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<b>CHAPTER 1: FUNDAMENTAL LEGAL ISSUES IN CONNECTION WITH INTERNATIONAL SALE OF GOODS CONTRACTS </b>

A typical trade transaction starts with a contract of sale, A seller and a buyer agree a price for a specified quantity and type of goods to be purchased under specified terms and conditions. From the buyer's point of view the legal objective of such a contract is to obtain ownership of the goods, and from the seller's to receive the price. Thus the essence of the contract is the transfer of property in goods for financial consideration.

Like any other contract, a contract of sale depends on an agreement between the seller and the buyer-which is usually shown by the acceptance of an offer." The contract of sale of goods is characterized in a majority of countries by the principle of "freedom of contract": the parties are free to fix the terms and conditions of the con- tract of sale-what prices will be charged, how payment will be handled, who will bear which costs of delivery, who will support which risks subject to the general principles of law and to domestic legislation governing unfair contract terms.

The rules as regards the making and communication of offer and acceptance and the revocation and termination of offers are common to all contracts, and may be found in general works on the law of contracts. An exchange of goods is not therefore a contract for the sale of goods bui a barter. Likewise a gift for no consideration is not a contract of sale. The contract of sale has been characterized as the "master" contract' since the series of contractual arrange- ments which follow-as regards transport, insurance and payment should accord with its provisions. Thus to avoid unwanted disputes and litigation it is essential that the contract of sale is carefully drafted and that specific reference is made to existing trade terms, like the current Incoterms, when stipulating the delivery point and the allocation of rights and responsibilities between the buyer and the seller. Moreover, if paymnent is to be by letter of credit, the requirements under the credit need to be clearly spelt out.

International sales of goods differ from domestic sales in a number of ways: they generally involve long distances during which the goods are in the custody of the carrier the risks involved in such transit are greater, and the transaction is normally irreversible, in that the physical return of the goods to the seller is in practice unlikely to be a realistic option, Furthermore, because of its nature, the transaction might be subject to a number of different jurisdictions with diverse legal systems. To cope with these problems, the business community has developed a number of standard contracts' and rules which cater for the peculiar needs of international commerce.

Preparation of a uniform law for the international sale of goods began in 1930 at the International Institute for the Unification of Private Law (UNIDROIT) in Rome. It was felt at the time that it would be of great value to the international business community to unify the law relating to international sales, to avoid providing different answers to questions such as when an offer or acceptance becomes effective, when possession, property or risk in the goods sold passes, what the rights of a buyer are when goods not conforming to the contract are tendered, and similar questions. After a long interruption in the work as a result of the Second World War, a draft was finally submitted to a diplomatic conference in The Hague in 1964, which adopted two conventions, the Convention relating to a Uniform Law on the International Sale of Goods and the Convention relating to a Uniform Law on the Formation of Contracts for the International Sale of Goods. Almost immediately upon the adoption of the two conventions, there was widespread criticism of their provisions as reflecting primarily the legal traditions of continental western Europe. One of the first tasks undertaken by the United Nations Commission on international Trade Law (UNCITRAL) upon its establishment in 1968 was to study the two conventions to ascertain which modifications might render them capable of wider acceptance by countries of different legal, social and economic systems. The result of this study was the adoption by diplomatic conference on 11 April 1980 of the United Nations Convention on Contracts for the International Sale of Goods," which combines the subject matter of the two prior conventions.

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The CISG came into force on 1 January 1988. According to the "Shipping, Transport, Marine Insurance and Intemational Trade Newsletter" of Dibb Lupton Alsop, (Match 1998), the States which have adopted the Convention to date are responsible for more than 60 per cent of the total volume of worldwide trade.

On December 18th, 2015, Vietnam officially ratified its accession to the CISG to become the 84th member of the Convention.

<b>Effective date: 1 January 2017 </b>

<b>Declarations and reservations: "This State declared, in accordance with articles 12 and 96 of the Convention, that any </b>

provision of article 11, article 29 or Part II of the Convention that allowed a contract of sale or its modification or termination by agreement or any offer, acceptance or other indication of intention to be made in any form other than in writing, would not apply where any party had his place of business in its territory."

It is the purpose of this course to familiarize students with some of the most important tools used in international trade to: (a) Allocate the rights and responsibilities of exporters and importers regarding the arrangements and payment for the delivery of the goods;

(b) Secure the payment by the buyer of the merchandises contracted (chapter III);

(c) Protect the buyer against the non-performance of the contractual obligations by the seller.

<b>1. The basis of International Sale of Goods Contracts 2.1.1. International Sale of Goods </b>

Contracts of sale are governed by either national law the law of the domicile of the seller or the buyer or by an international treaty, the United Nations Convention on Contracts for the International Sale of Goods (CISG). Since the CISG and most national laws are based on the customs of the business community (the lex mercatoria) it is not surprising that they exhibit a great degree of similarity.

Among the most authoritative definitions ofthe lex mercatoria are the following: "A set of general principles, and customary rules spontaneously referred to or elaborated in the framework of international trade, without reference to a particular system of law. "3

The ICC model international sale contract is developed for sales of manufactured goods intended for resale, where the buyer is not a consumer and where the contract is an independent transaction rather than part of a long-term supply arrangement. It is flexible enough to allow users to either incorporate the general conditions common to all contracts or the specific conditions, which set out standard terms common to all contracts incorporating the ICC general conditions of sale. The specific conditions are prepared in order to permit parties to agree to the particular terms of their sale contract and cover aspects such as:

• Information about the seller and the buyer (name, address, contact, etc.) • Description of the goods sold

• The contract price

• The delivery terms according to incoterms • Inspection of the goods by buyer

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• Payment conditions (irrevocable documentary credit or electronic fund transfer) • Resolution of disputes (arbitration or litigation)

Failing contrary agreement between the parties, the ICC Model International Sale Contract subjects the transaction to the CISG, which, for ease of reference, is appended to the model contract as annex 1. By means of this incorporation of the CCISG into the model contract, the Convention will apply whether or not the countries of the seller and buyer have ratified the Convention.

Morcover, while the model contract subjects the transaction to the United Nations

Convention for the International Sale of Goods (CISG), it also, in certain circumstances, permits the parties to incorporate specific conditions of national law. ICC provides guidance on each box of the form, and in some instances, lists of terms are defined, with the responsibilities of the parties clearly set out. On transport documents, for example, the model lists those in common use, such as the bill of loading, the multimodal transport document and the air waybill.

<b>2.1.2. Types of contracts </b>

The ITC Model Contract is greatly influenced by the CISG, which is widely accepted by lawyers of different traditions and backgrounds. The contract articulates practical requirements arising from commercial practice within the general rules of the CISG.

The ITC Model Contract may not be suitable for the sale of perishable goods. Apart from the fact that perishable goods are often sold by reference to branch- established trading terms and conditions, such goods require a different and more concise conformity criterion, short periods of time for notifying non-compliance, and a specialized quality inspection procedure.

The ITC Model Contract is presented in two versions a standard and short version. The standard version contains definitions of relevant notions (e.g. lack of conformity), special comments (e.g. on the notice of non-conformity), explanations and warnings to the parties (e.g. on the limitation of the seller's liability or on the validity of the agreed interest clause). The short version is more practice-oriented, covering the main rights and obligations of the parties with no special explanations. In addition, the short version contains only selected boilerplate clauses, whereas the standard version provides all the relevant boilerplate clauses included in the other ITC Model Contracts.

If the parties enter into a continuous relationship for the supply of goods, the ITC Model Contract on the International Long-term Supply of Goods is intended for use in connection with manufactured goods, rather than commodities, which have their own special features and are often sold on standard forms provided by associations of producers or dealers. The Model Contract is not intended for use in cases where goods are supplied for resale by a distributor (for those cases, see the ITC Model Contract for the International Distribution of Goods). While a contract for a long-term supply of goods would mainly be a sales contract, the parties can focus on various relational elements to improve the quality of logistics, delivery and the goods themselves. The larger contracted sales volumes give the parties more freedom to tailor their relationship. The purpose of such a contract is not only to arrange for the sales-related aspects, but also to improve the supply relationship by providing for:

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• Flexibility in modifying the applicable incoterm; • Fluctuations in purchase prices (including price developments related to raw materials or components); Flexibility about payment (i.e. No costly l/c or other payment mechanism is required); • A limitation of liability by reference to the (long) duration of the contract; Permissible events of force majeure, tailored to the particularities.

How to decide which contract - supply or manufacturing. A supplier may or may not be the manufacturer of the goods under contract. If the manufacturing aspect is predominant, it is recommended to use the itc model international contract manufacture agreement.

<b>2.1.3. Certain types of clauses in the CISG perspective </b>

This ITC Model Contract can be viewed as a general framework for numerous types of sales contracts in international trade. For implementation, the parties should adapt it to the nature of each particular sales contract as well as to the specific requirements of the applicable law, where such requirements exist.

<b>Scope: The contract contains the substantive rules for an international sales contract, i.e. the main rights and obligations </b>

of the parties, the remedies for breach of contract by the buyer; the remedies for breach of contract by the seller; and general rules that apply equally to both parties. It also contains the standard or boilerplate clauses broadly accepted in international commercial contracts.

<b>Structure: The contract is divided into four parts: </b>

 Key obligations related to the goods - delivery term, price, payment conditions, and documents to be provided;  The remedies of the seller in case of non-payment at the agreed time, the remedies of the buyer in case of non-

delivery of goods at the agreed time, lack of conformity of goods, transfer of property and defects;

 Avoidance (i.e. Termination) of contract and damages: termination grounds, avoidance procedure, effects of avoidance, restitution, damages and mitigation of harm; and

 Standard (boilerplate) provisions for more about these clauses, see the sections 4.3 (change of circumstances), 4.4 (force majeure), 4.8 (miscellaneous (boilerplate) clauses), 4.9(a) (applicable law), and 4.9(c) (dispute resolution).

<b>Delivery terms (INCOTERMS). Many cross-border sales transactions require transportation. Questions then arise as to </b>

which party should do what, who should bear the risk of the various means of transportation, who should arrange for insurance and for customs clearance. This introduces a wide range of possible combinations of responsibilities, but in practice the parties will seek a combination in which those risks and responsibilities match. Commonly used combinations are reflected in the Incoterms, contractual devices for delivery of goods. See section 5.3 for more information.

<b>Payment conditions. In cross-border sales where the parties do not hand over the goods, payment also entails an </b>

allocation of risk. Banks play an important trade- facilitating role in such cases. The parties may opt for various payment mechanisms, each of which presents a different allocation of risks for non-compliance. The allocation of risk may also engage the bank or banks involved, which affects the cost of the payment mechanism. Common payment mechanisms, provided for in the ITC Model Contract, are:

• Payment in advance: the buyer pays (part of) the purchase price into the seller's bank account;

• Documentary collection, involving documents against payment (d/p) or documents against acceptance (d/a): a simple mechanism and suitable if the buyer considers the seller to be a trustworthy party, and if the seller would probably be able to sell the delivered goods to third parties in case of fundamental breach;

• Irrevocable documentary credit, pursuant to an l/c, under the ucp600: this mechanism provides optimum security for both parties;

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• Payment supported by a bank guarantee; or

• Another specified payment mechanism (or combination of mechanisms).

<b>Documents. When a party arranges for transportation, insurance or customs clearance, it receives documentary evidence </b>

Those documents should be identified, and the desired contents may also be specified, in the sales contract. Article 5 of the ITC Model Contract serves as a stepping stone for such specifications. Even when a seller draws up a document alone they must not omit information required to be reflected in that document. This ensures that all documents contain the relevant information for all parties in the transportation and delivery chain. For example, the invoice may need to reflect the value-added tax (otherwise the buyer may not be able to reclaim the tax or apply for exemption), and levies charged in connection with exportation may be recoverable under international treaties. Furthermore, a bank engaged in an L/C payment will not verify if the goods are indeed the ones agreed in the contract, but it will investigate whether the certificate of origin, a certificate of inspection or a date of shipment are reflected in the way the parties agreed in the contract. Types of commonly agreed documents are:

 Commercial documents (e.g. Invoice, packing list);

 Shipping or transport documents (e.g. Bill of lading (ocean, multi-modal or charter party),  Airway bill, lorry or truck receipt, railway receipt, forwarder cargo receipt);

 Official documents (e.g. Customs documents, import permits, export permits, license, embassy legalization, certificate of origin, certificate of inspection, phytosanitary Certificate);

 Financial documents (e.g. Bill of exchange, co-accepted draft); and Insurance documents (e.g. Insurance policy or certificate).

