Source: http://www.cisg.law.pace.edu/cisg/biblio/kritzer2.html
Timestamp: 2019-04-26 16:57:25+00:00

Document:
Adapted excerpt from Albert H. Kritzer ed., Guide to Practical Applications of the United Nations Convention on Contracts for the International Sale of Goods (Kluwer Law International (1994). Reproduced with permission of the author.
- Should One Exclude It?
The application of the Vienna Convention is limited in four important respects: first, it governs only international sales; second, it applies only to the commercial sale of goods; third, it does not apply to certain questions often encountered in sales transactions; and fourth, the parties are free to exclude the application of the Convention, or vary the effect of its provisions.
A sale is international and the Convention applies if the parties to the contract have their places of business in different Contracting States. Art. 1(1)(a). Where a party has more than one place of business, the relevant place of business is the one most closely connected to the sales transaction. Art. 10(a). The Convention also applies when the parties' places of business are in different States and conflict of laws rules point to the application of the law of a Contracting State. Art. 1(1)(b). Under Article 1(1)(b), the Convention could apply where only one party has its place of business in a Contracting State and, conceivably, where neither party has his place of business in a Contracting State. The United States has made a reservation excluding the application of Article 1(1)(b), so that, in the typical transaction, the Convention will only apply to a U.S. party where both contracting parties have their relevant places of business in States that have ratified the Convention.
The Convention applies to a commercial sale of goods with two exceptions. First, the Convention expressly excludes coverage of consumer sales (unless the seller neither knew nor ought to have known that the goods' were purchased for consumer use). This is an exclusion of consumer sales; not an exclusion of consumer goods. The Convention also excludes securities transactions (including negotiable instruments) and sales of ships, aircraft and electricity. Art. 2. Second, the Convention excludes sales in which (apart from manufacturing or producing the goods) labor or other services constitute a preponderant part, and manufacturing contracts where the buyer supplies a substantial portion of the materials. Art. 3. The Convention does not define the words "preponderant" or "substantial". Where labor or other services (apart from manufacturing or producing the goods) constitute a significant portion of a contract or where important materials are supplied by the buyer and the parties desire to have the contract governed by the Convention, it would therefore be prudent to specifically state in the contract that the Convention shall apply, notwithstanding the provisions of Article 3.
The Convention does not address certain questions that arise frequently in the area of sales law. Unlike the U.S. Uniform Commercial Code, the Convention does not contain provisions on letters of credit, methods of perfecting security interests in goods and other commercial subjects, many of which can also be relevant to sales of goods.
Finally, the scope of the Convention is limited (or expanded) by the Convention's recognition of the principle of freedom of contract. The Convention specifically provides that parties are free to exclude the application of the Convention or derogate from or vary the effect of any of its provisions. Art. 6. Subject to domestic validity laws that may remain applicable, counsel preparing contracts to which the Convention applies therefore have the latitude to include clauses in their contracts modifying or eliminating various provisions that the Convention would otherwise mandate.
* Wherever possible, it was the intent of the Convention to use "words that refer to physical events that occur world-wide rather than legal idioms that vary from culture to culture." John O. Honnold, "Uniform Words and Uniform Application". The 1980 Sales Convention and International Juridical Practice", Einheitliches Kaufrecht and Nationales Obligationenrecht, Schlechtriem ed. (Baden-Baden: Nomos Verlagsgesellschaft, 1987), p. 119. ** Jacob S. Ziegel, in: Galston & Smit ed., "International Sales: The United Nations Convention on Contracts for the International Sale of Goods" [Parker School Text], Matthew Bender (1984), p. 9-5. As stated by Fatharly, "The Convention ... is a uniform standard for the conduct of international trade created by the marrying of several legal systems. It is for this reason that it has been widely accepted, and also precisely the reason why particular care should be taken when applying it." Mark Fatherly, "The Implications of Australia's Implementation of the Vienna Sales Convention", Lex Mundi World Reports (Supplement No. 30, December 1993), p. 21.
Counsel trained in the common law and the U.S. Uniform Commercial Code will find some surprises in the Convention's rules on formation of contracts.
Acceptance of an offer under the Convention is effective when it reaches the offeror and not when mailed as provided by the common law "mailbox rule". Art. 18(2). However, the Convention retains the most important effect of the common law "mailbox rule"; an offeror may not revoke an offer once the offeree has dispatched his acceptance. Art. 16(1).
The Convention's rules on revocation of offers vary somewhat from the UCC. Article 16(2)(a) provides that "an offer cannot be revoked if it indicates, whether by stating a fixed time for acceptance or otherwise, that it is irrevocable". Section 2-205 of the UCC states that an offer is not revocable if "by its terms [it] gives assurance that it will be held open". The difference in language allows tribunals more latitude in determining irrevocability than under the Uniform Commercial Code. Furthermore, while the UCC places a three month time-limit on the irrevocability of "firm" offers given without consideration and not renewed, the Convention seems to have left open the question of how long such an offer can remain irrevocable. Article 18(2), however, does state that when no time for acceptance is fixed, acceptance must occur within a reasonable time, taking due account of the circumstances.
Article 16 attempts to reconcile the wide variations in national rules regarding the revocation of offers. However, it contains traps for the unwary common law attorney. For example, a party intending to make an offer which will lapse after a stated period of time but may be withdrawn in the interim, may find that he has the burden of proving that such an offer can be revoked during the stated period. An offeror wishing to protect himself against a finding that he made an irrevocable offer, or desiring to maintain the right to revoke a "firm" offer after three-month's time, would be well advised to modify the application of Article 16 by appropriate language reserving the right to revoke the offer.
"Battle of the forms" is the term used to describe the situation in which both parties rely on printed terms and conditions (such as the fine print provisions that appear on the back of purchase order and acceptance forms) and there are discrepancies between the buyer's form and the seller's form which are not expressly resolved. This often occurs when neither party pays sufficient attention to the provisions printed on the form used by the other party. Battles of the forms present problems everywhere and under every commercial code none of which offers a perfect solution.
Before either party has taken further action, there is a rise or fall in the price of the goods. Was there a binding contract or can the disadvantaged party "renege"?
There has been performance. A dispute arises. What terms and conditions apply?
The alert to U.S. practitioners is that the Convention resolves both scenarios in a somewhat different manner than the Uniform Commercial Code.
Scenario One. The Convention's rules on what constitutes a valid acceptance are more rigid than those contained in the UCC, and seem to approach the common law "mirror image" rule. The basic rule contained in Article 19(1) is that if an offeree's purported acceptance contains any additions, limitations or other modifications of the offer, the acceptance operates as a rejection and a counter-offer. Article 19(2) goes on to state that unless the additional terms "materially alter" the terms of the offer, they constitute a valid acceptance and become part of the contract in situations in which the offeror has not objected to the discrepancy. Section 2-207 of the Uniform Commercial Code, on the other hand, begins with the proposition that a reply containing additional or different terms operates as an acceptance unless the acceptance is expressly made conditional on the offeror's assent to the additional terms.
The Convention's definition of terms that "materially alter" an offer includes terms relating to price, payment, quality and quantity of the goods, place and time of delivery, the extent of one party's liability to the other, or dispute settlement clauses. Art. 19(3). That definition is likely to include some terms that may not materially alter an offer under the UCC. The practical result of Article 19 may be that when standard printed forms are exchanged that do not match, fewer enforceable contracts will result than under the Uniform Commercial Code.
Scenario Two. The Convention and the UCC will probably lead to different results in the event the parties exchange conflicting standard printed forms and subsequently perform. Assuming that the offeree's reply contains terms that are materially different from the offer, the UCC provides that the. resulting contract will include only those terms on which the writings of the parties agree, excluding conflicting terms. UCC 2-207(3). The Convention, on the other hand, treats the material additions as a counter-offer and, depending on the circumstances, the offeror's performance may be regarded as an acceptance of a contract containing all of the offeree's modifications. Arts. 18-19.
Practical Responses. When you have a customer with whom you enter into frequent purchase order and acknowledgement transactions, the master agreement (i.e., an overriding contractual arrangement between the parties) is a practical response to problems presented under both scenarios. Where you do not have that, you are probably in a better position under Scenario Two if you are the one who fires the last shot in this "battle", e.g., an acknowledgement form in response to a buyer's purchase order.
Damages for precontractual liability appear to remain subject to regulation by applicable domestic law, not the Convention.
