An Analysis of The Compromises in the Cisg With Regard to Contract Formation - Essay Example

AN ANALYSIS OF THE COMPROMISES IN THE CISG WITH REGARD TO CONTRACT FORMATION Virtually from the time that human beings have realized that it is wellnigh impossible to produce everything in their own backyards, international sale of goods has become a necessity. Historically fraught with difficulty, given both the natural perils of the sea or other modes of travel and human error, legal systems have deemed it imperative to come up with rules to govern and protect not only international commerce so as to ensure its continued viability, but also the players involved - spelling out with no shortage of details the latter's rights and responsibilities. The laws have undergone shifts many times, perhaps owing to the fact that international commerce has itself undergone so many developments. The desire to create laws that govern transnational commerce is by no means a modern-day trend. As early as the medieval ages, there was already a realization among merchants that civil law was inadequate to address the growing demands of commerce, and the multifarious disputes arising from it.1 Hence, the Law Merchant (also known as the Lex Mercatoria) was enacted, which was a legal system developed and administered by merchants for the purpose of governing their transactions. Many of the principles of international mercantile law were derived from the early rules and traditions formulated in the Middle Ages.2 However, with regard to the unification of laws and the harmonization of principles that govern transnational commerce and in particular, the international sale of goods, serious efforts were undertaken only in the 1930s. The first draft of a uniform law on international sale of goods was developed in 1935, World political events intervened - in particular, the Second World War - and it was only in 1964 when two conventions were approved in a conference at The Hague. These conventions were the Uniform Law on the International Sale of Goods ("ULIS") and the Uniform Law on the Formation of Contracts for the International Sale of Goods ("ULF"). Unfortunately, these conventions were not able to go very far, as they lacked the broad acceptance from the community of states required to push international agreements forward. Only twenty eight states participated in the conference at The Hague, and out of that number only nine actually signed the conventions and agreed to be bound by them. Many states were not comfortable with the influence of the civil law traditions of Western Europe3 . The failure of these two conventions made one conclusion inescapable: to achieve uniformity and harmonization of the principles governing the international sale of goods, there must be widespread concurrence from a vast majority of state-actors.4 The road towards a unified law was long and arduous. Two years after the conferences at the Hague, the United Nations established the United Nations Commission on International Trade Law (UNCITRAL). However, it took ten years before the UNCITRAL released the 1978 Draft Convention. Perhaps the circumstances were a little different than they were in 1968, and there was a growing realization of the imperative to come up with rules that harmonize international trade law. In 1980, 62 countries came together in a conference in Vienna and, after some debate, approved unanimously the Convention on the International Sale of Goods (CISG). In 1988, the CISG finally came into force. The prefatory statement of the CISG illuminates us as to the overarching goals of the Convention: ''THE STATES PARTIES TO THIS CONVENTION, BEARING IN MIND the broad objectives in the resolution adopted by the sixth special session of the General Assembly of the United Nations on the establishment of a New International Economic Order, CONSIDERING that the development of international trade on the basis of equality and mutual benefit is an important element in promoting friendly relations among States, BEING OF THE OPINION that the adoption of uniform rules which govern contracts for the international sale of goods and take into account the different social, economic and legal systems would contribute to the removal of legal barriers in international trade and promote the development of international trade,''5 The entry of the Convention into force, however, is only the beginning and not the end of the challenges that it has faced. The inconsistencies, if not outright contradictions between civil and common law systems, have made it difficult to come up with an acceptable balance that will effectively regulate international commerce6. In an attempt to come up with a framework palatable to all players, compromises have been made. So difficult was the process of reaching a consensus that Gyula Eorsi, a Hungarian delegate, came up with a satirical play on it, an excerpt of which reads: ''Chairman/Bang!