Under a UCP 600-governed L/C payment transaction, the standard of examination to be applied by a bank is elaborated in UCP600 articles 18 to 28. These articles provide, for example, that:

 The start date of an insurance policy must be no later than the date of shipment, unless it is clear that the insurance coverage is retroactive (Article 28(e));

 A bill of lading may be given any title (Article 20(a)) but must indicate, inter alia, the name of the vessel (Article 20(a)(ii)) and contain terms and conditions of carriage, even though the bank will not examine such terms and conditions (Article 20(a)(v));

 An invoice must be expressed in the currency of the L/C (Article 18(a)(iii)).

<b>Late payment and charging interest. A seller would like to ensure that the buyer will pay its invoice in due time. </b>

Although the applicable law may provide for an entitlement to charge interest on late payments, it is psychologically stronger to be able to refer to precise contract terms stating that interest will accrue on late payments. Moreover, the statutory interest rate may be too low to justify collection proceedings in court.

In the ITC Model Contract, Article 6.2 provides for the seller's right to demand interest on late payments. However, it is important to note that an interest rate per day or per month will also be 'compounded daily or monthly (resulting in interest over interest and hence in a rapidly increasing percentage per year). If this effect is excessive over a relatively short period of time, many courts are inclined to adjust (or even set aside) an exaggerated high interest rate. If the applicable law nullifies excessive interest rates, a court will also likely disregard a stipulation such as "unless the applicable law prohibits such interest rate, in which case the highest permitted rate will apply". The specified interest rate should at least cover the interest that the seller would pay if it had to borrow the same amount from a bank.

<b>Penalty or liquidated damages for delayed delivery. The buyer may also wish to agree on a firm incentive for the seller </b>

to perform in a timely manner. Article 7.2 of the ITC Model Contract provides an option to include such an incentive in the form of a penalty or liquidated damages clause. To be valid and fully enforceable, the agreed amount of liquidated

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damages should roughly correspond to the damages likely to fall upon the buyer. As liquidated damages are estimated damages, the actual (exposure to) damages must be sufficiently uncertain at the time of contracting to warrant this option In common law contracts, the term 'penalty' should be avoided. As a matter of principle, courts will reject the concept of a penalty for non-performance, delay or inadequate performance; it will, however, permit a party's contractual entitlement to genuine estimate damages. In respect of such 'liquidated damages' clauses, and courts outside common law tend to take the same approach regarding a contractual penalty, a court will seek to achieve a fair result and therefore not enforce a term, with the penalty based on an estimate, that leads to an unjust enrichment of the enforcing party. The proper term under common law is liquidated damages and justified by clarifying that it is an incentive to perform duly and timely (and that the amount of the liquidated damages is an "accurate estimate of the damages" in case of undue or late performance). Because a penalty or liquidated damages clause contains only an estimate, the actual darnages suffered by the buyer may be much higher. However, under common law and in other jurisdictions, including a specified penalty excludes the right to claim actual damages (and in some jurisdictions, even the right to invoke other remedies). It is therefore important to add a phrase such as "without prejudice to the Buyer's right to claim damages" or similar wording.

<b>Lack of conformity of goods. The ITC Model Contract adopts the CISG concept of lack of conformity. This concept is </b>

wider than the concept of material defects (traditionally adopted in civil law countries) and includes differences in quality, as well as differences in quantity, delivery of goods of different kinds, and defects in packing.

Nevertheless, specific cases of non-conformity defined under the CISG largely correspond to how material defects are defined in civil law countries. Such cases include unsuitability of the goods for their ordinary purpose or for a particular purpose, as well as non-conformity with a sample or model (see also sections 5.2(d) and 3.4(u)).

The liability of the seller for non-conformity under the CISG is dealt with almost identically under most national rules dealing with liability of the seller for material defects. Furthermore, in the CISG, 'non-delivery' and 'lack of conformity are strictly separate forms of breach of contract. The same system is adopted in the ITC Model Contract, specifying special rules on the remedies of the buyer in case of non-delivery at the agreed time; special rules on the remedies of the buyer in case of non-conformity of goods; and general rules on avoidance due to non-performance of contractual obligations.

<b>Expertise procedure. To mitigate the risk of lasting controversies about an alleged non-conformity in the quality of </b>

delivered goods, the parties could provide for an expertise procedure. This procedure prevents such controversies from becoming endless and ensures that one party will not engage a third-party expert whose expertise or independence may be questionable. Article 9 of the ITC Model Contract provides for this kind of expert procedure (see also section 4.9(c)(iv)).

<b>Warranty disclaimer. Instead of the Model Contract's Article 8 (lack of conformity), a seller may propose a limited </b>

warranty and complete disclaimer of any implied or express properties of the goods sold under the contract. An example of such a disclaimer is:

The Goods are provided 'AS IS' and the Seller makes no other warranties regarding the Goods. The Seller expressly disclaims all representations and warranties, express and implied, including any warranties of merchantability, fitness for a particular purpose and non-infringement of any third-party rights.

If this choice is made, the provision should replace Sections 8.1 to 8.3, in particular, in the Model Contract. Including this kind of disclaimer reduces to a minimum the scope and relevance of Sections 8.4 to 8.5.

<b>Transfer of property. The ownership of goods transfers in accordance with the law applicable to the transfer of movable </b>

goods. In most jurisdictions, in the absence of express stipulations (e.g. a retention of title clause), ownership transfers when the seller 'delivers' the goods to the buyer because the risk transfers to the buyer. In cross-border sales transactions,

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this would be at the moment (and the place) determined by the agreed International Commercial Terms (INCOTERM) and may vary. See section 5.3 for more information.

<b>Retention of title clause. A seller with some negotiating power will ensure that ownership of the delivered goods does </b>

not transfer to the buyer before the purchase price has been paid (see optional Article 10.1 of the ITC Model Contract). A transfer of ownership obviously reduces the seller's right to reverse the sales transaction in case the buyer goes bankrupt or enters into suspension-of-payment proceedings. Ownership might also transfer by mixing the goods delivered with other similar goods (e.g. if the sale concerns generic products such as bricks, steel bars, pencils, raw materials or components). Therefore, it is important to complement a retention of title clause with an obligation to keep the goods under contract separate from the buyer's other goods.

<b>Avoidance (termination) of contract. The ITC Model Contract uses the term 'avoidance' of contract, also taken from the </b>

CISG, to mean contract termination. It adopts the CISG concept of fundamental breach of contract, but with significant modifications. First, the ITC Model Contract defines cases that constitute a breach of contract (where a party fails to perform any of its obligations under the contract, including defective, partial or late performance). Next, and on that basis, the ITC Model Contract establishes rules for two different situations:

<b>Fundamental breach. A breach of contract amounts to a fundamental breach' in cases where strict compliance of the </b>

obligation that has not been performed is of the essence under the contract, or where non-performance substantially deprives the aggrieved party of what it was reasonably entitled to expect. The ITC Model Contract allows the parties to specify cases that are to be considered as a fundamental breach (e.g. late payment, late delivery, non-conformity). In case of fundamental breach, the ITC Model Contract allows the aggrieved party to declare the contract void, without fixing an additional period of time to perform what is specified in the contract.

<b>Other (material) breaches of contract. In all other situations, where a breach of contract does not amount to a </b>

fundamental breach, the aggrieved party is obliged to fix an additional period of time for performance. Only when the other party fails to perform the obligation within that period, may the aggrieved party declare the contract void. The ITC Model Contract adopts the following CISG rule a declaration of avoidance is effective only if made by giving notice to the other party.

<b>'Material breach' as a reason for termination. Many contracts provide for a termination right in case of material breach. </b>

In this context, courts will give the term 'material" a meaning corresponding to 'significant from the perspective of the aggrieved party'. This implies an assessment as to whether the breach in question has a serious adverse effect on the party that has been deprived of performance or compliance with the contract. The assessment does not require such a breach to be fundamental, but the effect may well be the same. Given that providing for an assessment leaves uncertainty about what kind of breach will be deemed material, it is worth considering whether to expressly identify the specific breaches that will give rise to a right to terminate (as opposed to generic wording that each delay in payment or delivery, or every non- compliance with specifications, is material).

<b>Restitution. Once a sales contract is avoided (terminated), the parties' performances (if any) must be reversed. Given that </b>

the transaction crossed borders, there may be practical implications and additional costs to be incurred by either party. In the ITC Model Contract, Article 13 provides for restitution that can be adjusted to meet the particularities of the case.

<b>Damages. Article 14 of the ITC Model Contract contains an elaborate arrangement for claiming damages in case of </b>

non-performance (which includes non- conformity of delivered goods). First, paragraph 14.1 states the general principle that, except for cases of force majeure, any non- performance entitles the aggrieved party to damages. Second, the damages eligible for compensation are limited to those reasonably foreseeable at the time of contracting ('which the breaching party ought to have foreseen'). In case of avoidance, such damages will be calculated by reference to the replacement costs of

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the contract goods, increased by any additional expenses incurred (paragraphs 14.2 to 14.5). This provision substantially reflects Articles 74 to 76 of the CISG.

<b>Limitation of liability. The ITC Model Contract does limit the extent of liability by specifying the type of damages. The </b>

effect is that the buyer faces a discussion as to what ought to have been foreseen' by the seller. This eliminates opportunistic claims and, given the probable complex discussion of foreseeability', may discourage the buyer from submitting a claim (a phenomenon that is also called the 'nuisance value' of pursuing the claim into court with the related uncertainties). In practice, the parties may seek more certainty. The seller will exclude its liability and the parties will negotiate a limitation that matches the circumstances. For a more detailed discussion of the dynamics of such negotiations, see section 4.6.

<b>Mitigation of harm. In the ITC Model Contract, Article 15 expresses a general principle of law - even an aggrieved party </b>

must take such measures as may reasonably be expected in the circumstances to prevent that any damages or losses unnecessarily increase (also in CISG Article 77, and the same principle is expressed in UNIDROIT Principles Article 7.4.8.) The scope and extent of such measures must be proportionate to the harm suffered if the measures are not taken. Potentially, this may even require the aggrieved party to incur considerable costs. Those expenses are recoverable, however, as part of the damages. Applicable law. Article 23 of the ITC Model Contract is specific to the international commercial sale of goods. It stipulates that questions not regulated by the contract itself are governed by the CISG; and questions not covered by the CISG are governed by the UNIDROIT Principles; and to the extent that such questions are not covered by the UNIDROIT Principles, they are governed by reference to the national law chosen by the parties. The parties may agree on rules that modify, replace or supplement those of the CISG or the chosen applicable law.

<b>2. The "Choice of Law" in International Sale of Goods Contracts </b>

When negotiating an international contract, it is important to make the 'right' choice of law. Why, one might ask, should emphasis be placed on which law governs the contract if most conflict of laws rules entitle the parties to draw up their agreement as they wish? The answer is that it is practically impossible for the parties to individually negotiate every point that may arise under a contract. In fact, the parties will usually only settle the main questions. The essential points in a contract for the sale and purchase of goods are the specification of the kind and quantity of the purchased goods, as well as their price. By including an INCOTERM2 or another international trade term, the parties may settle further aspects which do not directly affect the reciprocal terms of the contract, such as the terms of delivery, passing of risk, insurance obligations, etc. However, the parties will usually not regulate every contingency.

Where the contract volume is extraordinarily high, the parties normally make the effort to expressly negotiate as many terms of the contract as possible. One might think that here, the question of the applicable law is of secondary importance, since the parties will try to exhaust the full potential for leeway allowable under the applicable law, and it will not be worth making more detailed investigations into the lex causae.

