be made at any time of the proceedings. 89 Article 3 PRC Judicial Interpretation on Application of Law requires that a choice-of-law clause be clearly expressed. See for a brief discussion Schwenzer, Hachem, Kee, Global Sales and Contract Law (OUP 2012) para. 4.17; Guangjian Tu (n 88) para. 142. 90 Guangjian Tu (n 88) para. 145- unfortunately Tu does not give any examples to the extent dépeçage is possible. 91 [1939] UKPC 7. 92 Compare Restatement (Second) § 187(2)(a) below para 50 n 106. which also places some weight on a substantial relationship between the parties and the transaction. Different Guangjian Tu (n 88) para. 146 who states that no connection is necessary. 93 Supreme People’s Court Judicial Interpretation 10 December 2012 cited in Jiang Rongqing ‘The Supreme People's Court clarifies main issues on Law of the Application of Law for Foreign-related Civil Relations of China’ (20 June 2013) para. 4https://www.mondaq.com/china/court-procedure/246142/the-s upreme-peoples-court-clarifies-main-issues-on-law-of-the-application-of-law-for-foreign-related-civil-re lations-of-china (accessed 23 June 2020). 84

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applicable to a contract is the law of the habitual residence of a party whose performance of obligation is most characteristic of the contract,94 or the law that is most closely connected with the contract95 (Articles 396 and 4197 of the LAVCR) and is subject to overriding mandatory rules and public policy (Articles 4 and 5 of the LAVCR). The Supreme People’s Court has nevertheless inferred a choice of law in certain circumstances.98 Any choice of municipal law is subject to overriding mandatory rules.99 Particular is 47 the Chinese public policy provision, albeit not dissimilar from Article 9 of the Rome I Regulation. Article 5 LAFCR states: Where the application of a foreign law will be prejudicial to the social and public interest of the PRC, the PRC law shall be applied.

The provision is wider than the usual public policy exception100 as can be understood 48 from the Supreme People’s Court Judicial Comment which clarifies101 that considerations of domestic social and public interests and generally aim at protecting domestic economic order or providing special protection for certain interests can be taken into account.102 Chinese law is silent on renvoi. Even though some Chinese private international 49 lawyers argue for the adoption of renvoi the People’s Courts tend to ignore renvoi103 in

94 Compare from already before the LAL Changzhou Lida Instruments Company Ltd. v USA Nilkota Inc (2005) Chang Civ 3 First Instance No 27. 95 Guangjian Tu (n 88) para149, Interpretation Supreme People’s Court Judicial Interpretation (10 December 2012) states in Article 5(2):“‘In determining the applicable law according to the most closely connected principle, the people’s court shall take into account the factors of the nature of the contract in dispute and the obligation performed by one party that can best embody the essential characteristic [characteristic obligation] of the contract and other factors to find out the law of the place with which the contract is most closely connected.“ See also to the general importance of closest connection: Zhengxin Huo ‘An imperfect improvement: the new conflict of laws act of the People’s Republic of China’ 60 (2011) ICLQ 1065, 1071, 1072. Compare from before the LAL Changzhou Kaiyi Traveling Things Company Ltd. versus Lifang Company Ltd. (Taiwan) (2006) Chang Civ 3 First Instance No. 29. The place and the characteristic performance have been held to be determinative when deciding about the close connection to the contract (Guangjian Tu (n 88) paras 160 et seq. 96 ‘The parties may explicitly choose the law applicable to their foreign-related civil relation in accordance with the provisions of this law.’. 97 Article 41 of the LACFR reads: ‘The parties may by agreement choose the law applicable to their contract. Absent any choice by the parties, the law of the habitual residence of a party whose performance of obligation is most characteristic of the contract or the law that is most closely connected with the contract shall be applied.’ Unofficial translation of the Chinese Statute on Choice of Law available on http://conflictoflaws.net/ News/2011/01/PIL-China.pdf. See generally Zhang ‘Codified Choice of Law in China: Rules, Processes and Theoretic Underpinnings’ (2011) 37 North Carolina Journal of International Law and Commercial Regulation 83. 98 Zhang (n 98) p. 120. 99 Article 4 of the Law of the People’s Republic of China on the Laws Applicable to Foreign-Related Civil Relations (2011). 100 Compare Article 9 Rome I Regulation, below para 84, → mn. 182. 101 Supreme People’s Court Judicial Interpretation 10 December 2012 cited in Rongqing ‘The Supreme People's Court clarifies main issues on Law of the Application of Law for Foreign-related Civil Relations of China’ (20 June 2013) para. 6https://www.mondaq.com/china/court-procedure/246142/the-supreme-peo ples-court-clarifies-main-issues-on-law-of-the-application-of-law-for-foreign-related-civil-relations-of-c hina (accessed 23 June 2020). 102 See regarding criticism on the public policy exception: Zhengxin Huo (n 96) 1065, 1073. 103 Kong and Minfei ‘The Chinese Practice of Private International Law’ (2002) 3 Melbourne Journal of International Law 414 et seq; Zhengxin Huo (n 96) 1065, 1074.

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line with the majority of private international law scholars104 and Article 20 of the Rome I Regulation and Article 17 of the Mexico Convention (1994). ee) United States 50

Choice of law rules in the United States tend to follow either the Restatement (Second) of Conflict of Laws105 or the UCC.106 Both instruments provide for party autonomy but require that the chosen law has a substantial connection to the parties or their transaction, or that there be a reasonable basis for the choice:107 § 187(2)(a), Restatement (Second). In the absence of choice, the Restatement requires the court to identify the law with the most significant connection, taking into account a number of designated factors: §§ 188 and 6108 Restatement (Second).109 The UCC applies to transactions ‘bearing

104 Maniruzzaman ‘Choice of Law in International Contracts: Some Fundamental Conflict of Law Issues’ (1999) 16 J Int’l Arb 141, 145. 105 24 US states follow the Restatement methodology (Symeon Symeonides ‘Choice of Law in the American Courts in 2018: Thirty-Second Annual Survey’ 67 (2019) The American Journal of Comparative Law 1, 36). Restatement (2d), § 187. Law of the State Chosen by the Parties: (1) The law of the state chosen by the parties to govern their contractual rights and duties will be applied if the particular issue is one which the parties could have resolved by an explicit provision in their agreement directed to that issue. (2) The law of the state chosen by the parties to govern their contractual rights and duties will be applied, even if the particular issue is one which the parties could not have resolved by an explicit provision in their agreement directed to that issue, unless either (a) the chosen state has no substantial relationship to the parties or the transaction and there is no other reasonable basis for the parties' choice, or (b) application of the law of the chosen state would be contrary to a fundamental policy of a state which has a materially greater interest than the chosen state in the determination of the particular issue and which, under the rule of s 188, would be the state of the applicable law in the absence of an effective choice of law by the parties. (3) In the absence of a contrary indication of intention, the reference is to the local law of the state of the chosen law. 106 See regarding the constitutional dimensions of conflict of laws in the United States, i.e. the federalstate competence division: Symeon Symeonides, Choice of Law (OUP, Oxford, 2016) at pp 17 et seq.; see also the regular update on United States choice of law: Symeon Symeonides ‘Choice of Law in the American Courts.’ eg ‘Choice of Law in the American Courts in 2018: Thirty-Second Annual Survey’ 67 (2019) The American Journal of Comparative Law 1, including a table of all US states and which choice of law methodology they follow. 107 Fox, International Commercial Agreements (4th edn, Wolters Kluwer 2009) p. 131. 108 Restatement (2 d), § 6. Choice of Law Principles: (1) A court, subject to constitutional restrictions, will follow a statutory directive of its own state on choice of law. (2) When there is no such directive, the factors relevant to the choice of the applicable rule of law include (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 protection of justified expectations, (e) the basic policies underlying the particular field of law, (f) certainty, predictability and uniformity of result, and (g) ease in the determination and application of the law to be applied. 109 See for an in-depth discussion of choice of law in contract under US law: Born and Rutledge, International Civil Litigation in United States Courts (5th edn, 2011) Ch. 8 C (pp. 758 et seq.).

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an appropriate relation’ to the state: § 1-301(b),110 § 1-105 UCC.111 In Scherk v AlbertoCulver Co the Supreme Court, however, stated that choice of law clauses in contracts promote ‘the orderliness and predictability essential to any international business transaction.’112 In Mastrobuono v Shearson Lehman Hutton Inc the Supreme Court held that a choice-of-law provision in a contract "may reasonably be read as merely a substitute for the conflict-of-laws analysis that otherwise would determine what law to apply to disputes arising out of the contractual relationship".113 Those statements suggest that parties are far more at liberty to choose an applicable law at the terms in the Restatement (Second) and the UCC suggest.114 § 188 of the Restatement applies the ‘most significant relationship’ test if the parties to 51 a contract have failed to determine the applicable law to their agreement.115 As Born and Routledge though point out ‘there is little consistency or uniformity among contemporary US choice-of-law decisions involving contracts.’ 116 According to Symeonides’ survey in 2018, 24 states follow the ‘most significant relationship’ analysis of the Restatement (Second), 11 states still follow the traditional place of contracting and place of performance analysis to determine the applicable law to a cross border contract, and 5 states conduct a ‘significant contact’ analysis.117 In addition to the usual rules governing contractual choice of law, a New York statu- 52 tory provision expressly validates a contractual choice of New York law for non-personal contracts having a value of at least $250,000, even if there is no relationship between the contract and New York. In IRB-Brasil Resseguros v Inepar Investments,118 the New York Court of Appeals held that a court interpreting a contract where the parties have chosen New York law, pursuant to New York General Obligations Law section 5-1401, should 110 § 1-301 (a) Except as otherwise provided in this section, when a transaction bears a reasonable relation to this state and also 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. (b) In the absence of an agreement effective under subsection (a), and except as provided in subsection (c), [the Uniform Commercial Code] applies to transactions bearing an appropriate relation to this state. 111 UCC, § 1-301(b), § 1-105 seem to limit the choice of the parties in regard to the applicable law to their contract solely to the country of the seller or the country of the buyer. However, judicial construction of this term has generally permitted the parties to choose the law of a neutral third country (Fox, International Commercial Agreements (4th ed, Wolters Kluwer 2009) p. 131 n 12). 112 417 US 506 (1974) 506, 507. 113 514 US 52, 59, 115 S Ct 1212, 131 L Ed 2 d 76 (1995). 114 Fox, International Commercial Agreements (4th edn, Wolters Kluwer 2009) p. 132. 115 Restatement (2nd), § 188. Law Governing in Absence of Effective Choice by the Parties: (1) The rights and duties of the parties with respect to an issue in contract are determined by the local law of the state which, with respect to that issue, has the most significant relationship to the transaction and the parties under the principles stated in s 6. (2) In the absence of an effective choice of law by the parties (see s 187), the contacts to be taken into account in applying the principles of s 6 to determine the law applicable to an issue include: (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 domicil, residence, nationality, place of incorporation and place of business of the parties. These contacts are to be evaluated according to their relative importance with respect to the particular issue. (3) If the place of negotiating the contract and the place of performance are in the same state, the local law of this state will usually be applied, except as otherwise provided in ss 189–199 and 203. 116 Born and Rutledge, International Civil Litigation in United States Courts (5 th edn, 2011) pp. 784. 117 Symeon Symeonides ‘Choice of Law in the American Courts in 2018: Thirty-Second Annual Survey’ 67 (2019) The American Journal of Comparative Law 1, 36. 118 20 N.Y.3 d 310 (2012).

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apply New York substantive law to the contract. New York substantive law applies regardless of whether the parties explicitly excluded New York conflict-of-laws rules and even if a traditional conflict-of-laws analysis would result in the application of another jurisdiction’s substantive law. In Ministers & Missionaries Benefit Bd v Snow the Court of Appeals emphasized that where parties include a New York choice-of-law clause in a contract, such a provision demonstrates the parties' intent that courts not conduct a conflict-of-laws analysis and extended that holding to contracts that do not fall under General Obligations Law § 5-1401. The Court clarified that this rule obviates the application of both common-law conflict-of-laws principles and statutory choice-of-law directives, unless the parties expressly indicate otherwise.119 § 5-1401 Choice of law (1) The 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 fifty thousand dollars, including a transaction otherwise covered by subsection one of section 1-105 of the uniform commercial code, 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. This 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, or (c) to the extent provided to the contrary in subsection two of section 1-105 of the uniform commercial code. (2) Nothing contained in this section shall be construed to limit or deny the enforcement of any provision respecting choice of law in any other contract, agreement or undertaking.

ff) Common Law 53

Many Common Law jurisdictions still apply the old Common Law choice of law rules for contracts. Examples are Singapore,120 Canada, Australia (with limitations) and New Zealand.121 Contracts are governed by the law expressly or impliedly selected by the parties or, in the absence of choice, by the law of the country or system of law with the closest and most real connection with the transaction or the parties. 122 The parties’ choice must be bona fide and legal.123 Unlike under the Restatement (2nd) the chosen applicable law does not have to have any connection with the contract.124 The Singaporean Supreme Court has summarized the position as follows:125 There are three stages in determining the governing law of a contract. The first stage is to examine the contract itself to determine whether it states expressly what the governing law should be. In the absence of an express provision one moves to the second stage which is to see whether the intention of the parties as to the governing law can be inferred from the circumstances. If this cannot be done, the third stage is to determine with which system of law the contract has its most close and real connection. That system would be taken, objectively, as the governing or proper law of the contract. See Las Vegas Hilton Corp v Khoo Teng Hock Sunny [1997] 1 SLR 341 and Dicey & Morris on The Conflict of Laws (11th edn) at Rule 180.

Ministers & Missionaries Benefit Bd. v Snow, 26 N.Y.3 d 466, 473 (10 Sept 2015). Compare Singapore Law Watch ‘Ch.06 The Conflict of Laws’ E (2) https://www.singaporelawwatch.s g/About-Singapore-Law/Overview/ch-06-the-conflict-of-laws (accessed 24 June 2020). 121 See for Canada: JPMorgan Chase Bank v. Lanner (The) (F.C.A.), [2009] 4 F.C.R. 109; Australia: Reid Mortensen et al, Private international law in Australia (4th ed, Lexis Nexis, 2019) Ch 17; New Zealand: Anthony Angelo, Private International Law in New Zealand (Wolter Kluwer, Alphen aan den Rijn, 2012) at p 34. 122 Bonython v Commonwealth of Australia [1951] AC 201 (PC) at 219; Amin Rasheed Shipping Corporation v Kuwait Insurance Co [1984] AC 50. 123 Vita Food Products Inc v Unus Shipping Co Ltd [1939] AC 277 (PC) at 290. 124 See already Vita Food Products Inc v Unus Shipping Co Ltd [1939] AC 277 (PC) at 290. 125 Overseas Union Insurance Ltd v Turegum Insurance Co [2001] 3 SLR 330; [2001] SGHC 147, [82]; see also Peh Teck Quee v Bayerische Landesbank Girozentrale [2000] 1 SLR 148; [1999] SGCA 79, [12], [17]. 119

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c) Summary The parties’ explicit or implied choice of an applicable law to their contractual rela- 54 tionship is honored world-wide by courts as the paramount consideration in determining the domestic law applicable to their contract. The degree of connection between the chosen law and the parties required varies between jurisdictions. This requirement, however, which was abandoned by English law already in the 1930 s126 is antiquated in today’s globalized world where states make every effort to encourage their businesses to enter the international market as much as possible.

3. UNIDROIT Principles of International Commercial Contracts The UNIDROIT Principles are a contract soft law instrument. Like the CISG, they 55 contain contract rules which are neutral, i.e. contract concepts to be found in many, if not all, legal systems. The Principles make available an accepted interpretation aid where the CISG does not provide a comprehensive solution, either because a provision is vague or ambiguous or the CISG does not regulate the issue at all.127 Since the Principles are a soft law instrument parties are generally not able to choose them directly as the applicable law to their contract unless they have opted for international commercial arbitration as their dispute resolution mechanism.128 Courts have affirmed the use of the UNIDROIT principles as the governing law of a contractual relationship.129

4. Conclusion Since the parties’ choice of law applicable to their contract is generally honored by 56 almost all jurisdictions130 parties should not let this opportunity unused. Time should be spent on carefully considering which law will best suit the contractual relationship between the parties. Care should be taken to achieve synergy between the chosen forum and the applicable law. It will not be in the interest of the parties to choose an applicable law that contains legal concepts unknown in the chosen forum. For example, if the parties choose English law to be applicable to their contract stipulating Germany in their choice of court clause will potentially lead to issues in contract interpretation. For a German court to apply the parol evidence rule which is still very strictly adhered to by the English courts will take considerable effort since it is contrary to the basic understanding of German contract law the court is trained in. That said, businesses, especially small and medium sized enterprises, having their business in one of the CISG

Vita Food Products Inc v Unus Shipping Co Ltd [1939] AC 277 (PC) at 290. Scafom International BV v Lorraine Tubes SAS 19 June 2009, http://cisgw3.law.pace.edu/cases/9061 9b1.html; International Institute for the Unification of Private Law, UNIDROIT Principles of International Commercial Contracts 2016 (Rome 2016) at p. 5 https://www.unidroit.org/english/principles/contracts/ principles2016/principles2016-e.pdf (accessed 15 June 2020); Eckart Brödermann, UNIDROIT Principles of International Commercial Contracts (Wolters Kluwer, Alphen aan den Rijn, 2018) at [7]; Veneziano ‘UNIDROIT Principles and CISG: Change of Circumstances and Duty to Renegotiate according to the Belgian Supreme Court’ (2010) Rev dr unif 137. 128 See below para 59 ; The Chinese European Arbitration Centre (CEAC) Hamburg Arbitration Rules offer the choice of the UNIDROIT Principles as an explicit alternative to the choice of a state law (CEAC Rules, Article 35 – https://www.ceac-arbitration.com/fileadmin/documents/rules/ceac-rules-2012-en.pdf [accessed 20 June 2020]). 129 Paris Court d’appel (25 Feb 2020) No 17/18001; Court of Appeal of Rio Grande o Sul, Noridane Foods SA v Anexo Commercial Importação e Distribuiçã Ltda, Brazil No 70072362940 (14 Feb 2017), UNILEX; Court of Appeal State of Rio Grande do Sul, Voges Metalurgia Ltda v Inversiones Metalmecanicas I.C.A.-IMETAL , Brazil No 4-25.2016.8.21.7004192500 (30 March 2017) UNILEX. 130 Exceptions are stated above in n 52. 126

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member states might be better off not to attempt to agree on a choice of law clause since the default regime of the CISG will provide for best practice contract framework. 131 57 The CISG offers real advantages for parties of international sales contracts since it offers a neutral set of rules that were designed with international sales law in mind. Parties should consider those advantages carefully before deciding to exclude the CISG in their contract. Parties who have their respective businesses not in CISG member states should be careful how to incorporate the CISG into their contract. In particular, it has to be noted that under the Rome I Regulation and in most domestic private international laws, parties can only choose national laws as an applicable law to their contract. The CISG is as such not a national law but an international convention. Parties have generally the option to agree on a domestic law of a CISG member state or parties can copy the relevant provisions of the CISG into their contract. The latter is also applicable should parties wish to have the UNIDROIT Principles as the applicable law to their contract. However, as discussed in the next part of this Chapter, if parties agree to international arbitration as the method of dispute resolution, they will have more freedom in the choice of the applicable law to their contract.

III. Choice of Law in Arbitration 1. Introduction For parties who consider the municipal legal system to be too restrictive, and who wish to ensure that their choice of non-national rules of law is given effect,132 arbitration may offer a valuable alternative to litigation in domestic courts. Arbitration is in some jurisdictions the standard means by which commercial disputes are resolved. It is increasingly chosen as a means of resolving disputes even in those countries, such as the United Kingdom and Germany, in which civil litigation in commercial disputes has been common.133 Even areas, which traditionally have preferred litigation, such as the finance sector, have discovered arbitration to resolve disputes.134 Because international arbitration sits apart from domestic legal systems, the choice of law rules that apply to the merits in arbitral disputes are not (necessarily) the same as those applied by courts.135 59 Most importantly, parties who submit their dispute to arbitration generally enjoy a greater degree of party autonomy and flexibility than those parties who resolve it in 58

131 This of course only applies if the parties are not represented, see Petra Butler ‘40 Years Convention on the International Sale of Goods (CISG) – Even More Important Today than 40 Years Ago to Encourage Trade?’ ZVglRWiss 118 (2019) 231. 132 See for a discussion Born, International Commercial Arbitration Vol II (2 nd edn, Kluwer International 2014) pp. 2661 et seq. 133 Compare Markus Altenkirch & Malika Boussihmad ‘International Arbitration Statistics 2018 – Another busy year for Arbitral Institutions’ Global Arbitration Review (2 July 2019), and particular for the Commonwealth: Commonwealth Secretariat (Petra Butler & Dharshini Prasad), A Study of International Commercial Arbitration in the Commonwealth (Commonwealth Secretariat, London, 2020) Ch 3.3. 134 ICC Commission Report, Financial Institutions and International Arbitration (ICC, Paris, 2016); Matteo Zambelli, LIDW 2019: The Rise of Arbitration in Financial Services Disputes (7 May 2019) http://a rbitrationblog.kluwerarbitration.com/2019/05/08/lidw-2019-the-rise-of-arbitration-in-financial-services -disputes-7-may-2019/?doing_wp_cron=1593224830.2107489109039306640625 (accessed 20 June 2020). 135 See for a comprehensive discussion on the choice of law in international arbitration outlining the different approaches that have been taken by arbitral tribunals and outlining a neutral approach that takes account of the nature of international arbitration: Born, International Commercial Arbitration Vol II (2 nd edn, 2014) § 19.03.