One of the most significant differences between the Convention's rules on contract formation and U.S. practice is the lack of a Statute of Frauds. Article 11 specifically provides that "A contract of sale need, not be concluded in or evidenced by writing ... it may be proved by any means, including witnesses." In this instance, the Convention has adopted a rule that is prevalent in many foreign jurisdictions, but not necessarily in the United States. Countries ratifying the Convention may make a reservation (called an Article 96 declaration) to the applicability of Article 11, thereby eliminating this provision. When a Contracting State has made an Article 96 declaration, some commentators believe that its Statute of Frauds will always be preserved. Others are of the opinion that the answer turns on principles of conflict of laws of the forum: if they point to the law of the declaring State, a writing may be necessary; but if they point to the law of a non-writing State, no writing will be necessary despite the Article 96 declaration.
In order to avoid having significant issues arise that can be proved or disproved without the benefit of written documentation, an offeror anxious to have a writing requirement may state as a material condition of his offer, that any acceptance must be in writing. The offeree, on the other hand, might be well advised to reiterate in writing the terms of the offer along with his acceptance and add that the offer and its acceptance contain all the terms and conditions of the agreement between the parties, which terms may not be varied except in writing. Similarly, as authorized by Article 29(2), parties can incorporate their own "Statute of Frauds" in their contract. In this clause, parties may also wish to devise their own response to the fact that the Convention has no parole evidence rule.
An international sale will typically involve carriage of goods with the consequent problem of determining when the risk of loss or damage passes. The basic Convention provision states that when the sale contract involves carriage of the goods and the seller is not bound to deliver the goods at a particular place, the seller's obligation to deliver is met by handing the goods over to the first carrier. Art. 31(a). Risk of loss passes to the buyer at that moment. Art. 67(1) When the sale contract does not involve carriage, the seller's delivery obligation is satisfied by placing the goods at buyer's disposal either at the seller's premises or at the place of manufacture. Art. 31(b) and (c). Where delivery takes place at seller's premises on a day certain or within a stated period, the risk of loss passes when the buyer picks up the goods, or failing timely pick-up, when the goods are placed at buyer's disposal. Art. 69(l). Whether the choice of the time of delivery within the stated period belongs to the seller or to the buyer, however, is an open question.
Where delivery is at a place other than the seller's place of business, risk of loss passes to the buyer when delivery is due and when the buyer is aware that the goods are placed at his disposal. Art. 69(2). The Convention is silent on whether constructive knowledge by the buyer that the goods have been placed at his disposal is sufficient. A prudent seller will systematically send notices to the buyer that the goods are available.
Under Article 68 (one of the least clear provisions of the Convention), unless circumstances indicate otherwise, the risk of loss in goods sold in transit passes from the seller to the buyer at the time of the making of the contract. This differs from the traditional practice of having risk of loss in goods sold afloat or in transit pass from the seller to the buyer with retroactive effect from the start of the voyage. However, parties who desire retroactive passage of risk can so provide. Art. 6. This is the recommended response to Article 68.
The Convention deals with overall issues associated with Delivery and Risk of Loss in Articles 31-34 and 66-70. The Convention's rules on these subjects are expressed in much more general terms than the rules provided by the International Chamber of Commerce in Incoterms and, in some situations, the Convention does not resolve responsibilities e.g., for export licenses and export tariffs, as clearly as Incoterms. Also, Article 58(1) states that the buyer shall make payment "when the seller places either the goods or documents ... at the buyer's disposal". Incoterms, on the other hand, require that the seller provide the buyer with a receipt from the bailee, a bill of lading from the carrier or a delivery order prior to demanding payment. Moreover, banks issuing letters of credit generally follow Publication 400 of the International Chamber of Commerce which provides that "in [documentary] credit operations all parties concerned deal in documents, and not goods." A problem could conceivably arise created by the conflict between the Convention, Incoterms and Publication 400. Should a seller deliver goods FAS without obtaining a receipt in a sale governed by the Convention and financed by a letter of credit governed by Publication 400, the seller would be entitled to payment under the Convention since he had placed the goods at the buyer's disposal; but the buyer could argue, under Publication 400, that payment is not due since the buyer had not received documents.
In many cases, it is likely that Article 9 will resolve such potential conflicts in favor of the rules set forth in Incoterms and Publication 400 even without express contract attention to the subject. Article 9 states that "the parties are bound by any usage to which they have agreed" and that any usage "of which the parties knew of 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" is impliedly made applicable to the contract, unless the parties state otherwise. When it is your intent to apply Incoterms and Publication 400, a prudent approach is to avoid questions by specifically referring to these usages in your contract and to also state that, in the event of any inconsistency between the Convention and Incoterms or Publication 400, then Incoterms and Publication 400 shall govern the rights and obligations of the parties.
Incoterms do not determine passage of title, nor does the Convention. Art. 4(b). You look to the applicable domestic law (when the Convention applies, we refer to this as the gap-filling law). Under many domestic legal systems, if the parties have not specified otherwise, title will pass at the point at which, the goods are delivered to the buyer. However, this is not a universal rule. For example, under certain legal systems, title can pass at the time of the conclusion of the contract. Title passage can impact upon taxation and sales credit, as well as other matters. This is too important a matter to be left the vagueries of domestic law. To avoid surprises, the recommended response is to specify in your contract the point at which you want title to pass.
Standard terms and conditions of sale used by U.S. exporters frequently contain retention of title clauses. Such clauses are designed to allow a seller, through summary proceedings, to recover unpaid-for goods in the hands of an insolvent buyer. Article 30, in a section of the Convention entitled "Obligations of the Seller", on the other hand, states that the "seller must deliver the goods, hand over documents relating to them and transfer the property in the goods as required by the contract and [the] Convention" (emphasis added). However in view of Article 4(b) which provides that the Convention "is not concerned with ... the effect which the contract may have on the property in the goods sold", the better view would seem to be that the italicized language relates to seller's obligation under Article 41 (this obligation is comparable to the UCC 2-312 warranty of title against third party claims). Of course, as under other legal systems, exporters would be well advised to make express provision if they wish to retain title as a form of security interest after goods are delivered.
Article 54 states that the buyer is obligated to "take such steps as may be required ... to enable payment to be made". This language does not appear to present any problem, but the manner in which it has been interpreted may. A Secretariat Commentary states that Article 54 "does not, require the buyer to undertake that his efforts will result in the issuance of a letter of credit. When a letter of credit is required, it is best for seller to impose this obligation upon the buyer in a clear and unequivocal manner in his Terms of Payment clause. Article 25 is also relevant to that clause. Under the Convention, it can be more difficult to "avoid" a contract for noncompliance with letter of credit or payment obligations than to cancel a contract for this reason under the UCC. The Secretariat Commentary on an earlier version of Article 25 that was not changed in this respect states "It would seem that in most cases the buyer's failure [to pay the price ... or perform any of his other obligations] would amount to a fundamental breach ... only after the passage of some period of time" (emphasis added). Exporters would be well advised to state that failure to comply with the letter of credit, payment and other obligations recited in the contract's Terms of Payment clause shall be regarded as a "fundamental breach of contract". A contract clause such as this engrafts onto the Convention the "perfect tender" doctrine applicable to this situation under the UCC.
In considering the remedial scheme of the Convention, parties should at all times be aware of the "dominant theme" of the Convention: "the role of the contract" entered into by the parties.* Article 6 permits parties to vary by contract remedial provisions as well as other provisions of the Convention.
* Honnold, John O."Uniform Law for International Sales Under the 1980 United Nations Convention" [Honnold Text], 2d ed. (Kluwer 1991), p. 47.
In certain respects, buyer's contract remedies under the Convention can be more expansive than those available under the UCC. They include the right to claim damages, reduce the price, require specific performance, demand repair of the goods, cover and "avoid" the contract, or suspend performance of his obligations. Arts. 45-52, 71, 74-77. All of these remedies, except avoidance, are available in the event the other party "fails to perform any of his obligations under the contract or this Convention." Arts. 45, 61. The triggering of remedies upon a simple failure to perform is significant, since the Convention thereby steers away from civil law systems that condition the availability of certain remedies on the existence of fault and embraces the remedy system familiar to common law attorneys. Under certain circumstances, the Convention at the same time preserves compensating civil law remedies, thereby at times also giving the buyer the benefit of such remedies.