Not all international contracts coming before an ICC arbitration panel contain a choice of law provision. In that regard, the ICC has also annually published the percentage of those contracts that are either silent with respect to a choice of law or choose to apply non-national law. Over the last five years, and indeed over the last ten years, this percentage has not varied by much, and has remained around 20%.

<i><b>The International Market for Contracts 34:455 (2014) </b></i>

However, even in lengthy and meticulously drawn-up contract documents, it is not realistic for the parties to try to agree one very point that theoretically might occur. It remains important to know which law applies to the contract because that law governs those issues not expressly settled by the parties. Moreover, the parties will be interested in having the largest party autonomy possible, i.e. they will be looking for a lex causae which grants it in the desired extent. Making the 'right' choice of law is therefore essential.

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<b>2.1.4. Choosing the Domestic Law of one of the Parties 2.1.1. Both Parties Want Their Own Domestic Law to Apply </b>

In practice, the choice of the law that is to govern a contract is dominated by the respective interest of each party to have its own domestic law applied. The parties are familiar with their own law and are convinced that they will save considerable costs in not being required to investigate the intricacies of a foreign law. If they have their own law applied, they do not have to consult external experts, but rather, can rely on their usual, well-acquainted legal advisors. Therefore, in order to save costs to investigate foreign laws and avoid increased legal uncertainty that might arise when applying an external law, the parties to an international contract will strive towards an application of their own law, even if that law is less suitable for the transaction at hand than another law might be."

Conflicts are a given when each party insists on its domestic sales provisions. Where one party pushes its own law, it is highly likely that the other party will reject it because it would be at an 'information disadvantage' concerning the other party's law. This, in turn, might have a harmful effect on its legal position. The usual scenario is the clash of standard contract terms containing each party's choice of law clause, the so- called 'battle of forms'. The tricky question of whether the choice of law clause of one party prevails over that of the other party then arises. If both parties have basically the same bargaining power, neither will succeed in enforcing its own domestic law. For these situations, we must look for alternatives.

<b>2.1.2. The Choice of a Third Domestic Law </b>

In order to avoid the situation where the other party has the benefit ofhaving its own law applied to the contract, the parties might agree on the law of a third state, to which neither of them has a particular connection.

<i>a. The choice of an allegedly particularly 'good' law </i>

There are some laws that are deemed particularly suitable for sales contracts because they are the law of a state that plays a dominant role in a certain trade area." For example, the law of New York is frequently chosen for specific finance transactions," and parties to ship charter agreements or raw material transactions often agree on English law because London is the leading market place for such contracts. A further popular example is the choice of English law in international contracts for the supply of cereals owing to the leading role of the London Corn Trade Association.

The International Market for Contracts 34:455 (2014)

However, the law of a dominant market place is not automatically the best law. From a civil law point of view, the problem is that the leading market places are mostly common law countries. This means that, unlike in civil law countries, the primary sources of law are not codes and legal statutes, but case law. Acts and other legislative works are only subsidiary legal sources. This often makes it difficult for lawyers from civil law countries to find the relevant information, i.e., the status quo of how a legal issue is currently approached. What may sound trivial is nonetheless often overlooked in day-to-day practice, namely that for a civil law foreigner, the common law is less predictable and, therefore, a dangerous playing field, especially where the other party has profound common law legal advice. In particular, where there is a difference in the legal backgrounds of the parties, and one party is more familiar with the English language and the intricacies of the common law, the other party should be cautious about blindly subjecting itself to the law of a common law country, although it may be the law of a market dominating state.

English law historically has had a wide geographic reach, a feature that emanates from the days of the British Empire, which stretched from the Antipodes (Australia, New Zealand, Oceania) through the Far East (Singapore, Malaysia, Hong Kong), to India, Pakistan, British colonies in South and East Africa, the Caribbean, and Canada. Many former English colonies maintain a strong legal link to English law [2], and English decisions retain strong persuasive authority in many

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of those jurisdictions. US law is, of course, grounded on English common law principles. From a private civil law perspective, English and common law is based on the fundamental principle of freedom of contract, which is more flexible than many civil law systems, applying a more prescriptive civil code. Parties to an English law contract generally are bound to their agreement, and terms are upheld unless they are for an illegal purpose or contrary to public policy. In English civil proceedings, the losing party generally pays the prevailing party's reasonable costs, in contrast to US and other systems where each party generally bears its own. In cross border construction contracts, the 'loser pays' regime, combined with the 'pay as you go' approach on interim matters brought before a court, can be a powerful disincentive to weak or speculative claims. Conversely, a prevailing claimant can recover far more of its costs than under a 'pay-your-own' regime.

Nevertheless, assuming that the parties to an international commercial transaction have been guided by the parameters discussed above, the choice of the 'best law' might still be a myth for practical reasons. The parties may lack the information and capacity to judge whether a certain law is the 'best' for their contract. Information is pricey, and the parties will often not deem the expenditure of high sums of money in order to find out the 'best law' a worthwhile investment. Rather, they will rely on other people's experience and 'post-humous reports. A comparison of competing legal systems at the stage of contract formation in order to find the law which best suits the contract at issue will only be rewarding for transactions in which huge amounts of money are at stake.

For parties who cannot afford the luxury of expensive scrutiny of the various available legal systems and who consequently agree on a third law at the time of contract formation quite quickly, the expense of investigating the third law inevitably crops up at a later stage. In case of a dispute, each party will need to consult external experts. This, in turn, increases the total transaction costs. Resorting to sophisticated lawyers with local expertise who will generate reliable information about the outcomes obtainable under a certain foreign law is worthwhile only for exceptional transactions of very high importance. For the run-of-the-mill contract, the costs linked to deliberate choice of law procedures are prohibitive.

The choice of a third law might lead to a disagreeable surprise, in particular where one party has invested more time and money in scrutinising the possibly suitable law than the other. Choosing a third law has been characterised as a 'Jump into the dark, the dark referring to the depths of the unknown in the foreign law. Indeed, such a choice of law clause may turn out to be a Trojan horse, in that one party, who is aware that the provisions of a particular third law are disadvantageous to the other party, may suggest that law as a good, neutral compromise.

The traditional and still prevailing approach to nationalize cross-border transactions that is, to subject them to the law of a particular country as if they were purely domestic contracts may be criticized for a number of reasons. To begin with, domestic laws may not only vary considerably in content, but they are often ill-suited for the special needs of international trade. With respect to some domestic laws, it may even be almost impossible to find out what solution they provide for the issue at stake because of the rudimentary character of the legal sources and the difficulty of accessing them. Yet also highly developed legal systems often prove to be outdated.

Moreover, the very fact that in a given case more than one domestic law may be claimed to apply inevitably raises a problem in the conflict of laws. The uncertainties and inconveniences that derive from this are only too evident. Because of the different national rules of private international law, parties risk remaining uncertain as to the law governing their contract until the competent forum is established. Even then, depending on the conflict-of-laws rules of the forum, the same contract may well be subject to the law of State X or to the law of State Y. Moreover, as rightly pointed out, judges, while paying lip-service to the forum' s conflict-of-laws rules, in practice tend to favour in most cases the application of their own domestic substantive law. Last but not least, even if a judge was prepared to apply a foreign law, it is far from granted that he or she will be in a position to interpret it properly.

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Of course, parties may make use of their right nowadays generally admitted- to choose the law that should govern their contract. However, unless one of them is in a position to impose its own law-as is certainly the case with the big global players- the parties are usually reluctant to accept the application of the domestic law of the other. If so, they will have to resort to a 'neutral' law that is, the law of a third country that is foreign to both of them, and to know its content may require time- consuming and expensive consultations with lawyers of the country of the law chosen.

Another way out of the deadlock, of course, would be for the parties to agree to submit the disputes arising from the contract to arbitration and to choose, as they nowadays may according to most of the national arbitration laws, non-State 'rules of law' as the law applicable to the substance of their disputes. Yet, if they do not opt for such a solution, the determination of the applicable law will be left to the relevant conflict-of-laws rules, with all of the uncertainties indicated above. Indeed, not only in court proceedings but also in the case of arbitration absent any indication to the contrary by the parties, the arbitral tribunal is bound to apply 'the law-that is, a particular domestic law determined by the conflict-of-laws rules that it considers applicable.

Another possibility for the parties to avoid the application of any domestic law would be to try to lay down in their contract-and, in fact, they do so quite often, especially with respect to complex transactions-a detailed and possibly exhaustive regulation of their rights and obligations so as to avoid to the greatest possible extent any recourse to external sources. Yet, apart from the fact that in so doing the parties often encounter insurmountable difficulties arising from the language barriers between them and the absence of internationally uniform legal terminology on which they can rely, in the case of disputes, even such supposedly self-regulatory contracts or 'contrats sans lof cannot do without a general legal framework to which to resort for their proper interpretation and implementation. Moreover, at least in proceedings before a domestic court, the terms of the contract are binding only to the extent that they do not conflict with the mandatory rules of the otherwise applicable domestic law.

It is true that as of the beginning of the last century and, above all, in the second half of it, States have also been adopting an increasing number of international uniform law conventions in the field of contract law, with a view to eliminating the uncertainties arising out of the coexistence of different national legal systems. Yet, despite some undoubtable successes, the overall results of the unification efforts by legislative means are rather disappointing especially in the light of a cost/benefit analysis.

<b>2.1.5. The application scope of the CISG </b>

Generally, the CISG applies to sales of goods between parties whose relevant places of business are in countries which have adopted the Convention. For example, the CISG would be applicable to a contract for the sale of ceramic tiles between an Italian seller and a U.S. buyer since (i) the contract is for the sale of goods, and (ii) the parties to the transaction have their relevant places of business in countries which have adopted the Convention. The applicability of the CISG, however, is limited by a number of factors. One scenario in which the CISG is not applicable is when it is not readily apparent that the parties to the contract are from different States. For instance, such a situation might arise where the parties appeared to have their places of business in the same State but one of the parties was acting as the agent for an undisclosed foreign principle. In this situation, although the parties reside in different States, the CISG would be inapplicable.

Additionally, the language of the CISG has placed further restrictions on its applicability by excluding certain types of goods and certain types of sales from its scope. Under Article 2 of the CISG, the sale of stocks, shares, investment securities, negotiable instruments, money, ships, vessels, hovercraft, aircraft, and electricity are all items which are explicitly excluded from the Convention. The CISG also precludes its application to situations where the goods are bought for personal, family or household use, when the goods are sold by auction and when the goods are sold on execution or otherwise by authority of law.

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Further exclusion of the Convention's applicability arises in situations where the parties share in a substantial part of the supply of materials or labor. Article 3 of the CISG states that contracts for the supply of goods are to be considered sales unless the party who orders the goods undertakes to supply a substantial part of the materials necessary for such manufacture or production. The theory behind this exclusion is such a contract is more akin to a contract for the supply of services or labor rather than a contract for the sale of goods. Additionally, Article 3 further restricts the Convention's application in situations where the preponderant part of the obligations of the party who furnishes the goods consists of the supply of labor or other services. This restriction is intended to exclude situations where, for instance, the purchase of a small machine would require significant installation work and extended supervision. In this scenario, the CISG would exclude transactions focused on service, rather than sales, aspects.

The most dominant theme of the Convention is its non-mandatory nature. Parties who desire not to submit their commercial relationships to the reaches of its provisions are empowered by one of its Articles to "opt out" of the Convention in its entirety or derogate from or vary the effect of any of its principles. The source of this autonomy is contained in Article 6 of the Convention which states that "[t]he parties may exclude the application of [the] Convention or, subject to Article 12, derogate from or vary the effects of any of its provisions."

The simplest way to exclude the application of the CISG or "opt out" is by inserting a choice of law provision in the international sale contract. However, choice of law clauses must explicitly provide that the Convention is inapplicable to the international sale of goods transaction in order to ensure that it will not be applied. Practitioners should be aware that clauses specifying the laws of a country or a specific U.S. State will not, in most instances, effectively exclude the application of the Convention.

A majority of arbitral tribunals and national courts around the world have held that a choice of law clause in an international sale of goods contract which selects the laws of a Contracting State means that the Convention (and not the domestic commercial laws of such Contracting State) shall apply to the contract. This position is taken, for the most part, because the Contracting States have incorporated the Convention into the laws of their country, and the law of such Contracting State which governs international commercial contracts for the sale of goods is the CISG.