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court.136 This is because international arbitration is founded on the very idea of contract. Arbitral tribunals, unlike courts, do not have a lex fori. That means, an arbitral tribunal does not have to apply automatically the substantive law of the seat of arbitration.137 The seat of arbitration, however, determines the lex arbitri. The lex arbitri in turn governs the procedural facets of international arbitration.138 Those aspects include the rules regarding the determination of the law applicable to the substance of the dispute. The greater degree of party autonomy can be seen, for example, in s 46 of the Arbitration Act 1996 (UK) which provides that the parties may agree to submit their dispute to ‘considerations’ other than the law of a country.139 Likewise Article 21(1) 1st sentence of the ICC Rules states that ‘[t]he parties shall be free to agree upon the rules of law to be applied by the arbitral tribunal to the merits of the dispute’. Parties who choose arbitration as their preferred mode of dispute resolution are, therefore, free to choose the CISG directly140 or soft law like the UNIDROIT Principles, as the law applicable to their contract.141 In case that parties do not stipulate an applicable legal regime governing their con- 60 tract, arbitrators, unlike judges, have a greater degree of freedom to determine the applicable substantive law. Again, the ICC Rules are a good example of the arbitrators’ scope. They state in Article 21(1) 2nd sentence: ‘In the absence of any such agreement, the arbitral tribunal shall apply the rules of law which it determines to be appropriate’.

2. CISG The CISG provides a neutral set of rules that were drafted with international business 61 in mind. Article 1 CISG, as discussed above,142 sets out when the CISG is applicable between parties of a sales contract. In regard to the application of the CISG by an arbitral tribunal three scenarios have to be distinguished. Firstly, and uncontroversial, commercial parties will benefit from the CISG’s neutrality by choosing the CISG as the governing law of their sale of goods contract. An arbitral tribunal will generally respect that choice.143 Unlike the Rome I Regulation or most national laws an arbitral tribunal can apply the CISG as the choice of the parties directly if it is either acting as amiable 136 See Tibor Várady, John Barceló III, Stefan Kröll & Arthur von Mehren, International Commercial Arbitration (6th ed, West Academic Publishing, St Paul, 2016) pp 1, 2; Gaillard, ‘The Role of the Arbitrator in Determining the Applicable Law’ in Newman and Hill (eds), The Leading Arbitrators’ Guide to International Arbitration (3rd edn, 2014) pp. 437, 442, 443. 137 Sapphire International Petroleums Limited v National Iranian Oil Company, Award, (1967) 35 ILR 136; Goldman ‘La lex mercatoria dans les contrats et l’arbitrage internationaux: réalité et perspectives’ [1979] J du Droit Intl 475, 491; Blackaby, Partasides, Redfern, Hunter, Redfern and Hunter on International Arbitration (6th edn, 2015) paras 3.217, 3.218. 138 Blackaby, Partasides, Redfern, Hunter, Redfern and Hunter on International Arbitration (n 140) paras 3.223 et seq. 139 See also, for example, Code de Procédure Civile (France), Article 1496(1); Zivilprozessordnung (Germany), § 1051; Arbitration Act 1996 (NZ), Sched 1, Article 28; International Arbitration Act 1974 (Aust), Sched 2, Article 28. 140 Note that the Rome I Regulation is not applicable to arbitration (Rome I Regulation, Article 1(2)(e)). 141 Compare ICC Case No. 7319 (1992) 120 (1993) J du Droit Intl 1018 where the arbitral tribunal was asked to apply ‘general principles of law applicable in Western Europe’; ICC Case No .3131 (26 October 1979) Pabalk Ticret Limited Sirketi v Norsolor SA (1984) IX YBCom Arb 109, 110 where the tribunal applied international lex mercatoria in circumstance where the parties made no choice in regard to the applicable law to the merits of the case; Gaillard ‘The Role of the Arbitrator in Determining the Applicable Law’ in Newman and Hill (eds), The Leading Arbitrators’ Guide to International Arbitration (3 rd edn, 2014) pp. 437, 452. 142 At para 13 et seq. 143 Note that issues of the application of mandatory rules or ordre public in regard to the application of the CISG should only arise in exceptional circumstances (potentially in regard to interest if the seat of the

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compositeur or if the lex arbitri permits or even requires the application of rules of law instead of (or in addition to) a particular domestic law.144 62 Secondly, the application of the CISG by an arbitral tribunal in an international sale of goods transaction is a valid choice, when the parties have not agreed on an applicable law governing their relationship.145 However, it is controversial in what circumstances an arbitral tribunal can apply the CISG. When an arbitral tribunal can and should apply the CISG, void of a parties’ agreement, will be discussed under (a). Lastly, the question arises what impact the parties’ choice of an applicable domestic law has on the application of the CISG by an arbitral tribunal. a) Parties Made no Choice in Regard to the Applicable Law 63

Some arbitration rules provide arbitrators with a wide discretion when the parties have not agreed to a domestic law applicable to their contract.146 Article 28(2) of the UNCITRAL Model Law narrows the arbitral tribunal’s discretion slightly by stating that ‘the arbitral tribunal shall apply the law determined by the conflict of laws rules which it considers applicable.’ aa) Article 1(1)(a) CISG

Article 1(1)(a) CISG which states that the CISG is applicable if parties have their businesses in different member states, can be understood as a unilateral choice of law rule which calls for the application of the CISG as part of the law of the forum.147 Alternatively, when concentrating on its effect the CISG may be characterized as an overriding mandatory law of the forum148 or as a self-executing treaty. 65 The prevailing view is that Article 1(1)(a) CISG does not apply in the context of arbitration.149 This view is based on the understanding that Article 1(1)(a) CISG is an international treaty and as such binds the states and its organs but only those. In other 64

arbitration is in an Islamic state) since the CISG was drafted with the aim to amalgamate the world’s legal regimes. 144 See for a full discussion in regard to the UNIDROIT principles in international arbitration: Scherer ‘Use of PICC in Arbitration’ in Vogenauer (ed) Commentary on the UNIDROIT Principles of International Commercial Contracts (2nd edn, 2015) pp. 110 et seq; Sung-Kyu Hong ‘The Analyzing on Application Cases of UNIDROIT Principles in International Commercial Arbitration’ 21 (2011) J. Arb. Stud. 131 (with English summary). 145 See Kröll, ‘Arbitration and the CISG’ in Schwenzer, Atamer, Butler (eds), Current Issue in CISG and Arbitration (2013) p. 59; Waincymer, ‘The CISG and International Commercial Arbitration: Promoting a Complimentary Relationship between Substance and Procedure’ in Baasch Andersen, Schroeter (eds), Sharing International Commercial Law across National Boundaries: Festschrift für Albert H Kritzer (2008) p. 582; see in regard to a quantitative analysis of the use of the CISG by arbitral tribunals: Mistelis, ‘CISG and Arbitration’ in Janssen, Meyer (eds), CISG Methodology (Sellier 2009) pp. 375 et seq.; Schmidt-Ahrendts, ‘CISG and Arbitration’ (2011) 59 Belgrade L Rev 211. 146 See, for example, SIAC Rules, Article 27.1, 2 nd sentence, LCIA Rules, Article 22.3, or ICC Rules Article 21(1) 2 nd sentence: ‘In the absence of any such agreement, the arbitral tribunal shall apply the rules of law which it determines to be appropriate’. 147 Schlechtriem, ‘Requirements of Application and Sphere of Applicability of the CISG’ (2005) 36 VUWLR 781 at 784; cf Schwenzer (n 7) pp. 19–20; cf Fawcett, Harris and Bridge (n 22) at [16.24]–[16.35], [16.104]. 148 Cf the House of Lords’ treatment of the Hague Visby Rules in The Hollandia [1983] 1 AC 565. 149 See Schwenzer/Hachem in Schwenzer (n 13) Intro to Articles 1-6 CISG, paras. 11 et seq.; cf Petrochilos, ‘Arbitration Conflict of Laws Rules and the 1980 International Sales Convention’ (1999) 52 Revue Hellenique de Droit International 191; Kröll, ‘Arbitration and the CISG’ in Schwenzer, Atamer, Butler (eds), Current Issue in CISG and Arbitration (2013) p. 59.

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words, Article 1(1)(a) CISG is a direction to the courts alone and not to international arbitral tribunals.150 In the author’s view the fact that the CISG is an international treaty does not preclude 66 an arbitral tribunal to apply Article 1(1)(a) CISG. In fact, in the author’s view the argument can be made that the application of Article 1(1)(a) CISG is wider in international arbitration than in litigation. In litigation Article 1(1)(a) CISG can only be applied if the forum state is a CISG member state. Arbitral tribunals, as indicated above, are generally not bound by the law of the forum state.151 Article 1 CISG, including Article 1(1)(a) CISG, as indicated above, acts, according 67 to one view, as a unilateral conflict of laws rule. Born states the use of international conflict of law rules to determine the applicable law in arbitration would ‘escape the peculiarities of national legal systems’ and would lead to ‘principally neutrality, efficiency, predictability and effective international enforcement’.152 The CISG, like international arbitration, provides uniform, neutral international principles for international sale of goods transactions that the business world desires. The CISG circumvents the issues that the choice of a national law transports into a contractual relationship since a national law reflects the social, economic, and, above all, the political environment of that particular country. The advantage that the application of the CISG to a contractual relationship brings is evidenced by the fact that 93 states, including most of the world largest economies, have ratified the CISG.153 For an international arbitral tribunal to apply Article 1(1)(a) CISG is coherent with the idea of applying an international conflict of laws rule. In addition, if one takes the view that the CISG is a self-executing international treaty 68 an international arbitral tribunal as part of the international legal order is bound by the CISG. As Born reminds154 Law is the basis for international arbitration, without which the arbitral process loses both its legitimacy and efficacy […].

The CISG, as part of the international legal order, is part of the law an international 69 arbitral tribunal cannot ignore if the parties to a sale of goods transactions have their places of businesses in different CISG member states. It should be remembered that parties can opt out of the CISG if they do not want the CISG to apply to their sale of goods transaction. The analysis does not ignore that under Article 26 of the Vienna Convention on the 70 Law of Treaties (1969) international treaties only bind contracting states as parties to these treaties.155 Businesses in CISG member states are part of the legal order of the member state and per se part of the international legal order. International human rights treaties, like the International Covenant on Civil and Political Rights (‘ICCPR’), are in accordance with Article 26 of the Vienna Convention (1969) also only applicable in the member states to the Convention. However, it is accepted that the rights enshrined 150 Kröll, ‘Arbitration and the CISG’ in Schwenzer, Atamer, Butler (eds), Current Issue in CISG and Arbitration (2013) pp. 59, 65; Janssen, Spilker ‘CISG in the World of International Commercial Arbitration’ (2013) 77 RabelsZ 131, 137. 151 See especially in regard to the CISG Janssen, Spilker, ‘CISG in the World of International Commercial Arbitration’ (2013) 77 RabelsZ 131, 138, 139. 152 Born, International Commercial Arbitration Vol II (2 nd edn, 2014) p. 2651. 153 http://www.uncitral.org/uncitral/en/uncitral_texts/sale_goods/1980CISG_status.html (last accessed 5 April 2015). 154 Born, International Commercial Arbitration Vol II (2 nd edn, 2014) p. 2657. 155 See in regard to the Article 26 Vienna Convention (1969) argument which underpins the general view that arbitral tribunals are not bound to apply Article 1(1)(a): Janssen, Spilker, ‘CISG in the World of International Commercial Arbitration’ (2013) 77 RabelsZ 131, 137.

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in the ICCPR are applicable irrespective of having been ratified by a state and that they are a bench mark in the international setting.156 The CISG has been ratified by 93 states157 and many states have amended their domestic contract law incorporating the provisions of the CISG or part of it.158 Even though the CISG has not reached the same level of acceptance as the ICCPR, i.e. can be said to be customary law,159 the CISG represents the most unified approach to the regulation of sale of goods transactions. It was conceptualized and drafted by representatives of all legal orders and from all parts of the world. Its Article 1 CISG, including Article 1(1)(a) CISG, therefore, represents what one would expect from an international conflict of laws rule. 71 The author’s view that Article 1(1)(a) CISG can and should be applied by an international arbitral tribunal if the parties have not made an explicit choice of the applicable law governing their contract is corroborated by two empirical studies. The studies found that international arbitral tribunals in actual fact already do apply Article 1(1)(a) CISG.160 The reason that arbitral tribunals probably ignore the prevailing view in the literature lies in the fact that Article 1(1)(a) CISG allows a tribunal to give effect to an implied consent by business parties which have their businesses in different CISG member states that the CISG will govern their sale of goods contract.161 The CISG, as already stated earlier, provides for uniform, neutral international principles for international sale of goods transactions which aligns with the intention of parties using international arbitration as their preferred mode of dispute resolution.

156 Compare Simmons, ‘Civil rights in international law: Compliance with aspects of the ‘International Bill of Rights’’ (2009) 16 Indiana Journal of Global Legal Studies 437. 157 http://www.uncitral.org/uncitral/en/uncitral_texts/sale_goods/1980CISG_status.html (last accessed 5 April 2015). 158 See in general in regard to the influence of the CISG in respect of the reform of sales law: Schwenzer, Hachem, ‘The CISG – Successes and Pitfalls’ (2009) 57 Am J Comp L 457, 461, 462. See for China Han, ‘The CISG and Modernisation of Chinese Contract Law’ Victoria University Law Review 67; for Germany Schlechtriem/ Schroeter, Internationales UN-Kaufrecht (6th edn, 2016) para. 19; for Eastern Europe Zoll, ‘The Impact of CISG on Polish Law’ (2007) 71 RabelsZ 81 et seq. In addition, in Africa, the sixteen member states of the Organisation for the Harmonisation of Business Law in Africa (l'Organisation pour l'harmonisation en Afrique du Droit des Affaires, OHADA) have adopted the Acte uniforme sur le droit commercial général (AUDCG) which is primarily based on the CISG. 159 For a law or practice to meet the requirements of customary law there must be duration, consistency and generality of practice, as well as opinio juris, see ICJ Statute Article 38(1)(b); Crawford, Brownlie’s Principles of International Law (2012) 24, 25. 160 Mistelis, ‘CISG and Arbitration’ in Janssen and Meyer (eds) CISG Methodology (2009) 375. In a study that surveyed 240 arbitral awards and 800 judgments in regard to their analysis of the CISG Article 1(1)(a) CISG was a point of discussion in nearly all awardsUnlike the Mistelis study, the study found that arbitral tribunals discussed Article 1(1)(a) CISG but ultimately applied the domestic law that had the closest connection to the contract. In most cases the tribunals held that the closest connection was to the forum.: Butler ‘CISG and Arbitration – A Fruitful Marriage’ (2014) 16 International Trade and Business Law, Special Volume for Professor Zeller’s 70th Birthday 322, 330 et seq. 161 In the empirical study conducted by the author the parties in only five awards (out of the 240 awards analyzed) explicitly excluded the CISG: Butler, ‘CISG and Arbitration – A Fruitful Marriage’ (2014) 16 International Trade and Business Law, Special Volume for Professor Zeller’s 70 th Birthday 322, 331. In fact, in 41% of cases the parties had made no stipulation of the applicable law (Butler, ‘The Use of Foreign Judgments in New Zealand Courts’ Private Law, national-global-comparative, FS für Ingeborg Schwenzer zum 60. Geburtstag (2011)). See also Blackaby, Partasides, Redfern, Hunter, Redfern and Hunter on International Arbitration (5th edn, 2009) para. 3.206 in regard to tribunals practice to determine the implied choice of the parties in the absence of an express choice.

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bb) Article 1(1)(b) CISG It is uncontroversial that Article 1(1)(b) CISG can be applied by an international 72 arbitral tribunal.162 Article 1(1)(b) CISG directs the application of the CISG when the rules of the private international law of the forum lead to the application of the law of a CISG member state which incorporates the CISG. Article 1(1)(b) CISG is not a choice of law rule. It gives the CISG domestic law status and prevents any possible renvoi. The direction incorporated in Article 1(1)(b) CISG to an arbitral tribunal is therefore the same as for any court: if the rules of private international law applied by the arbitral tribunal lead to the law of a CISG member state the CISG will be applicable.163 cc) CISG as Rules of Law In addition, to the analysis of Articles 1(1)(a) and (b) CISG, as indicated earlier, 73 many arbitration rules give the arbitral tribunal a mandate to choose the applicable law by allowing the direct choice of ‘rules of law’ as the applicable law the tribunal considers ‘appropriate’.164 Therefore, even if one does not follow the analysis under aa. for the reasons set out under aa. a tribunal given that mandate should apply the CISG directly.165 b) Parties Have Chosen an Applicable Domestic Law Due to the wide mandate some arbitration laws and rules grant the arbitral tribunals, 74 the question arises whether the arbitral tribunal is free to apply the CISG despite an explicit choice of a domestic law. If the parties have chosen a domestic law of a CISG member state the CISG is applicable as part of the domestic law of the country (Article 1(1)(b) CISG) unless the parties have explicitly excluded it.166 If the parties have chosen the domestic law of a CISG non-member state the choice generally means that the parties have excluded the applicability of the CISG.167 An arbitral tribunal can apply the CISG despite the parties have chosen the domestic law of a non-member state if the tribunal either has the mandate to act ex aequo et bono. To apply the CISG despite the parties’ choice of the domestic law of a non-member state a tribunal would need to find that a gap in the applicable domestic law which could not be closed from within the domestic law.

162 Petrochilos, ‘Arbitration Conflict of Laws Rules and the 1980 International Sales Convention’ (1999) 52 Revue Hellenique de Droit International 191; Kröll ‘Arbitration and the CISG’ in Schwenzer, Atamer, Butler (eds), Current Issue in CISG and Arbitration (2013) p. 59. 163 See in regard to the application of Article 1(1)(b) CISG above paras 19 et seq. and Janssen, Spilker, ‘CISG in the World of International Commercial Arbitration’ (2013) 77 RabelsZ 131, 139 who also discusses whether Article 95 CISG binds the arbitral tribunal. 164 Note that in regard to Article 28(2) Model Law and the derived § 1051 Zivilprozessordnung (German Code of Civil Procedure) it is controversial whether the arbitral tribunal apply rules of law only if the parties explicitly or impliedly agreed to them – see for a discussion: Cordero-Moss, ‘Can an Arbitral Tribunal Disregard the Choice of Law Made by the Parties’ (2005) 1 Stockholm International Arbitration Review 1, 20; Scherer ‘Use of PICC in Arbitration’ in Vogenauer (ed), Commentary on the UNIDROIT Principles of International Commercial Contracts (2nd edn, 2015) para. 4 (p. 114) who cites in n 10 ICC Case No. 13450 (2014) 141 Clunet 193 (experts) where the arbitral tribunal applied the CISG together with the UNIDROIT Principles based on Article 28(2) UNCITRAL Model Law. 165 See Janssen, Spilker, ‘CISG in the World of International Commercial Arbitration’ (2013) 77 RabelsZ 131, 141. 166 See in regard to the degree of explicitness required Schlechtriem/Butler, UN International Sale of Goods (2009) para. 1.6. 167 Schlechtriem/ Butler, UN International Sale of Goods (2009) para. 1.6.1.

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c) Summary 75

The CISG does not (yet) meet the requirements of customary international law. However, the CISG has been ratified by nearly half of all states and is one of the most successful international commercial conventions. Arbitral tribunals should apply the CISG if the parties have not chosen an applicable domestic law unless there is a clear indication that the parties would not apply the CISG or the lex arbitri requires a choice of a national law. The CISG provides a neutral set of rules that were drafted with international business in mind the presumption therefore has to be that, unless there is an indication to the contrary, the CISG will adequately regulate the contractual relationship between the parties.