This is the Convention's counterpart to UCC 2-714 (Damages for Accepted Goods). Both the Uniform Commercial Code and the Convention allow consequential damages, both recite foreseeability tests which apply to time of conclusion of the contract, and both contain somewhat similar phrases: "ought to know" (Art. 74) and "reason to know" (UCC 2-714). However, Article 74 also refers to "possible consequences"; UCC 2-714 does not. The UCC standard is simply "reason to know". This is a common U.S. statutory phrase which, has been defined elsewhere as "awareness of substantial probability". The distinction between the Article 74 standard, awareness of possible consequences [i.e., awareness that a given result might occur]; and "awareness of substantial probability" may prove to be significant. Accordingly, it is not surprising that Article 74 is said to be "sufficiently flexible to accommodate further wisdom" with respect to "the allocation of costs of unanticipated or improbable developments". * Exporters desiring to remove the speculative from the bargains they make would do well to exclude responsibility for consequential damages in the Limitation of Liability clause they include in all contracts governed by the Convention.
* Honnold Text, op. cit. at 506.
Article 78 states that 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, and Article 84 states that if the seller is bound to refund the price, he must pay interest on it from the date on which the price was paid.
Interest as separate from damages. Article 78 also contains the statement that interest is recoverable "without prejudice to any claim for damages ... under Article 74." Because interest is separate from damages, a party can be obligated to pay interest even where damages are excused pursuant to the Convention's counterpart to force majeure (Art. 79). In this case, the fact that the existence of an Article 79(1) impediment does not, relieve a party from the obligation to pay interest on sums in arrears appears to be generally favorable to sellers.
Formula to be used to calculate interest and procedures to trigger the running of interest. Although neither Article 78 nor Article 84 sets forth the formula which should be used to calculate the rate of interest, the Secretariat Commentary (dealing with seller's obligation to pay interest when he is bound to refund the price) states: "Since the obligation to pay interest partakes of the seller's obligation to make restitution and not of the buyer's right to claim damages, the rate of interest payable would be based on that current at the seller's place of business." The Convention also does not refer to procedures to trigger the running of interest, e.g., the "sommation a payer" (formal notice) that is required under. French law: these procedures are probably excluded by Article 59.
The prudent approach is to insert in your contract explicit provisions regarding rate of interest and procedures to trigger its running.
Article 50 provides to buyers who have received non-conforming goods, a remedy borrowed from civil law but which may be in some respects more expansive than reduction-in-price remedies in effect in many civil law jurisdictions. When goods do not conform to the contract, the buyer who accepts such goods may unilaterally reduce the price by the proportion that the value of the goods as delivered bears to the value conforming goods would have had at that time. There is no direct equivalent to Article 50 in the Uniform Commercial Code. The closest UCC counterpart is the "self help" remedy provided in Section 2-717 which permits the buyer to deduct all or part of his damages from the purchase price still due. Article 50 goes beyond this; under the Convention the remedy of reduction in price is available even where the buyer has already paid the price. When a buyer is entitled to damages under Articles 45 and 74, the difference between such damages and a reduction in price under Article 50 will generally not be significant, since a buyer claiming damages is in effect claiming a reduction of the price. However, application of the formulas in Articles 74 and 50 can lead to different recoveries in the case of changing market prices; in some situations, the result is that a buyer who has made a bad bargain can come out better under Article 50 than under Article 74.
Another important difference between Article 50 and its UCC counterpart is that Article 50 also provides buyers a "safety net" to cover, cases in which they are unable to claim damages but nevertheless wish to keep goods that do not conform to the contract. Under Article 50, a buyer can reduce the price without having to be concerned with Article 74 defenses such as foreseeability of damages, force majeure (i.e., Article 79 exemptions) or, it has been said, failure to mitigate losses. Common law practitioners can perhaps best understand the safety-net aspect of Article 50 by thinking of it as a form of buyer protection which, in its own way, is somewhat akin to the protection afforded employees under no-fault workman's compensation laws. [As distinguished from such laws, however, in this case, if in doubt as to the availability of damages, it has been said that a buyer can seek relief under both Article 50 and Article 74 and take the best relief he can ultimately establish.] It should be noted that the buyer may not resort to the remedy of reduction in price if the seller is able to cure the non-conformity without causing the buyer unreasonable delay or inconvenience. In such a case, the buyer, nevertheless, retains the right to claim damages.
Exporters may wish to specifically exclude the application of Article 50, or phrase their Limitation of Liability clause so as to restrict buyer's remedies to those recited in other clauses of the contract, e.g., Liquidated Damages, Warranties and Patent Indemnities.
The right to require performance can be broader than under the UCC. Under the Convention, this right is not conditioned on inadequacy of damages; a seller need not demonstrate inability to resell prior to insisting on buyer's performance, nor must the buyer demonstrate inability to cover elsewhere prior to obtaining specific performance. Arts. 46, 62. However, the Convention makes an important concession to national law by providing that "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." Art. 28: The results will therefore depend, not on the substantive law of the contract but on the law of the forum. And if the law in effect in the geographic location of the tribunal before which an action is brought takes a liberal attitude toward specific performance, that remedy may be granted regardless of the substantive law of the contract. Here also, if desired, the right to specific performance can be curbed by a suitably phrased Limitation of Liability clause.
Cited above are two of the members of a triumvirate of civil law remedies that may be available to a buyer. Reduction in price is the first [unless the contract provides otherwise, this civil law remedy is always available when the Convention governs]. Specific performance, the second, is available to the extent permitted by the law of the forum in which complainant elects to sue [specific performance, in the present context, is termed a civil law remedy in the sense that civil law courts generally look upon expansions of the right to specific performance with less disfavor than common law courts]. The right to collect penalties [penalty clauses may be permitted in civil law jurisdictions but not in common law jurisdictions] is a third form of relief that may be available when the Convention governs.
The Convention itself is silent on the subject of penalty clauses. Therefore, when the Convention governs, the buyer's ability to enforce a penalty clause is governed by what the law of the contract would be if there were no Convention. If that law, i.e., the gap-filling law, is the law of a civil law jurisdiction, the buyer will generally have as an additional remedy the power to enforce a penalty clause; whereas, if the gap-filling law is of a common law jurisdiction such as the United States or Great Britain, he will not.
"Avoidance" is a remedy that can be similar to, but somewhat more difficult to come by than rejection, revocation of acceptance, or cancellation under the Uniform Commercial. Code. This remedy is only available under the circumstances indicated below. When avoidance is not available to an aggrieved party, he may nevertheless, in a proper situation, claim damages, seek specific performance or, if he is the buyer, exercise his right to reduce the price. Arts. 45, 61.
Buyer's right to declare the contract avoided. A buyer may declare the contract avoided when the seller commits a "fundamental breach of contract" (Art. 49), i.e., a breach of contract that results in a detriment to the buyer which substantially deprives him of what he is entitled to expect under the contract and which was foreseable by the seller or a reasonable person of the same kind in the same circumstances as the seller. Art. 25. Section 2-601 of the UCC permits a buyer to reject for any non-conformity. This right is, however, modified by "reasonable grounds to believe" and "substantial impairment of value" applicable to special situations described in UCC 2-504, 2-508, 2-608 and 2-612, respectively. Although there are similarities between aspects of these standards and the "substantial deprivation" and "foreseeability" standards of Article 25, there are cases in which it will be more difficult for a buyer to declare a contract avoided under the Convention than to revoke his acceptance or reject shipments and cancel a contract under the Uniform Commercial Code.
Seller's right to declare the contract avoided. The above distinction is more pronounced when one compares seller's rights under the Convention and the UCC. The Convention does not have anything akin to a "perfect tender" rule. Under the Convention, a seller may declare the contract avoided for reasons similar to those cited above, i.e., when the buyer commits a "fundamental breach of contract" (Art. 64): a breach of contract that results in a detriment to the seller which substantially deprives him of what he is entitled to expect under the contract and which was foreeseable by the buyer or a reasonable person of the same kind in the same circumstances as the buyer (Art. 25). UCC 2-703, on the other hand, gives to the seller the right of cancellation "Where the buyer wrongfully rejects or revokes acceptance of goods or fails to make a payment due on or before delivery or repudiates ..." Although, like Section 2601, UCC 2-703 is subject to the "good faith" requirement of UCC 1-203, Section 2-703 is not qualified by other UCC provisions to the same extent as Section 2-601. The net result is that it is generally more difficult for an aggrieved seller to declare a contract avoided under the Convention than to cancel a contract under the UCC.