Until recently, U.S. courts had not addressed the applicability of the CISG in such situations. However, in 2001 the U.S. District Court for the Northern District of California in Assante Technologies, Inc. v. PMC-Sierra, Inc., made clear that a choice of law clause which merely specifies the law of a U.S. State or the general law of a Contracting State is insufficient to exclude the application of the Convention.

<b>Assante Technologies, Inc. v. PMC-Sierra, Inc </b>

Facts: The plaintiff [buyer] Assante Technologies, Inc., a Delaware corporation with its principal place of business in Santa Clara County, California, purchased application-specific integrated circuits in a number of transactions from defendant [seller] PMC-Sierra, Inc., a Delaware corporation with its principal place of business in British Columbia, Canada. Assante brought an action against PMC-Sierra after a number of the electronic components that it ordered failed to meet certain designated technical specifications. While there was not a single contract embodying the agreement pertaining to the sales, Assante asserted that acceptance of each of its purchase orders was expressly conditioned upon PMC-Sierra's acceptance of Assante's "Terms and Conditions" which were included with each purchase order Assante's Terms and Conditions, as they related to the law governing the "APPLICABLE LAW: The validity [and] performance of this [purchase) order shall be governed by the laws of the state shown on the Buyer's address on this order."

The Buyer's address as shown on each of the purchase orders was San Jose, California. On the other hand, PMC-Sierra argued that the terms of shipment were governed by a document entitled "[Seller's] Terms and Conditions of Sale." Seller's Terms and Conditions, as they related to the law governing the transactions, provided:

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"APPLICABLE LAW: The contract between the parties is made, governed by, and shall be construed in accordance with the laws of the Province of British Columbia and the laws of Canada applicable therein, which shall be deemed to be the proper law hereof."

<b>Issue: Assante further asserted that, even though the parties are from two nations which have adopted the CISG, the choice </b>

of law provisions in the "Terms and Conditions" set forth by both parties reflects the parties' intent to "opt out" of the application of the Convention. PMC-Sierra, on the other hand, asserted that merely choosing the law of a jurisdiction is insufficient to opt out of the Convention, absent an express exclusion of the CISG.

<b>Decision: The court, in rendering its decision, held that the choice of law clauses contained in the "Terms and Conditions" </b>

of both parties were insufficient to exclude the application of the Convention. The court, in rendering its opinion, stated: "Although selection of a particular choice of law, such as 'the California Commercial Code' or the 'Uniform Commercial Code' could amount to an implied exclusion of the CISG, the choice of law clauses at issue here do not evince a clear intent to opt out of the CISG. For example, [seller's] choice of applicable law adopts the law of British Columbia, and it is undisputed that the CISG is the law of British Columbia [citation omitted]. Furthermore, even [buyer's] choice of applicable law generally adopts the 'laws of the State of California, and California is bound by the Supremacy Clause to the treaties of the United States. Thus, under general California law, the CISG is applicable to contracts where the contracting parties are from different countries that have adopted the CISG. In the absence of clear language indicating that both contracting parties intended to opt out of the CISG the choice of law provisions [do not] preclude the applicability of the CISG." Therefore, the holding in Assante makes clear that U.S. parties wishing to exclude the application of the Convention to their transactions must provide clear language evidencing such intent.

While a clear majority of courts and tribunals around the world have taken the same approach as the court in Assante, practitioners must be mindful of several decisions which have reached opposite conclusions. In a small number of controversies where the Convention would otherwise have been applicable, courts and tribunals have held that a choice of law clause which specifies the national law of a country amounts to an implicit and effective exclusion of the Convention." On the other hand, in situations where the parties desire the application of the Convention, it is helpful to provide clear language evidencing such intent.

As stated above, a well-drafted choice of law clause can effectively exclude or ensure the application of the Convention to an international sale of goods contract. While common practice is not to include an express exclusion or application of the Convention, we recommend that choice of law clauses in future international commercial contracts for the sale of goods include specific language either expressly excluding or adopting the application of the Convention. This will ensure that the law intended to be applied by the parties is solidly established and not second guessed by a court or arbitral tribunal.

Please note that when expressly electing to apply the Convention to a contract for the international sale of goods, two important points must be addressed. First, it is prudent to include the language version of the Convention which is to apply. Official versions of the CISG are available in Arabic, Chinese, English, French, Russian and Spanish. Several other unofficial translations are also available in a variety of languages. Potential inconsistencies between different language versions of the Convention could lead to varying results in application. Therefore, it is important to specify a language version of the Convention. Second, it is also recommended that parties include a "gap filling" law to supplement issues not resolved by the Convention. The selection of a national system to supplement the limited CISG scope may serve to provide the parties a sense of increased certainty.

According to article 6, the parties may exclude the application of the CCISG or derogate or vary its effect. Parties may also negotiate different clauses in their contract. Moreover, usages which are customary between the parties and any practices which have developed in their relationship take precedence over the rules of the CISG.!? Even usages which

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reasonable people would normally consider to be part of their contract take precedence over the provisions of the Convention. Parties may furthermore agree that the CCISG shall only apply in part and that they will derogate from some other CCISG provisions or alter their legal effect. The basic principle of the Convention is that, subject to one exception, the parties should be free to exclude its terms in whole or in part (article 6).

The standard contracts of the Federation of Oils, Seeds and Fats Associations (FOSFA) and the Grain and Feed Trade Association (GAFTA) inelude the following clause: "The following shall not apply to this contract: (2) the uniform law on sales (.. ): (8) the United Nations Convention on Contracts for the International Sale of Goods (...).

The exception relates to the requirement of writing. The Convention provides that a contract does not have to be concluded, evidenced or varied in writing (article 12).'" Article 96, however, allows a State whose laws do have such a requirement to make a declaration that this rule is not to apply when any party to the contract has his place of business in that State. In that case, the requirement of writing cannot be excluded.'

Finally, the CISG is not applicable to the capacity of the parties, the formal validity of the contract, the transfer of ownership and the legal effects of the contract in respect of third parties.'

Pursuant to article 92, contracting States may exclude the application of part 1 (formation of an international contract of sale) or part III (substantive rules). When the seller and the buyer have agreed on a trade term, such as free on board (FOB) or cost, insurance and freight (CIF), the regulation intended by that term takes precedence over the provisions of the Convention. Further, the Convention does not prevent the parties from agreeing on a uniform interpretation of the trade terms by embodying into their contract Incoterms or a similar text.

In Vietnam, the applicability of CISG since its effective date in the countries has exposed remarkable lessons. Firstly, 5 years after joining the CISG, there are a large number of disputes in arbitration (up to over 60 cases) and many international disputes for the sale of goods in courts, which could have been resolved on the basis of CISG, have applied Vietnamese law instead. Secondly, arbitral awards in Vietnam are expected to be a good reference source for courts to apply CISG in litigation. A positive sign is that in most arbitration cases in Vietnam applying the CISG, the Arbitral Tribunal has applied the CISG uniformly from the point of view of respecting the internationality of the CISG.

As of the last update in September 2021, the United Nations Convention on Contracts for the International Sale of Goods (CISG) is applicable in Hong Kong. Hong Kong is a Special Administrative Region (SAR) of China, and it has its own legal system, which includes its own regulations on international commercial transactions. Hong Kong adopted the CISG as part of its domestic law through the United Nations (Convention on Contracts for the International Sale of Goods) Ordinance. The ordinance came into effect on August 1, 1997. Therefore, the CISG is part of the law governing contracts for the international sale of goods in Hong Kong.

The CISG applies to contracts for the sale of goods between parties located in different countries that are signatories to the convention. It covers various aspects of international sales contracts, including contract formation, obligations of the buyer and seller, delivery of goods, passing of risk, remedies for breach of contract, and more.

However, it is crucial to remember that the CISG may not apply if one of the parties explicitly excludes its application or if the contract is governed by the law of a country that is not a signatory to the convention. When conducting international business in Hong Kong or with Hong Kong-based companies, it is essential for parties to understand the applicability of the CISG and ensure their contracts comply with its provisions if they wish to be governed by its rules. As always, parties involved in cross- border transactions should seek professional legal advice to fully understand the implications and requirements of the CISG and other relevant laws.

<b>CHAPTER 2: INSIGITT INTO THE SCOPE OF APPLICATION OF CISG </b>

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The sphere of application of the CISG, that means its applicability to certain contracts, falls to be determined according to its own rules of application set out in Articles I to 6 CISG. To determine its applicability, the CISG relies on elements related to (a) the parties (and their connection to a Contracting State to the CISG) and (b) to the transaction itself. Only where Articles 1 to 6 CISG leave a gap, or specifically allow, are choice of law rules to be used to determine the application of the CISG to the contract in question.

In addition to providing rules relating to the application of the CISG, Articles I to 6 CISG provide rules which limit its scope. These rules are of great importance because the unification of sales law of different legal jurisdictions' traditions through the CISG is only a partial one: the CISG only purports to regulate a section of the law, namely that concerning a sales contract and its performance. Therefore, in practice domestic law (which is determined by private international law rules) will be applicable together with the CISG. Accordingly, it is advisable to stipulate in a contract not only the applicability of the CISG but also the domestic law governing the contract.

<b>2.2. The geographical scope of the CISG </b>

<b>2.1.1. Approaches adopted in Article 1(1) CISG </b>

Article 1(1) [draft counterpart of CISG article 1(1)) provides that the basic criterion for the application of this Convention to a contract of sale of goods as well as to its formation is that the places of business of the parties are in different States. This Convention is not concerned with the law governing contracts of sale or their formation where the parties have their places of business within one and the same State. These matters will normally be governed by the domestic law of that State.

By focusing on the sale of goods between parties whose places of business are in different States, the Convention will serve its three major purposes:

(1) to reduce the search for a forum with the most favourable law;

(2) to reduce the necessity of resorting to rules of private international law,

(3) to provide a modern law of sales appropriate for transactions of an international character.

Even though the parties have their places of business in different States, this Convention applies only if: (1) The States in which the parties have their places of business are Contracting States; or

(2) The rules of private international law lead to the application of the law of a Contracting State.

Under paragraph (2), the Convention does not apply if "the fact that the parties have their places of business in different States does not appear either from the contract or from any dealings between, or from information disclosed by, the parties at any time before or at the conclusion of the contract". One example of such a situation is where the parties appeared to have their places of business in the same State but one of the parties was acting as the agent for an undisclosed foreign principal. In such a situation paragraph (2) provides that the sale, which appears to be between parties whose places of business are in the same State, is not governed by this Convention.

If the two States in which the parties have their places of business are Contracting States this Convention applies even if the rules of private international law of the forum would normally designate the law of a third country, such as the law of the State in which the contract was concluded. This result could be defeated only if the litigation took place in a third non-Contracting State, and the rules of private international law of that State would apply the law of the forum, ie., its own law, or the law of a fourth non- Contracting State to the contract.

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A further application of this principle is that if two parties from different States have designated the law of a Contracting State as the law of the contract, this Convention is applicable even though the parties have not specifically mentioned the Convention.

Even if one or both of the parties to the contract have their places of business in a State which is not a Contracting State, the Convention is applicable if the rules of private international law of the forum lead to the application of the law of a Contracting State. The Convention is the law for international sales between parties from member states. If the Convention is not applicable because one party or both parties have their places of business outside the member states, national private law rules determine which law applies. It may be that the law indicated by the rules of conflict of laws is that of a member state. Then the questions arises if it should be the set of rules for internal or for international commercial operations. The authors of the Convention were of the opinion that it should be the latter and this for several reasons: The Convention is published and known as well as the national sales law. The Convention is especially conceived for international affairs. For an exporter or importer, the Convention will be a set of rules which he is accustomed to use. No party should be confronted with unknown or difficult to discover rules of civil or commercial law. To place a foreigner in a worse situation because he knows the law less well than you is not acceptable. These are the main reasons for Article 1(1)(b) which makes the Convention also applicable where the rules of private international law lead to the application of the law of a Contracting State including the law of the forum. Nevertheless a reservation to adopt the Convention without its Article 1(1)(b) was requested and admitted. Out of more than forty member states only China, Czech Republic, Slovak Republic and the U.S. have made use of this reservation.