/The discussion is open on art. 1. The distinguished delegate from Knowhowland has asked for the floor. The Delegate from Knowhowland: Thank you Mr. Chairman. My delegation proposes that art. 1 should read as follows: "The dog shall bark." Thank you Mr. Chairman. The Delegate from Oraculum: With greatest respect Mr. Chairman, this proposition runs against all experience. My delegation proposes the following wording: "The cat shall mewl." Thank you. The Delegate from Knowhowland: My delegation is terribly sorry to disagree with my friend from Oraculum, Mr. Chairman, but I have to remind you that my proposal stating that "The Dog Shall Bark" is backed by a 700 year old, uninterrupted line of court decisions in my country. Thank you Mr. Chairman. The Delegate from Oraculum: Without underestimating, Mr. Chairman, the erudition, frugality and creative force of the courts and the importance of judge-made law, may I call your attention to the fact that the proposal tabled by the delegation of the Republic of Oraculum stating "The Cat Shall Mewl" is warranted not only by our Civil Code but also by our greatest brains in legal thinking from the early 18th century up to the present days and is sociologically correct. Thank you Mr. Chairman7.'' This paper will analyze the compromises made in the CISG between civil and common law systems with regard to the formation of contract. It must be noted that the CISG demands not only harmonization, but uniformity. It means that the laws of various systems must not only be reconcilable or must not only complement each other, it must be uniform, if not identical. Article 7 lays this down. 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. Achieving uniformity, however, is easier said than done. It is all too easy to make the effectivity of the Convention suffer because of a desire to find consistencies between divergent legal frameworks. Many legal analysts have posited that an infirmity of the CISG was that it strove to achieve the most acceptable framework, instead of reaching the best framework, thus sacrificing the quality of the legislation in the name of consensus. Said Arthur Rosett: 'The difficulty with many of these apparent compromises is that they simply do not resolve the problem they purport to address. They do not reflect two parties having yielded part of their positions to each other for the sake of agreement, but rather two sides agreeing to give the appearance by verbal formula which does not provide meaningful guidance in concrete situations.8 Before we begin discussing the uneasy compromises in the text of the CISG it is imperative that we first explore the differences between the common law system and the civil law system with regard to international sale of goods, in particular the formation of a contract of sale. The three most distinct differences may be found in the concepts of consideration, offer and acceptance, and specific performance. Firstly, while common law systems are very strict with regard to the issue of specific performance and have demonstrated unwillingness to compel specific performance as a remedy for breach, civil law systems on the other hand, have shown some degree of leniency in its favor. Second, in common law systems, consideration is required before a contract becomes enforceable. This requirement is not present in civil law systems. The third difference is with regard to when acceptance becomes effective. Under the civil law system, acceptance does not become effective until receipt. Hence, if a party has given his acceptance to an offer but such acceptance has been lost or delayed in transit, the risk of the loss or delay is borne by the person who accepted the offer. Under common law, however, acceptance is effective upon from the time that it has been communicated, regardless of when it reaches the offeror. Formation of a contract The provisions dealing with the formation of a contract are found in Part II of the CISG. It is an elementary principle that a contract consists of an offer and acceptance. A proposal may be considered an offer when two requirements have been met. First, when it is "definite" - "A proposal is sufficiently definite if it indicates the goods and expressly or implicitly fixes or makes provision for determining the quantity or the price,"9 and second, when the offeror has demonstrated his intention or amenability to be bound in case of acceptance10. This is to be contradistinguished from "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."11 Explains Valioti: The description of the goods, their quantity and price are the essentialia negotii of the contract, in other words, the minimum content that should be included in the offer; the goods should be referred to expressly, and the quantity and price either expressly or implicitly. Since these constitute the minimum content of the offer, it is clear that other elements could be included, which are even necessary in certain types of transactions, in order for them to be regarded as sufficiently definite; such elements could be for example the place of delivery or the method of payment.12 A response to an offer is an acceptance when "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."13 An exception to this is found in paragraph 3, which reads: "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 ..."14 Even provisions as straightforward as