Avoidance can be a thorny problem since the aggrieved party must be sure that the breach is fundamental before resorting to the remedy. One way to circumvent this problem in certain instances is by use of a remedy adapted from German law. Section 326 of the Civil Code of the Federal Republic of Germany has stated that where there is a default by one party "the other party may give him a reasonable time within which to perform his part with a declaration that he will refuse to accept the performance after the expiration of the period" and, if performance is not made in due time, the party who gave this notice (called a Nachfrist) may "withdraw from the contract". Articles 47 and 49 (Buyer's Rights) and Articles 63 and 64 (Seller's Rights) adopt a version of this concept. Under the Convention, in the event the seller delays in delivering the goods or the buyer fails to pay the price or take delivery, the aggrieved party may safely avoid the contract in this manner -- without regard to whether the breach was "fundamental".
There is no direct equivalent to the Nachfrist in the Uniform Commercial Code, but the Official Commentary to UCC 2-309 does state that "surprise is to be avoided, good faith judgment is to be protected, and notice or negotiation to reduce ... uncertainty to certainty is to be favored". Also, there is a mechanism for converting ambiguous. behavior into grounds for rejection which may be derived from UCC 2-609. Section 2-609 permits a party to demand adequate assurance when reasonable grounds for insecurity arise with respect to the performance of the other party and, until he receives such assurance, to suspend any performance for which he has not already received the agreed return, if such action on his part is commercially reasonable.
* E. Allan Farnsworth, in: Lausanne Colloquium, "1980 Vienna Convention on the International Sale of Goods" (Schulthess Polygraphischer Verlag, 1985), p. 105.
Rules on notice of lack of conformity of the goods are in some respects unique to the Convention. Similarities and differences between CISG and UCC rules on this subject are summarized below.
Similarities. A buyer loses the right to rely on a lack of conformity if he fails to 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". Art. 39(1). A comparable reference to notice appears in UCC 2-607(3)(a) which provides that if the goods have been accepted, the buyer must give notice of a claim of breach "within a reasonable time after he discovers or should have discovered the ground for it."
Differences. UCC 2-606(l)(a) accords the buyer "a reasonable opportunity to inspect the goods"; Article 38(1) requires the buyer to examine the goods "within as short a period as is practicable in the circumstances". This suggests that a higher degree of promptness may be required under the Convention. A higher degree of specificity may also be required. Contrary to the rule that may, under various circumstances, exist under the UCC, a German court has held that a notice that merely called attention to "poor workmanship and improper fitting" of the goods was an unsatisfactory response to the Article 39(1) requirement that the notice specify "the nature of the lack of conformity" [HKO 3726/89, IPRax 1990, p. 316]. Buyers subject to the Convention should accustom themselves to greater specificity when sending notices of non-conformities. In addition, the Convention provides that a buyer loses the right to rely on a lack of conformity of the goods if he fails to notify the seller within two years of delivery, unless this time-limit is inconsistent with a contractual period of guarantee. Art. 39(2). In the case of latent defects, there are circumstances in which Article 39(2) can produce a harsher result than under the UCC.
Also to be considered is Article 44 which can interject an element of uncertainty. Delegates from developing countries were concerned about short notice periods, arguing that when their countries sold raw materials to buyers in industrialized countries, the buyers would have little difficulty discovering the existence of defects; yet when sellers from industrialized countries sold complicated machinery to developing countries, the buyers, might have difficulty identifying a defect within a short period of time. As a compromise, the Convention adopted Article 44 which provides that, notwithstanding Article 39(1), a buyer who fails to give notice within a reasonable time may reduce the price of the goods or claim damages, other than loss of profits, if the buyer has a reasonable excuse for his failure to give the required notice. The remedies of reduction in price and damages are exclusive of all other remedies. Also, the excuse permitted under Article 44 does not alter the absolute two-year cutoff date present under Article 39(2). A practical response to issues associated with Article 39(2) and Article 44 is to specify in the contract (in the warranty clause, for example) the cut-off period that is most appropriate to the product sold.
Article 79 comprises the Convention's version of a force majeure provision. The thrust of Article 79(1) is .that a party is not liable in damages for failure to perform if the failure was due to an "impediment" beyond the party's control and the party could not reasonably be expected to have taken the impediment into account when the contract was made, or to have avoided or overcome it or its consequences. Article 79(2) also provides that when a party's failure to, perform is due to the failure of a third party whom he has engaged to perform the whole or a part of the contract, then that party is exempt from liability only if the third party would be exempt from liability under the test set out in Article 79(1) as applied to the third party.
Article 79 appears to be more liberal than civil codes which define force majeure as an event which is unforeseeable and irresistible and that renders an obligation impossible to perform. However, the test for an exemption under Article 79 appears stricter than the "commercial impracticability" standard recited in the UCC. Also, the exemption provided by Article 79 is not as broad as the exemption under the Uniform Commercial Code.
Caveat. Article 79, although exempting the non-performing party from liability for damages, does not affect liability for interest or other remedies under the Convention, including an action for reduction of the price. Under the Convention, a buyer awaiting performance may opt to avoid the contract where the delay in performance amounts to a fundamental breach. In lieu thereof, the right to specific performance may be available even though performance becomes impractical following the extinction of the exempting event. Also, where the applicable domestic law allows penalty clauses, they may be enforced, despite the existence of a qualifying exemption.
* The Convention is not the only sales code that has had difficulty resolving such issues by statute. See, for example, White & Summers who state "Anyone who has concluded his first year contracts course in confusion about the doctrine of impossibility and has since had difficulty mastering 2-615 [of the Uniform Commercial Code] or has found that the cases somehow slip through his fingers when he tries to apply them to new situations, may take some comfort in knowing that he is in good company." Uniform Commercial Code, 3d ed., West (1988) p. 155.
Mitigation of loss is another concept that applies to an action for damages, but, it has been said, not to an action to reduce the price. There can also be cases in which mitigation of loss may not apply to an action for specific performance.
Most domestic legal systems, civil as well as common law, subscribe to the notion that a party in breach should not be penalized to the extent that the party with whom he contracts can, without adverse consequences, mitigate the loss that would otherwise be incurred. The Uniform Commercial Code requires parties to. act in "good faith" in performance or enforcement (Section 1-203) and parties cannot recover consequential damages that "could reasonably be prevented by cover or otherwise" (Section 2-715(2)). Also, Section 336 of the Restatement of Contracts denies recovery for "harm that the plaintiff should have foreseen and could have avoided by reasonable effort without undue risk, expense or humiliation."
The Convention refers to "good faith" in the interpretation of its provisions. Art. 7. In the first sentence of Article 77, the Convention also refers to mitigation in seemingly broad terms. However, the literal language of the second sentence of Article 77 is limited to claims for damages. Furthermore, the legislative history of Article 77 suggests that its draftsmen intended to limit its relief to claims for damages. Parties who subscribe to the philosophy of Section 336 of the Restatement of Contracts and wish to assure themselves that the concept of mitigation will apply to all remedies should engraft the desired mitigation concept onto a Limitation of Liability clause, or specifically refer to this subject elsewhere in the contract.
The Convention has a warranty of title comparable to that which exists under the Uniform Commercial Code, even though the Convention does not use the words "warranty" or "title". Article 41 provides that the seller must deliver goods which are free from any right or claim of a third party. This is comparable to Section 2-312(1) of the UCC.
Under Article 42(1) the seller has an obligation to deliver goods free from any right or claim of a third party based on industrial or intellectual property, of which the seller knew or could not have been unaware. The warranty contained in UCC 2-312(3) applies to "rightful" claims; it is not limited to claims "of which the seller knew or could not have been unaware". This is a case in which the Convention provides buyers less protection than does the UCC. The distinction between "rightful claims" and "claims of which the seller knew or could not have been unaware" may be significant when the seller knows of an intellectual property right but, based on an opinion of counsel, believes that right to be invalid or unenforceable. Also, under Article 42(2)(a) when the buyer has knowledge of a right but, based upon an opinion of counsel or prior relevant activity of the proprietor of the right, believes the right to be invalid, unenforceable or historically unenforced, the Convention may exempt the seller from an obligation if such right is raised or asserted, even if the seller also had prior knowledge of the right.
Another difference between the intellectual property provisions of the Convention and the UCC is that Article 42(2)(b) relieves the seller of responsibility for rights or claims resulting from specifications furnished by the buyer, whereas the UCC goes a step further and requires the buyer to indemnify the seller from the general obligation to deliver goods free of third-party claims when the buyer provides the seller with the specifications for the goods. Exporters manufacturing goods to buyers' specifications who wish to obtain an indemnity comparable to that provided under the Uniform Commercial Code should provide for it in their contracts.