Germany has declared that it would not apply Article 1(1)(b) in respect of any state that had made a declaration that that state would not apply Article 1(1)(b). This is perfectly permissible because a state is allowed to make use of a permitted reservation only partially. The effect of the German restricted reservation is that if Article 1(1)(a) does not apply but the sale, following the rules of German international private law, would fall under German national law or under the national law of any other Contracting States except China, Czech, Slovak or U.S. law, the Convention will apply. In the cases of these four states, German courts must apply the rule of these states for internal sales.

In evaluating article 1(1)(b), one should also consider the impact of an article 95 declaration by a Contracting State. Article 95 permits a Contracting State to declare that it will not by bound by article 1(1)(b).

<b>2.1.2. Articles 1(1)(b) and 95 of the CISG </b>

Article 95 of the CISG provides that any 'state may declare at the time of the deposit of its instrument of ratification, acceptance, approval or accession that it will not be bound by subparagraph (1)(b) of article 1 of this Convention'. As referred to above, article 1(1)(b) contains one of the two alternative applicability criteria of the CISG and provides that it applies when the rules of private international law refer to the law of a contracting state.

Even though the meaning of article 95 seems relatively clear at first glance, it has given rise to much controversy and its interpretation and application has generated considerable scholarly debate. Recently, the CISG Advisory Council published an opinion on its interpretation.

This CISG AC Opinion will be analysed in this contribution. Since article 95 was analysed in detail by the present author in a previous edition of this journal, its background and history will not be repeated. This article will engage with the Advisory Council's interpretation of this provision and focus on a remaining contentious matter, namely, the correct interpretation and application of the proper law of a contract.

There is much support for the view that application of the CISG, under article 1(1)(b), amounts to application of the Convention as part of the proper law of the contract - assuming of course that the lex causae is that of a CISG contracting

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state. It has also been established that a state that made an article 95 reservation, remains a contracting state under the CISG.

It is widely accepted that the lex causae should be applied in the same manner as a forum, in its state of origin, would have applied it.

<i>A renowned conflicts scholar explained the correct application of a foreign lex causae as follows: </i>

In an autonomous conflict system the notion of "origin-conform application" of foreign law is not an expression of loyalty towards the State of origin of a foreign law. Instead it is primarily a consequence of taking seriously the command of the national rules on choice of law, and truly subjecting the dispute to the "really applicable" foreign law. The principle of origin-conform application of foreign law aims at safeguarding that foreign law in another State's court [and requires that it] is applied in the same manner as a court (or other competent authority) would do in the State of origin of that law. The perspective to be chosen is, in other words, that of the foreign court.

As applied to the topic at hand, the CISG can only find application as part of the legal system indicated by the rules of

<i>private international law of the forum, if the applicable lex causar would designate the CISG as the relevant body of rules </i>

to be applied in the circumstances. The same holds true for application of the CISG as pan of a proper law chosen by the parties.

In reservation contracting state Law of reservation contracting state NO In reservation contracting state Law of non-reservation contracting

state

YES In non-reservation contracting

Courts of certam article 95 reservation states seem to conclude that they should only apply the CISG if the requirements for application under article 1(1)(a) are met. The AC Opinion stresses the fact that the article 95 reservation relieves reservation states from the public international law obligation to apply the CISG under article 1(1)(b), but does not prohibit them from applying it should they wish to do so. The overwhelming majority of commentators also support the view that fora in reservation states should apply the CISG if the law of a non-reservation contracting state is found to be applicable as the proper law of the contract. Staying true to the principle of origin- conform application of the lex causae would indeed require the CISG to be applied as the relevant body of rules designated for international sales contracts under the lex causae If this argument is followed through, then the CISG should not be applied if a forum in a non-reservation contracting state finds the law of a reservation state applicable in terms of its rules of private international law. However, the CISG AC supports application of the CISG in the last-mentioned scenario, based on the view that the Convention's applicability criteria are met from the forum's perspective. This argument is certainly commendable from a uniform law perspective and has won the support of several authors but does not, unfortunately, enjoy unanimous acceptance. The purpose of the CISG is the adoption of uniform rules for international trade in order to contribute to the removal of trade barriers and to promote the development of international trade. It seems as though the object and purpose of the

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CISG requires it to be applied as widely as possible. Therefore, the CISG AC's interpretation of the article 95 reservation, in a manner that ensures minimum impact on the Convention's scope of application, is certainly to be supported.

<b>2.3. The material scope of the CISG </b>

The Convention applies to contracts for the sale of goods. Although the Convention does not provide any definition of this type of contract, the contract for the sale of goods covered by the Convention can be defined as a contract "pursuant to which one party (the seller) is bound to deliver the goods and transfer the property in the goods sold and the other party (the buyer) is obliged to pay the price and accept the goods." Thus, as one court put it, the essence of the contract lies in goods being exchanged for money. Pursuant to article 29, contracts modifying a sales contract also fall within the substantive sphere of application of the Convention.

<b>2.3.1. Data as the new "goods" covered by CISG? </b>

Nowadays, a range of other digital products (that might not be thought of as constituting software in this traditional sense) are now commonly traded in what is a 'relatively new market': including apps, firmware, digital music, and ebooks. All of this trade is effected via the same digital unit: data. It is no longer the case that only tangible products, or only software in the intangible space, is traded online. As long ago as 1994, it was noted that '[m]ore than perhaps any other commodity, data must be allowed to move without barriers in order to allow the world economy to grow in the most efficient manner possible'. Cross-border data transactions raise challenging private law (contract law) issues, as well as the data protection and privacy issues that we are perhaps more familiar with from our everyday lives. Contracts are 'the safest way to exploit data", given the limitations of intellectual property laws. Persisting with existing CISG-software analyses also risks implying, either intentionally or unintentionally, that data other than traditional executable computer programs falls outside of its scope. Specifically assessing the CISG's capacity to govern non-software data trade is therefore important, given the nuances of data trade.

Software and software data are two types of data. They are both commonly commercially traded. Nevertheless, software data is qualitatively different to software. It does not consist of executable files. And in some cases, unlike software, non-software data is not functional in and of itself." Media files and raw data, for example, require things to be done to them by software or by apps in order to be useful Apps, like software, are functional: but they do not constitute traditional executable files. All four types of media files considered in this article are not inherently functional, but instead are accessed (and thus made useful) via software or apps: including audiovisual software, image viewers or editors, and word processors. Raw data, including personal data, similarly requires analysis with the assistance of software or apps in order to be understood. To take one example, analysis of heart rate data can facilitate predictions as to whether or not someone's health is at risk due to an abnormal heart rhythym. When analysis is applied to raw data, via software or apps, that data 'enables more insightful judgments; it allows you to serve your customers and your clients better, and to run your business better. the practical equivalence of software to traditional (physical) goods has been offered by some existing commentaries as one justification for classifying software as goods pursuant to CISG article 1(1). Software sales have been described as 'comparable to the sale of a machine, where the seller retains the intellectual property rights necessary for [its] designing, developing, manufacturing, and operating'. This analogy, however, incorrectly assumes that all traditional goods are functional Respect to certain types of non-software data, it is not so for incomplete software, and this is also not true for traditional goods. The CISG 'does not exclude goods or transactions on this basis', and to the contrary, reproduction actually constitutes one of the pillars of mass production' in relation to traditional goods trade By restricting non-software data's capacity to flow across borders, data localisation laws might shape the contours of a commercial data transaction. From a practical perspective, there may also be good commercial reasons for sellers to retain data on their own servers, or at some other place external to the buyer. In both cases, transactions might involve (for example) web-based data access: where no data, or perhaps only incidental login or help data, is actually downloaded by

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non-the buyer. These factors do not affect non-the capacity of non-software data to satisfy CISG article 1(1)'s goods criterion: a conclusion consistent with the more general observation that data localisation laws are not supposed to inhibit trade. Anecdotal evidence suggests that the CISG is often excluded in the tech industry'. However, The CISG's harmonised rules seek to promote cross-border trade in traditional goods, and they have that very same potential in the digital sphere. Should the CISG presumptively govern non-software data trade, CISG article 6 would preserve merchants' rights to opt-out, in favour of an otherwise applicable non-harmonised state law. Party autonomy is actually an essential component of the CISG's regulatory framework, given its commercial law context. International data traders stand to benefit from the CISG's ready-made and already-widely-adopted private law framework. The CISG is capable of governing contracts that have both goods and services elements.

Broadly interpreting CISG article 1(1)'s goods criterion is considered to be consistent with the CISG's 'intentions and goals', its 'underlying concepts', and the desirability of securing 'legal certainty through uniform rules'. It is also arguably consistent with the limited exclusions contained in CISG article 2, which indirectly help define CISG article 1(1)'s goods criterion, and which do not refer to software or data. The rationale for widely interpreting CISG article 1(1)'s goods criterion is not clearly stated in the Schlechtriem and Schwenzer commentary's current English edition. Its 2nd edition, however, explained its own (even wider) reading as acknowledging the CISG's French language text, and accommodating the 'invention' of new merchandiser offering CISG article 7(1) as an interpretative justification. Muñoz supports this view, hypothesising that an inability to foresee 'the new type of goods that were to be sold just a few years ahead in CISG contracts' might be 'a reason why [the drafters] may have wilfully avoided a definition of goods'. However, interpreting the goods criterion broadly leads to the arguable conclusion that the CISG may apply also to intangible goods Tangibility has been an important consideration in existing CISG-software analyses. However, as Green argues in a recent theoretical analysis addressing salm laws in general, focusing on tangibility is misguided: whilst tangibility describes things that were traditionally considered goods, it does not necessarily define the concept, with the real question being whether there is a particular interest in something that is being exchanged against money. Like its application to software, the CISG's more general application to trade in intangibles is not universally accepted. If non-software data were to be treated as inherently tangible, its classification as goods for the purposes of CISG article 1(1) would be self-evident

Applying CISG article 1(1)'s goods criterion to new commercial subject matters requires a consideration of the suitability of the CISG's provisions for the type of trade in question. The conclusion that the CISG applies to non-software data trade can only be reached after independently analysing the application of the CISG's provisions in the specific non-software data context. This is an exercise that existing CISG-data scholarship is yet to properly undertake.

Furthermore, provided that CISG article 1(1)'s goods criterion is satisfied according to the test outlined above, the CISG does not require that the goods themselves cross state borders. Though one might ordinarily expect this to be the case, CISG article 1(1)'s internationality rule only requires that the parties have their 'places of business in different States' The CISG applies where buyers and sellers are in different states but traditional goods don't move, and it also applies where goods move between third and fourth states. 209 If data localisation laws, commercial convenience, or both lead to a situation where non-software data does not move, that data can still be goods: its location and movement are irrelevant in this regard.

Interpreting the CISG's scope as including non-software data trade is also consistent with the CISG's overall evolution as an instrument of international commercial law. The CISG requires goods to be fit for their purposes (Article 35). CISG article 3 addresses the CISG's capacity to regulate mixed contracts involving both goods and services elements. There is, therefore, a certain irony in the fact that the CISG has itself been repurposed in many different ways over the past 40 years. The CISG has been exposed to numerous mould-breaking usages: it has inspired domestic law reform, the development of other international instruments, contract drafting practices, expanded understandings of what now constitutes internationally accepted trade law.

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The Convention also covers other types of contracts, such as contracts for the delivery of goods by installments, as can be derived from article 73 of the Convention, and contracts providing for the delivery of the goods sold directly from the supplier to the seller's customer. Article 3 contains a special rule which extends 'within certain limits' the Convention's substantive sphere of application to contracts for the sale of goods to be manufactured or produced as well as to contracts pursuant to which the seller is also bound to deliver labour or services.

In this regard, Article 3 of the CISG shows the features to be considered to determine whether a contract is to be qualified as a contract of sale under the CISG if the seller undertakes to produce, deliver, and/or install the sold goods, or to provide other kinds of services, in addition to its obligation to sell and deliver the possession and the ownership of the sold goods. This provision extends the Convention's sphere of application to some contracts that include some act in addition to the supply of goods.