those contained in Part II of the CISG are fraught with much danger and controversy, particularly in areas wherein there is an attempt to reconcile divergent legal frameworks. One such problem is the unstated price. If a proposal does not state a price or provides a method for its determination, may it still be considered a definite offer Under the law of the United States, yes. In particular, the Uniform Commercial Code states, "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 ... nothing is said as to price..."15 However, many other countries believe that it does not constitute a definite offer. A perusal of the pertinent provision (Article 14) in CISG demonstrates that the CIS tends to lean in favor of this restrictive view, in that it requires that the contract "implicitly fixes or makes provision for determining the quantity and the price." A compromise to this would perhaps be Article 55, which reads: ''Where a contract has been validly concluded but does not expressly or implicitly fix or make provision for determining the price, the parties are considered, in the absence of any indication to the contrary, to have impliedly made reference to the price generally charged at the time of the conclusion of the contract for such goods sold under comparable circumstances in the trade concerned.'' But there are problems with this formulation. Its biggest shortcoming is that it applies only in a situation wherein a contract had already been validly concluded. Explains Farnsworth: "If the United States were to ratify the Convention but not take Part II, a contract with an unstated price could be validly concluded because UCC 2-305 would then apply. But if we were to ratify the entire Convention, including Part II, it could be argued that article 14 prevented a contract with an unstated price from being validly concluded," so that article 55 could not have effect."16 Even within the text of the CISG, for that matter, some authors believe that there are contradictions. Article 14 appears to imply that no contract can be concluded if there is no price certain. Article 55 makes it seem that a contract can be validly concluded without making any reference to the price. There are two schools of thought where this is concerned. Some thinkers believe that article 14 should be read alone, coming to the and if the parties did not make any arrangement for the price, then it cannot be said that there is a valid contract. On the contrary, there is another view which states that Articles 14 and 55 should be harmonized together, since the latter has a gap-filling function with regard to the missing price. The second group posits the assumption that a valid contract is concluded.17 The other contradiction with the US' UCC is that while the CISG refers to "the price generally charged [in the trade] at the time of the conclusion of the contract," the UCC refers to "a reasonable price at the time for delivery."18 It cannot be gainsaid that this could cause conflicts in the future, inasmuch as the prices in the market are always subject to fluctuation. The next problem is the irrevocability or the revocability of an offer. Here we see a three way battle in answer to the question "when is an offer irrevocable There are systems wherein an offer is revocable, unless something is given as consideration for the promise by the offeror not to revoke. This is so even if there is something in contract that states it is firm or irrevocable, but there is no consideration attached. In other systems, an offer it revocable unless there is something in the contract that states it is irrevocable, with no need for consideration. This is how it is in the United States under the Uniform Commerce Code. Lastly, in other systems, like Germany, all contracts are irrevocable unless there is a stipulation made by the offeror that it is revocable. These three schools of thought, all starkly in contrast with one another, had been one of the thorniest challenges faced by the drafters of the harmonized law on the international sale of goods. The drafters of the CISG opted for the second option, wherein an offer is revocable unless the offer states that it is irrevocable. Article 16 (2) a states that all offers are revocable, subject to the exception that "an offer cannot be revoked ... if it indicates, whether by stating a fixed time for acceptance or otherwise, that it is irrevocable ..." On the surface, it would appear to resemble what is stated in the Uniform Commerce Code. Valioti is quick to disabuse us of that notion. Hidden in the Convention's provision there may be, however, an unpleasant surprise for the unsuspecting common law lawyer. If an offeror says, "If I do not hear from you in a week, my offer expires," a judge in a common law system would probably regard this as meaning only that the offer lapses after ten days and not that it is irrevocable for ten days. The result under the Convention, is not entirely clear. Delegates from some civil law countries argued that the fixing of a time, even for lapse, should always make the offer irrevocable for that time, so that the offer just quoted would be irrevocable for ten