Under the Convention, a seller has a four-fold obligation to deliver goods of quantity, quality and description required by the contract, contained or packaged in the manner required by the contract. Art. 35. Although the Convention and the UCC language covering express and implied warranties is not identical, operation of the two sets of rules would, in practice, likely lead to similar results.
The Convention and the UCC differ more substantially on the manner of excluding warranty obligations. As the UCC trained lawyer knows, to disclaim an implied warranty of fitness for a particular purpose and other express or implied warranties, the contract must contain certain words of art or expressions such as "there are no warranties which extend beyond the description on the face hereof", and the writing must be conspicuous. UCC 2-316. The Convention contains no such requirements. Article 35(2) states that the seller must deliver conforming goods "except where the parties have agreed otherwise" and it would seem that parties may by express agreement exclude warranty obligations simply with language that meets the general standards of clarity set forth in Article 8.
Limitation of Liability clauses often contain provisions such as the following: "This clause sets forth the exclusive remedies for claims based upon defects in or nonconformity of the Products, whether the clam is in contract, warranty, tort (including negligence) or otherwise" or "If circumstances occur which give rise to claims for damages based on contract, warranty, tort (including negligence) or otherwise, such claims shall be limited to ..." When the Convention applies, a reference to "claims for damages" should be expanded to encompass all remedies. There is also merit to a Definitions clause when one's disclaimer contains contract terms which are not used in the Convention -- the term "warranty", for example.
If the circumstances that occur are addressed by the Convention, the Convention permits parties to limit liability for claims which arise from such circumstances, without regard to the label that national law would assign to the claim. If, however, the circumstances that occur are not expressly provided for in the Convention, applicable national laws or public policy can affect the validity of certain limitations of liability. Article 4(a). Examples include domestic prohibitions against exclusions of liability for gross negligence or for the consequences of intentional acts. The impact of Article 4(a) may also be illustrated by a contract clause which states that liability shall not exceed the purchase price of the product, or part which gives rise to the claim, i.e., a clause that can be construed as limiting seller's responsibility to payment of the price of a $10 component which caused a $100,000 item of equipment to fail; and a domestic rule of law which provides that if the parties intended to conclude a contract of sale, they must accept the legal consequences that there be at least a fair quantum of remedy for breach of the obligations or duties outlined in the contract. That is the UCC rule.
A properly phrased Limitation of Liability ("LOL") clause is an extremely important part of an exporter's contract. A fringe benefit of the Convention may be that it will enhance the exporter's ability to "sell" such clauses to his customers. In U.S. domestic trade, it is not necessary to sell the LOL concept. LOL is an established standard clause that has been used for many years. Almost all U.S. firms utilize this concept, each in its own words, but with a similar fundamental approach. Therefore, the domestic customer rarely questions the concept; he is conditioned to accept it. A domestic negotiator would likely be astonished at the notion of actually having to sell an LOL clause; his customer's questions might go to specific wording, but rarely to the concept itself. This has come about as a response to consequential damage concerns present in the U.S. scene. In the international scene, when various foreign sales codes do not raise the spectre of consequential damages, it is not uncommon to find tenders that are silent on the subject of limitation of liability and which are accepted by foreign competitors without such protection. Consequently, the U.S. negotiator has often found himself at a competitive disadvantage, having to sell the LOL concept as well as the LOL clause he proposes. The Convention may help dissipate this competitive disadvantage. The risk of liability for consequential damages under Article 74 of the Convention may prove to be greater than the risk of liability for consequential damages under Section 2-715 of the Uniform Commercial Code. As the significance of this sinks in, it is probable that, in time, U.S. exporters will no longer be frequently faced with the need to sell the LOL concept when foreign competitors do not raise this issue. It is believed that, in time, all competitors (foreign as well as U.S.) whose contracts are subject to the Convention will propose LOT, clauses and that foreign customers will accept this as a "given" as do U.S. customers today.
"If under the contract the buyer is to specify the form, measurement or other features of the goods and he fails to make such specifications either on the date agreed upon or within a reasonable time after receipt of a request from the seller, the seller may, without prejudice to any other rights he may have, make the specifications himself in accordance with the requirements of the buyer that may be known to him. If the seller makes the specifications himself, he must fix a reasonable time within which the buyer may make a different specification. If after receipt of such a communication, the buyer fails to do so within the time so fixed, the specification made by the seller is binding."
By suitable contract language this concept may also be applied to other acts to be performed by the buyer which can affect timely performance, for example, inspections that must be conducted by the buyer prior to final performance. One can, for example, specify that if the buyer does not conduct such inspections within the period of time specified, the inspections shall be conducted by the seller on behalf of the buyer. In a similar vein, many contracts provide that when approvals are required, they shall be deemed to have been granted if inspection is not conducted within the time frame specified.
"The applicable text of the Convention shall be the official United Nations text in the language in which the Contract is written."
Jurisdiction and venue. The Convention does not purport to address jurisdiction and venue. This is left to the applicable domestic law. On the other hand, in an action for the purchase price, many domestic rules of procedure provide that jurisdiction and venue are at the place of payment and, the Convention's rules on this subject are 180� different from those of the UCC. UCC 2-310(a) states "Unless otherwise agreed ... payment is due at the ... place at which the buyer is to receive the goods even though the place of shipment is the place of delivery"; whereas CISG Article 57(1), which is more advantageous to international sellers, provides that unless otherwise agreed, payment is due "at the seller's place of business." This provision, which is designed to reflect the realities of national currency control regulations, makes more sense in this respect than its UCC domestic counterpart but, as indicated, it can also impact upon national rules on jurisdiction and venue in a manner that is not satisfactory to buyers. Buyers concerned with this may wish to insert a more favorable choice-of-forum clause in their contracts.
Part One (first order of precedence), the terms and conditions of the contract; Part Two (second order of precedence), the Convention [specific relevant provisions and if none, general principles on which the Convention is based]; and, if neither resolves the issue, Part Three (third order of precedence), the designated gap-filling law.
When your contract is governed by domestic law, a customary preference is if possible an arbitrator whose legal training is similar to yours. When the UN Sales Convention governs, recognize that here too, the background of the arbitrator may influence the results. Although Article 7 stresses uniform interpretation, it is unrealistic to assume that parties ruling on contracts who are "intimately familiar only with their own domestic law" will not be "subject to a natural tendency to read the international rules in light of the legal ideas that have been imbedded at the core of their intellectual formulation".* There can therefore be cases in which you will be better able to predict the outcome if the issues are ruled upon by an arbitrator from a country that has a legal and economic regime of a type with which you are familiar. Where, as is often the case, your options are limited to arbitrators from countries other than your own, knowledge of the nature of the domestic legal system the arbitrator was trained in can be helpful.
* Honnold, Documentary History of the Uniform Law for International Sales (Kluwer 1989), p. 1. The Convention contains certain conflict-compromises that may be susceptible to different interpretations depending on one's background. Among the main conflict-compromise lines reflected are continental-common law, East-West and North-South. Gyula Eörsi, "A Propos the 1980 Vienna Convention", 31 Am. J. Comp. L. 346 (1983). Potential problems associated with some of the conflict-compromise lines may be eliminated by careful contract draftsmanship. Articles 16(2), 44, 68 and 79(1) fall into this category. However, there is the reference to "general principles in Article 7(2) and there are other cases in which the spectre of different interpretations cannot be tempered as well by contract attention to issues. "Causality" and "foreseeability" (see Articles 74 and 25) are examples of concepts whose meaning may be influenced by an arbitrator's background. Similarly, "validity" (see Article 4) is subject to different interpretations and, therefore, can have varying shades of influence upon a contract, demanding upon the interpreter. "Good faith" is another such concept (see Annotated Text of Article 7(1) for citations to the conflict-compromise that led to the Convention's reference to good faith and the risk that it may be interpreted pervasively or narrowly depending upon the background of the interpreter). "Reasonableness" is a related concept. Common law attorneys can be surprised by the meaning given to "reasonableness" by, for example, a tribunal whose indoctrination has been socialist rigidity. Also to be considered are terms such as "fundamental breach", which although unique to the Convention, have overtones of domestic approaches ... an "echo of something familiar" . . . and therefore may be defined "according to the method to which [each legal system] is accustomed." Barry Nicholas, "The Vienna Convention", 105 L. Quarterly Rev. 219 (1989).