Pursuant to paragraph 1 of Article 3, contracts in which the seller is under an obligation to manufacture or produce the goods would be deemed as a contract, of sale as it regards the application of the CISG. However, if the party who orders the goods undertakes to supply a substantial part of the materials necessary for such manufacture, then that contract would not be subjected to the CISG. In the event that a substantial part of the materials is provided by the buyer, then the main obligation of the buyer is to shape the provided material, and to provide manpower or services to the other party of the contract; therefore, these types of contracts would be deemed as service or employment contracts, or contracts for work. Pursuant to the CISG Advisory Committee, the main feature that is used to determine which party is to provide the substantial part of the materials is the economic value of the materials provided by cach party. However, if the materials provided by the buyer are used for packaging or delivery of the goods, and not for the manufacture or production of the goods, this does not affect the applicability of the CISG to the relevant contract.

With respect to paragraph 1 of Article 3, in order to decide whether or not the selier's obligation to sale of the goods to produce or manufacture the goods to be sold, the local courts consider whether the materials provided by the buyer are essential for the production or manufacture of the goods or whether the obligation to deliver the materials is regulated as a main obligation of the buyer.

On the other hand, paragraph 2 of Article 3 of the CISG governs the applicability of the Convention to mixed contracts. According to the said paragraph, the CISG does not apply to the contracts where the preponderant part of the obligations of the party who provides the goods is to supply labor or other services.

According to the UNCITRAL document A/CN.9/1064/Add.2 on "Revised draft legal taxonomy revised section on data transactions", the Introduction of the document highlights the UNCITRAL Commission's consideration of a preliminary draft of the legal taxonomy on data transactions and the ongoing revisions and consultations with experts to make it relevant in a rapidly changing environment. The Commission is invited to acknowledge the work done and authorize its publication as a "living document" in cooperation with relevant international organizations.

The document outlines the Main Revisions to A/CN.9/1012/Add 2, particularly focusing on data transactions. It defines data transactions as commercial transactions concerned with the provision of data and highlights two types: data provision and data processing Data provision involves providing data to another party, while data processing entails processing data for another party, focusing more on the provision of services.

A rough distinction may be drawn between two types of data transactions:

(a) Data provision- a data transaction in which a person (the "data provider") provides data to another person (the "data recipient"). The data provider may provide the data by giving the data recipient access to the data, or by giving the data recipient access to a data source that the data provider controls. In very broad terms, data provision may be likened to the "sale" or "licensing" of data. Data provision transactions include "data sharing" arrangements by which the parties provide data to one another, usually via an online space, such that each party is both data provider and data recipient;

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(b) Data processing a data transaction in which a person (the "data processor") processes data for another person (the "data controller") and provides the processed data to the other person. While data processing comprises all types of operations performed on data (including collection, recording, organizing, structuring, altering, and transmitting), common types of data processing transactions includes data scraping. cloud-based services, data analytics, data platform services, and electronic transmission services. While data processing may result in the provision of data, the transaction is more concerned with the provision of services.

The discussion of contract law (A/CN.9/1012/Add.2, paras. 12-15) is being revised to refer to additional materials on the rights and obligations that are usually contained in data provision contracts and data processing contracts. As the different types of underlying data transactions engage different business needs, the different types of contracts will address different rights and obligations.

Several national and international initiatives have sought to identify the various of rights and obligations that are suited to data transactions:

(a) As part of an ongoing joint project, the American Law Institute (ALI) and the European Law Institute (ELI) are examining the legal rules and doctrines governing data transactions and data rights with a view to developing principles for a data economy ("ALI/ELI Principles"). In their current form, the principles distinguish two types of contract, namely (1) contracts for the supply or sharing of data, which include contracts for the transfer of data, and (ii) contracts for services with regard to data, which include contracts for the processing of data. For each type of contract, the principles identify a range of rights and obligations that should be included by law, subject to the agreement of the parties;

(b) In 2018, the Ministry of Economy, Trade and Industry of Japan published contract guidelines on the utilization of data ("METI Data Guidelines")2 with a view to "promoting reasonable negotiations and execution of contracts, reducing transaction costs and diffusing data contracts". The METI Data Guidelines distinguish three types of contract, namely (i) data provision contracts, (ii) data generation contracts, and (iii) data sharing contracts using platforms, which includes contracts between the platform operator and data users for the provision of processed.

While the typology of contracts adopted by each initiative differs, both initiatives address data provision contracts and data processing contracts:

(a) Data provision contracts usually contain terms addressing the following data- specific issues: (i) What the data are a precise description of the types of data to be provided under the contract;

(ii) How the data are provided if data are transferred to a medium (eg, a disk, a server or an online platform), which party has control of the medium; if access is given to data ur to a data source whether the data provides merely authorizes authorized necess or does more to facilitate that access;

(iii) Conformity of the data-description and warranties as to the quantity and quality of the data, including in terms of its completeness, accuracy, and format, as well as confirmity with any relevant industry or international standards or representations made by the data provider,

(iv) Use of data by data recipient - description and warranties as to how the data recipient may use (or more generally process) the data, including any limitations on use by reference to purpose, rights of others, or use by the data provider, (v) Use of data by data provider - description of how the data provider may use the data (if at all), as well as any use in any new data generated by the data recipient in its use of the data;

(vi) Dealing with data upon breach or avoidance description of how the defaulting party is to deal with the data in the event of breach or avoidance of the contract.

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(b) Data processing contracts usually contain terms addressing the following data- specific issues

(1) Scope and purpose of services description of the data processing services provided by the data processor, including performance parameters,

(ii) Data security and data integrity description of the policies and procedures for maintaining data security and integrity, and for managing security incidents,

(iii) Data portability description of processes available to the data recipient to access data in a format that is usable in systems other that the system provided by the data processor,

(iv) Data localization any limitations on the locations in which the data are processed under the contract;

(v) Use of data by data processor-description of how the data processor may use data collected under the contract, particularly data collected from the data recipient, and data provided under the contract, including any limitations on use by reference to purpose (eg. the purpose of providing the data processing services) and obligations to deliver up data at the end of the contract term.

The discussion of other legal regimes applicable to data as a commodity (A/CN.9/1012/Add 2, paras 33-39) will be revised to cover materials on recent developments and initiatives:

(a) In India, a committee of experts commissioned to deliberate on a non-personal data governance framework has released a draft report exploring mechanisms to establish rights over non-personal data collected and generated in India. In particular, the report examines the possibility of the law conferring certain rights on the community that generated the data, comprising "any group of people that are bound by common interests and purposes, and involved in social and/or economic interactions" 3 Those rights include the right to derive economic and other value from the data, and the right to eliminate or minimize harms to the community;

(b) In Germany, the SME strategy developed by the Federal Ministry for Economic Affairs and Energy contemplates a "data economy that is appropriate for SMEs" and refers to improvements in the form of data access in the event of joint value creation with larger companies,

(c) References to the ALI/ELI Principles will also be updated.

The appraisal (A/CN 9/1012/Add 2, paras. 42-57) is being revised to update the discussion of the CISG and to include a discussion of the Notes on the Main Issues of Cloud Computing Contracts, which is particularly relevant to transactions for "data processing".

(a) With regards to the CISG, leaving aside the debate on the meaning of "contracts of sale of goods", a more practical question arises as to whether the provisions of the CISG are appropriate to address the needs of the parties to data transactions, specifically data provision contracts. As the Secretariat observed in 2001, it is one thing for the "sale" of "virtual goods" to come within the scope for the CISG, it is another thing for the substantive rules laid down by the Convention to accommodate the practical needs of those kinds of transactions. 5 An analysis of substantive provisions of the CISG reveals that some of its provisions would ordinarily find application in the relationship between the parties to data provision contracts, such as provisions regarding contract formation (arts. 14-24), general provisions relating to the sale of goods (arts. 25-29), and provisions relating to anticipatory breach and fundamental breach of contract (arts. 25 and 71). However, the provisions concerning rights and obligations of the parties may not be adapted to data transactions, even applying a generous functional equivalence approach,

(b) As for the Notes on the Main Issues of Cloud Computing Contracts, cloud- based services are essentially a form of data transaction of the data processing type. The Notes, prepared by the secretariat and approved for publication by the

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Commission in 2019, contain a non-exhaustive analysis of issues for consideration by parties before and during the drafting of contracts for cloud-based services, including the application of mandatory laws and the issues to be addressed in the contract. While not prepared with data transactions in mind, the issues analysed in the text are relevant to the conclusion of data processing contracts, including the dista-specific censuers maly contained in those contracts.

Overall, The United Nations Commission en foternational Trade Law (UNCITRAL) plays a crucial role in the development and promotion of international trade law. In the context of digital transactions and the Convention on Contracts for the International Sale of Goods (CISG), UNCITRAL has been actively involved in creating legal frameworks to address the challenges and opportunities presented by digital commerce.

UNCITRAL has recognized the increasing significance of digital transactions in international trade and has been actively engaged in developing legal instruments to facilitate such transactions. One of the notable initiatives by UNCITRAL in this area is the adoption of the UNCITRAL Model Law on Electronic Commerce in 1996. This model law provides a solid legal basis for the use of electronic communications in international trade, including the formation and validity of contracts, the use of electronic signatures, and the recognition of electronic records and documents.

Moreover, UNCITRAL has been involved in exploring the legal aspects of emerging technologies, such as blockchain, smart contracts, and electronic transferable records. Through its Working Group on Electronic Commerce, UNCITRAL continues to study the legal issues and challenges posed by these technologies and seeks to develop harmonized international rules to promote their use in cross-border transactions securely

The Convention on Contracts for the International Sale of Goods (CISG) is one of UNCITRAL's most well-known and significant achievements. The CISG, adopted in 1980, provides a unified framework for international sales contracts between parties from different countries. It aims to remove legal barriers and uncertainties in international trade by offering a standardized set of rules governing contract formation, performance, and remedies for breach.

UNCITRAL has actively worked to promote the adoption and uniform interpretation of the CISG across different jurisdictions. It organizes conferences, workshops, and training programs to raise awareness about the convention and its benefits, encouraging more countries to become parties to the CISG.

Furthermore, UNCITRAL has undertaken work to address issues related to the application of the CISG to e-commerce and digital transactions. The commission has considered how the traditional rules under the CISG can be adapted to accommodate the unique challenges and characteristics of online sales. This includes studying issues related to contract formation, communication of offers and acceptances, electronic communications, and the use of standard terms and conditions in digital transactions governed by the CISG.

Overall, UNCITRAL's work on digital transactions and the CISG demonstrates its commitment to promoting fair, efficient, and secure international trade, adapting its legal frameworks to keep pace with technological advancements and evolving business practices. By providing uniform and modem legal rules, UNCITRAL continues to play a significant role in fostering international trade and economic cooperation.