3. UNIDROIT Principles of International Commercial Contracts 76

As discussed above under para 55, the UNIDROIT Principles make a useful addition to the CISG providing for solutions where a gap in the CISG exists. However, unlike the CISG the UNIDROIT Principles are soft law. ‘Law’ that lacks the legitimacy of municipal law or of international conventions.168 Therefore, an arbitral tribunal can apply the UNIDROIT Principles if it is either acting as amiable compositeur or if the lex arbitri permits or even requires the application of rules of law instead of (or in addition to) a particular domestic law.169

4. Parties Have Not Stipulated Applicable Substantive Law Parties who do not incorporate a choice of law clause in their contract generally do not provide for the private international law rules to determine the applicable domestic law in their contract either. 78 In the absence of the parties’ choice of a substantive law governing their contract (and/or choice of private international law rules) the European Convention on International Commercial Arbitration (1961) and some national arbitration laws provide a framework for the arbitral tribunal to determine the applicable law.170 The former provides in Article VII(1) that ‘failing any indication by the parties as to the applicable law, the arbitrators shall apply the proper law under the rule of conflict that the arbitrators deem applicable.’ Nearly identical wording can be found in s 28(2) of the First Schedule 77

168 See in regard to the legitimacy of rules, especially in light of the CISG and soft law: Spagnolo, ‘The CISG as Soft Law and Choice of Law: Goju Ryu?’ in DiMatteo (ed), International Sales Law – A Global Challenge (2014) pp. 154, 157. 169 See for a full discussion on the use of UNIDROIT Principles in international arbitration: Scherer, ‘Use of PICC in Arbitration’ in Vogenauer (ed), Commentary on the UNIDROIT Principles of International Commercial Contracts (2nd edn, 2015) pp. 110 et seq.; see more generally Gaillard, ‘The Role of the Arbitrator in Determining the Applicable Law’ in Newman and Hill (eds), The Leading Arbitrators’ Guide to International Arbitration (3rd edn, 2014) pp. 437, 460 et seq. who points out that ‘[t]he application of transnational rules of law to the merits of a dispute can be particularly helpful as a means to overcome a situation of stalemate in cases where two or more legal systems are equally closely connected to the dispute, but lead to significantly different results’ [at 461]. See also Brödermann, UNIDROIT Principles of International Commercial Contracts (Wolters Kluwer, Alphen aan den Rijn, 2018) at p 13 [3] noting that the Chinese European Arbitration Centre (CEAC) Hamburg Arbitration Rules offer the choice of the UNIDROIT Principles as an explicit alternative to the choice of a state law (CEAC Rules, Article 35 – https://www.ceac-arbitration.com/fileadmin/documents/rules/ceac-rules-2012-en.pdf [accessed 20 June 2020]). 170 See Gaillard, ‘The Role of the Arbitrator in Determining the Applicable Law’ in Newman and Hill (eds), The Leading Arbitrators’ Guide to International Arbitration (3 rd edn, 2014) pp 437,454 et seq. in regard to an overview of the different methods of determining the applicable law in regard to the merits of the dispute in international arbitration; Born, International Commercial Arbitration Vol II (2 nd edn, 2014) p. 2656.

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of the New Zealand Arbitration Act 1996, however drawing on the UNCITRAL Model Law rather than the European Convention.171 The section allows the arbitral tribunal ‘to apply the law determined by the conflict of laws rules which it [the tribunal] considers applicable.’ The New York approach to determining the applicable substantive law is an ‘interest analysis’, which seeks to apply the law of the jurisdiction with the greatest interest in the outcome of the dispute.172 This analysis will consider the domicile of the parties, the place of execution and the place of performance of the contract among other factors.173 § 1051(2) of the German Civil Procedure Code (ZPO) provides, on the other hand, a choice of law rule: ‘Failing any designation by the parties, the arbitral tribunal shall apply the law of the State with which the subject matter of the proceedings is most closely connected’.174 It has to be noted that the provisions do not compel the arbitrator to apply particular choice of law rules, like the ones of the seat of the arbitration. However, those provisions make it equally clear that the arbitral tribunal cannot just apply substantive law directly but has to apply a choice of law analysis first. Arbitrators may even dispense with national choice of law rules, relying instead on a 79 ‘direct’ choice of law.175 The arbitrators’ recognized broad discretion in regard to choice of law rules can 80 be explained by the obligation of contracting states under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (‘New York Convention’) to recognize arbitral awards without engaging in any substantive review of the merits of the award.176 Unfortunately, as Born points out, however, the choice of the applicable law in 81 international arbitration is currently in a state of flux.177

171 UNCITRAL Model Law, Article 28(2): ‘Failing any designation by the parties, the arbitral tribunal shall apply the law determined by the conflict of laws rules which it considers applicable.’. 172 See Intercontinental Planning Ltd v Daystrom Inc 24 NY 2 d 372, 382 (1969); JSO Associates, Inc. v Price, 2008 N.Y. Misc. LEXIS 8844 (21 March 2008). 173 See for example, Intercontinental Planning Ltd v Daystrom Inc 24 NY 2 d 372, 384 (1969); Miller v. Global Jewish Assistance & Relief Network, 2008 N.Y. Misc. LEXIS 7589 (9 Jan 2008). 174 See also Swiss Private International Law Statue 1987, Article 187(1): ‘The arbitral tribunal shall decide the case according to the rules of law chosen by the parties or, in the absence thereof, according to the rules of law with which the case has the closest connection.’. 175 See Article 1496 of the French Code of Civil Procedure provides that the arbitral tribunal may resolve the dispute ‘in accordance with the rules of law [it] considers appropriate’; Spanish Arbitration Act 2003 (as amended 2011), Article 34(2): ‘Failing any designation by the parties of the applicable law, the arbitrators shall apply the law they deem appropriate’. SIAC, Article 27(2): ‘The Tribunal shall apply the rules of law designated by the parties as applicable to the substance of the dispute. Failing such designation by the parties, the Tribunal shall apply the law which it determines to be appropriate’. Indian Arbitration and Conciliation Act 1996, Article 28(1)(b)(iii):’apply the rules of law it considers to be appropriate given the circumstances surrounding the dispute’ and also LCIA Rules, Article 22(3), ICC Rules, Article 21(1)–21(2) invite the tribunal to have regard to trade usages. See Fawcett, Harris and Bridge (n 22) p. 687; Schwenzer/Hachem in Schwenzer (n 13) Intro to Articles 1–6 CISG, para. 13; Mistelis in Kröll, Mistelis and Perales Viscasillas (n 12) Article 1 CISG, paras 18, 19. 176 Born, International Commercial Arbitration Vol II (2 nd edn, 2014) p. 2620. 177 Born, International Commercial Arbitration Vol II (2 nd edn, 2014) p. 2656; see for a comprehensive discussion Id. § 19.03; Qiu, ‘A Comparative Analysis of the Approaches used to determine the Four Laws of Commercial Arbitration’, in 86 (2020) The International Journal of Arbitration, Mediation and Dispute Management, p. 50; Silberman, Ferrari ‘Getting to the law applicable to the merits in international arbitration and the consequences of getting it wrong’ in Ferrari & Kröll (eds) Conflict of Laws in International Arbitration (Sellier-de Gruyter, 2011) 257.

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IV. Parties Included Choice of Law Clause in their Contract – Limits [P]rinciples of private international law to be consulted in order to find the law applicable are those relating to freedom of choice, by virtue of which, in an agreement which is international in character, the law expressly chosen by the parties must be applied first.178

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When the parties have chosen a law applicable to their contractual relationship three questions arise: firstly, is the agreement valid and enforceable?; secondly, if the agreement is valid and enforceable, do any exceptions exist; and lastly, how has the agreement to be interpreted? The following will discuss mandatory rules and ordre public which pose a limit to party autonomy and can impact on the validity of the choice of law agreement and/or limit the application of the chosen law by the forum court or international arbitral tribunal.

1. Mandatory rules 83

Mandatory rules and public policy can narrow the parties’ choice. Mandatory rules have been defined as imperative rules of law that cannot be excluded by agreement of the parties.179 Mandatory rules of law are seen to pursue public interests and perceived in a manner to override the interests of private parties. a) Cross Border Litigation

84

Mandatory rules are generally seen to include two groups, broadly defined, of norms: one dealing with protection of certain contract parties, and another expressing the fundamental policies of the enacting states.180 Many of the rules in the latter group embody the public regulatory and economic policies of the enacting state, including, for instance, competition law and securities regulation. It is uncontroversial that courts can apply the mandatory rules of the forum country to a contract.181 178

165.

Saudi Arabia v Arabian Am. Oil Co., (Aramco), Ad Hoc Award (23 August 1958), (1963) 27 ILR 117,

179 For example, Rome I Regulation, Article 9(1): ‘Overriding mandatory provisions are provisions the respect for which is regarded as crucial by a country for safeguarding its public interests, such as its political, social or economic organisation, to such an extent that they are applicable to any situation falling within their scope, irrespective of the law otherwise applicable to the contract under this Regulation’. § 1-301 of the UCC provides that a choice of law will be disregarded where it violates a ‘fundamental’ policy of the state whose law otherwise would govern. See Buxbaum, ‘Mandatory Rules in Civil Litigation: Status of the Doctrine Post-Globalization’ (2007) 18 Am Rev Int’l Arb 21 who points out that lot has been written on what constitutes mandatory rules. Article 1.4 of the 2016 UNIDROIT Principles of International Commercial Contracts (entitled ‘Mandatory character of the provisions’) provides: “Nothing in these Principles shall restrict the application of mandatory rules, whether of national, international or supranational origin, which are applicable in accordance with the relevant rules of private international law”; Fazilatfar, Overriding Mandatory Rules in International Commercial Arbitration (Edward Elgar, 2019) p 1; compare for breach of international law as forming part of the public policy exception: Kuwait Airways Corp v Iraqi Airways Co (Nos 4 and 5) [2002] UKHL 19, [2002] AC 883 at [26] et seq. (per Lord Nicholls); [114] (per Lord Steyn). 180 For further differentiation, see Blessing, ‘Impact Of The Extraterritorial Application Of Mandatory Rules On International Contracts’ (1999) p. 14, 15 sketching out the following categories of mandatory rules: (1) those protecting monetary interests of the enacting state (e.g. exchange control regulations); (ii) those of a fiscal nature (e.g. customs regulations); (iii) those safeguarding economic interests of the enacting state (e.g. import and export restrictions); (iv) those protecting the welfare of certain individuals (e.g. rules protecting the weaker contract party); (v) those serving political or military interests (e.g. embargoes); (vi) those aimed at protecting environmental welfare; and (vii) those protecting open markets (e.g. competition laws). 181 Compare Rome I Regulation, Article 9(2): ‘Nothing in this Regulation shall restrict the application of the overriding mandatory provisions of the law of the forum’; Derains, ‘Public Policy and the Law

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It is, however, controversial in how far courts have to take account of mandatory rules 85 of non-forum states connected to the contract, such as the lex contractus or the rules of a third country with a connection to the contract.182 Some international conventions, covering particular substantive areas, permit the courts of signatory states to apply foreign mandatory law. These include the Hague Conventions on Agency183 and Trusts,184 as well as Article VIII(2)(b) of the International Monetary Fund Agreement 1945, which effectively requires member states to honor the mandatory exchange control regulations of other members.185 Some conventions and national laws contain special choice-of-law rules which allow 86 the application of foreign mandatory rules,186 often in order to protect weaker parties in particular kinds of contractual relationships, such as employees or distributors. If a legal systems lacks such legislation, a general comity jurisprudence might be in place that permits the application of foreign law.187 Where the foreign mandatory rule in question is part of the chosen domestic law by the parties a court may turn to the general principles of private international law favoring party autonomy, and enforce the rule on that basis.188

Applicable to the Dispute in International Arbitration’ in Sanders (ed), Comparative Arbitration Practice and Public Policy in Arbitration (ICCA Congress Series No 3, 1987) 228. 182 See for a discussion: Medic, ‘Lex Contractus and Overriding Mandatory Rules: What can we learn from the CJEU Case Law’ 2016 The Legal Challenges of the World, 43. 183 Convention of 14 March 1978 on the Law Applicable to Agency, Article 16: ‘In the application of this Convention, effect may be given to the mandatory rules of any State with which the situation has a significant connection, if and in so far as, under the law of that State, those rules must be applied whatever the law specified by its choice of law rules’. 184 Convention of 1 July 1985 on the Law Applicable to Trusts and on their Recognition, Article: ‘If another State has a sufficiently close connection with a case then, in exceptional circumstances, effect may also be given to rules of that State [which must be applied even to international situations, irrespective of rules of conflict of laws]’. 185 Agreement of the International Monetary Fund, Article VIII(2)(b) ‘Exchange contracts which involve the currency of any member and which are contrary to the exchange control regulations of that member maintained or imposed consistently with this Agreement shall be unenforceable in the territories of any member.’. 186 Rome I Regulation, Article 9(3): ‘Effect may be given to the overriding mandatory provisions of the law of the country where the obligations arising out of the contract have to be or have been performed, in so far as those overriding mandatory provisions render the performance of the contract unlawful. In considering whether to give effect to those provisions, regard shall be had to their nature and purpose and to the consequences of their application or non-application’; Swiss Private International Law Code, Article 19(1). 187 Restatement (Second) of Conflict of Laws § 187(2)(b), suggesting a practice of such application under US law; see also Fawcett ‘Evasion of Law and Mandatory Rules in Private International Law’ (1990) 49 CLJ 44, 55: ‘The only basis for a national interest [in upholding a foreign law] is that of considerations of comity of nations’. 188 The general question whether mandatory rules should be applied as part of the lex causae is debated among commentators. Compare Baade, ‘The Operation of Foreign Public Law’ (1995) 30 Tex Int’l LJ 429, 462 (citing the 1975 resolution of the Institut de Droit International and describing ‘an emerging consensus in favor of the general application (to the extent compatible with forum public policy) of foreign public law as an incidental but determinative element of the lex causae’) and Vischer, ‘General Course on Private International Law’ (1992) 232 Recueil des Cours 9, 150, 166–168: discussing the debate over the ‘integral application of the lex causae, irrespective of the nature of the foreign rules in question’; with Voser, ‘Mandatory Rules of Law as a Limitation on the Law Applicable in International Commercial Arbitration’ (1996) 7 Am Rev Int’l Arb 319, 323: supporting the counter-position: mandatory rules of the lex causae should not automatically be applied, because that application would ‘ha[ve] the effect of granting the interests of the state which provides the lex causae an unjustified primary position over other states’ interests’.

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b) International Arbitration 87

Since party autonomy is the core principle of (international) arbitration an arbitral tribunal will disregard the parties’ choice only in certain limited and highly exceptional circumstances. Public policy principles, i.e. mandatory rules, might set limits to the parties’ free choice. The international arbitrator is frequently confronted with the difficult tasks to adjudicate a clash between public interests of a state and the legitimate interests of the parties.189 According to Barraclough and Waincymer it is uniformly accepted that ‘arbitrators must apply any mandatory rule that reflects transnational public policy in order to maintain minimum standards of conduct and behaviour in international commercial relations.’190 As a Cour d’appel put it:191 [t]he security of international commercial and financial relations requires the recognition of a public policy that is, if not universal, at least common to the various legal systems.

Therefore, if a law or rule fulfils the requirement of transnational public policy it will be mandatory law notwithstanding which law the arbitral tribunal is analyzing (i.e. whether the tribunal is applying the lex contractus, the law of the seller in a sales contract192 or the law of the seat of arbitration).193 89 Transnational public policy reflects the fundamental values, the basic ethical standards, and the enduring moral consensus of the international business community.194 It represents values that are superior to those of particular national systems, and arbitrators owe a paramount duty to the international community to refuse to apply any mandatory rules that conflict with transnational public policy.195 Examples are human rights (such as opposition to racial, sexual and religious discrimination and slavery), 88

189 Nobumichi Teramura, Ex Aequo et Bono as a Response to the ‘Over-Judicialisation’ of International Commercial Arbitration (Kluwer Law International, 2020) Ch 2.2 & Ch 5.2. 190 Barraclough, Waincymer, ‘Mandatory Rules of Law in International Commercial Arbitration’ (2005) 6 Melbourne Journal of International Law 20. However, see Born in International Commercial Arbitration Vol II (2 nd edn, 2014) pp. 2716, 2717 who cautions in regard to the use of transnational public policy since it has the inherent risk of contravening the ratio of international arbitration: ‘to provide a predictable, objective, neutral and legally binding resolution of the parties dispute.’ However, Born states that inter alia the prohibition to ‘supplying arms to terrorist groups’ is accepted transnational public policy. See also Teramura, Ex Aequo et Bono as a Response to the ‘Over-Judicialisation’ of International Commercial Arbitration (Kluwer Law International, 2020) Ch 6; Chen, ‘Empirical Research on Mandatory Rules Theory in International Commercial Arbitration’, 19 International Trade and Business Law Review, p 245. 191 As cited (in translation) in Lalive, ‘Transnational (or Truly International) Public Policy and International Arbitration’ in Sanders (ed), Comparative Arbitration Practice and Public Policy in Arbitration (1987) pp. 257, 278. 192 Empirical research suggests that arbitral tribunals are reluctant to apply mandatory rules that are foreign to the lex contractus and that courts do not base their decisions in set aside and annulment proceedings (Chen [n 193] 245, 263, 264 et seq.). Please note, however, that arbitral tribunals have applied the mandatory rules of a third state if there was a strong connection to the facts (despite the fact that the parties had chosen a different applicable law): Final Award ICC Case No 8528, (2000) XXV YBCom Arb 341, 348; Born, International Commercial Arbitration (2nd edn, 2014) pp. 2712 et seq. 193 Note that Blessing argues that mandatory laws of the seat should never be taken into account by an arbitral tribunal (Blessing, ‘Impact of the Extraterritorial Application of Mandatory Rules of Law on International Contracts’ in Vogt (ed) Swiss Commercial Law Series Vol 9 (1999). Tribunals have, however, applied the mandatory rules of the seat and some authors have also favoured the application of mandatory rules of the seat: Mayer, ‘Mandatory Rules of Law in International Arbitration’ (1986) 2 Arb Int’l 274, 275 et seq.; Noussia, ‘Punitive Damages and Arbitration: Panacea or Curse? (2010) 27 J Int’l Arb 277, 284; Born, International Commercial Arbitration (2nd edn, 2014) pp. 2709, 2710. 194 Lalive, ‘Transnational (or Truly International) Public Policy and International Arbitration’ in Sanders (ed), Comparative Arbitration Practice and Public Policy in Arbitration (1987) pp. 257, 285, 286. 195 It is accepted that not total unanimity among the world’s nations is required for it to reflect transnational public policy Gaillard and Savage (eds), Fouchard, Gaillard, Goldman on International Commercial Arbitration (1999) p. 863.

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bonos mores (including opposition to corruption, terrorism, genocide and pedophilia), fair hearing and due process.196

2. Ordre Public Whether there is a distinction between ordre public and mandatory rules is probably 90 a slightly academic discussion.197 From a private international law perspective the notion of ordre public refers even more to the underlying values of a given society and its legal system. The question arises in regard to the chosen domestic law as lex contractus. In litigation under the domestic law’s ordre public means that courts will not enforce contracts the performance of which would contravene fundamental moral principles, or which would offend against some other overriding public interest.198 § 187(2)(b) of the Restatement (Second) indicates that a public policy will only override the parties’ chosen law if the public policy is of the state whose law is applicable to the contract but for the choice of law clause and which has a ‘materially greater interest’ than the state whose law has been chosen.199 Rules that have been held to constitute public policy include labour relation rules or rules concerning set-off.200 § 1-301 UCC (2001) states that a law will be disregarded where it violates a fundamental policy of the state whose law would be applicable but for the choice of law clause. Unlike the Restatement (Second) the UCC does not require that the state has a ‘materially greater interest’.201 In Lehman Brothers v Minmetals202 the issue arose under New York law ‘whether a 91 state with no connection to either the parties or the transactions could apply its own law, consonant with the Full Faith and Credit Clause, when doing so would violate an important public policy of a more interested state.’203 The Court held that § 5-1401 New York General Obligations Law204 clearly stated that the parties’ choice of law was paramount 196 Gaillard and Savage (eds), Fouchard, Gaillard, Goldman on International Commercial Arbitration (1999) p. 853. 197 See Torremans (ed), Cheshire, North & Fawcett: Private International Law (15 th edn, 2017) who distinguish between ordre public as a Civil Law doctrine and the English doctrine that withholds all recognition from any foreign law or judgment which is repugnant to the distinctive policy of English law, and it refuses to enforce any foreign law which is of a penal, revenue or other public nature at pp 752, 753. 198 Scarman J in Re Fuld’s Estate (No 3) [1968] P 675, 698; Kuwait Airways Corpn v Iraqui Airways Co (Nos 4 and 5) [2002] UKHL 19 at [16] per Lord Nicholls), [2002] 2 AC 883; Forde, ‘The ‘Ordre Public’ Exception and Adjudicative Jurisdiction Conventions’ (1980) 29 Int’l & Comp LQ 259, 259. 199 Prod Res Group, LLC. V Oberman, No 03 Civ 5366, 2003 WL 22350939, at *8 (S.D.N.Y. August 27, 2003); Bus Incentives Co v Sony Corp. of Am., 397 F.Supp. 63, 67 (S.D.N.Y.1975) (citing Restatement (Second) Conflict of Laws, § 187); see also SG Cowen Secs. Corp. v Messih, No. 00 Civ. 3228, 2000 WL 633434, at *3 (S.D.N.Y. May 17, 2000), aff 'd 224 F.3 d 79 (2 d Cir. 2000) (applying California law despite parties' agreement to New York law); Caribbean Wholesales & Serv. Corp. v U.S. JVC Corp., No. 93 Civ. 8197, 1996 WL 140251, at *2–*3 (S.D.N.Y. March 27, 1996) (applying Puerto Rico law despite parties' agreement to New York law); Triad Fin. Establishment v Tumpane Co., 611 F.Supp. 157, 162 (N.D.N.Y.1985) (applying Saudi Arabian law to certain issues despite parties' agreement to New York law). 200 Born and Rutledge, International Civil Litigation in United States Courts (5 th edn, 2011) p. 761. 201 Born and Rutledge, International Civil Litigation in United States Courts (5 th edn, 2011) p. 761. 202 Lehman Brothers Commercial Corporation v Minmetals International Non-Ferrous Metals Trading Company 179 F Supp 2 d 118 (S.D.N.Y. 2000). 203 Lehman Brothers Commercial Corporation v Minmetals International Non-Ferrous Metals Trading Company 179 F Supp 2 d 118 (S.D.N.Y. 2000) 137. 204 ‘The 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 fifty thousand dollars, including a transaction otherwise covered by subsection one of section 1-105 of the uniform commercial code, 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. This section shall not apply to any contract, agreement or undertaking (a) for labor or personal services,

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and the Court did not need to consider whether the contract violated Chinese public policy. However, the Court did point out that even though the contract was valid, and the chosen New York law applied to it meant the contract was enforceable. The Court pointed out that ‘[a] contract that is illegal in its place of performance is unenforceable in New York if the parties entered into the contract with a view to violate the laws of that other jurisdiction’.205 92 Whether an arbitral tribunal has to take the ordre public into account might depend on the choice of law clause, i.e. whether the parties when agreeing, for example, to English law as the lex contractus also agreed to the applicability of the entire English law. Born argues that choice of law clauses like ‘This contract shall be interpreted in accordance with the laws of State X’ or ‘This contract shall be governed by the laws of State X’ only encompass the chosen law as rules of contract interpretation, performance and validity.206

E. Cross References & Additional Commentary 93

See, with regard to the choice of jurisdiction → Chapter 6 (Sieg Eiselen).