Article 1(1)(b), pursuant to Article 95, the United States, Czech Republic, China and Slovakia have declared that Article 1(l)(b) is not applicable to them. An Article 95 declaration is designed to help limit the application of the Convention to contracts between parties whose relevant places of business are in countries that have ratified the Convention.
Article 12. Declarations that preserve domestic Statutes of Frauds are in effect for Argentina; Belarus, Chile, China, Estonia, Hungary, the Russian Federation and Ukraine.
Part II (Formation of the Contract). Denmark, Finland, Norway and Sweden have declared, pursuant to Article 92, that the Convention's rules on Formation of Contracts will not apply to them.
Declarations that may be made by Federal States. Pursuant to Article 93, Denmark has declared that the Convention shall not apply to the Faroe Islands or Greenland, and Australia has declared that the Convention shall not apply to certain island territories external to it.
One of the reasons for enacting the Convention is to provide a uniform body of law in the event the parties fail to consider or agree on the applicable body of law. Notwithstanding this justification, the Convention specifically excludes certain issues normally encountered in international sales contracts. Articles 4 and 5 state that "The 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 any of its provisions or of any usages; (b) the effect which the contract may have on the property in the goods sold"; and "The Convention does not apply to the liability of the seller for death or personal injury caused by the goods to any person."
Other relevant matters, while not specifically excluded from the Convention, are not directly addressed by the Convention. The Convention is silent as to whether the parties may assign rights and obligations under a contract. The Convention does not define the rights of an aggrieved party when there is fraud. The UCC has extensive provisions on the perfection of security interests in goods sold (Section 9). The Convention does not address this subject. The Convention says nothing with respect to the responsibility of an employer for acts of employees or the capacity of an agent to bind its principal; questions of authority to act for another are to be resolved by applicable domestic law. The Convention does not attend to significant issues of law associated with letters of credit; nor does it define delivery terms in as comprehensive a manner as contracting parties generally desire. There are also issues which may or may not be regarded as within the purview of the Convention, "mistake" for example. When there is a mistake, some commentators believe that contract rights and remedies are in many cases governed solely by the Convention, except in the case of fraud. Others regard mistake as a validity doctrine that is reserved unto domestic law.
Assignments. Under the UCC, assignments are generally permitted unless the assignment would materially change the performance of a party or materially impair his chances of receiving return performance. UCC 2-210(2). In general, prohibitions of assignments are construed under the UCC as barring only the delegation of performance, not the assignment of rights. UCC 2-210(3). The UCC, in this respect, embodies the principle of the free alienability of assets and the related goal of the promotion of commerce. Promotion of trade through the harmonization of international sales law was a goal of the drafters of the Convention. Although the Convention is silent on the issue of assignability of contract rights, one might argue that the goal of the promotion of international trade should lead to the free assignment of contract rights, absent an express contract clause to the contrary. However, to eliminate any question as to whether a contract can be assigned, the parties should specifically address this subject in the contract.
Authority to Act for Another. The doctrine of "respondeat superior" (an employer is responsible for the acts of his employee) is not universal. Although the delegates to the Vienna Conference appear to have accepted at least one application of this doctrine (see Annotated Text of Article 80), if employees or representatives of the buyer are expected to conduct inspections or perform other duties, it would be prudent to state in your Inspection clause or elsewhere in the contract that the parties will be bound by the acts (or failures to act), acquiescence, statements and decisions of their employees or representatives (engineers, architects, inspection authorities, etc.).
Stale Law Suits. The absence of a time limitation for the filing of suits for damages or the exercise of other remedies is also a gap in the Convention. This gap can normally be filled by a suitable contract clause.
Letters of Credit, Delivery Terms, Passage of Title. In certain cases, the need to clarify issues associated with letters of credit and delivery terms may be accommodated under the Convention by its reference to established practices and usages. A suitable response to the need to clarify issues associated with letters of credit can generally be achieved by reference to the ICC's Publication 400; similarly, a suitable response to the need for more comprehensive coverage of delivery terms can generally be achieved by a contract reference to Incoterms. It is also good to specify in your contract the point at which title will pass.
Not all gaps can be as readily rectified by specific attention to the relevant issue in the contract. There is, therefore, a need for a reference to either general principles recited in the Convention or to some other body of law. Article 7(2) states "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." Where a matter is governed by the Convention but not expressly settled in it and the Convention contains no applicable general principles, Article 7(2) authorizes invocation of rules of private international law. It is probable that a tribunal construing this provision would make every effort to find applicable general principles in the Convention before applying the rules of private international law because Article 7(1) states that "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." However, the Convention does not seek to promote the uniform resolution of matters not governed by the Convention. The drafters of the International Convention for the Settlement of Investment Disputes were able to provide that national public policies would not be a defense to an award under that convention. The drafters of the UN Sales Convention were not able to provide that national public policies which impact upon the validity of contract provisions are automatically superseded by this Convention. Under the UN Sales Convention, when issues pertaining to the validity of contract provisions are not expressly resolved by it, such issues are to be resolved according to the principles of private international law (Art. 4(a)), which may vary from jurisdiction to jurisdiction.
The recommended response to the need for a gap-filling law is to specify the supplemental law that should apply to matters not governed by the Convention and to matters governed by the Convention which are not expressly settled in it and on which there are no applicable general principles recited in the Convention.
Which gap-filling law should be specified: the law in effect in seller's country, the law in effect in buyer's country, or a neutral body of law? The Convention is an alternative to the national law of either party to the contract, i.e., a compromise. When a compromise on the gap-filling law is also sought and the contract contains an arbitration clause which specifies that the arbitration shall be conducted at a neutral site, a reasonable proposal may be to have the law of the country in which the arbitration is to be conducted serve as the gap-filling law. As in other selections of governing law, the impact of this law should be evaluated prior to making such a proposal in order to avoid surprises.
U.S. counsel, used to setting forth their contractual arrangements in detail, should continue to do so when the Convention governs. For civil law practitioners also, the Convention may not at this time provide the desired basis for a brief European-style contract because it is not yet accompanied by a gloss of relatively standard interpretations comparable to that associated with civil codes. The importance of uniformity of interpretation is stressed by Article 7 ... still, it would seem prudent for all to "err" on the side of greater contract specificity until we have a better feel for how well this goal is implemented.
* E. Allan Farnsworth ,"Damages and Specific Relief', 27 Am. J. Comp. L. 252 (1979).
Certain customary terms -- "warranty" and "cancellation", for example -- are nowhere to be found in the Convention. Parties may wish to track the precise language of the Convention by having an exporter's disclaimer state "there is no obligation of the seller as to conformity of the goods, except ..." rather than "there are no warranties, except ..."* and by substituting "avoidance rights" for customary contract references to cancellation rights. In the alternative, parties may include a Definitions clause such as the following, which provides a response to the Convention's non-use of the terms "warranty" and "cancellation" and to its undefined reference to "termination".
The term "warranty" is defined as a commitment that a certain fact regarding the subject of this Contract is, or shall be, as it is expressly or by implication declared or promised to be.
"Termination" occurs when either party pursuant to a power or law puts an end to this 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.
Contract draftsmen should familiarize themselves with all instances in which the Convention departs from the terminology to which they are accustomed and respond in the manner most appropriate to their transactions.
* E. Allan Farnsworth, "Review of Standard Forms", 21 Cornell Int'l L.J. 442-443 (1988). ** This is a contract implementation of a Lewis Carroll philosophy, "when I use a word ... it means just what I choose it to mean -- neither more nor less." Through the Looking Glass, Grosset & Dunlap 1946, p. 238.
The contract protection you want will generally vary by product environment.
"[A]t the one extreme we find sales of commodities such as grain, silk, coffee, oil, sugar, etc., which are bought and sold in great quantities in international markets. For the sale of commodities, strict rules on the duties of seller and buyer and on the remedies for breach of contract are required. Such contracts generally contain an element of speculation, and gains and losses reflect fluctuations in, price. Accordingly, damages depend on developments related to price, and if there is a breach of contract by the seller, the damages will be the same whoever the buyer. If the goods are non-conforming and the buyer declares the contract avoided, the seller can generally sell them elsewhere without great difficulty, even if at a lower price because of the defect.
These environments are, in effect, two separate masters. The provisions on the Convention, like those of the UCC and most other domestic sales codes, in many instances impact equally on both. Can such provisions serve masters as different as these in an equally satisfactory manner? For example, should or should not a sales code have a "mirror image" rule, a "perfect tender" rule, etc.? Does not the answer turn in part on the interests of the environment served?