In 1998, the United States recommended that UNCITRAL develop an international convention on electronic contracts based on the preexisting principles of the Model Law on Electronic Commerce (MLEC) adopted by UNCITRAL in 1996. These principles include technological neutrality, national source neutrality, and party autonomy in the choice of applicable contract law and rules.6 In July 2005, the Convention on the Use of Electronic Communications in International Contracts (CUECIC) was adopted by UNCITRAL at its thirty-eighth session 7 The General Assembly of the United Nations later adopted CUECIC on November 23, 2005.8 The CUECIC remained open for signature by all nations until January 16, 2008.9 Signing the convention only indicates an intention to consider its ratification rather than consent to be bound by it. 10 As of January 16, 2008, eighteen nations including China, Russia, Singapore, and the Republic of Korea had signed CUECIC.11

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Unlike the CISG, which applies to "contracts of sale of goods,"12 CUECIC applies to "electronic communications in connection with the formation or performance of a contract between parties whose places of business are in different States "13 Therefore, CUECIC potentially applies to contracts for services, licenses of software, auctions, barter, and other types of transactions, as well as sales of goods.14

Like the MLEC, the purpose of the CUECIC is to "remove [existing legal] obstacles to the use of electronic communications in international contract[]" formation and performance. 15 The MLEC, which has been implemented with varying degrees of uniformity, is a model for national and sub-national legislation. 16 CUECIC establishes a treaty-based framework of rules to legitimize contract formation and performance through electronic communications by commercial parties whose contract places of business are in different nations, unless the parties effectively choose an alternative applicable law. 17 In addition, CUECIC validates the use of electronic communications for notice, filing, and other procedures prescribed by international treaties that were drafted prior to the advent of modern electronic communications.18

International electronic contract law will proceed to develop from the same sources from which international law generally develops. Treaties are only one of several sources of international law, and commercial law treaties, such as CUECIC and CISG, are only one of several sources law. Judicial decisions, customary law, scholarly writings, and general principles of of international electronic commerce and law, such as equity and good faith, are other sources of internationaliaw thaimight servetosupplementtreatytexts, tofillgaps in subject matter addressed by treaties, to contradict and supersede treaty rules, or to provide an enforcement structure for treaty law

Commercial parties have the freedom to contract across national borders, absent legislative prohibitions. No specific authorizations are required for their contracting to take electronic form. Parties may agree to document their transactions solely through the exchange of computer- generated messages. However, unless parties had the foresight and capability to address every legal rule that might apply to their contract, treaty-based rules of law might be applied by an adjudicator in the event of a contract dispute between the parties 22 Federal and state legislation, based on the MLEC, han heen enacted in the United States to supply both mandatory and default rules for commercial and consumer electronic contracts.23 However, until CUECIC is ratified by at least three nations, no international treaty will establish rules similar to those of the federal Electronic Signatures in Global and National Commerce Act (E-SIGN) or the state model law, the Uniforin Electronic Transactions Act (UETA) 24 Nevertheless, international commercial sales, licenses, barters, swaps, and auctions of goods, services, software, and other information will continue to increase in volume. E-commerce law that might apply to such contracts in the absence of, or in addition to, CUECIC is described further in this Part and in the remainder of the Article.

The MLEC, and E-SIGN and UETA, which are based on the MLEC, explicitly recognize the legal effect, validity, and enforceability of electronic signatures, contracts, and other related records 25 State laws based on UETA apply to purely intrastate contracts and contracts for which such laws are chosen by the contracting parties. E-SIGN applies to all contracts affecting interstate commerce and contracts where the chosen or otherwise applicable state law failed to adopt minimum standards recognizing the validity of electronic contracts as set forth in E-SIGN.26 E-SIGN also applies "with respect to any transaction in or affecting ... foreign commerce. "27 Ratification of CUECIC by the United States would replace conflicting E-SIGN rules for international contracts subject to CUECIC. .

The CISG was adopted by UNCITRAL in 1980, before the development of the Interact and other advanced means of electronic communication. The CISG only mentions a "writing" in article 11's climination of any contract form requirement, 29 in article 21(2) when a "letter or other writing containing a late acceptance" is nevertheless effective as an acceptance, 30 and in article 29(2) wherein "contracts in writing" requiring their modification or termination "in writing" may not be otherwise modified or terminated.31 Only CISG article 13 addresses electronic equivalents of traditional paper "writings" by stating: "For the purpose of this Convention 'writing' includes telegram and telex. "32

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CISG article 7(2) provides:

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.33

A general principle of freedom of contract form is stated in CISG article II: "A contract of sale need not be concluded in or evidenced by writing and is not subject to any other requirement as to form."34 Therefore, commentators have suggested that article 13 "must be read to include all electronic forms of communication as well."35 Article 13's use of the nonexclusive term "includes" supports this interpretation. Furthermore, if the underlying reasons for the requirement of a "writing" are the future accessibility and readability of the communication, if an electronic communication may be stored and later reproduced in electronic or paper form, it should satisfy these functional reasons for a "writing" requirement and should be considered the equivalent of a paper "writing."36

CISG article 12, however, permits ratifying nations whose municipal laws require offers, acceptances, any other indications of intention, and/or contracts, modifications or terminations to be in writing, to "declare" pursuant to article 96 that the freedom of form rule of article 11 "does not apply where any party has his place of business in that State."37 Therefore, whether a traditional paper "writing" is required in a CISG- governed sale of goods contract depends on the treaty version ratified by the particular Contracting States in which the parties have their places of business 38

No requirement of a signature or an original writing is stated in the CISG. The second sentence of article 11's freedom of form rule states: "[A contract of sale] may be proved by any means, including witnesses. "39 Therefore, a contract may be proved to be the legal commitment of a party without proof of the party's signature to the contract and without proof of the "original" character of the contract document, unless the parties require a signature or an original through the exercise of their freedom to derogate by contract from particular CISG provisions pursuant to CISG article 6.40

In 2003, the first opinion of the CISG Advisory Council addressed "electronis communications. "41 In interpreting CISG article 11, the Advisory Council concluded "[The] CISG enables parties to conclude contracts electronically. "42 Furthermore, CISG article 13 was interpreted so that "[the term 'writing' in CISG also includes my electronic communication retrievable in perceivable form."43 Applying a functional test, the Advisory Council determined: "The prerequisite of 'writing' is fulfilled as long as the electronic communication is able to fulfil the same functions as a paper message These functions are the possibility to save (retrieve) the message and to understand (perceive) it. "44 Furthermore, the Advisory Council opined, "Unless the parties have limited the notion of writing, there should be a presumption that electronic communications are included in the term 'writing." This presumption could be strengthened or weakened in accordance to the parties' prior conduct or common usages (CISG Article 9(1) and (2))."45

The CUECIC electronic "writing" test of "accessible so as to be usable for subsequent reference" is an improvement upon the CISG Advisory Council test of "retrievable in perceivable form" if it adds an implication of continued accessibility. CUECIC provides an electronic "signature" test where the CISG provides none CUECIC also provides a test for "original" electronic communications, while the CISO provides none.

CUECIC explicitly recognizes the legal equivalence of electronic contracts, signatures, and originals The pre-Internet CISG text must be analyzed through statutory interpretation and advisory opinions in order to legitimize electronic contracts and electronic signatures and originals where international commercial sale of goods contracts require them pursuant to the municipal law of a Contracting State in which a party has its contract place of business, pursuant to CISG article 12 and article 96 declarations by that Contracting State.

Ratification of CUECIC by a Contracting State that previously ratified the CISG with an article 96 declaration requiring paper "writings"65 would overturn any such previous requirement for international commercial contract formation, modification, and related communications.66 The treaty-based framework of electronic communication rules established

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by CUECIC provides an incentive for those nations that have maintained a "writing" requirement under the CISG to legitimize electronic contracts and contract communications.67 The alternative to CUECIC ratification is the governance of electronic communications by customary international law.68 Customary law will make such communications subject to rules chosen by the marketplace of international contract participants, rather than to rules consciously chosen by national representatives making explicit public policy choices.69

Neither the CISG, nor the UNCITRAL-sponsored MLEC, nor the later UNCITRAL-sponsored Model Law on Electronic Signatures provides for electronic agents or automated electronic contracts. The E- SIGN, however, provides for formation of contracts through the interaction of a computer program or other automated means of communication and an individual or another electronic agent. 127 The UETA provides for contract formation by the "interaction of electronic agents" or an "electronic agent and an individual."128 CUECIC article 12 provides for contract formation through the interaction of "automated message systems" or through the "interaction of an automated message system and [an individual]."129 The inclusion of a provision for contract formation by "electronic agents" in CUECIC appears to represent a belated acceptance by non- U.S. legal systems of the legitimacy and utility of such methods. 130 CUECIC acceptance of contract formation by electronic agents might be limited, however, to the human-programmed action of such "agents," and might exclude the independent action of electronic agents initiated through "artificial intelligence. "131 The legal capacity of "electronic agents" to form electronic contracts pursuant to human-programmed protocols and through artificial intelligence would facilitate the expansion of both commercial and consumer electronic commerce. 132

CISG article 14(2) provides that "[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."133 CUECIC article 11 establishes a presumption regarding the effect of Web site information as an offer to contract. Unless the site clearly indicates the intention of the Web site sponsor to be bound to acceptances by parties treating the Web site's terms as an offer, such "proposal [s] to conclude a contract. that make use of interactive applications for the placement of orders," if addressed generally to the public and not to one or more specific parties, are "to be considered as an invitation to make offers."134

When the terms of a contract are questioned, the authenticity of the version of the contract from which the purported terms are taken is often an issue. Sometimes the "original" version of a contract is stipulated by the parties to be the only or primary version from which terms are to be determined in order to eliminate unauthorized alterations to contract terms in later copies. If an international electronic contract gives primacy to the "original" version of the contract, how is such an "original" to be identified?

The CISG does not require retention of a contract in its original form. If the CISG is the applicable law of the contract, the authenticity of contract terms may be proved in other ways. CISG article 8 permits interpretation of the statements and the conduct of a party according to his subjective intent, if known by the other party, or otherwise according to his intent as determined under an objective standard.135 CISG article 9 permits interpretation of contract terms according to party course of dealing, course of performance, and applicable trade usage. 136 A CISG- governed contract cannot be required to be in writing, unless the CISG version includes a declaration to that effect under article 96. Therefore, no "parol evidence" type of rule under the CISG generally excludes evidence of contract terms external to the "original" version of a contract.

The CUECIC provisions on "original" communications establish a useful set of default rules for authentication of electronic communications in the place of the CISG's reliance on customary law, trade usage, and party practices. The CUECIC rules on originality do not, however, contemplate total displacement of customary law and trade usage-based rules on originality Custom and trade usage are expected to supplement the test of "originality" regarding article 9.5(b)'s standard of reliability of information integrity 143 According to Polański, customary law might have already developed

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requiring an online business to summarize a transactionbeforeacceptingpayment, 144 thereby confirmingtheaccuracy of contract terms. Customary law might also require an online business to confirm an online order instantly and by electronic means, 145 thereby confirming the intent of the parties to contract on specified terms.

The potential disadvantages of standardized terms include the difficulty of reading and understanding such terms because of their electronic form165 and the greater difficulty of negotiating individual changes to objectionable terms because of their standardization. 166 The CISG and CUECIC each apply only to commercial, and not consumer, contracts 167 Nevertheless, defenses to electronic contracts pertinent to their particular form, such as procedural and substantive unconscionability, are often raised

Legal limitations on freedom of electronic contracts in the United States have tended to be proscriptive in nature, limiting contract terms only when they exceed certain outer bounds of acceptability. In contrast, European and other jurisdictions have tended towards more prescriptive limitations, such as the European Union Directive on Privacy 168 and the European Union Directive on Electronic Commerce.169 By following a technology-neutral and national origin-neutral framework for facilitating electronic contracts, CUECIC promotes a more proscriptive approach to the development of electronic contracts within a broad range of technological solutions and national legislation.

<b>2.3.2. Provisions to be applied to mixed contracts </b>

As stated in the Commentary on the Draft Convention of 1980, with regard to mixed contracts that are subjected to the CISG, the application of the Convention is limited to the obligations, claims, and disputes regarding the sales of goods; whereas, the claims and disputes regarding the obligation to perform certain work that is undertaken by the party obliged to provide the goods, would be governed by the governing domestic law.

In accordance with explanations regarding Articles 3(1) and 3(2) of the CISG, contracts for work are not subjected to the CISG, in principle. However, in mixed contracts, where the party obliged to provide the goods also undertakes to perform other obligations regarding contracts for work, would be subjected to the CISG, if the preponderant part of the seller's obligation is not the performance of work.

<b>2.3.3. Preponderant part of the sale of goods contract </b>

Often times, the parties of a contract of sale agree that the seller is to perform certain services related to the sold goods, such as packaging and delivery of the goods, under the same contract governing the sales of the goods. In such cases, in order to determine whether the CISG applies to a mixed contract, it must be considered which obligation constitutes the preponderant part of the entire obligations of the party providing the goods.

The determination of the preponderant part of the seller's obligations has been the subject of cases before local courts and arbitral tribunals. According to these examinations, it has been concluded that if the preponderant part of the seller's obligation under a contract is the sale of the goods, and the other obligations can be qualified as ancillary obligations under the contract of sale, then the said contract would be subjected to the CISG.

As stated by the CISG Advisory Committee, the "preponderant part" of the obligation must be interpreted considering the entire content of the contract, the purpose and essence of the contract, the weight given by the parties to different obligations under the contract, and the economic value given to different obligations.