days -- an unpleasant surprise for an offeror used to the rules of the Uniform Commercial Code. 19 Delegates from common law countries argued that if the time was fixed for lapse and not irrevocability, then the fixing of a time should not make the offer irrevocable. It would appear that these voices from the common law were heard. That notwithstanding, a careful inspection would reveal that under the Convention an offeror wishing to fix a time for lapse but not for irrevocability should not be specific about such wishes. But there is another exception in Article 16(2)b which allows a situation where irrevocability may be read, i.e., "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.' The first exception, or Article 16(2)a would be recognized by civil lawyers, and Article 16(2)b had been drafted in a language that is familiar to lawyers of common law systems.20 We now proceed to possibly the most controversial issue under formation of contracts in the CISG - the mailbox rule. Or otherwise put, the question as to when a contract is deemed perfected. At what point does the offeror lose the power to revoke the offer At what point does the offeree lose the power to withdraw his acceptance In case of loss or delay in transmission, who bears the risk These are questions that have befuddled contract law theorists since time immemorial. As previously explained, common law systems hold that acceptance is effective from the time it is transmitted, or from the time that the offeree puts it in his mailbox for dispatch - hence, the "mailbox rule". In contrast, civil law systems maintain that acceptance becomes effective only upon receipt. Let us now look at how the CISG attempted to reconcile the two competing systems. With regard to the question of the power of the offeror to revoke the offer, the CISG sides with the common law, and uses the dispatch rule, i.e., "Until a contract is concluded an offer may be revoked if the revocation reaches the offeree before he has dispatched an acceptance." However, with regard to the second question, or the question involving the withdrawal of acceptance by the offeree, the CISG follows civil law and uses the receipt rule. Article 22 states: ""An acceptance may be withdrawn if the withdrawal reaches the offeror before or at the same time as the acceptance would have become effective." This is supported further by Article 18(2) which states: "An acceptance of an offer becomes effective at the moment the indication of assent reaches the offeror." What is the problem brought about by this attempt to harmonize two conflicting systems Farnsworth puts it in this wise: This provision poses a minor problem when coupled with the dispatch rule applicable to the revocability of an offer. Suppose that an offeree who has received an offer by mail, mails an acceptance which takes three days to reach the offeror. During those three days the offeror is powerless to revoke the offer, but the offeree can, by telephoning the offeror, withdraw his acceptance. During those three days the revocable offer has become, in a sense, an irrevocable one.21 Now, an issue that has generated much controversy is the issue of whether or not an offer that contains a "fixed time" is revocable or not. The language eventually used by the Vienna Convention is deemed to be a "compromise solution".22 The issue is that "fixed time" means different things under the common law system and the civil law system. In civil law, when a fixed time is set for acceptance by the offeror, it is irrevocable until the lapse of that time. In common law, however, unless other indications point to the contrary, it is revocable. How then does the Convention resolve this dilemma By the insertion of Article 8, which states that "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" and that "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." This can only mean that having a fixed time for acceptance does not necessarily "make the offer irrevocable".23 As to the act or conduct that would suggest revocability or irrevocability, "such an act or conduct may consist of preparation for production, buying or hiring materials or equipment, incurring expenses where that act or conduct was regarded as normal in the trade concerned, or was supported by preliminary negotiations, or should otherwise have been foreseen or known to the offeror."24 Article 16 should also be reexamined as it is an attempt to reconcile the two divergent viewpoints on revocability. Article 16 states that until a contract has been is concluded an offer may be revoked if the revocation reaches the offeree before he has dispatched an acceptance, unless (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. This is meant to offer protection to an offeree that expects that a contract is concluded and the offeror can no longer revoke his offer25 On the issue of delay or loss and who bears the risk, the Convention shows its bias for the civil law system and states "A contract is concluded at the moment when an acceptance of an offer becomes effective in accordance with the provisions of this Convention." Thus, if the acceptance has been sideswiped in