Authors of sales codes are often presented with the dilemma of how best to accommodate conflicting objectives. The contract draftsperson, on the other hand, need not undertake the challenge of facing opposite directions at the same time. He should attune desired rights and remedies by comparing that which the Convention offers with the needs of his product environment and, making such contract adjustments as are appropriate. Article 6 of the Convention recognizes the need for this and expressly authorizes such adjustments. Article 9, with its reference to established usages and practices the parties have established, is also available as a means of overriding provisions of the Convention that are not oriented to one's product environment.
Thus, Convention places the burden of achieving good livable contracts upon the shoulders of contract draftspersons -- which is precisely where good contract draftspersons should wish to have this burden placed -- and helps them satisfy it by offering two aids, Article 6 and Article 9.
* The examples of variations in sales transactions and attentions desired are those of Philippe Kahn adapted to the Vienna Convention by Jan Hellner in International Sale of Goods: Dubrovnik Lectures, P. Sarcevic & P. Volken eds. (1986), pp. 337-338. Enderlein & Maskow state "[Tlhe CISG, in comparison with ULIS, is more oriented to the trade in machinery than in raw material." Fritz Enderlein & Dietrich Maskow, "International Sales Law, Oceana (1992), p. 16. Van der Velden states that, because of the Convention's emphasis, it will be particularly important for contractors in commodity sales to shelter behind their own standard-form contracts. Frans J.A. van der Velden, "The Law of International Sales: The Hague Conventions 1964 and the UNCITRAL Uniform Sales Code 1980 - Some Main Items Compared", Hague-Zagreb Essays 4 on the Law of International Trade, Voskuil & Wade eds. Nijhoff: The Hague, 1983), p. 66. ** As stated by Audit, "The Convention's self-effacing character is one of its most striking features. Article 6 allows parties to stipulate out of the Convention or any of its provisions; Article 9 gives superior weight to trade usages, regardless of whether the parties specifically designate an applicable law." Bernard Audit, "The Vienna Sales Convention and the Lex Metcatoria", Lex Mercatoria and Arbitration, Carbonneau ed. (Transnational 1990), p. 141.
Recognize the absence of a Statute of Frauds; consider a contract "Statute of Frauds" which also seeks to respond to the fact that Convention has no parole evidence rule.
Take into account other differences between the Convention's rules on the formation of contracts and the rules to which you are accustomed. U.S. parties should be especially alert to different Convention rules on revocability of offers and on the resolution of battle-of-the-forms issues.
Identify the applicable gap-filling law.
Consider referring to ICC Incoterms and Publication 400 for comprehensive attention to delivery terms, risk of loss, documentary credits, and related issues. Remember also that neither Incoterms nor the Convention rules on passage of title. Both leave this to the gap-filling law. To avoid surprises (different gap-filling laws treat this subject differently), you should specify in your contract the point at which you want title to pass.
As a seller, you should wish to add a "perfect tender" doctrine to your Terms of Payment clause in order to make it clear that failure to comply with payment of letter of credit obligations will constitute a "fundamental breach of contract". A corollary for importers to whom it is especially important to have bills of lading, insurance certificates and other such documents in the precise form required by contract is to provide that non-compliance with seller's obligations with respect to tender of documents shall be a "fundamental breach of contract".
Include a suitable limitation of liability and exclusion of consequential damages and consider in this clause whether you wish to restrict the right to reduction of the price and the right to specific performance that may be available under the Convention.
Not rely on the Convention's counterpart to force majeure. Substitute your own Excusable Delays clause, the customary response to virtually every other sales code.
Expressly specify (in the Warranty clause, for example) the period for notification of defects that is most suitable to your product. Be aware too that, pursuant to Article 27, unless the contract provides otherwise, the exporter can bear the risk of delay or non-receipt of notices from the buyer which trigger warranty obligations.
Recognize that the Convention contains no provisions on the right to assign a contract; include such contract provisions on assignments as are appropriate to your situation.
Consider a contract "Statute of Limitations" to forestall stale lawsuits.
Consider an Arbitration clause geared to the Convention and consider carefully the situs of the arbitration.
Consider also interest and the desirability of tying down the applicable rate of interest and procedures to trigger its running.
If you wish to do so, include a clause on mitigation of loss that clearly applies to all remedies, not merely claims for damages.
In your contract's preamble or elsewhere in the contract, identify the place of business of each party that has the "closest relationship to the contract and its performance." This is a departure from customary preamble references to the principal places of business of the parties. Applicability of the Convention depends upon closest relationship, not principal places of business.
Opt-in vs. opt-out. When you are a member of the Book-of-the-Month Club you automatically receive the book selected by that club unless, on each applicable occasion, you advise that you do not want their selection. The Convention is a similar "club"; where it applies, unless you take the initiative and opt-out, you automatically get its "book" of sales law when there is appropriate country membership (i.e., ratification). If, by its terms, the Convention applies to your contract, your contract is automatically governed by it unless you indicate that this is not what you desire. If you do not want to subscribe to the Convention's terms, it is therefore best to say so in your contract. The following are examples of contract language that should suffice.
The rights and obligations of the parties under this Contract shall be governed by the local, domestic law of the state of ______________ U.S.A., including its provisions of the Uniform Commercial Code (illustrative contract clause suggested by Professor Honnold).
If you want to exclude the Convention, a contract clause which simply states "The rights and obligations of the parties shall be governed by the internal law of the state of __________ U.S.A." may not suffice. Article VI of the U.S. Constitution states "Treaties ... shall be the supreme Law of the Land". The Convention was ratified by treaty; when a contract falls within the scope of the Convention, the Convention is the law of the state of _________ U.S.A. Therefore, when you want to exclude the Convention, it is best to be more specific, as in the italicized clauses.
Will you opt for the Convention when you can have your contract governed by your own local, domestic law? At this time, the most probable answer is, No. Do you not know that law better than the foreign party with whom you are contracting? Should you not therefore be better able to take advantage of its benefits and design around its pitfalls?
Should you opt for the Convention when you cannot have your contract governed by your own local, domestic law? In such cases, the Convention should be looked upon as an alternative which may be better than the other options available -- an alternative that should look better as you get to understand the Convention better. And you should get to understand it better in any event because it may apply to some of your transactions --battle-of-the-forms transactions, for example -- whether you want it to or not.
The prediction is that as we get to understand the Convention better, it will be used in an expanding number of instances in all categories of transactions.
"When should the Convention be excluded? This is the most basic question a ... lawyer must always ask herself in advising a client who is buying goods from or selling them to a person with a place of business in another Convention State. Much will depend on the circumstances of each case, the nature of the goods, and the identity of the other party to the contract. Subject to this caveat, I believe the following generalizations can be justified.
* Jacob S. Ziegel, "Canada Prepares to Adopt the International Sales Convention", 18 Canadian Bus. L. J. 8-9 (1991). In a similar vein, Ziegel states that "the Convention is likely to prove most useful where the parties are drawn from significantly different legal environments or from diverse cultural or economic backgrounds, and where they feel the need for a neutral sales regime to govern their contractual relationships. Where these conditions are met they may not mind the newness of the Convention rules or the fact that important aspects of the sales contract -- in particular the validity and property effects of the contract (Article 4(a) and (b) -- are not governed by the Convention and will have to be determined through the application of private international law rules." Jacob S. Ziegel, "The International Sales Convention: Some General Considerations", Actes du colloque sur la vente Internationale, Perret & Lacasse eds. (Montreal: Wilson & Lafleur 1989), p. 60.
Few should quarrel with Ziegel's case three. It is the most significant advantage of the Convention. At first blush, Ziegel's case one conclusion also appears to be entirely sound. However, even where you have the opportunity to apply your own domestic law, consider the following caveat raised by Moses.
* Margaret Moses, "United Nations Convention on Contracts for the International Sale of Goods", New Jersey Lawyer (May/June 1992), pp. 38-39. In a similar vein, Lavers states "It is well known that some courts have a parochial tendency when it comes to application of their own legal regime. Historically, this has been the case involving distribution arrangements, where courts have rejected foreign choice of law provisions on the grounds that local distribution arrangements are, of local importance. In a classic distributor arrangement (as opposed to commission sales agent), the terms of sale to the distributor are of prime importance. The supplier may maximize its chances of having a choice of law provision honored when a problem arises if it has adopted the CISG, which may actually be the law of the land in the distributor's country, and, in any event, is more likely to be regarded as less 'imperial' and more acceptable to the local court." Richard M. Lavers, "CISG: To Use, or Not to Use?", Guide to the Int'l Sale of Goods Convention, Hancock ed. (Business Laws Inc., May 1993). p. 102.006.