F. Matters to Consider I. Interpretation of the Choice of Law Clause A court or arbitral tribunal will interpret a choice of law clause, like any other contractual provision. The contractual language the parties used to set out their agreement on the applicable law will be the primary source for the court or tribunal to interpret the choice of law clause. It is generally accepted that a choice of forum clause has no determinative effect on the interpretation of the choice of law clause. 207 95 Often the parties’ intention in regard to the scope of the choice of law clause will have to be established. The starting point for this inquiry has to be the language of the choice of law clause. The language of a choice of law clause stating ‘This contract shall be governed by and construed in accordance with the laws of Vindobona’ might lead to a different conclusion in regard to scope than a clause stating ‘This contract shall be governed in all respects by the laws of Vindobona.’ The former invites the court or tribunal to ascertain whether questions of validity or capacity are covered by the choice of law clause. The latter suggests on the other hand that all matters of contract law are covered by the clause. The question arising for a tribunal or court under the latter clause is whether that clause also covers certain matters of tort law, like product liability. Related to the question of scope in regard to subject matter is the question in regard to scope whether the choice of law clause refers to the whole of the law of a 94

(b) relating to any transaction for personal, family or household services, or (c) to the extent provided to the contrary in subsection two of section 1-105 of the uniform commercial code. 2. Nothing contained in this section shall be construed to limit or deny the enforcement of any provision respecting choice of law in any other contract, agreement or undertaking.’. 205 Lehman Brothers Commercial Corporation v Minmetals International Non-Ferrous Metals Trading Company 179 F Supp 2 d 118 (S.D.N.Y. 2000) 138. 206 Born, International Commercial Arbitration (2 nd edn, 2014) p. 2708 citing a number of ICC awards. 207 Born and Rutledge, International Civil Litigation in United States Courts (5 th edn, 2011) Chap. 8, p. 762.

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state, i.e. including its choice of law rules, or just the substantive law. The Restatement (Second) states that unless there is evidence that the parties have agreed otherwise, the presumption is that they have agreed to the application of the substantive law only,208 avoiding a renvoi. Article 20 of the Rome I Regulation clarifies that under the Regulation the rules applicable are the rules excluding the rules of private international law of the applicable domestic law. Whether the parties wanted to regulate the applicable law in regard to procedure, statutes of limitation, or burden of proof (the latter two are in some jurisdictions matters of procedure rather than substantive law) with their choice of law agreement will often also be a matter of interpretation for the tribunal or court. 209

II. Procedural/Substantive Question As mentioned above the starting point for deciding whether an issue is deemed 96 procedural and therefore the law of the forum or the lex arbitri is applicable or whether it is deemed substantial is the choice of law clause of the parties and its interpretation. In the absence of a choice of law clause or if an intention of the parties cannot be ascertained the traditional Common Law approach in regard to whether an issue is deemed procedural or substantive is that the distinction depends on whether the matter goes to the existence and content of the right, or to its enforceability: the former is substantive, the latter is procedural.210 However, that approach has been replaced with a more functional approach. The approach inquires whether the application of foreign law in the case would cause undue inconvenience to the administration and machinery of justice in the court of the forum.211 The functional approach is also favoured in other jurisdictions, like Germany, since it allows for appropriate and fair results.212

III. Burden of Proof The starting point for inquiry is again the choice of law clause between the parties.213 97 In the absence of a choice of law clause or if the intention of the parties in regard to burden of proof cannot be ascertained it depends on the classification whether the issue is a question of law or fact.214 The effects of a classification as a question of fact or law, respectively, are threefold: Firstly, it depends on this classification who has to introduce a certain matter to the proceedings. Facts have to be pleaded by the parties, while questions of law have to be considered by the court ex officio. Secondly, the court will take notice of questions of law whereas questions of fact have to be proven by the parties. The obligation to prove certain facts lies normally with the party to which these facts are

Restatement (Second) Conflict of Laws, § 187(3). Restatement (Second) Conflict of Laws, §§ 122–143 which suggests that some issues will generally not be subject to the parties’ chosen law unless there is clear evidence to the contrary. 210 Huber v Steiner 2 Bing NC 202, 132 ER 80; Star City Pty Ltd v Tan Hong Woon [2002] 2 SLR 22. 211 Tolofson v Jensen [1994] 3 SCR 1022; John Pfeiffer Pty v Rogerson (2000) 203 CLR 503; Harding v Wealands [2005] 1 WLR 1539 but different for Singapore see Star City Pty Ltd v Tan Hong Woon [2002] 2 SLR 22. 212 Kropholler, Internationales Privatrecht (6th edn, 2006) p. 128. 213 See Hausmann, ‘Pleading and Proof of Foreign Law – a Comparative Analysis’ (2008) The European Legal Forum 3. 214 For a detailed discussion see Hausmann, ‘Pleading and Proof of Foreign Law – a Comparative Analysis’ (2008) The European Legal Forum 3. 208 209

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favourable.215 Furthermore, the distinction between questions of fact and law is important with regard to the scope of appeal. Questions of law generally can be subject to appeal whereas statements of fact made by the lower court are normally binding on the appeal court. Under German procedural law foreign law is treated as law and not as fact.216 However, § 293 ZPO provides that foreign law is subject to proof in case that it is unknown to the court. § 545 ZPO provides that an appeal on questions of law can only be based on the violation of ‘federal law’. Therefore an appeal cannot be based on the violation of foreign law.217 English law treats foreign law as a question of fact.218 As a consequence foreign law has to be proven by experts.219 The French Cour de cassation held that French courts are obliged to apply foreign law ex officio.220 A failure to do so can result in the decision being set aside on appeal. The exception is in the area of law in which the parties have the free disposition of their rights, i.e. in contract law.221 98 Article 18 of the Rome I Regulation states in (2) that a contract may be proven by ‘any mode of proof recognized by the law of the forum or by any of the laws referred to in Article 11[222] under which that contract or act is formally valid, provided that such mode of proof can be administered by the forum.’ It is controversial whether and to what extent the Rome I Regulation affects the rules of the contracting states on the pleading of foreign law.223 The language of the Regulation appears to make it mandatory in contract cases for a court to consider what a contract’s applicable law is by virtue of the Regulation, regardless of whether the parties plead foreign law.224

G. Sample Clauses UNIDROIT Principles of International Commercial Contracts 99

Model Clause for incorporation in the contract This contract shall be governed by the United Nations Convention on Contracts for the International Sale of Goods (CISG) interpreted and supplemented by the UNIDROIT Principles of International Commercial Contracts (2016).’

215 Hausmann, ‘Pleading and Proof of Foreign Law – a Comparative Analysis’ (2008) The European Legal Forum 2. 216 § 293 ZPO (Civil Procedure Code); Kropholler, Internationales Privatrecht (6 th edn, 2006) § 31 I. 217 RGZ 126, 202; RGZ 150, 314; BGH WM 1969, 858; BGH NJW 2003, 2685, 2686. 218 Fentiman, ‘Foreign Law in English Courts’ 108 (1992) LQR 142, 143, 144; see for an in-depth discussion Fentiman, Foreign Law in English Courts: Pleading, Proof, and Choice of Law (1998). 219 Fentiman, Foreign Law in English Courts: Pleading, Proof, and Choice of Law (1998) pp. 176 et seq. 220 Cass civ 25 November 1986, Rev crit 1987, 383; Cass civ (25 May 1987) Clunet 1987, 927. See also Article 3 and Article 4(1) Austrian Private International Law Act (1978) which compel the Austrian courts to ascertain foreign law ex officio and Article 16 Swiss Federal Private International Law Act 1987; Article 14(1) of the Italian Private International Law Act (1995) states ‘the judge has to ascertain the applicable foreign law of his own motion’. 221 Cass civ 4 December 1990, Clunet 1991, 371; Cass civ 18 December 1990, JCP 1992 II 21824. 222 Article 11 of the Rome I Regulation deals with formal validity. 223 Collins et al (eds), Dicey, Morris & Collins on the Conflict of Laws (15 th edn, 2014) para. 9-011; Hartley ‘Pleading and Proof of Foreign Law – the major European Systems compared’ (1996) 45 Int’l & Comp LQ 271, 290; Hausmann, ‘Pleading and Proof of Foreign Law – a Comparative Analysis’ (2008) The European Legal Forum 6. 224 See Article 2 Rome I Regulation that ‘a contract be governed by the law chosen by the parties.’.

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Model Clause for use after a dispute has arisen

100

This dispute shall be decided in accordance with the United Nations Convention on Contracts for the International Sale of Goods (CISG) interpreted and supplemented by the UNIDROIT Principles of International Commercial Contracts (2016).

Allison E Butler A Practical Guide to the CISG: Negotiations through Litigation

101

Pursuant to Article 6 of the United Nations Convention on Contracts for the International Sale of Goods (‘the Convention’), the parties hereby expressly opt out of the United Convention on the International Sale of Goods 1980 and hereby agree that all matters arising from this Contract shall be governed by the [INSERT LAW].225

102

Hague Conference Illustration 3-1. The choice of law agreement provides that ‘this contract shall be governed by the CISG without regard to the provisions of any national law, except provisions of the law of State X which apply to those matters not governed by the CISG’. Illustration 3-2. The choice of law agreement provides that ‘this contract shall be governed by the PICC and, with respect to issues not covered by those principles, by the law of State X’.226

103

Choice of Law or Applicable Law (CISG Opt-In): This Contract and any matter arising out of or related to this Contract shall be governed by the provisions of the ‘United Nations Convention on Contracts for International Sale of Goods’ (CISG) shall apply to this Contract. On all matters not covered by the CISG, the Contract shall be governed by the laws of England.

104

Choice of Law or Applicable Law (CISG Opt-Out): This Contract and any matter arising out of or related to this Contract shall be governed by the laws of England. The provisions of the ‘United Nations Convention on Contracts for International Sale of Goods’ shall not apply to this Contract.

105

‘Change’ of Law Clause: References to any statute or statutory provision include references to that statute or statutory provision as amended, consolidated or replaced from time to time.

H. Additional Sources Basedow et al, Encyclopedia of private international law (Edward Elgar, 2017), Bernasconi, ‘The Personal and Territorial Scope of the Vienna Convention on Contracts for the International Sale of Goods’ (1999) 46 Netherlands International Law Review 137; Born, International Commercial Arbitration Vol II (2nd edn, Kluwer International 2014); Butler, ‘40 Years Convention on the International Sale of Goods (CISG) – Even More Important Today than 40 Years Ago to Encourage Trade?’ 118 (2019) Zeitschrift für Vergleichende Rechtswissenschaft, 231; Butler & Prasad, A Study of International Commercial Arbitration in the Commonwealth (Commonwealth Secretariat, 2020); Butler/Geissler, 'Contractual Realities of SMEs Contractual Realities of SMEs –Access to Commercial Justice’, 2020 Austrian Yearbook on International Arbitration, 466; Butler, ‘CISG and Arbitration – A Fruitful Marriage’ (2014) XVII International Trade and Business Law 322; Coe, Private International Law and Arbitration, Volume 1 (Edward Elgar, 2018); Collins (ed), Dicey, Morris and Collins on the Conflict of Laws (15th edn, Suppl, Sweet & Maxwell 2018);Torremans (ed), Cheshire, North & Fawcett, Private International Law (15th edn, OUP 2017); Fawcett et al, Human rights and private international law (OUP, 2016); Fawcett, Harris and Bridge, International Sales in the Conflict of Laws (OUP 2005); Fentiman, Foreign Law in English Courts: Pleading, Proof, and Choice of Law (OUP 1998); Ferrari, Concise Commentary on the Rome I Regulation (2nd edn, CUP, 2020); Ferrari et al, Private International Law: contemporary challenges and continuing relevance (Edward Elgar, 2019); Ferrari 225

B-1.

Butler, A Practical Guide to the CISG: Negotiations through Litigation (2007 Supplement 2), Form

226 Hague Conference on Private International Law, Commentary on the Hague Principles on Choice of Law in International Contracts (April 2015) Article 3 Illustration 3-1 and 3-2.

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Chapter 30 Choice of Law & Gillette, International sales law (Edward Elgar, 2017); Ferrari & Kröll, Conflict of laws in international arbitration (Sellier, 2011); Ferrari, ‘PIL and CISG: Friends or Foes?’ (2012) 3 IHR 89; Gaillard, ‘The Role of the Arbitrator in Determining the Applicable Law’ in Newman and Hill (eds), The Leading Arbitrators’ Guide to International Arbitration (3rd edn, Juris Publishing 2014) 437; Garcia-Bolivar & Otero (eds), Recognition and enforcement of international commercial arbitral awards in Latin America: law, practice and leading cases (Brill, 2015); Hay, Advanced Introduction to private international law and procedure (Edward Elgar, 2018); Kadner Graziano, ‘The CISG before the Courts of Non-Contracting States? Take Foreign Sales Law as You Find It’ (2011) 13 YB PIL 165; International Institute for the Unification of Private Law, UNIDROIT Principles of International Commercial Contracts 2016 (Rome 2016); Hausmann, ‘Pleading and Proof of Foreign Law ‒ a Comparative Analysis’ (2008) The European Legal Forum 1; Kessedjian, Private International Law Aspects of Corporate Social Responsibility (Springer, 2020); Keyes, Optional Choice of Court Agreements in Private International Law (Springer,2020); Knetsch, Das UN-Kaufrecht in der Praxis der Schiedsgerichtsbarkeit (Peter Lang 2011); Kröll, Mistelis and Perales Viscasillas (eds), UN Convention on Contracts for the International Sale of Goods (2 nd edn, C.H.Beck 2018); Kropholler, Internationales Privatrecht (6th edn, Mohr Siebeck 2006); Lando and Beale (eds), Principles of European Contract Law (PECL): Parts I and II (Kluwer 2000); Lazić & Stuij, Brussels Ibis Regulation Changes and Challenges of the Renewed Procedural Scheme (Springer, 2017); Mandery, Party Autonomy in Contractual and Non-Contractual Obligations: A European and Anglo-Common Law perspective on the freedom of choice of law in Rome I Regulation on the law applicable to contractual obligations and the Rome II Regulation on the law applicable to non-contractual obligations (Peter Lang, Frankfurt, 2014); Magnus, Staudinger BGB – Wiener UN Kaufrecht – CISG (Sellier, 2018); Magnus & Mankowski (eds), Rome I Regulation (Otto Schmidt Verlag 2017); Mankowski (ed), Commercial Law (Beck & Hart, 2019); Maniruzzaman, ‘Choice of Law in International Contracts: Some Fundamental Conflict of Law Issues’ 16 (1999) J Int’l Arb 141; McLachlan, Lis pendens in international litigation (Pro Quest, 2009); Mills, Party autonomy in private international law (CUP, 2018); Mistelis, ‘CISG and Arbitration’ in Janssen and Meyer (eds), CISG Methodology (Sellier 2009) 375; Mortensen et al, Private international law in Australia (4th ed, Chatswood, 2019); Muir Watt et al., Global private international law: adjudication without frontiers (Edward Elgar, 2019); Nord & Cerquiera, International Sale of Goods: A private international law comparative and prospective analysis of Sino – European Relations (Springer, 2017); Perales Viscasillas & Ramos Muñoz, ‘CISG & Arbitration’ (2011) 10 Spain Arbitration Review 63; Petrochilos, ‘Arbitration Conflict of Laws Rules and the 1980 International Sales Convention’ (1999) 52 Revue Hellenique de Droit International 191; Piltz, Internationales Kaufrecht (2nd edn, C.H. Beck 2008); Redfern, Hunter & Blackaby et al, Blackaby et al, Redfern and Hunter on International Arbitration (6th edn, OUP 2015); Reithmann & Martiny, Internationales Vertragsrecht (8th edn, Otto Schmidt Verlag 2015); Savage & Gaillard (eds), Fauchard, Gaillard, Goldman on International Commercial Arbitration (Kluwer Law International 1999); Schlechtriem, ‘Requirements of Application and Sphere of Applicability of the CISG’ (2005) 36 VUWLR 781; Schlechtriem & Butler, UN Law on International Sales (Springer 2009); Schwenzer (ed), Schlechtriem & Schwenzer Commentary on the UN Convention on the International Sale of Goods (4th edn, OUP 2016); Schwenzer, Hachem & Kee, Global Sales and Contract Law (OUP 2012); Sooksripaisarnkit, China’s One Belt One Road Initiative and Private International Law (Routledge, 2018); Symeonides, Choice of Law (OUP, 2016); Tu, Private International Law in China (Springer, 2016); Hauberg Wilhelmsen, International commercial arbitration and the Brussels I Regulation (Edward Elgar, 2018).

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Index Bold numbers refer to chapters, normal ones to margin numbers. Abuse of rights 3 24 Acceptance 8 1 ff., 37, 53 ff. – CISG 8 53 – Commercial confirmation letter 8 63 ff. – Dispatch principle 8 44 – English law 8 19 – Late 8 58 f. – Mirror image rule 8 24, 23 61 f. – Mode of 8 53 – Modified 8 60 ff. – Silence 8 54 ff., 63 – Standard terms 9 2, 103 – Time frame 8 57 ff. Advancement of negotiations 3 97 AEPL Code 3 89 Agency – Conflicts of interest 27 57 Agency, commercial – Agent, obligations of 27 55 ff. – Authority, actual 27 30 – Authority, apparent 4 103, 27 9, 45, 46 f., 48 – Authority, customary 27 30 – Authority, express 27 27 – Authority, implied 27 27, 30 – Authority, incidental 27 31 – Authority, retroactive 27 27 – Brussels I Regulation 27 70 – Canvassing agent 27 28 – Civil Law 27 5 – Commission 27 110 ff. – Commission agents 27 10 – Common Law 27 6, 30 – Confirming house 27 11 – Continuing authority 27 69 – Direct representation 27 7, 29 – Disclosed principal 27 27 – Duration of 27 41 – Duty of loyalty 27 95 – Duty to cooperate 27 79, 114 – EU Directive on Commercial Agents 27 12, 59 – Fiduciary duties 27 23, 55 ff. – Fixed period 27 81 – Freight forwarder 27 11 – Good faith 27 23, 29, 46, 54 – Goods 27 71 – Gratuitous 27 53 – Illustrations 27 110 ff. – Indefinite period 27 81 – Indemnity option 27 70 – Indirect representation 27 7, 9, 29, 49 – Informed consent 27 57 – Intermediation 27 31 – Mandate 27 5, 23 ff., 29, 31 – Non-competition clause 27 73, 95 – Principal, obligations of 27 53 – Privity rule 27 50 ff.