the mail or gets intercepted, there is not contract under the Convention. In common law, there would be a contract. Now we go to what is known as the "Battle of the Forms". In transactions, the common method would be for the seller to send a price list or a catalog. The buyer would then send his purchase order. After which, the seller sends an acknowledgement. All of these forms would contain small print at the back, warranties and safety nets designed to protect the interests of the source of the forms. It would be of no surprise, therefore, that discrepancies could arise between the forms. Farnsworth describes the dispute that could arise as follows: Disputes arise in two types of situations. First, before there has been any performance, there is a change of circumstances, such as a rise or fall in market price, and one of the parties seizes upon the discrepancies in the forms as an excuse for not performing. Second, after shipment of the goods by the seller and their receipt by the buyer, a dispute arises over some aspect of performance, often the quality of the goods, and it becomes necessary to determine the contract terms that govern the dispute.26 The United States under the Uniform Commercial Code states that an expression of acceptance, even though it contains different or additional terms, is still an expression of acceptance. The Convention, however, adopts the mirror image rule and this is crystallized in Article 19(1) which states: ""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." This is qualified by paragraph 2 of the same Article which reads, ""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." 27 Finally, we move to the issue of specific performance. Civil law systems allow parties to seek the remedy of specific performance, while common law systems would rather award damages. The CISG once again concedes to civil law systems and allows specific performance by virtue of Article 46(1) which states: "'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.' But the real compromise is acutely seen in Article 28, described as the 'enclave built into the realm of unified law28', which states: 'If, in accordance with the provisions of this Convention, one party is entitled to require performance of any obligation of 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.' In short, the CISG recognizes specific performance but at the same time does not oblige domestic courts to apply them if they ordinarily would not. This is an attempt at striking a balance between two legal systems. CONCLUSION It is obvious that we have a law that is far from perfect and it is not difficult to conjure several scenarios where problems and loopholes would present themselves. However, it is no small feat that this Agreement was reached given the competing legal systems and states deadset on protecting their own interests. It is an interest to international commerce and its importance in this global age that states had actually come together to make the necessary compromises and harmonies. While many of the provisions would be irrelevant to the modern trader (for example, the mailbox rule is an archaic term; dispatch often takes a matter of seconds and is done electronically), it still provides the necessary foundations for the modern rules governing commerce and trade. BIBLIOGRAPHY H. Bernstein and J. Lookofsky, "Understanding the CISG in Europe", 1997, Kluwer Law International. C.M. Bianca-M.J. Bonell (eds), "Commentary on the International Sales Law. The 1980 Vienna Sales Convention", 1987. I. Carr and R. Kidner, "Statutes and Conventions on International Trade Law", 3rd edition, 1999, Cavendish Publishing Limited. L. D'Arcy, C. Murray and B. Cleave, "Schmitthoff's Export Trade: The Law and Practice of International Trade", 2000, Sweet and Maxwell Ltd. G. Ersi, 'A Propos For The 1980 Vienna Convention On Contracts For The International Sale Of Goods' (1983) 31 The American Journal of Comparative Law 333, 335. E. A. Farnsworth. First published in Galston & Smit ed., International Sales: The United Nations Convention on Contracts for the International Sale of Goods, Matthew Bender (1984), Ch. 3, pages 3-1 to 3-18. R. Goode, "Commercial Law", 2nd edition, 1995, Penguin Books. J.O. Honnold, "Uniform Law For International Sales", 3rd edition, 1999, Kluwer Law International. . J.C. Kelso, "The United Nations Convention on Contracts for the International Sale of Goods: Contract Formation and the Battle of Forms", 21 Columbia Journal of Transnational Law (1982), 529-556, p. 540. A.F.M. Maniruzzaman, "Formation of International Sales Contracts: a Comparative Perspective", International Business Lawyer, December 2001, 483-489, p. 485. P. Schlechtriem, "Commentary on the UN Convention on the International Sale of Goods (CISG)", 2nd edition, 1998, Clarendon Press Oxford. P. Winship, "Formation of International Sales Contracts under the 1980 Vienna Convention", International Lawyer (1983), 1-15, p. 7 Z. Valioti. "The Rules on Contract Formation Under the Vienna Convention on Contracts for the International Sale of Goods." Pace Law Institute of International Commercial Law. (2003) Read More