- A detailed comprehensive contract that pays proper attention to issues that may arise. The detailed comprehensive sales contract may be a departure from tradition for civil law attorneys; not so for others -- U.S. counsel and their Canadian colleagues, for example. They usually prefer such a contract -- without regard to which body of law governs it.
- A governing law clause that designates the Convention and the gap-filling law. A prudent contract draftsman will always seek to designate a gap-filling law he is comfortable with, for example, This contract shall be governed by the UN Convention on Contracts for the International Sale of Goods supplemented by the law of [the Province of Ontario, Canada] [the State of New York, U.S.A.] [or whichever other gap-filling law you are most comfortable with].
When you obtain this in case two or case one, are you disadvantaged because the Convention supplants much of the domestic sales law you might otherwise prefer? Remember, the Convention has an exceptionally strong freedom-of contract provision. The CISG is structured so that it trumps much of domestic sales law and its Article 6 says that your contract trumps the Convention. At the Vienna Conference, some delegates sought to qualify the latitude granted to contracting parties by Article 6 -- much like the UCC's freedom-of-contract proviso is qualified. This attempt to restrict freedom of contract under the Convention was rebuffed (OFFICIAL RECORDS, p. 86). True, the Convention does not rule out various validity issues under the gap-filling law, nor does it attend to other ways in which the gap-filling law may impact on your contract. However, if you are able to specify the gap-filling law as above, do you not have as good a response to this as you can obtain?
Also, every contract negotiator appreciates the trade-off value of a posture of "sweet reasonableness" -- particularly when that which he trades off can lead to other advantages. And what could be more reasonable than a neutral governing law that is not designated to favor either contracting party? Accordingly, when you have a detailed contract that pays proper attention to your issues and a gap-filling law you are comfortable with, you may wish to draw the line on issues that can have a more meaningful effect on your contract. For example, when negotiating your clause on dispute resolution, you may wish to relate it to the governing law clause. You will normally prefer arbitration at a neutral forum rather than litigation in the home courts of the other party. What better way to set the stage for neutral-forum arbitration than a neutral governing law about which neither party's home courts have pre-eminent expertise?
Cases may arise in which you will wish to include the Convention in instances in which it would not normally apply, for example, a sale by a party whose relevant place of business is in the United States to a customer in a country that has not ratified the Convention; or a sale of an excluded product aircraft, for instance. In such cases, if you want to have the contract governed by the Convention, it is prudent to specify that the Convention shall apply except only those provisions that exclude such a transaction. The hierarchy of contract and sales code protection in effect under this application is: First, provisions of applicable domestic law that cannot be overridden by contract; Second, provisions of the contract (express and implied); Third, provisions of the Convention; Fourth, provisions of the gap-filling law.
Writing requirements, although superseded by Article 11, may re-enter the equation if properly invoked under domestic rules on principal and agent relationships -- a subject not addressed by the Convention.
Other significant issues may arise in jurisdictions that follow the later-in time rule. In the United States, for example, a treaty (e.g., the Convention) overrides federal and state law, but a federal law that is enacted after the treaty can override the treaty. In the U.S., federal procurement laws that are promulgated after the Convention may therefore override substantive provisions of the Convention.
When contracting with a government entity, if you want to have the Convention apply, the recommended approach is to seek to improve your posture by expressly designating the Convention as the governing law, rather than relying on its automatic application.
Tort claims may or may not fall outside the scope of the Convention. Clearly, they do when they pertain to personal injury claims by the buyer, the seller or third parties. Art. 5. The same rule applies to property damage claims by third parties. The Convention does not address such third-party rights. A different rule may apply to property damage claims by parties to contracts governed by the Convention. Consider, for example, a fire caused by defective goods. The goods are destroyed as is the factory that housed them. The incident occurred more than two years after the goods were handed over to the buyer. Prior to the fire, the buyer had no reason to suspect that there was a defect. Also, at the time of the fire, the contract guarantee had expired. Domestic tort law may provide a remedy; the Convention specifically rules out its remedies. Can buyer avail himself of the domestic tort remedy?
There is today no unanimity as to how such matters shall be resolved. The issue is one of pre-emption vs. non-pre-emption by the Convention and, if the former, the extent to which the Convention should pre-empt. The spectrum of opinions is illustrated by excerpts from commentaries by Khoo, Honnold, Enderlein & Maskow and Schlechtriem, who favor varying degrees of universality vs. Lookofsky, who forecasts more of a look homeward trend.
"The Convention requires an international interpretation of its own rules ... but we cannot ask it to 'settle' matters which lie clearly beyond its scope. ... Since the Convention is clearly 'not concerned with' ... rights arising in connection with delictual obligations ... Such matters must be left to the otherwise applicable national law." Joseph Lookofsky, "Loose Ends and Contorts in International Sales: Problems in the Harmonization of Private Law Rules", 39 Am. J. Comp. L. 407 (1991).
"In those jurisdictions where contract and tort have both served as a basis for product liability claims ... the contract rules of the Convention will, in all likelihood, continue to compete with tort actions authorized by national law. ..." (Id. at 414-415).
Khoo, Honnold and Enderlein & Maskow are of the opinion that the label that is assigned to the operative facts by domestic law should not be relevant.
"Since the Convention does not exclude claims for damage to property, it would follow that such claims, if they otherwise fall within the Convention, would be governed by the Convention. Problems may arise in some legal systems where claims for material damage, even by the buyer, are classified as claims in tort. On a narrow interpretation of the main provision of article 4, it might possibly be argued that such a claim does not arise from the contract of sale. It is submitted, however, that this view is open to question. The mere presentation of a claim as a claim in tort does not take it out of the Convention if the Convention would otherwise apply." Warren Khoo, Bianca-Bonell Commentary, Guiffrè: Milan (1987), p. 50. "The substance rather than the label or characterization of competing rule of domestic law determines whether it is displaced by the Convention. In determining such questions, the tribunal ... should be guided by the provisions of Article 7, and give to the Convention the widest possible application consistent with its aim as a unifier of legal rules governing the relationship between parties to an international sale." Id. at 48.
"The important point is to focus on whether the Convention addresses the situation in question; if so, the uniform international rules should not be displaced merely because of the labels attached to various doctrines of domestic law." Honnold Text, 2d ed., p. 318.
"[T]he possibility of an alternative application of national law cannot be made dependent on the qualification of that legal institute in domestic law ... It is exactly such attempts which Article 7 is directed against." Enderlein & Maskow Commentary, p. 47.
"... a tort action for property damages caused by defective and non-conforming goods should not be barred by an omission to give notice within reasonable time under Article 39 of CISG, so as to prevent the loss of remedies granted by Article 45 et seq. of CISG. Even if the goods themselves were, destroyed by a defect giving rise to a tort action based on strict liability, the interest protected is basically an extra-contractual one, for it should not be decisive whether the 'dangerous' defect destroyed the goods sold or another piece of property of the buyer or someone else." Peter Schlechtriem, "Borderland of Tort and Contract", 21 Cornell Int'l L.J. 468, 473-474 (1988).
There may also be situations in which unjust enrichment (quantum meruit) can be a viable domestic remedy. Schlechtriem reports the following 1988 ruling of the Supreme Court of Israel.
The ULIS rules at issue are sufficiently similar to the rules of the CISG to enable one to cite this case as also relevant to the manner in which the CISG may be interpreted.
* Schlechtriem, "Uniform Sales Law-The Experience with Uniform Laws in the Federal Republic of Germany" in "Sartryck", Juridisk Tidskrift vid Stockholms Universitet, Argang, 3/NR 1/1991-92, p. 13. ** Reported in Friedmann, "Restitution of Profits Gained by Party in Breach of Contract", 104 L.Q.R. 386 (1988).

References: Art. 1
 Art. 10
 Art. 1
 Art. 2
 Art. 3
 Art. 6
 Art. 18
 Art. 16
 Art. 19
 Art. 31
 Art. 67
 Art. 31
 Art. 69
 Art. 69
 Art. 6
 Art. 4
 Art. 28
 Art. 25
 Art. 39
 Art. 39
 Art. 7
 Art. 35
 Art. 5