– Ratification 27 27, 32 ff., 36 ff., 38 – Registration requirements 27 73 – Self-employed agents 27 7 – Serious breach 27 85 ff. – Sub-agents clause 29 151 – Termination 27 60, 84 ff., 89, 92 ff. – Theory of separation 27 5 – UK Agency Regulations 1993 27 19 – Undisclosed principal 27 7, 9, 33, 49 ff. Agreement to agree 4 2, 47, 56 ff., 86 Agreement to negotiate 3 206 ff., 4 59 Agreement with open terms 4 58 Anti-assignment – Assignment of contract 25 84 – Assignment of rights 25 86 – Construction 25 84 – Litigation 25 83 – Subcontracts 25 85 Anticipatory breach 18 1 ff., 19 79 f., 20 46, 106 ff. – Adequate assurance 18 63 f. – Avoidance 20 14, 116 ff. – CESL 17 45 – Chinese law 17 92 – CISG 17 14 – Clause 18 35, 75 – Damages 18 28, 65, 71 f. – Delayed loading 18 69 f. – Distinctions in the CISG 18 39 – English law 17 67 – French law 17 76 – Fundamental breach 18 37 ff., 53 ff., 60 ff. – German law 17 53 – Insecurity of performance 18 5 ff. – Manifestation of 18 22 – Notice of avoidance 18 62 f. – of condition or essential term 18 61 – PECL 17 35 – Probability of 18 59 – Requirements for 18 17 ff. – Spanish law 17 84 – Substitute transaction 18 71 f., 19 60 – Suspension of performance 18 1, 7 f. – UCC 17 60 – UNIDROIT Principles 17 25 Arbitration 6 15 – Absent choice of law 30 78 – Amiables compositeur 22 131 – Chinese law 6 188 – Choice of law 30 1 ff., 4, 7 f., 58 ff., 79 ff., 82 – Choice of law clause 6 4, 13 f., 75 ff., 140, 143 ff., 186 ff., 28 44, 29 163 – Contract referee 28 46 – English law 6 188 – Ex aequo et bono 22 131 – Fair and equitable decision standard 1 20

1073

Index – – – – – – – – – – – –

French law 6 188 German law 6 188 Hardship 22 131 Jurisdiction 6 10, 13 f. Lex mercatoria 5 37 Mandatory rules 30 87 ff. Merger clause 23 215 New York Convention (1958) 30 80 Ordre public 30 92 Seat 30 59 Spanish law 6 188 UNIDROIT Principles 5 36 f., 37, 30 4, 59, 76 – US law 6 188 Artificial intelligence 8 74 Assignability – assignability of future rights 25 66 – Assignment of Future receivables 25 62 – Assignment of salary 25 61 – BGB 25 61 – Champerty 25 63 – Code Civil 25 59 – Code Monetaire et Financier 25 60 – Codigo Civil 25 59 – Common Law 25 63 – Intangible property 25 63 – Law of Property Act 1925 25 65 – Loi Dailly 25 60 – maintenance 25 63 – PECL 25 64 – Restatement (Second) of Contracts 25 66 – Statutory prohibitions 25 57, 58 – Substantive Requirements 25 56 – UN Convention on the Assignment of Receivables in International Trade 25 67 – UNCITRAL Legislative Guide on Secured Transactions 25 67 – UNIDROIT International Factoring Convention 25 67 – UNIDROIT Principles 25 65 Assignment 25 1 – Absolute 25 37 – Acknowledgement 25 39 – Claims 25 14 – Clause 29 150 – Companies Act 2006 25 47 – contracts 25 12 – Contracts for the benefit of third parties 25 38 – definition 25 35 – delegation 25 41 – English Law 25 46 – Financing technique 25 36 – For security purposes 25 37 – Formal validity 25 44, 45 – Novation 25 42, 29 149 – Power of attorney 25 40 – rights 25 11 – Security purposes 25 47 – Similar transactions 25 34 – Validity of an assignment 25 43

1074

Autonomy – of decision-making 3 28 Avant-contract 3 194 Avoidance 20 1 ff., 5, 8, 25, 26 3 – and termination 20 3, 25, 29 ff. – Anticipatory breach 18 1, 17, 38 ff., 20 14, 116 ff. – Assurance of performance 18 27 – CISG 20 26 ff., 46 ff., 60 ff. – Consensual 20 13, 45, 59 – Consequences 20 33 – Damages 18 65, 20 1, 13, 27, 42, 99 – Defects in consent 20 2 – Effect of 20 4 f., 13, 26 ff. – English law 26 41 – Excuse 22 4, 16 – Exercise of 18 56, 20 60 ff. – French law 26 37 – Fundamental breach 12 57, 18 21, 20 14, 46 ff., 86 ff., 91 f., 101 – German law 26 36 – Grounds for 20 14, 25, 46 ff., 114 ff. – Installment contract 18 41 f. – Late delivery 12 74 – Limitations 20 16 – Mistake 26 19, 22 f. – Model clause 20 114 ff. – Nachfrist 20 14 – Non-delivery 12 57 – Notice of 18 39, 56, 62 f., 74, 20 8, 15, 59, 60, 121 f. – Partial 20 13, 30, 36 ff., 46, 54 ff., 101 ff. – Requirements 18 53 ff., 20 15 – Resale 20 16 – Restitution 20 8 f., 16, 26, 72 ff., 94, 96 f., 101, 119 f. – Restitutionary obligations 20 10 – Retraction of 20 15, 66 – Substitute transactions 19 56 – Time of 19 62 – Transfer of risk 21 15, 24 ff. – Unilateral 20 13 Bailment 13 12, 15 Battle of the forms 1 35 f., 9 102 – CISG 23 61 f. – Knock out rule 23 61 ff. – Last shot rule 23 61 f. – Merger clause 23 234 Best efforts, duty of – Exclusive agency contract 4 34 Bill of Lading 13 52, 21 32 – Hamburg Rules 13 55 – Rotterdam-Rules 13 54 Bills of Exchange – Documentary Collections Transaction 13 34 Bona fides 3 21 Bonne foi 3 52 Breach – Avoidance 12 57

Index – Chinese law 17 89 ff. – CISG 17 7 ff. – Classification of 28 73 – Cumulation of 28 73 – Documentary 13 37 ff., 46 ff. – Effect on conformity of goods 13 50 – English law 17 64 ff. – Excuse 17 43 – Fault 17 7, 21, 19 79 f. – French law 17 72 ff. – Fundamental 17 8, 19 60, 101 f., 21 24, 29 – German law 17 50 ff. – Non-acceptance 19 48 – PECL 17 31 ff. – Remedies 19 1 ff., 17, 20 25, 44 – Repudiatory 20 32 – Spanish law 17 81 ff. – UCC 17 58 ff. Breaking off negotiations 3 10, 55, 64, 88 ff., 150 ff. – in Chinese law 3 105 – in French law 3 104 – in German law 3 103 – PECL 3 102 – PICC 3 102 Break-up fee 3 220 Brussels I Regulation 6 6, 93 f., 126 – Application of 6 19 ff., 54 ff. – Arbitration 6 187 – Commercial agency 27 70 – Delivery 12 22 – Domicile 6 25 ff. – Forum non conveniens 6 197 f. – Lis alibi pendens 6 190 f. – Presumption of exclusivity 6 182 Burden of proof – Rome I Regulation 30 98 Business – Place of 5 4, 6 3, 9, 30 14 Cancellation – Damages 20 32 – Effect of 20 32 – Partial 20 56 – UCC, French, German, and Chinese law 20 32 f. Carriage 12 9 ff. – Contract of 21 30 – Particular place exception 21 38 ff. – Risk 21 20, 22, 30 Carrier 18 23 – Definition of 21 35 Chain of distribution – Right of redress 24 3 Change of circumstances 4 12, 22 9, 34, 28 2, 21, 27, 31 ff., 37 f. – Chinese law 22 83 ff. – Contract formation 22 123 – Documentation 28 72 – French law 28 17

– PECL 22 58 – Renegotiation 28 56 – Spanish law 22 68 Choice of law 4 15, 121, 22 138, 30 1 ff. – Applicable law criteria 30 51 – Arbitration 30 1 ff., 4, 7 f., 58 ff., 78 ff., 82 – Burden of Proof 30 97 f. – CISG exclusion 5 4 – “Closest connection test” 30 29 – Common Law 30 53 – Exclusion of CISG 30 26 ff. – Hague Principles on Choice of Law 30 29, 41 – Incorporation by reference 30 34 – Mandatory rules 29 12, 30 30, 83 – Merger clause 23 227 – Non-national rules 30 33 – Ordre public 30 90 ff. – Procedural/Substantive question 30 96 – Professio juris 11 35 – Public policy exception 1 23, 30 30, 83 – Renvoi 30 49 – Restatement (Second) 30 50 – Rome I Regulation 30 36 – Specific connecting factors 30 29 – Synergy between jurisdiction and applicable law 30 7 f. – UCC 30 50 – UNIDROIT Principles 30 55 Choice of law clause 5 33, 37 – Model clauses 30 99 ff. – Parties’ intention 30 95 – Restatement (Second) 30 95 – Rome I Regulation 30 95 – Validity 5 4 CISG 25 4 – and precontractual liability 3 55 – Article 4 25 52 – Assignment of rights 25 52 – Autonomous application of 5 26 – Choice of 30 24 f. – Commercial agency 29 14 – Concurrence of claims 24 10 ff. – Conflict of laws 5 26 – Conformity 11 51, 14 17 ff., 47 ff. – Consumer contracts 9 17 – Contract validity 11 36 ff. – Contracting States 30 19 ff. – Delegation of performance 25 9 – Distribution agreement 29 14 f. – Documents 13 75 ff. – Exceptions 25 52 – External gap 1 7 – Good faith 15 9, 17 5 ff., 26 85 – Hardship 22 26, 38 ff. – Homeward trend 11 42, 14 2, 42 – Incorporation 30 24 f. – INCOTERMS 10 48 – Liability for personal injury 5 32 – Limitation of actions 16 84 ff. – Merger clause 23 216 ff.

1075

Index – Mixed sale 5 5, 30, 29 14 – Model clauses 5 52 ff. – Non-Contracting States 30 23 – opt-out 1 4, 6, 26, 11 48 f. – Post-contractual obligations 29 15 – precontractual liability 3 56, 77 ff. – Products liability 24 6 ff. – Relationship to national laws 5 39 ff. – Scope 1 4, 14 46, 28 6, 29 4 – Software 5 5, 27 – Standard terms 9 9 ff. – Third party rights 5 32, 29 46 Classification – of precontractual liability 3 19 ff. Classification of precontractual liability 3 54 Commercial confirmation letter 8 63 ff. Commercial guarantees – English law 24 41 – French law 24 42 – German law 24 43 Communications – Electronic 7 8 – Internet 7 6 Competition law – Commercial agency 27 64 – Covenants not-to-compete 29 47, 99 – Distribution agreements 27 61 f., 64 – EU block exemptions 29 8 – EU Regulation 1983/83 29 8 – Japan Antimonopoly Act Guidelines for International Licensing Agreements 29 100 – Non-reciprocal grant-back clause 29 98 – Territorial restrictions 29 8, 12, 47, 120, 128 Condition precedent 4 79, 81 Conditional contract 4 76, 90 Confiance légitime 3 24, 104 Confidential information 29 96 ff., 109 ff. – Buyer’s information 29 103 ff. – Customer databases 4 4 – Know-how 4 4 – Proprietary information 29 96 – Public domain 29 84, 88 – Specialized skills 29 97 Confidentiality 3 34, 55, 60, 117 ff., 147, 178 ff., 217, 236 f. – Agreement 4 106, 112 f., 8 71, 29 35, 153 – Breach of duty 4 4, 29 108 – Clause 29 83 ff., 85, 90 ff., 104 f., 108, 162 f. – Distribution agreement 27 105 – Duration of 29 88 – Duty of 3 55, 64, 4 1, 4 ff., 105, 29 83 – Exceptions 29 94 – express 3 120 – implied 3 120, 180 ff. – in PCI 3 192, 217, 236 f. – Model Clauses 4 126 – Post-contractual 4 4 – Pre-contractual 4 4 – Public domain 29 162

1076

– Trade secrets 29 35 Conflict of law – Applicable law 1 5 Conflict of laws – Applicable law 1 23, 5 10, 6 7, 30 2 – CISG 30 19 f., 31 – Common approach 30 3 – Regulation of invalidity 11 33 Conformity – CESL 14 21 – Chinese law 14 30 – CISG 11 51, 14 6 ff., 17 ff., 47 ff. – Concept of 14 31 ff. – Definition 14 5 – Description 14 63 – Documentary Credit Payment 13 27 – English law 14 27 ff. – French law 14 24, 32 – Fungible goods 22 32 – German law 14 22 f., 32 – Model 14 55 ff. – of the goods 3 86 – Packaging 14 61 ff. – Particular purpose 14 52 ff. – PECL 14 21 – Public law regulations 14 48, 64 – Sample 14 55 ff. – Spanish law 14 24, 32 – Sphere of control rule 22 32 – Transfer of risk 22 32 – UCC 14 25 – UNIDROIT Principles 14 21 – Warranty 14 32 Consent – Particularized 29 58 Consideration 4 88, 8 5, 17, 20, 36, 11 7 Consumer protection 14 3, 21, 29 44 – Advertising 8 47 – Electronic contracts 1 38 ff. – Products liability 24 22 – Standard terms 9 5 – Warranty 29 15 Contextual interpretation – PECL 23 135 – PICC 23 135 Contract referee 28 46 Contract types of – Commercial 5 1 f. – Conditional 4 76, 90 – Consignment 29 81 – Consulting 29 147 – Consumer 5 1 f. – Conversion 29 136 – Distribution 5 1 – Divisible 20 38 ff., 101 ff., 106 ff., 28 24 – Exclusive agency 4 34 – Framework agreement 5 28, 28 5 – Installment 18 41 f., 54 ff., 20 36 f., 46, 55, 86 ff., 97, 28 5, 24 – Long-term 28 21

Index – Mixed 5 5, 30, 27 72, 28 6 f., 29 4, 6, 11, 82 – Option 4 91 – Output 28 50 ff. – Sales 5 1 f., 39 ff., 28 5 f. – Service 5 3, 5, 20 30, 28 6 – Successive 18 31 f. Contracts for the benefit of third parties – agency 25 91 – American Law 25 128 – Assignment 25 91 – BGB 25 98, 122, 129, 130 – CESL 25 97 – Chains of contracts 25 117 – Chinese Law 25 108 – CISG 25 94 – Code Civil 25 99, 123 – Codigo Civil 25 100, 124 – Contract (Rights of Third Parties) Act 1999 25 130 – Contracts (Rights for Third Parties) Acts 1999 25 120 – Contracts (Rights of Third Parties) Act 1999 25 106, 114, 125, 129 – Counterclaims 25 129 – Creation of enforceable third party right 25 112 – Creditor beneficiary 25 111, 113 – Culpa in contrahendo 25 115 – Damages for the non-performance of an obligation 25 118 – Defences available to the promisor against the beneficiary 25 129 – Doctrine of privity 25 114 – Domestic sales 25 92 – Draft Common Frame of Reference 25 119, 127, 129 – Enforceable right 25 109 – English Law 25 125 – Exclusion of liability 25 120 – Exemption Clauses for the benefit of third parties 25 120 – Exemption from liability 25 131 – Express 25 112 – French Case law 25 130 – Himalaya Clause 25 120, 131 – Implied 25 112 – incidental 25 90 – Incidental third party 25 111 – Intended 25 90 – Intended third party 25 111, 128 – International sales 25 92 – International sales transactions 25 93 – Life insurance contracts 25 92 – Limitation of liability 25 120 – Modification of the contract for the benefit of Third Parties 25 121 – Moral benefit/interest 25 110 – Notification of the intended third party 25 128 – PECL 25 96, 119, 126 – Physical injury 25 115 – Protective effect for third parties 25 115

– Pure economic loss 25 115, 116 – Remedies available to the promisee 25 130 – Restatement (Second) of Contracts 25 107, 129, 130 – Revocation of the contract for the benefit of Third Parties 25 121 – Secondary obligations 25 115 – Service contracts 25 132 – Set-offs 25 129 – SGA 25 105 – Sole beneficiary 25 111 – Sub-contractors 25 92 – Third party beneficiary 25 90, 109 – Third party claims 25 109 – Third party rights 25 89, 91 – Third party rights clauses 25 132 – UCC 25 101 – UCC § 2-318 A 25 102 – UCC § 2-318B 25 103 – UCC § 2-318C 25 104 – UNIDROIT Principles 25 95, 119 – Variation of the contract for the benefit of Third Parties 25 121 Contractual freedom 3 2, 9 ff., 15 Contractual intent – Evidence of – surrounding circumstances 23 69 – French law 23 65 – Objective 23 126, 172 – Objective, exceptions to 23 28 ff. – PECL 23 44 ff. – PICC 23 39 ff., 124 – Spanish law 23 65 – Standard of intent 23 25 ff., 126, 172 – Subjective 23 49 f., 126, 172 Contractual negotiations 3 6 ff., 15 Contractual prohibitions – BGB 25 76 – Civil Law 25 68 – Code Civil 25 72 – Common Law 25 68 – English Law 25 75 – Loi Dailly 25 71 – PECL 25 73 – Reasons 25 69 – UCC 25 70 – UNIDROIT Convention on International Factoring 25 74 – UNIDROIT Principles 25 77 Contractual requirement – Constitutive 7 5 – Evidentiary 7 5 Contributory fault 3 128 Contributory negligence 26 90 ff. – English law 26 95 – French law 26 94 – German law 26 93 – Mitigation of damages 26 90 – Restatement (Second) of Contracts 26 95 – Spanish law 26 94

1077

Index Convergence – of civil law and common law 3 17 Cooperation, Duty of 17 40, 28 25 Cotract-like relationship 3 8 Court order to negotiate 3 136 Covenants not-to-compete 29 121 ff. – Illegal restraints of trade 29 133 Croyance légitime 3 24, 104 Culpa in contrahendo 3 20, 22, 24, 37, 46, 62, 77, 83 ff., 123, 188, 198 f. Cure – CESL 17 46 – Chinese law 17 93 – CISG 13 81, 17 15 – Comparison 17 101 – Delivery 13 81 – Documents 13 43 ff. – English law 17 68 – French law 17 77 – German law 17 54 – Methods 13 45 – PECL 17 36 – Right to 19 103 f. – Spanish law 17 85 – UCC 17 61 – UNIDROIT Principles 17 26 Currency 19 4 Custom 13 10 Customary law – Pacta sunt servanda 4 28 Damages 19 1 ff., 17 ff., 20 44 – Agreed upon 19 71 ff. – Anticipatory breach 18 28, 65, 71 f. – Assessment 19 51 f. – Avoidance 18 65, 20 1, 13, 27, 42, 99 – Breach of warranty 29 33 – Calculation of 19 4, 20, 48 ff., 56 ff., 61 ff., 73, 76 ff., 20 67 – Cancellation 20 32 – Compensatory 4 5, 19 4 f., 21 f. – Consequential 19 5, 22 119, 29 59, 80 – Definition of 19 21 f. – Disgorgement of profits 4 110, 29 95, 108 – Double 19 63 – Economic loss 5 32, 24 81, 29 59 – Exchange rate fluctuation (delayed performance) 22 152 ff. – Expectancy 4 117, 19 5, 24, 44 ff. – Expenses 19 45 ff., 53 ff. – Fault 19 30 – Full compensation principle 19 29, 89, 94 – Incidental 19 5, 20 82, 89 – Indemnity payments 19 26 f., 29 134 – Interest 19 1, 4, 5, 20, 88, 90, 91 ff., 95 – Limitation of 29 33 – Liquidated 5 31, 20 28, 29 84 – “Loss of a chance” 19 40 – Mitigation of 18 66, 19 85 f., 26 90, 27 36 – Non-Fundamental breach 21 29

1078

– – – – –

Precontractual liability 3 55, 121 ff., 123 ff. Preservation of goods 19 37 Products liability 24 72 ff. Protected interests 19 4, 23 ff. Punitive 4 3, 101, 109, 19 21, 53, 71 ff., 29 69, 108 – Recovery of 19 27 ff., 32, 35 f., 40, 45, 51 f. – Reliance 4 5, 38, 42, 44, 78, 115, 19 43 ff. – Remoteness 19 28 – Restitution 4 44, 19 21, 22 4, 109 ff. – Substitute transaction 19 56 ff., 20 35, 22 105 – Suspension of performance 18 28 – Transfer of risk 21 15 – UNIDROIT Principles 17 22 Data protection 4 120, 29 164 ff. – Clause, rights in 29 165 – EU Data Protection Directive 29 119, 166 – Ownership clause 29 164 Debtor Protection – Anti-assignment clauses 25 82 – BGB 25 79, 80 – Chinese Law 25 81 – Code Civil 25 79 – Code Monetaire et Financier 25 79 – Defences 25 78, 80 – Notice to the debtor 25 79 – PECL 25 79, 81 – Restatement (Second) Contracts 25 79 – UCC Article 9 25 79, 80 – UNIDROIT Principles 25 79, 81 Deceit 26 49 Decision-making autonomy 3 28, 47 Declaration of avoidance 20 9 Defect – hidden 16 50 – in title 17 13 – latent 4 104 – minor 28 73 Defects in consent – Avoidance 20 2 – CESL 26 3, 21 – CISG 26 8 – Common Law 26 24 – Effects 26 7 ff. – German law 26 23 – PECL 26 21 – Types of 26 18 ff. – UNIDROIT Principles 26 20 – Vitated consent 26 1 ff. Defence and rights of set-off – Contra preferentem 25 87 Defenses 26 1 ff. – Categories of 26 1 f. Delegation 25 5 – CESL 25 17 Delegation of Duties 25 1 Delivery 12 2 ff., 21 15 – Additional time for 12 57

Index – – – – – – – – – – – – – – – – – – – – – – – – – –

Avoidance 12 74 Breach 13 46 ff. Brussels I Regulation 12 22 Carriage of goods 12 9 ff. CESL 17 41 Chinese Civil Code (CCC) 13 91 Chinese law 12 33 ff., 68 CISG 12 9 ff., 54, 13 75, 17 5 Constructive 21 17, 61 Cure 13 81 Damage after 12 16 Defective 13 49, 18 29 f. Delivery of Documents 12 38, 13 1 Documentary breach 13 46 ff. Duty 21 34 Early 12 45, 50 ff., 73 Electronic 13 100 English law 12 29 f., 65 f. First carrier 12 12 ff. Fixed date for 12 54 French law 12 27, 63, 13 87 Fundamental breach 12 74 German law 12 25 f., 62, 13 86 Handing over 12 3, 14 Incomplete 13 48 INCOTERMS 5 38, 6 122, 129 f., 10 34 f., 12 2, 9, 11, 22, 75, 13 95 f. – Late 12 50, 73 – Liability 12 45 – Manner of 12 3, 7 ff. – Marking of goods 12 19 – Model clauses 12 47 f., 77 f. – Non-conforming 13 37 ff., 40 ff., 50, 20 36, 54, 21 27 – Non-delivery 12 57, 13 47 – Packaging 12 3, 17, 20 – Partial 12 45 – Party-agreement 13 38 – Passing of risk 12 6 – PECL 12 24, 61, 13 85 – Performance of 12 16 – Place of 6 120 ff., 12 7 ff., 9, 13 19, 21 60 f. – Placing at the buyer’s disposal 12 3, 18 ff. – Reasonable time 12 50 ff., 65 – Right to cure 13 43 ff. – Sale of Goods Act 1979 13 89 – Shipment 12 44 – Short 19 100, 20 36, 54 – Spanish law 12 28, 64, 13 88 – Taking delivery 12 9 – Taking over 21 54 ff. – Time of 12 6, 16, 55, 69, 13 19, 21 57 – UCC 12 31 f., 67, 13 90 – UNIDROIT Principles 12 23, 59 f., 13 84 Delivery of documents 13 18 Derivatives market 28 48 Derogation 1 6 Disclaimer 4 47, 85, 92 f. – Liability to third party 15 20 – Model clause 4 129 – Warranty of title 15 35 f.

Disclosure – Duty of 4 101 f., 104, 16 74 – Material fact 4 13 Dispatch principle 8 19, 44, 20 59, 65 f., 69 – Notification duty 16 57 Dispute resolution clause 3 223 – in PCI 3 223 Distribution agreement 27 59, 29 59, 101 ff., 111, 125, 152, 156 – Agency law 27 4 – Best efforts clause 27 98, 102 f., 29 158 – CISG 29 14 f. – Confidentiality clause 27 105 – Default clause 27 106 f. – Distributor, obligations of 27 74 ff. – Distributor-Agent distinction 27 62 ff., 66 ff. – Duty to renegotiate 27 78 – EU block exemptions 27 28, 61 f., 64, 99, 29 100 – EU Regulation 1983/83 29 8 – EU Regulation 330/2010 27 95 – General conditions of sale 27 101 – Intellectual property rights 27 105 – Internet sales 27 65 – Minimum sales clause 29 158 – No contest clause 27 105 – Non-competition clause 27 95 – Notice 27 106 – Parallel imports 27 65, 99 – Post-termination obligations 27 109, 29 131 – Products liability 27 104 – Resale price maintenance 27 62 – Reservation of title clause 27 105 – Termination 27 82 ff., 91, 106 ff., 115 ff., 29 158 – Territorial restrictions 27 62, 99 – Warranties 27 104 Distribution of costs – in PCI 3 218 ff. Documentary Collections Transaction – Bills of Exchange 13 34 – Cash Against Documents 13 28 ff. – Conditions for the release of documents 13 35 Documentary credit 13 6 Documentary Credit Payment 13 22 – Document presentation 13 23 – Irrevocable credit 13 26 – Revocable credit 13 26 – UCP 600 Rules 13 25 ff. Documentary sales contract 13 10 Documents 12 38 – Bailment 13 12 – Bill of Lading 13 52 ff., 60 – Certificates of origin 13 63 – Chinese Civil Code (CCC) 13 91 – CISG 13 75 ff., 82 – Commercial invoice 13 62 – Conformity of 13 37 ff., 40 ff., 46 ff. – Consignor’s copy of an air waybill 13 58

1079

Index – – – – – – – – – – – – – – – –

Delivery of 13 2 ff., 17 ff. Dock receipts 13 61 Dock warrant 13 56 Documentary credit 13 6 Documents of title 13 12 ff. Electronic 13 100 French law 13 87 Functions 13 9 f. German law 13 86 Handing over 6 125 Letter of credit 13 23 Lex mercatoria 13 10 Negotiable Bill of Lading 13 52 ff. Negotiable documents of title 13 13 Non-delivery 13 47 Non-Negotiable documents of title 13 14 f., 52 ff. – Obligation to deliver 13 18 – of title 13 51 ff. – PECL 13 85 – Property 13 12 – Relationship to contract 13 2 – Representing the goods 13 12 – Right to cure 13 43 ff. – Sale of Goods Act 1979 13 89 – Sea waybill 13 60 – Spanish law 13 88 – Straight document of title 13 14 f. – Transfer of title 13 6, 9 – Transport 13 12 – Types of 13 11 ff. – UCC 13 90 – UNIDROIT Principles 13 84 – Warehouse receipt 13 57 – Warrants for the delivery of goods 13 59 Documents of title 13 12 ff. Domicile 6 3, 14, 54 ff., 126 – Brussels I Regulation 6 25 ff. – Chinese law 6 50 ff., 73 – English law 6 37 ff., 54 ff. – French law 6 34 ff., 54 f., 70 ff. – German law 6 28 ff., 54 f. – Spanish law 6 31 ff., 54 f. – US law 6 44 ff. Drafting, of contracts 1 27 ff. – Adversarial approach 1 27 – Definitions, general 1 30 ff. – Definitions, specific or technical 1 30 – Legal language, use of 1 29 – Recitals 1 30, 33 – Relationship preserving approach 1 27 Duress 3 15, 8 34, 11 9, 26 3, 63 Duty – of confidentiality 3 34 – of information 3 33 Duty of care 3 47, 133 Duty of confidentiality 3 34, 64, 117 ff. Duty of information 3 33, 47, 55, 106 ff., 168 ff. – CESL 3 114 ff. – DCFR 3 114 ff.

1080

– in Chinese law 3 113 – in French law 3 112 – Scope and depth 3 111 Duty of loyalty 3 27, 32, 47, 68 Duty of protection 3 31, 64 Duty to cooperate 26 4 ff., 80 ff. Duty to inform 3 33, 47, 64, 75, 127 Duty to mitigate damages 26 92 – CESL 26 92 – PECL 26 92 – UNIDROIT Principles 26 92 Duty to negotiate 3 203, 206 ff. Economic Foreign Espionage Act 4 110 Economic Value Test 5 29 Electronic contracting 1 37 ff. – CISG Advisory Council Opinion 1 1 39 – Consumer contracts, regulation of 1 38 ff. – Convention on the Use of Electronic Communications in International Contracts 1 39 – Formalities 1 40 – Model Law on Electronic Commerce 1 39 – Model Law on Electronic Signatures 1 39 Electronic Data Interchange (EDI) 1 37 English law – Consumer sales 17 66 – Contributory negligence 26 95 – Frustration 22 76 f. – Good faith 26 81, 84, 88, 28 20 – Jurisdiction 6 37 ff., 54 ff., 85 f., 135, 183 – Lis alibi pendens 6 194 – Long-termcontracts 28 20 f. – Specific performance 17 62 – Standard terms 9 69 ff. – Undue influence 26 68, 78 Entire agreement clause 23 57, 185 Equity 29 108 Essentialia negotii 8 29 Estoppel 3 17 – Merger clause 23 57 – Promissory 8 21 EU Consumer Sales Directive – Public statements 24 46 EU Database Directive 96/9/EC 4 111 Evergreen laws 29 134 ff., 148 – Goodwill idemnity 29 156 Examination 5 10, 16 1 ff., 65 ff., 21 21, 57 – CESL 16 14 – Chinese law 16 21 f. – CISG 16 25, 31 ff. – Common Law 16 20 – Costs of 16 42 – Distance sales 16 32 f. – English law 16 19 – Exception 16 74 – Excuse 16 26, 78 ff. – Expertise 16 30

Index – Extent of 16 25 ff. – Fixed period 16 69 ff. – French law 16 16 – German law 16 15 – Implicit 16 67 – PECL 16 13 – Period, length of 16 31 ff., 35 ff. – Redirection 16 34 – Representative 16 26 – Spanish law 16 17 – UCC 16 18 – UNIDROIT Principles 16 13 Exclusion and limitation of liability 3 218 ff., 240 ff. – in PCI 3 218 ff., 240 ff. Exclusion and limitation of liabtility 3 222 – in PCI 3 222 Exclusivity 3 214 ff., 229 ff. – in PCI 3 192, 238 f. Excuse 16 1 f. – Adaptation of contract 22 59 – Allocation of risk 22 72 – Alternative performance 22 22 – Avoidance 22 16 – Beyond control 22 12 – CESL 17 39, 22 55 ff. – Chain of transactions 22 19 f. – Chinese law 17 90, 22 83 ff. – CISG 22 21 ff. – Common Law 22 79 f. – Currency fluctuation 22 14 – Czech law 22 103 – Double impediment 22 22 – Duration of contract 22 15 – Duty to renegotiate 22 57 – English law 22 76 ff. – Excessively onerous standard 22 57 – Extraordinary event 22 13, 124 – Force majeure 22 121, 28 26 – Foreseeability 22 12 f., 28 – Frustration 28 20, 26 – Generic factors 22 12 – Good faith 22 38 – Goods in receivership 22 122 – Government approval 22 126 – Hardship 28 26 – Hungarian law 22 103 – Impediment 28 26 – Impossibility 28 20, 26 – Impracticability 28 26 – Just-in-time contracting 22 119 ff. – Long-term contracts 22 107, 129 ff., 135 – Nordic law 22 104 – Notice of impediment 22 25 – PECL 17 31 f., 22 58 f. – Polish law 22 103 – Price changes 22 72 – Production failure 22 105 f. – Restatement (Second) of contract 22 81 – Restitution 22 109 ff. – Strike or Quarantine 22 121

– Substitute performance 22 24 – Supply shortages 22 108 – Suspension of contract 22 16 – Termination 22 126 – Third party 22 20 – Trade usage 22 136 – Transfer of risk 22 78 – Undue burden 22 12, 124 – UNIDROIT Principles 17 21 – War risk 22 124 Expectation interest 3 55, 127 Expenses – during negotiations 3 125 External gap 3 79 Fairness – Principle of 28 29 Fault – Contributory 19 79 f. Fiduciary duty 4 102 Final integration clause 23 185 First carrier rule 21 32 ff. Force majeure 22 5 ff., 87 ff., 101, 132 ff., 28 26, 34 ff. – Chinese law 22 83, 91 ff. – Clause 22 4, 27, 132, 134, 141 ff., 28 9, 35 f., 43, 62, 64, 74 – Examination duty 16 41 – French law 22 65 ff. – Good faith 22 90 ff. – ICC clause 22 143 – Notification duty 16 41, 55 – Risk 21 15, 19 – Strike or Quarantine 22 121 – Termination 28 62 – “Tracing back” 22 19 – UCP 600 22 142 – UNIDROIT Principles 22 52 f. Formal requirements – Approval 4 27 – CESL 7 33 – Chinese law 7 44 – CISG 7 27 ff., 8 38, 11 39 – Commerical agency 27 73 – Contract validity 11 39 – Electronic communications 7 28 ff. – Electronic signature 7 42 – English law 7 43 – French law 7 38 – German law 7 35 ff. – Jurisdiction 6 101 ff. – Model clauses 7 59 ff. – Notice 16 46 – PECL 7 33 – Registration 4 27 – Signature 7 30 – Spanish law 7 39 – UCC 7 40 f. – UNIDROIT Principles 7 34 – Validity 7 10

1081

Index – Warranty 29 29 f. – Writing 6 102, 7 1, 10, 28 Formal validity 25 5 Formalities – Modifications 7 31 Formation of contract – artificial intelligence 8 74 – by conduct 8 37 – Certainty of agreement 8 31 – CISG 8 5 – Consensus 8 26 ff. – Crossing offers 8 67 f. – English law 8 16 ff. – Extended process of 8 69 ff. – Formal requirements 8 38 – French law 8 5 – Intention to be bound 11 9 – Internet auction 8 73 – Offer 8 4 – Spanish law 8 5 – Standard terms 8 30 – UCC 8 24 Forum non conveniens 6 4, 11, 14, 64, 65, 74, 92, 142, 143 ff., 197 ff. – Chinese law 6 201 – Doctrine of 6 199 – Elements of 6 166 f. – English law 6 198 – US law 6 199 f. France – Loi Dailly 25 21 Franchising 27 61, 96 Fraud 4 101, 26 1 f., 49 ff., 28 71 – Avoidance for 20 2 – CESL 26 54 f. – Chinese law 26 62 – Definition of 26 51 – English law 26 59 – French law 26 57 – German law 26 56 – PECL 26 53 – Restatement (Second) of Contracts 26 60 – Spanish law 26 58 – UCC 26 61 – UNIDROIT Principles 26 52 – Withholding information 26 53 Freedom of contract – Freedom of form 7 4 – NOM clauses 7 32 French law 20 33 – Cause or causa 8 36, 11 7 – Consumer contracts 17 73 – Contributory negligence 26 94 – Domicile 6 34, 54 f., 70 ff. – Force majeure 22 65 ff. – Formal requirements 7 38 – Imprévision 22 64 – Jurisdiction 6 34 ff., 54 f., 70 ff., 131, 183 – Lis alibi pendens 6 192 – Standard terms 9 78 ff.

1082

Frustration – English law 22 76 f. Fundamental breach 20 5, 43, 47, 106 ff. – Anticipatory breach 18 21, 37 ff. – Assurance of performance 18 27 – Avoidance 20 14, 46 ff., 86 ff., 91 f., 101 – CESL 17 44 f. – Chinese law 17 91 – CISG 17 8 ff. – Criteria 18 60 f. – Default clause 28 42 – English law 17 65 f. – French law 17 74 f. – German law 17 51 f. – INCOTERMS 21 64 – Late delivery 12 74 – Non-delivery 12 57 – PECL 17 33 f. – Probability of 18 53, 59 – Spanish law 17 83 – Suspension of performance 18 21 – Time of the essence 18 67 f. – Transfer of risk 21 15, 24 ff. – UCC 17 59 Gap-filling 1 16 ff., 4 58 German law 20 33 – Commercial guarantees 24 43 – Contributory negligence 26 93 – Covenant 29 124 – Domicile 6 28 ff., 54 f. – Formal requirements 7 35 ff. – Good faith 4 37, 26 87 – Hardship 22 60 ff. – Jurisdiction 6 28 ff., 54 f., 100, 133, 183 – Lis alibi pendens 6 192 – Long-term contracts 28 27 – Notification duty 16 1, 45 – Public statements 24 44 – Rechtsbindungswille 8 36 – Standard terms 9 49 ff., 23 213 – Störung der Geschäftsgrundlage 22 62 – Wegfall der Geschäftsgrundlage 22 10, 62 Good faith 3 2, 10, 16, 21, 24, 35 ff., 48 ff., 51 ff., 54, 66, 74, 77, 8 71, 14 4, 16 74, 26 4, 80 ff., 28 37 f. – Adaption of contract 28 27 – Agency 27 23, 46, 54, 79, 84 – and the CISG 3 77 – CESL 17 40, 26 82 f., 86 – Chinese law 22 91 ff., 26 89 – CISG 15 9, 17 5 ff., 23 99, 26 85 – Common Law 23 105 – Disclosure 26 55 – Distribution agreements 27 78 – Duty to renegotiate 22 57 – English law 26 81, 84, 88 – Equitable estoppel 23 105 – Excuse 22 38 – Force majeure 22 90 ff. – French law 17 71, 26 87 – German law 4 37, 26 87

Index – – – – – –

Illusory contract 4 35 Implied duty of 4 91, 28 20 in Chinese law 3 76 Interpretation 1 17, 14 40, 18 59, 23 9, 99 Mitigation 19 81 f. Negotiations 4 2, 5 ff., 30 ff., 36 f., 28 38, 59 ff. – objective 3 51 f., 54 – PECL 23 101, 26 82 f., 86 – Performance 17 5 ff., 20, 96, 28 38 – PICC 23 100 f. – precontractual 3 10, 14, 15 f., 24, 48 ff., 54, 80 – Restatement (Second) of Contract 26 81, 84, 88 – Scottish law 4 38 ff. – Spanish law 26 87 – Specific performance 19 104 – subjective 3 51 f., 54 – Supplementation 23 164 f. – Trade usage 28 60 – UCC 4 58, 17 56, 26 81, 84, 88 – UNIDROIT Principles 17 20, 26 82 f., 86 Good faith and fair dealing 3 57, 59 Good faith precontractual 3 66 Good reason – of breaking off negotiaions 3 98 Goods – English law 28 20 Grant back clause – Pro-licensee 29 114 ff. Gray market 29 120 – Field of use restrictions 29 100 – Parallel imports 29 47 – Quantity restrictions 29 100 Hague Convention 1955 – Auction 30 41 – Habitual residence 30 41 – Party autonomy 30 41 – Public policy 30 42 Hague Principles on Choice of Law – CISG 30 44 – Party autonomy 30 29, 43 Hardship 22 94 ff., 28 8, 26, 31 ff. – Arbitration 22 131 – CESL 22 56 – Chinese law 22 84 f. – CISG 22 26, 38 ff. – Clause 22 4, 94, 155 ff., 28 33, 62, 68, 74 – Contractual equilibrium 28 28 f. – Degree of 22 99 – English law 28 20 – Excessively onerous principle 22 98 – French law 22 64, 28 17 – German law 22 60 ff., 28 28 f. – Long-term contracts 22 98 – Renegotiate, duty to 22 3, 94 – Trade usage 22 100 – UNIDROIT Principles 22 52 f., 28 29

Heads of Agreement 8 69 ff. Hidden defect 4 104, 14 24, 41, 51, 17 72 f., 24 32 f. ICC – Documentary Collections Transactions 13 28 ff. – Documentary Credit Payment 13 23 – INCOTERMS 13 95 f. – UCP 600 Rules 13 23 – URC 522 13 28 ff. Illusory contract 4 35 Impediment 28 34 ff. – Allocated risk, implied 22 33 – CISG 22 20, 33, 34 ff. – Cost of production 22 34 – Extraordinary event approach 22 33 – Foreseeability 22 33, 34 ff. – Price fluctuation 22 34 Impossibility – English law 22 76 f. – German law 22 60 ff. – Objective 22 2, 88 – Subjective 22 2, 88 Impracticability 22 7, 102 – Restatement (Second) of contract 22 81 – UCC 22 69 ff. Imprévision, Doctrine of 28 17 INCOTERMS 1 2, 29, 10 1 ff., 21 47 – Allocation of duties 10 36 – Application of 10 39 ff. – Bill of lading 10 30 – Breach of a duty 10 37 – Carriage and Insurance Paid to (CIP) 10 14 – CFR (Cost and Freight) 10 20 – Choice of a clause 10 8 – CIF 10 31 – CIF (Cost, Insurance, Freight) 10 21 – CIP 10 31 – CISG 10 48 – Container transport 10 57 – Cost allocation 10 38 – Costs 10 29 – CPT (Carriage Paid To) 10 13 – DAP (Delivered At Place) 10 15, 16 – DDP (Delivered Duty Paid) 10 17 – Delivery 6 122, 129 f., 12 2, 9, 11, 22, 75, 13 95 f. – Differences, between 2000 and 2010 INCOTERMS 5 38 – Documents 10 28 – English 5 45 – EXW (Ex Works) 10 11 – FAS (Free Alongside Ship) 10 18 – FCA 10 30 – FCA (Free Carrier) 10 12 – FOB (Free On Board) 10 19 – Further applicable law 10 33 – History of 10 4 – Horizontal 10 24 – Inconsistent contract terms 10 49

1083

Index – Incorporation of 5 10, 15 f., 10 40 ff., 45, 49 – INCOTERMS 2010 10 22 ff. – Indirect reference to 10 42 – Insurance 10 31 – Interpretation of 10 46 f. – Modification of 10 55 – Order of 10 7 – Place of delivery 10 34 f. – Place of performance 10 9 – Risks, Transfer of 10 34 – security clearance 10 27 – Selection, considerations for 10 56 – Time of delivery 10 32 – Time of essence 10 60 – Trade usage 10 43 f. – Transport of goods 10 10 Indemnification 29 48, 117 – Patent infringement 29 116 Independent contractor status 29 135 Information duty 3 33, 47, 55, 64, 75, 106 ff., 127, 168 ff. – CESL 3 114 ff. – DCFR 3 114 ff. – in Chinese law 3 113 – in French law 3 112 – Scope and depth 3 111 Injunction – precontractual liability 3 55 Insurance – Products liability 29 80, 168 – War risk 22 124 Integrity – of the other party’s person and assets 3 26 Intellectual property – Buyer’s knowledge of rights 15 67 ff. – CESL 15 14 f. – CISG 15 7 ff., 16 f., 45 ff., 71 ff., 29 16 f., 46 – Distribution agreement 27 105 – French law 15 30 – German law 15 24 f., 74 f. – Implied warranty 15 10 ff. – Improvements, made by licensee 29 113 – Indemnity clause 29 167 – Infringement 29 16 f., 49 – Limitations 15 52 ff. – No-challenge clauses (validity clause) 29 99 – Patent indemnity clause 29 56 ff. – Proprietary information agreement 29 52 ff. – Registration 29 11 – Seller’s knowledge of rights 15 52 ff. – Territorial limitations 15 41 ff. – Third party rights or claims 15 3 ff., 29 75 ff. – UCC 15 10 ff. – Warranty 29 49 ff. Intensity of negotiations 3 97 Intentional misrepresentation 4 3 Interest 19 1, 4, 20, 88, 90, 20 44, 72, 78, 101 – Calculation of 19 90 – Damages 19 91 ff., 95 – Rate of 19 94, 20 16

1084

– Restitution 19 96 f. Intermediaries 13 5 Internal gap 3 78, 79 Interpretation 4 86 – "Maxims; Principles of " 23 64 ff., 65 ff., 69 ff., 73 f., 81 ff., 86, 88 f., 91 f., 93 ff., 98, 99 ff. – Ambiguity 1 16 ff. – Arbitration 1 18, 23 55 – Australian law 23 27 ff. – Chinese law 23 122 – Choice of law clause 30 94 – CISG 14 41, 23 164 – Commercial purpose 23 127 f. – Constructive 8 6 – Contextual 4 50, 23 65, 129, 206 – Contra proferentem 23 75 ff. – Contractual effect 23 88 f. – Course of dealing 4 50 – Course of performance 4 50 – Default rules 23 60 ff. – Definiteness requirement 1 18 – Definition clauses 23 53 – Designation of essential terms 23 54 f. – Ejusdem generis 23 96 – Entire agreements clause 23 57 – Evidence of past practices and usages 23 152 ff. – Evidence of subsequent conduct 23 57 ff. – Evidence of Written vs Oral terms 23 137 – Evidence of – prior negotiations 23 29, 57 f., 119 f. – Evidence of – subsequent conduct 23 29 – Evidence prior negotiations 23 73 – Exclusionary rules 23 141 ff., 146 – Expressio unius 23 95 – Extrinsic evidence 23 29, 57 ff., 69 f., 114, 132 ff. – Favor negotii 23 88 f. – Gap-filling 23 160 ff., 164, 168 – Good faith 1 17, 14 40, 18 59, 23 9, 75, 78, 99 ff., 105, 108, 164 f. – Handwritten vs Printed 23 98 – Hierarchy of terms 23 56 – Hypothetical intent 1 17, 18 – Identification of terms 23 109 ff. – Implied terms 23 122, 160, 164 – In arbitration 23 55 – Intention 23 4, 26 – Interpretation vs Supplementation 23 5, 160 – Linguistic discrepancies 23 91 f. – Literal 28 20 – Literal (plain) meaning 23 71 – Merger clause 23 206 – Methodology 14 35 f., 65, 23 55, 172 – No oral modification clause 23 57, 59 – Objective 23 27 ff., 37 ff., 40 ff., 41 ff., 45 ff. – Objective approach 23 29 – Ordering 23 56, 85 – Parol evidence rule 23 9, 111 ff., 127, 130 ff. – Party control over 23 52 ff.

Index – – – – – – – – – – – – – – – – –

Penalty default rule 23 137 Plain meaning rule 23 65 ff., 129 Practices and Usages 23 122 ff. Prior negotiations 23 9, 29, 119 f. Private dictionary meaning 23 29 Public policy 23 52 Purposive approach 23 65 ff. Reasonable reliance 23 58 f. Reasonableness standard 23 50 Requirement of ambiguity 23 29, 69 f., 73 Restrictions 23 55 Role of Court 23 52 Smart contracts 23 85 Specific vs general 23 93 Standard of Intent 23 37 ff. Standard terms 23 43, 75 ff., 78, 81 ff., 85 Subjective 23 27, 34, 37 ff., 40 ff., 41 ff., 45 ff., 48 ff., 116 – Subjective vs objective 23 34 – Subsequent conduct 23 9, 29, 146 ff. – Supplementation 23 164 – Supplementation of terms 1 7, 23 5, 109, 160 – Surrounding circumstances 23 127 f. – Syntactical Presumptions 23 95 ff. – Theory of – commercial vs protecting weaker parties 23 25 – Trade usage 4 50 – UCC 4 50 – vs construction 23 7 – Whole contract 23 86 – Économie du contrat 23 34, 164 Interpretation – Extrinsic evidence – Australian law 23 132 ff. Interpretation – Commercially reasonable construction 23 69 ff. Interpretation – Contra proferentem – Australian law 23 77 – Chinese law 23 75 – CISG 23 78 – French law 23 75 – German law 23 75 – Italian law 23 75 – PECL 23 78 – Philippines law 23 75 – PICC 23 78 – Spanish law 23 75 – UK law 23 77 – US law 23 77 Interpretation – Contractual effect – American Restatement 23 88 – Argentinian Código Civil y Comercial 23 88 – CISG 23 90 – French Code Civil 23 88 – German BGB 23 88 – Italian Codice Civile 23 88 – Mexican Código Civil 23 88 – PECL 23 90 – Philippines Civil Code 23 88 – PICC 23 90 – Spanish Código Civil 23 88

Interpretation – Evidence of past practices and usages – American Restatement 23 152 – Australian law 23 152 – UCC 23 152 – UK law 23 152 Interpretation – Evidence of practices and usages – CCC 23 153 – CISG 23 154 – French Code Civil 23 153 – German BGB 23 153 – Italian Codice Civile 23 153 – PECL 23 155 – Philippines Civil Code 23 153 – PICC 23 155 – Requirement of ambiguity 23 153 – Spanish Código Civil 23 153 Interpretation – Evidence of prior negotiations – Australian law 23 141 f. – CISG 23 119 – PECL 23 119 f. – PICC 23 119 f. – UK law 23 141 f. Interpretation – Evidence of subsequent conduct – Argentinian Código Civil y Comercial 23 150 – Australian law 23 146 – Canadian law 23 146 – CISG 23 151 – New Zealand law 23 146 – PECL 23 151 – Philippine Civil Code 23 150 – PICC 23 151 – Spanish Código Civil 23 150 – UK law 23 146 – US law 23 146 Interpretation – Evidence of Written vs Oral terms – Argentinian Código Civil y Comercial, 23 138 – CCC 23 138 – French Code Civil 23 138 – German BGB 23 138 – Mexican Código Civil 23 138 – PECL 23 138 – Spanish Código Civil 23 138 Interpretation – Expressio unius – UK law 23 95 Interpretation – Extrinsic evidence 23 129 – Argentinian Código Civil y Comercial 23 128 – Australian law 23 69, 114 – Contract intended to be wholly in writing 23 114 – German law 23 128 – New Zealand law 23 69 f. – Philippines Civil Code 23 128 – Spanish Código Civil 23 128 – UK law 23 69, 114

1085

Index Interpretation – gap-filling – CCC 23 164 – CISG 23 168 – French Code Civil 23 164 – PECL 23 168 – PICC 23 168 Interpretation – Good faith – American Restatement 23 105 – Australian Consumer Law 23 105 – CCC 23 102 – CISG 23 99, 108 – Danish law 23 102 – Egyptian Civil Code 23 102 – English Consumer Rights Act 23 105 – French Civil Code 23 102 – German BGB 23 102 – Italian Codice Civile 23 102 – Kuwaiti Civil Code 23 102 – PECL 23 101 – PICC 23 100 f. – Qatari Civil Code 23 102 – UAE Civil Code 23 102 – UCC 23 105 Interpretation – Handwritten vs Printed – American Restatement 23 98 – Australian law 23 98 – UK law 23 98 – US law 23 98 Interpretation – Implied terms – American Restatement 23 160 – Australian law 23 160 – Singaporean law 23 160 – UK law 23 160 – US law 23 160 Interpretation – Linguistic discrepancies – CCC 23 92 – CISG 23 91 – French Code Civil 23 92 – Laws prioritising local language 23 92 – PICC 23 91 – Turkish Law No 805 on Mandatory Use of Turkish Language for Corporations 23 92 Interpretation – Literal (plain) meaning – American Restatement 23 65 – Australian law 23 69 – CISG 23 73 – New Zealand law 23 69 – PECL 23 73 – PICC 23 73 – UCC 23 65 ff. – UK law 23 69 Interpretation – Literal meaning – CCC 23 65 – French Code Civil 23 65 – Philippines Civil Code 23 65 – Spanish Código Civil 23 65 Interpretation – Negotiated vs standard terms – American Restatement 23 81 – CCC 23 81 – CISG 23 81 ff., 84

1086

– French Civil Code 23 81 – German BGB 23 81 – PECL 23 83 – PICC 23 83 f. Interpretation – No oral modification clause – PICC 23 59 Interpretation – Objective vs subjective approach – American Restatement 23 29 – Australian law 23 29 – Canadian law 23 29 – New Zealand law 23 29 – UK law 23 29 – US law 23 29 Interpretation – Ordering between interpretive rules – American Restatement 23 156 – Spanish Código civil 23 156 – UCC 23 156 – US law 23 156 Interpretation – Parol evidence rule – American Restatement 23 115 – Australian law 23 132 ff. – CISG 23 116, 135 – Contract intended to be wholly written 23 111 ff. – Indian Evidence Act 23 111, 130 – Mexican Código Civil 23 116 – PECL 23 135 – Philippines Civil Code 23 116 – PICC 23 135 – Prior negotiations evidence 23 134 – Requirement of ambiguity 23 132 ff., 134 – Singaporean Evidence Act 23 111, 130 – Spanish Código Civil 23 116 – Subsequent conduct evidence 23 134 – Surrounding circumstances evidence 23 133 f. – UCC 23 115 – UK law 23 133 – US law 23 134 Interpretation – Practices and Usages – CCC 23 122 – CISG 23 123 – English Sale of Goods Act 23 122 – PECL 23 123 – PICC 23 124 Interpretation – Prior negotiations evidence – American Restatement 23 143 – Argentinian Código Civil y Comercial 23 143 – Canadian law 23 143 Interpretation – Purposive approach – American Restatement 23 65 ff. – Argentinian Código Civil y Comercial 23 71 – CCC 23 65 – French law 23 71 – Italian Codice Civile 23 71 – Mexican Código Civil 23 71 – Philippines Civil Code 23 71 – Spanish law 23 65

Index – UK law 23 71 – US law 23 65 ff. Interpretation – Reasonableness standard – PECL 23 50 Interpretation – Specific vs general – American Restatement 23 93 – PICC 23 93 Interpretation – Structure – CISG 23 45 ff., 48 ff. – PECL 23 45 ff., 48 ff. – PICC 23 45 ff., 48 ff. Interpretation – Subjective vs objective – Chinese law 23 34 – Egyptian law 23 34 – French law 23 34 – German law 23 34 – Good faith 23 34 – Kuwaiti law 23 34 – Qatari law 23 34 – Spanish law 23 34 – UAE law 23 34 Interpretation – Supplementary terms – PICC 23 124 Interpretation – Whole contract – American Restatement 23 86 – Argentinian Código Civil y Comercial 23 86 – CISG 23 86 – French Code Civil 23 86 – Mexican Código Civil 23 86 – PECL 23 86 – PICC 23 86 – Spanish Código Civil 23 86 Interpretation – Written versus oral – Japanese law 23 118 Invalidity 3 33, 42 ff., 62, 106, 111 – Applicable law 11 32 – Conflict of laws 11 33 – Contractual practice 11 29 ff. – Degrees of 11 17 ff. – Discharging the contract 11 27 – Mandatory rules 11 16 ff., 29 ff. – Partial 11 18 f. – PECL 11 61 ff. – Public policy 11 12 ff. – Tamquam non esset 11 24 f. – UNIDROIT Principles 11 52 ff. Investment – precontractual 3 12 Invitatio ad offerendum 8 4, 46, 73 Judgments – Enforcement of 6 8 Jurisdiction – Agreement on 6 3, 9, 15, 74 ff., 92 ff., 139 ff. – Arbitration 6 13 f., 140 – Chinese law 6 50 ff., 73, 98, 106, 137, 184 – Choice of law clause 6 103 f. – CISG 6 12, 22, 76, 120 f. – Domestic procedural rules 6 16 f. – Domicile 6 25 ff., 54 ff., 126

– – – – – – – –

English law 6 37 ff., 54 ff., 85 f., 135, 183 Exclusion of 6 10 f., 14, 138 ff., 190 ff., 197 ff. Exclusive 6 14 f., 75 ff., 128, 139 ff. Formal requirements 6 101 ff. Forum non conveniens 6 4 French law 6 34 ff., 54 f., 70 ff., 131 f., 183 German law 6 28 ff., 54 f., 100, 133, 183 Jurisdiction clause 6 3 f., 10, 13 f., 75 ff., 139 ff., 143 ff., 182 ff., 29 163 – Lex fori 6 7 – Lis alibi pendens 6 4 – Minimum-contacts test 6 65 ff. – Model clauses 6 206 ff. – Private international law 6 7 – Spanish law 6 31 ff., 54 f., 134, 183 – Submission 6 3, 9, 74 ff., 92 ff., 105 – US law 6 44 ff., 65, 87 f., 98 f., 136, 183, 185 – Validity of agreements 6 92 ff. – Venue 6 1 ff., 15 ff. Justifiable reason – of breaking off negotiaions 3 98 Just-in-time contracting 28 74 Knock out rule – CISG 23 62 – French law 23 62 – German law 23 62, 63 – PECL 23 63 – PICC 23 62 – US law 23 62

Language – Discrepencies 23 91 ff. Language of – Contract 23 91 f. – Plain meaning rule 23 65 ff. Law of Property Act 1925 25 30 – Formal validity of assignment 25 29 Legal certainty 7 1 Letter of credit 13 23 Letter of intent 3 194, 8 69 ff. – binding 3 194 – hard 3 194 – non-binding 3 194 – soft 3 194 Lex fori – Procedural rules 6 16 f. Lex mercatoria 1 1 ff., 9, 13 10 – Arbitration 5 37 Liability – Cap 19 35 ff. – Disclaimer of 4 2, 89 ff., 8 22 – Exclusion of 24 87 – Exemption from 20 42, 28 26 – Fault 17 21, 43 – Late delivery 12 45 – Limitation of 12 73, 19 72, 73, 22 1, 29 56, 69 – Network of 24 90 f. – of producer 24 22

1087

Index – Post-contractual 29 44 – Strict 17 72, 19 26 Licence agreement 5 27 Limitation and exclusion of liability 3 192 – in PCI 3 192 Limitation period 26 96 ff. – CESL 26 100 – Chinese law 26 105 – Effect of expiration 26 5, 97 – English law 26 103 – French law 26 102 – German law 26 101 – Limitation Convention 26 96 f., 98 f. – PECL 26 100 – Spanish law 26 102 – US law 26 104 Lis alibi pendens 6 4, 10, 14, 92, 141, 143 ff., 190 ff. – English law 6 194 – French law 6 192 – German law 6 192 – Spanish law 6 193 – US law 6 195, 196 Long-term contracts 4 79, 22 11, 28 1 – Adjustment of 28 27 – Chinese law 28 24 – Common Law 28 20 f. – Cost increase 22 107 – Excuse 22 129 ff., 135 – German law 28 27 – Hardship 22 98 – Merger clause 23 232, 239 – Termination of 28 8, 39 Loss – Additional 19 57 – Avoidance of 20 101 – Calculation of 19 4 – Causation 19 28 – Certainty of 19 39 – CESL 24 73 – CISG 19 38 ff. – Consequential 19 29, 35 f. – Currency 19 88 – Current price 19 64 – Definition of 19 21 f., 41 f. – Establishing 19 38 ff. – Foreseeability of 19 4, 27 ff., 71, 110, 20 101 – Future 19 21 f., 34, 51 f. – Incidental 19 35 f. – Interest 19 91 – Mitigation of 18 66, 19 1, 4, 20, 28, 59 f., 62, 65, 76 ff. – Non-pecuniary 19 22, 41 f. – of Profits 19 34, 51 f. – Probability 19 30 – Proof of 19 40 Loss of chance 3 125, 133 Loss of profit 3 135 Lost opportunity 3 125 Lost profit 3 125

1088

Loyalty 3 68 – duty of 3 27, 32, 47 Loyalty, Duty of 28 38 Lugano Convention 6 6 – Application of 6 19 ff. L’apparence 3 24 Magnuson-Moss Act 24 30, 29 32 – Conspicuousness requirement 29 58 Mailbox rule 8 19 Marine insurance 13 10 Memorandum of Understanding 3 194, 8 69 ff. Merchant – Definition of 14 44 Merger clause 23 57 ff., 185 – Agreement-in-fact 23 202 ff. – Arbitration 23 215 – Battle of the forms 23 234 – Burden of proof 23 191 f. – CESL 23 211 – Choice of law 23 227 – CISG 23 58, 216 ff. – Collateral agreements 23 211, 224 – Common Law 23 204 f. – Consumer contracts 23 211 – Derogation from CISG 23 238 – Estoppel 23 57 – French law 23 202 f. – Fully integrated contract 23 208 – German law 23 202 f., 213 – Incorporation by reference 23 236 – Individually negotiated 23 191 ff., 213 – Long-term contracts 23 232, 239 – Model clauses 23 180, 237 ff. – Parol evidence rule 23 204 ff., 208, 221 – Partial integration 23 212 – PICC 23 58 – Presumption of completeness 23 205 – Reasonable alternative meanings 23 210 – Rebus sic stantibus 23 224 – Rebuttable presumption 23 205 – Surprising terms 23 191 f. – Trade usage 23 191, 206, 233 – Waiver and estoppel 23 224 – Written confirmation rule 23 188, 234 Misrepresentation 1 33, 3 15, 42, 44, 74, 4 101 ff., 8 34, 26 3, 28 71, 29 48 – Avoidance for 20 2 – Disclosure, Duty of 4 3 – English law 26 59 – Fraudulent 26 24, 50 f. – Innocent 4 3 – Intentional 4 3 – Material fact 4 1 – Negligent 4 3 – Restatement (Second) of Contracts 26 60 – Spanish law 26 58 – UCC 26 61

Index Mistake 3 45, 4 102, 8 34, 11 9, 22 123, 26 1 ff., 26 ff. – Avoidance for 26 19 – CESL 26 34 – Chinese law 26 25, 47 f. – CISG 26 19, 30 – Common Law 26 3, 28 – English law 26 39 f. – French law 26 37 f. – Fundamental 26 28 – German law 26 35 f. – Legally relevant 26 27 – Mutual 26 28, 40 f. – of fact 26 28, 39 – of law 26 28, 39 – PECL 26 33 – Quality of goods 11 51 – Restatement (Second) of Contracts 26 44 ff. – Seriousness 26 26, 32 f., 38 – Spanish law 26 38 – UNIDROIT Principles 26 31 f. – Unilateral 26 3, 28, 40, 42 Mitigation 19 1, 4, 28, 76 ff. – Agreed damages clause 19 78 – Burden of proof 19 87 – CISG 26 91 – Contributory fault 19 79 – Costs 19 85 f. – Current price 19 65 – Good faith 19 81 f. – of loss 18 66 – Reasonable measures 19 83 ff. – Remedies 19 107 – Specific performance 19 81 – Substitute transaction 19 59 f., 84 Model clauses – Choice of CISG 5 52 ff., 53 ff. – Choice of law 5 55 f., 30 99 ff. – Choice of UNIDROIT Principles 5 55 f. – Confidentiality 4 126 – Distribution agreements 27 57 f., 100 f. – Exclusion of CISG 5 52 – Lock-out clause 4 127 – Merger clause 23 180, 237 ff. – No oral modification clause 23 181 Model Rules of Professional Conduct 1 26 Modification – NOM clauses 7 41 Nachfrist 12 57, 14 23, 20 14, 46, 50 ff., 51, 91, 28 29 – CISG 17 11 – German law 17 52 – UNIDROIT Principles 17 24 Negative interest 3 123 ff. Negligence – Contributory 26 4, 90 – English law 24 51 – French law 24 53 – Intentional 26 4 – Italian law 24 52

Negotiate, Duty to 28 28 Negotiations – Agreement to negotiate 4 59 – Bad faith 4 1, 15 – Breaking off 4 5, 12 – Contractual 3 6 ff., 15 – Duty of good faith 4 2, 5 ff., 30 ff., 32 ff., 36 f. New York Convention 6 14, 140, 186, 28 44 No oral modification clause – CISG 23 216 – Model clauses 23 181 Non-binding clause 3 203, 209 – in PCI 3 234 Non-conformity 3 46 ff., 106, 16 1 – Notification of 16 10 ff., 44 ff. – Party-agreement 13 38 – Remedies 14 20 Non-contractual liability – Negligence 24 50 ff. – Strict liability 24 57 ff. – Tortious mispresentation 24 55 ff. Non-disclosure 4 112 Non-mandatory law 20 6 Notice 20 9 – Adequate assurance 18 74 – Avoidance 18 62 f., 20 8, 15, 60, 121 f. – CISG 16 57 ff. – Commercial agency 27 81 – Communication of 8 39 ff. – Implied 20 61 – Nachfrist 20 50 ff. – Non-conformity 16 1 ff., 10 ff., 44 ff., 19 102, 20 60, 21 57 – of appropriation 21 52 – of avoidance 11 20, 18 56, 74, 19 56, 20 59 – of impediment 16 55, 22 25 – of rejection 20 70, 95 – of termination 20 69 – Set-off 26 108, 111 – Suspension of performance 18 7, 24 f. – Termination 20 88, 29 155 – Third party claim 29 17, 46 Notice, time and manner of 5 10, 16 1 ff., 44 ff., 65 ff. – CESL 16 14 – Chinese law 16 21 f. – Content of 16 44 f. – Dispatch principle 16 20, 57 – English law 16 19 – Exception 16 74 – Excuse 16 78 ff. – Failure of 16 62 ff. – Fixed period 16 70 ff. – Formal requirements 16 46 – French law 16 16 – German law 16 15, 45 – PECL 16 13 – Period, calculation of 16 51 ff. – Period, length of 16 55 – Period, start of 16 47 ff.

1089

Index – “reasonable time” 16 51 f. – Receipt principle 20 69 – Remedy 16 56 – Requirements 16 57 – Risk of transmission 16 58 f. – Spanish law 16 17 – UCC 16 18 – UNIDROIT Principles 16 13 Novation 25 5 Nullity 3 42 ff. Obligation de moyens 3 136, 206, 208 Offer 8 1 ff., 37 – CISG 8 39 ff. – Counter 8 60 ff. – Effectiveness of 8 4 – English law 8 18 – Essentialia negotii 14 3 – Firm 8 24, 48 – French law 8 51 – German law 8 51 – Modification 8 4 – Proposals 8 47 – Rejection of 8 52 – Requirements of 8 45 – Revocation of 8 4, 43, 48 f. – Silence 8 4 – Standard terms 9 2, 103 – Termination of 8 52 Ordre public – Cross border litigation 30 90 – International arbitration 30 92 Pacta sunt servanda 4 28, 22 79 Pacte de préférence 3 216 Parol Evidence Rule 1 20, 4 50, 113, 14 4, 31, 22 136, 23 24, 111 ff., 130 ff., 141 ff. – CISG 14 38 f., 23 116, 135 – Classification of 23 131 – Exceptions to 23 115 – Extrinsic material 14 37 – Merger clause 23 204 ff., 208, 221 – Surrounding circumstances 23 129 Partial avoidance – CISG 20 36 ff. Partial breach – Avoidance 20 8 Payment 16 63 – CISG 13 82 – Documentary Collection Transaction 13 21 ff., 82 – Documentary Credit Payment 13 21 ff. – Late 19 20, 90, 93, 20 91 f. – Partial 20 86 ff. – Place of 6 124 f., 129 f., 130 Perfect tender rule 20 41, 48, 95, 104, 28 73 Performance 17 1 ff. – Additional time 21 28 – Advance 18 20 – Assurance of 18 5 ff., 7 f., 24, 26, 20 106 ff.

1090

– CESL 17 37 ff. – Chinese law 17 86 ff. – CISG 17 3 ff. – Defective 14 21 – Documents of title 13 12 – English law 17 62 ff. – Exemption 21 16 – Express 14 21 – French law 6 131, 17 69 ff. – German law 17 47 ff. – Good faith 17 5 ff., 20, 96, 28 38 – Implied 14 21 – Impossibility 11 45 ff. – INCOTERMS 10 36 – Insecurity of 18 5 ff., 17 – Late 14 21, 17 11, 20 14, 51 – PECL 17 27 f. – Place of 6 107 ff., 120 ff., 127, 17 96 – Refusal of 17 10 – Spanish law 17 78 ff. – Suspension of 18 1 f., 20 49 – Time of 17 96 – UCC 17 55 – UNIDROIT Principles 17 16 ff. Positive interest 3 127 Post-contractual obligations 4 112 f., 29 1 ff., 11, 134 – Ancillary clauses 29 163 – CISG 29 15 – Distribution agreement 27 109 – Distributor agreement 29 154 – Duty to fulfil outstanding orders 29 154 Precontractual documents 3 18, 188 ff. Precontractual duties 3 24, 30 ff., 50, 54 Pre-contractual instruments 3 188 ff., 190 ff., 194 ff., 197 ff., 203 – Agreement in principle 4 14, 79 – Heads of agreement 4 14 – interpretation of 3 200 – legal effects of 3 197 ff. – Letter of Intent 4 42, 47, 76 ff. – Lock-out agreement 4 15, 31, 47, 86 ff. – Memordandum of Understanding 4 79 – Negotiation agreement 29 83 – Preliminary agreement 4 2, 123 – types of 3 200 ff. Precontractual investment 3 12 Precontractual liability 3 1 ff., 12 f. – and fault 3 100 – and the CISG 3 55, 56, 77 ff., 81 ff. – Bad faith negotiations 4 1, 15 – Breaking off negotiations 4 5, 12 – classification 3 19 ff. – Confidentiality 4 1 – contributory fault 3 128 – Culpa in contrahendo 4 5, 37 – damages 3 55, 121 ff. – Disclaimer 4 16 – Disclosure, Duty of 4 1 – in Chinese law 3 73 ff., 138 ff.

Index – in Dutch law 3 71, 135 ff. – in French law 3 66 ff., 131 ff. – in German law 3 62 ff., 130 – in Italian law 3 70 – in Spanish law 3 69 – in the civil law 3 1 ff. – interim nature of 3 22 f., 54 – PECL 3 57 ff., 129 – PICC 3 57 ff., 129 – Promissory estoppel 4 1, 15 – remedies 3 55, 121 ff. – specific performance 3 55 Precontractual reliance 3 12 Precontrato 3 196 Pre-emption agreement 3 216 Preliminary agreement 3 13, 198 Prescription 19 102, 26 96 Price – Adaptation of 28 3, 47 ff., 53 – Determination of 8 27 – Fluctuation 28 48 f. – Indexing 28 66 ff. – Inflation 28 48 – Market 20 32 – Payment of 17 6 – Protection of 28 60 – Recovery of 20 34, 96, 101 ff., 104 Price escalation clause 22 159 Price Reduction 19 110 ff., 20 44 – Application of 19 4 – Calculation of 19 110 – Civil Law 19 112 – Non-Fundamental breach 21 29 – Notification duty 16 56 Private international law 1 5, 4 15 ff., 5 4, 26, 30 2 – Hague Conference on Private International Law 6 24 – Lex fori 6 7 Privity of contract 24 68 Producer’s liability – Commercial guarantees 24 40 ff. – Non-contractual 24 49 ff. – Public statements 24 44 ff. – to consumer 24 22 ff. – Warranty claims 24 26 ff. Product liability insurance 29 68 Product safety – Recall rules 24 92 ff. Promesse unilatérale 3 213 Promissory estoppel 4 30, 42, 44, 78, 114 ff. – Interpretation – Parol evidence rule 23 115 – Restatement (Second) of Contracts 4 1, 115 Protection of debtors and defences 25 5 Public bidding 3 37, 166 f. Public policy – Choice of law 30 30, 83 – Hague Convention 1955 30 42

– Party autonomy 30 87 ff. Public statements 24 45 – English law 24 47 – EU Consumer Sales Directive 24 46 – German law 24 44 – US law 24 48 Reallocation of costs 3 203 – in PCI 3 218 ff., 221, 240 ff. Reasonable expectations 22 9 Reasonable reliance 3 32, 88, 96 f., 160 f. Reasonableness and fairness 3 21 Reasonbale reliance 3 90 Rebus sic stantibus 22 10 Receipt principle 8 42, 20 69 Redelijkheid en billijkheid 3 71 Reduction 7 3 Rejection – Damages 20 99 – Notice of 20 95 – of goods 20 95 f., 104 Relational Contracting, Theory of 28 21 Reliance 3 27 – precontractual 3 12 – reasonable 3 32, 88, 90, 96 f., 160 f. Reliance interest 3 14, 55, 123 ff. Remedies 18 7, 20 25, 44, 54 – Agreed damages 19 75 – Avoidance 18 1, 19 60, 21 24 – Breach of confidentiality 29 108 – Breach of warranty 29 33 – Buyer 21 24 ff. – Cancellation 20 32 – CESL 17 43, 22 56 – Chinese law 17 89 – CISG 14 20, 17 7 – Cumulation of 19 101, 111 – Damages 19 1 ff., 21 29 – Default clause 28 42 – English law 17 62, 66 – French law 17 72 f. – German law 17 47, 50 – Limitation of 20 28, 29 58 ff. – Mitigation 19 80 f., 107 – PECL 17 31 – precontractual liability 3 55, 121 ff. – Price reduction 19 1, 21 29 – Products liability 24 67 ff. – Secondary 19 1 ff., 17 f. – Seller 24 88 – Spanish law 17 81 ff. – Specific performance 19 1 – Termination 20 29 – UNIDROIT Principles 17 21 – Warranties 29 48 – Withholding performance 19 60 Renegotiation, Right to 28 8, 32, 38, 56 ff., 60 Reputation 13 5 Res judicata 6 10

1091

Index Restatement (Second) of Conflict of Laws 30 50 Restatement (Second) of Contracts 25 4 – assignment 25 31, 54 – Delegation of performance of duty 25 32 Restitution 21 31 – Avoidance 20 16, 26, 72 ff., 94, 96 f., 101, 119 f. – CESL 20 78 ff. – CISG 20 72 ff. – Exceptions 20 73, 79 – Goods 21 26 – Interest 19 96 f. – Limitation of 20 30 – PECL 20 78 ff. – PICC 20 78 ff. – Termination 20 30 ff., 34, 78, 96 f. Retention of title 13 6, 29 81 Revocation of an offer 3 85 Risk 20 43 – Allocation of 13 4 ff., 21 1 ff., 16 ff., 22 52, 28 31, 35 f., 39 – Avoidance 20 13, 16 – Burden of proof 21 61 – Carriage 21 20, 30 – Definition 21 13 – Delivery 12 6, 21 60 f. – Financial 13 6 – Force majeure 21 15, 19 – Implied allocation 22 33 – INCOTERMS 10 34, 21 36 f. – of transmission 16 58 f. – Payment 21 15 – Physical 13 7 – Reservation of title 21 33 – Retrospective allocation 21 49 ff. – Sale in transit 21 48 ff. – Transfer of 21 1 ff., 22 ff., 32 ff., 41 ff., 22 32, 78 Rome Convention 5 37 Rome I Regulation – Burden of proof 30 98 – Choice of law clause 30 95 – Depeçage 30 37 – Factual connection 30 45 – Habitual residence 30 39 – Mandatory rules 30 40 – No choice by parties 30 39 Sale – “as is” 29 48 – Commercial 5 1 f. – Conditional 29 118 – Consumer 5 1 f., 28 – Definition of 5 27, 28 6 f. – Distribution contracts 5 1 – English law 5 45 – Framework agreements 5 1 – French law 5 43 – German law 5 39 ff. – in transit 21 48 ff.

1092

– Manufacture 5 29 – Mixed 5 30, 29 6, 11, 82, 118 – of Software 5 27 – Reverse 21 31 – Service contracts 5 3 – Spanish law 5 42 ff. – US law 5 44 Scottish law – Good faith 4 38 ff. Sequential agreements 4 48 Serious breach 20 7 Set-off 20 76, 26 6, 29 102 – Chinese law 26 107, 116 – CISG 26 109 – Common Law 26 115 – Conditions of 26 108 – Definition of 26 106 – French law 26 107, 114 – German law 26 107, 113 – Mutuality of claims 26 106, 108 – Notice of 26 108, 111 – PECL 26 107, 112 – Spanish law 26 107, 114 – UNIDROIT Principles 26 107, 110 f. Sincerity clause 3 215 Software – Applicability of CISG 5 9 – CISG 5 27 – Nature of 5 5, 9 Specific performance 17 94, 19 39, 98 ff., 103 f., 20 44 – by buyer 19 99, 105 – by seller 19 99 – CESL 17 38 – Common Law 19 109 – English law 17 62 – Exclusion 17 16 – German law 17 47 – Good faith 19 104 – Mitigation 19 81 – PECL 17 27 f. – precontractual liability 3 55, 133, 136, 139 – UCC 17 55 Stand-alone (severable) clauses 3 203 Standard terms 4 55, 8 30 – "Battle of the forms; last shot rule" 9 18 – Adaptation of contract 9 6 – Agreement on 6 101 f. – Battle of the forms 9 29, 39, 59, 66, 76, 83, 89, 97, 109 – CESL 9 40 ff. – Chinese law 9 91 ff., 23 75 – CISG 9 9 ff., 23 78, 84 – Consumer contracts 9 17, 28, 32, 46, 53, 58, 65, 75, 78, 82, 88, 96 – Definition of 23 84 ff. – English law 9 69 ff. – Express incorporation 9 11 ff., 26, 35 ff., 43 f., 44 f., 52 ff., 62 f., 72 f., 79 f., 86, 92 f. – Fair notice 9 100 f.

Index – – – –

French law 9 78 ff., 23 75 German law 9 49 ff., 23 75, 213 Incorporation 9 20 Incorporation of 5 10, 9 1 ff., 7, 10 ff., 24 ff., 35 ff., 42 ff., 72 ff., 79 ff., 103 ff., 23 62 – Incorporation of, implied 9 15 f., 27, 38, 45, 56 f., 64, 74, 81, 87, 95 – Interpretation of 23 85 – Italian law 23 75 – Jurisdiction clause 6 13 – Knock-out rule 9 19 – Knowledge of 9 2 f. – Notice of 9 23, 108 – PECL 9 32 ff., 23 78 – PICC 9 22, 23 78, 84 – Public policy 9 3 – Spanish law 9 85 ff. – UCC 9 61 ff. – Validity of 5 31, 9 1, 21, 31, 48, 60, 68, 77, 84, 90, 98 Statute of Frauds 4 51 f., 54 Stop-gap agreement 4 59 Strategic contracting 28 63 Subject to board approval 3 211 Subject to contract 3 209 f. Subject to form 3 209 f. Substitute transaction 20 32, 101 – Anticpatory breach 18 71 f., 19 60 – Damages 19 20, 20 35, 22 105 – Mitigation 19 59 f., 84 – Reasonableness of 19 4, 58, 61 – Time of 19 59 Suspension of performance 18 5 ff., 24 ff., 20 4, 49, 22 23 – CESL 22 56 – CISG 26 30 – Damages 18 28 – Fundamental breach 18 21 – Goods in transit 18 23 – Limitation 18 20, 30 – Notice of 18 7 – Successive contracts 18 31 f. – Termination 22 23 Termination – Accumulative breaches 28 73 – and avoidance 20 3, 25, 29 ff. – Chinese law 17 89 ff. – Clause 28 39, 29 144, 155, 158 – Commercial agency 27 84 ff. – Damages 20 35, 99 – Distribution agreement 27 84 ff. – Effect of 20 29 ff., 40 – English law 17 65 f. – Excuse 22 126 – Force majeure 28 62 – French law 17 72 ff. – Fundamental breach 17 23 ff., 20 91 f., 102 ff. – Hardship 28 21 – Long-term contract 28 8, 39

– Notice of 20 69, 88 – of offer 8 52 – Partial 20 38 ff., 56, 102 ff. – PECL 20 29 ff. – Restitution 20 30 ff., 34, 78, 96 f. – Retraction of 20 69 – Spanish law 17 83 – UNIDROIT Principles 17 22, 20 29 ff. Terms, common – Agreed damages 19 3, 71 ff., 75 – Anti-Evergreen 29 157 – Anti-solicitation 29 132 ff. – Arbitration 6 143 ff., 20 28, 28 44, 29 163 – As is 1 14 ff. – Avoidance 20 85 – Best-efforts 27 102 f., 29 158 – Blanket clauses 1 19 – Choice of law 1 6, 5 4, 33, 29 12, 30 77 ff. – Confidentiality 20 28, 27 105, 29 83, 85, 90 ff., 104 f., 108, 162 f. – Correction 28 55 – Default 22 160, 27 106 ff., 28 42 – Delayed performance 22 120, 161 – Dispute resolution 28 45 – Early termination 28 39 – Entry into force 4 79, 82 – Escape 22 137 – Force majeure 22 4, 27, 132, 134, 141 ff., 28 35 f., 43, 62, 64 – Garden leave 29 132 ff. – Government approval 22 162 – Gross inequities 28 69 f. – Hardship 22 4, 94, 155 ff., 28 33 – Hold harmless 29 66 – Indemnity 4 128, 22 163, 29 167 – Independent Contract 29 139 ff. – Indexation 22 164 – Intervener 22 165 – Jurisdiction 5 33, 6 143 ff., 20 28 – Limitation of liability 29 56, 69 – Liquidated damages 5 31 – Lock-out 4 15, 31, 47, 86 ff., 127 – Market reopener 28 70 – Merger 1 20, 4 51 f., 9 107, 28 43 – Minimum sales 29 158 – No Oral Modification 1 20, 23 216 – Non-challenge (validity) 29 77, 99 – Non-competition 27 95, 29 99, 126 ff. – Non-infringement 29 56 – Non-Partnership 29 138 – Non-reciprocal grant-back 29 98 – Non-use 29 90 – Ownership of data 29 164 – Patent indemnity 29 56 ff. – Penalty 5 31, 19 3, 71 ff., 20 28 – Price escalation 22 159, 28 3, 10 f., 37 f., 47 ff., 66 ff. – Price indexation 28 53 – Product liability 29 168 – Recitals 28 71 f. – Renegotiation 22 166, 28 3, 37, 53 ff., 62 – Reservation of title 27 105

1093

Index – Rights in data 29 165 – Single-use only 29 118 – Standstill 4 86 – Sub-agents 29 151 – Survivability 29 160 ff. – Take or Pay 22 167 – Termination 27 106 ff., 29 144, 155, 158 – Time of the essence 1 29 – Whereas 1 33 – Work for Hire 29 142 The UN Convention on the Assignment of Receivables in International Trade 25 6 Third party – Buyer’s knowledge of rights 15 67 ff. – CESL 15 14 f. – CISG 29 46 – Claims 5 32, 29 46 – Excuse 22 20 – Intellectual property 15 3 ff., 15 – Liability to 15 20 – Limitations 15 52 ff. – Notice, of claim 29 17 – Rights 29 2, 46 – Seller’s knowledge of rights 15 52 ff. – Territorial limitations 15 41 ff. Threat 26 1 f. – Avoidance for 20 2 – CESL 26 64 – Chinese law 26 71 – English law 26 67 – French law 26 64 ff. – German law 26 65 f. – Intimidation 26 63 ff., 66 – PECL 26 64 – Physical duress 26 66 – Restatement (Second) of Contracts 26 69 f. – Spanish law 26 64 ff. – UNIDROIT Principles 26 64 Tracking chips (Radio-frequency identification or RFID) 1 40 Trade secrets 3 119, 4 105, 107 ff., 29 35, 96 – Uniform Trade Secrets Act 4 22 f. Trade terms 10 1 ff., 50 ff. – Franco, free 10 51 – ICC 13 95 f. – INCOTERMS 13 95 f. – Purpose 10 2 f. – Relevance 13 20 Trade usage 4 50 – Art. 9 CISG 1 9 ff., 22 136 – Excuse 22 136 – Hardship 22 100 – INCOTERMS 10 43 f. – Internationally known requirement 1 10 – Ought to have known standard 1 10, 13 Transfer of title 13 6, 9 Transport – Documents 13 12 Treu und Glauben 3 52, 4 37 – Interpretation – Good faith 23 102

1094

UCC 25 24 – Alienability of debtor’s rights 25 28 – Assignment of rights 25 26, 27 – Conspicuousness requirements 29 58 – Contextual interpretation 4 50, 23 65, 209 f. – Debtor protection 25 28 – Delegation of performance 25 25 – Delegation of performance of the duties 25 27 – Firm offer 8 50 – Good faith 4 58, 17 56, 26 81, 84, 88 – Impracticability 22 69 ff. – Standard terms 9 61 ff. – Unconscionability 26 74 UCP 600 – Force majeure 22 142 UN Convention on the Assignment of Receivables 25 3 UN Electronics Convention 7 29 ff. UNCITRAL 25 3 – Model Law 7 6 Unconscionability 3 15 Unconscionability, Doctrine of 26 74, 28 21 Undue influence 3 15, 26 1 – English law 26 68, 78 – Restatement (Second) of Contracts 26 70 Unfair exploitation 26 1, 72 ff. – CESL 26 72, 76 – Chinese law 26 79 – English law 26 78 – Excessive benefit 26 75 – French law 26 77 – German law 26 72, 77 – Gross disparity 26 75 – PECL 26 72, 76 – unfair advantage 26 75 – UNIDROIT Principles 26 76 UNIDROIT Convention on International Factoring 25 3, 6 Uniform Commercial Code (UCC) 25 4 Uniform Electronic Transactions Act (UETA) 1 37 Uniform Trade Secrets Act 4 107 f. Unilateral promise 3 213 Unjust enrichment 4 30, 40, 44, 109, 115 Usury 19 91 Validity 7 1 ff., 11 6 – Formal requirements 11 39 – PECL 26 21 Venire contra factum proprium 3 21, 24, 54, 78, 130 Venue 6 1 Vitiation of consent 3 44 Voidability 3 42 ff. Vorvertrag 3 196

Index Warranty 29 58 – After-sales service 29 68 – against dispossession 15 29 f., 36 – Allocation of 29 61, 68 – Breach of 29 33 – CISG 14 17 ff., 41, 29 15, 44 ff. – Conflicting 29 31 – Consumer protection 29 15 – Disclaimer of 29 29 f., 69 – Disclaimer, to ultimate purchaser 29 72 – Duration of 29 60 – Exclusion of 14 68 ff., 29 27 – Exporter-importer-ultimate purchaser 29 61 ff. – Express 14 1 ff., 25, 29 28, 62 – Extension of 29 60 – Formal requirements 29 29 f. – French law 24 31 ff. – implied 14 1 ff., 25, 15 10 ff., 26 ff., 29 27, 48 – Infringement claims (IPR) 15 10 ff., 35 f., 29 46, 49 ff. – Interpretation of 14 4, 29 31

– Latent defect 4 104 – Liens, free of 29 49 – Limited express 29 58 ff. – No modifications 29 73 – Notion of 29 48 – of quality 1 14 – of title 1 14, 15 32, 35, 29 49 ff. – Patent indemnity 29 56 – Post-contractual 29 7 – Producer’s liability 24 26 ff. – Product liability insurance 29 68 – Quiet possession 15 28 – Remedies 29 33, 48, 62 – Survival clause 29 48 – Title 15 21 ff. – Trade usage 29 30 – UCC 29 27 ff. – Ultimate purchaser 29 63 ff. – Warranty bond 29 67 Withdrawal of an offer 3 84

1095