Pursuant to the CISG Advisory Committee, the main feature to be considered while interpreting the preponderant part of mixed contracts, is the economic value of each obligation under the contract.

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Thus, the ratio of the price of each obligation to the total contract price must be compared. Local courts often calculate the percentage of the prices of each obligation in order to determine the effect of each obligation to the contract price. If the price determined for the sales of goods is below 50% of the total contract price, then it would be deemed that the preponderant part of that contract is not sales

However, even if the consideration agreed upon for the sales price is lower than 50% of the contract price, the contract may still be deemed as a contract of sale under the CISG, if the price determined for the sales is higher than the prices determined for the other obligations under the same contract. The Zurich Commercial Court qualified a contract as a contract of sale where the seller is obliged to sell computer applications to the buyer, upload these applications to the buyer's computer, and train the buyer in how to use these applications, since the consideration of the sales establishes 45% of the contractual price, where the price determined to train the buyer constitutes 20% of the contract price, and uploading the applications costs 35% of the contract price.

Further, during its evaluation as to whether or not the CISG is applicable to the relevant case, a local court qualified a contract as a contract of sale for the reason that the delivery and installment prices were not separately invoiced to the buyer, but the consideration for these services were included under the sales price, and that fact shows the parties intended to determine the sales to be the main obligation.

<b>CHAPTER 3: INTRODUCTION TO PRINCIPLES OF THE INTERNATIONAL SALES OF GOODS UNDER CISG </b>

International uniform law always faces the difficulty that not all matters can be considered during the drafting process. No matter how well prepared a convention is, gaps will always remain. This can be due to the complexity of the subject matter, different economic systems, varying legal structures or even political backgrounds. What is also very important is the fact that international uniform law is in some way always the result of compromises that could be agreed upon. Art. 7(2) CISG is a crucial provision for the uniform interpretation and application of the CISG. Under Art. 7(2) CISG, gaps in the Convention are in the first instance filled with the Convention's general principles. Only if it is impossible to identify a general principle, one can resort to the applicable national law via international private law. Matters not governed at all by the Convention are resolved by direct recourse to domestic law as determined by international private law rules. This basic guideline seems to be easy to understand; however, there are quite a number of difficulties that arise when applying Art. 7(2) CISG. These difficulties result from different aspects: first of all, Art. 7(2) CISG cannot be analysed separately. There is interplay between the interpretation of the Convention as following from Art. 7(1) CISG and the gap-filling provided by Art. 7(2) CISG. Moreover, it is sometimes difficult to make a clear distinction between the matters that are governed by the Convention and those which are not.

<b>3.1. Gap-filling with the Use of General Principles </b>

The preamble of the CISG determines the Convention's objective: the adoption of uniform rules for the international sale of goods to promote the development of international trade. This objective has to always be kept in mind when interpreting and applying the CISG. To promote a uniform application of the CISG and to achieve the Convention's objective as laid down in the preamble, Art. 7 CISG provides judges with some guidelines: "Regard is to be had to its international character" and "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 (...)." The wording of Art. 7(2) CISG clearly shows that general principles on which the CISG is based only become important when matters are governed by the CISG but where they are not expressly settled in it. As a first step one thus has to ascertain whether or not a certain matter is governed by the CISG. If a matter is expressly outside the scope of application of the CISO, Art. 72) CISG and the Convention's general principles m not be referred to. This means that questions concerning the property of the goods s or questions concerning the validity of the contract or of any of its provisions must w be answered with the help of general principles as these questions are-as Art. 41 2 CISG expressly provides-outside the scope of the Convention. Pursuant to Art. 5 CISG

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the same applies to the liability of the seller for death or personal injury caused by the goods to any person. Art. 2 CISG and Art. 3(b) CISG also expressly exclude further matters from the scope of the Convention.

Aside from this, according to Art. 4 sent. I CISG only the formation of the contract of sale and the rights and obligations of the seller and the buyer arising from such contract are governed. So after having taken a first glance at Art. 4 CISG, one might get the impression that the distinction is easy to draw between matters governed by the Convention and those that are not. But a more thorough glance reveals the difficulties that result from the scope of application as laid down in Art. 4 sent. I CISG: the buyer's and the seller's rights and obligations arising from a sales contract are not listed comprehensively, for if they were, there would be no gaps to fill and Art. 7(2) CISG would be superfluous.

In order to understand and apply Art 7(2) CISG correctly, it is therefore essential to determine whether or not a specific matter is governed by the Convention. This in return makes it first necessary to interpret a provision and to ascertain its scope of application thereby, as the (extensive) interpretation of a provision might lead to the conclusion that a certain matter is governed by the CISG although this is not expressly provided for in the provision. In other words: it is impossible to clearly differentiate between the interpretation and the gap-filling of the CISG, as at the same time the clarification of a provision fixes its scope of application and therefore answers the primary question whether a gap exists that needs to be filled.

Of course, each case will have to be examined individually to ascertain whether or not Art. 7(2) CISG can be applied. As a rough guide, one can keep in mind that gap. filling is possible only for questions that are so closely related with a provision of the CISG that recourse to domestic law via international private law would take the question out of context. It must be a matter of sales transactions, on which the Convention is silent.

It must be noted though that after having detected a(n) (internal) gap, it is indispensable to first analyse the parties' intentions and agreement before resorting to the CISG's general principles or even the domestic law via private international law rules. This at least notional-primary step results from Art. 6 CISG, according to which the parties may exclude the application of the Convention or derogate from or vary the effect of any of its provisions. If an analysis of the parties' intentions reveals that they have reached an agreement on the issue at question, general principles or even the domestic law must not be resorted to. Instead, the issue is to be resolved according to their agreement

<b>3.2. Recourse to Domestic law </b>

If the matter is governed by the Convention but not expressly settled in it, in the absence of a general principle to fill the gap the issue is to be settled in conformity with the law applicable by virtue of the rules of international private law (of the forum). Following the preamble's objective as set out above, it is an undisputed fact that recourse to domestic law endangers the uniform application of the Convention. As such, recourse to domestic law via international private law rules is only the last resort and judges should always consider-without pushing the Convention's scope of application too far - whether or not the issue can be solved by liberally interpreting a provision of the Convention or by applying it in an analogous way.

<b>3.2.1. Rate of Interest Payment </b>

In practical experience, one very important matter is the question of interest rates. Art. 78 CISG provides 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 (...)." However, this provision is silent on the rate of interest payment as the delegates on the Vienna Conference could not agree on this point. There is no (generally approved) general principle of the Convention with regard to the interest rate. For this reason recourse to the applicable national law seems preferable irrespective of whether or not this is an external or an internal gap Recourse to the applicable national law also seems to be the prevailing opinion i (international) judicature as well as of commentators and other authors.

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<b>3.2.2. Limitation of Claims, Set-off and Representation </b>

One further important issue that is pot governed by the Convention is the question of limitation of claims. Aside from the application of the UN Limitation Convention the applicable national law is to be determined by conflict rules of the forum. Un today, this solution has been abided by all courts without a single exception. It has to be noted though that according to some commentators and court decisions recourse to conflict law rules is not necessary where claims shall be offset that result from the contractual relationship govered by the CISG. It is maintained that in such situations (eg a claim for damages by the buyer against the seller because of non-conformity of the goods that is offset against a claim for payment of the price by the seller against the buyer) set-off is admissible without any further prerequisites by direct recourse to the Convention.

Representation is also outside the scope of the Convention. The Convention is silent on this matter. Consequently this question is to be answered by the applicable national law determined by conflict law rules.

<b>3.3. Identification of General Principles </b>

Although Art. 7(2) CISG refers judges to the Convention's general principles to fill a gap, the Convention's general principles are not expressly laid down therein. Broadly speaking, three different categories of general principles can be identified.

The first category is made up of general principles that can be derived from one single article of the Convention that is a clause with general applicability according to its wording and its systematic position. For example, Art. 6 CISG (principle of party autonomy) and Art. 7 CISG (principle of observance of good faith) are both regulated within the Convention's general provisions and apply to the CISG as a whole.

As for the second category, some general principles can be identified by analysing several articles and thereby finding an overarching purpose. These articles may not even be systematically connected in such a way that they stem from a single chapter or even a single section. For example, the very important principle of preservation of the contract can be derived from Art. 25, 49(2) CISG and 82 CISG.

As a third category, one can ascertain some general principles from a single provision where its ruling can be generalised to similar situations, although this possibility of generalisation does not result from the wording of the provision or its systematic position within the Convention. For example, Art. 57 CISG is not a general provision of the Convention. Nevertheless, from the provision a general principle can be derived with regard to the place of performance for pecuniary claims.

<b>3.3.1. General principles that can be derived from a clause with general applicability a. Autonomy of the Parties </b>

The undisputedly most important general principle is the principle of party autonomy which follows from Art. 6 CISG. As the parties' agreement always takes priority over the Convention's provisions, the principle of party autonomy also takes priority over other general principles where they would lead to a different result. The principle of party autonomy is widely acknowledged both among scholars and courts. According to this principle, the parties are free to choose the law applicable to the contract. Under Art. 6 CISG, the parties can opt out of the Convention as a whole; with the exception of Art. 12 CISG (see Art. 12 sent. 2 CISG) they can also derogate from single provisions with or without agreeing on substitute provisions.

<b>b. Observance of Good Faith </b>

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The principle of observance of good faith is also one of the Convention's general principles. Although the requirement to observe good faith is laid down in Art. 7(1) CISG and therefore expressly only applies to the interpretation of the Convention, it is nevertheless acknowledged that the observance of good faith is also a general principle to fill gaps. A French appellate court even ruled that the violation of the principle of good faith entitled the other party to damages. This ruling does not seem to be open to generalisation. Moreover, as the general principle of good faith is vague and gives little guidance to fill gaps, it is necessary to deduce the following subcategories or aspects from it: the prohibition of contradictory behaviour (prohibition of venire contra factum proprium) is a result of the principle of good faith. Additionally, the duty to cooperate and the duty to supply all the necessary information for the performance of the contract can be inferred from it. Finally the principle of estoppel can be concluded from the principle of good faith. In one case an Austrian court held that the seller was estopped from setting up the defence of a late notice according to Art. 39 CISG as the buyer was led to believe that the seller would not raise this defence.

Again, it has to be stressed that before resorting to the principle of observance of good faith one should first determine whether or not a gap actually exists and one should also make clear whether the observance of good faith is used for the interpretation of the Convention as following from Art. 7(1) CISG, or as means to fill gaps according to Art 7(2) CISG. Only a strict distinction between these two functions of the observance of good faith ensures a correct and comprehensible-application of the Convention. This necessity to distinguish becomes clear when taking a closer look at a decision of a German court. The court held that following from the observance of good faith it is not necessary to declare the contract avoided when the right to avoid the contract principally exists and when at the time of the covering purchase it is clear that the debtor will not perform. Without elaborating on the correctness or incorrectness of this decision, its ruling could not be based on the gap-filling function of the observance of good faith. This is due to the fact that all articles governing the avoidance of the contract (see Art. 49, 51, 64, 72 CISG and 73 CISG) expressly state that a declaration of avoidance is necessary. In other words, there is no gap which needs to be filled.

<b>3.3.2. General principles can be identified by analysing several articles a Principle of Preservation of the Contract </b>

As for the general principles that can be derived from several articles, the principle of preservation of the contract (favour contractus) is probably the one most acknowledged. It can be derived from Art. 25, 34, 37, 39, 43, 47, 48, 49, 63, 64, 82 CISG. All theses articles impose demanding prerequisites on the remedy of avoidance of the contract. The reasons for these demanding prerequisites have often been explained: the costs arising from the transportation of goods due to the avoidance of the contract shall be avoided. The seller can of course avoid these costs by selling the goods. in the buyer's country, but this only evokes different problems such as storage costs until the time of delivery or even the problem of finding a different buyer in countries that do not have a developed network of dealers.

Nevertheless, there are possible areas of application for this general principle: if the seller delivers goods before the date of delivery, following Art. 37 CISG he has a right to cure up to that date provided that the exercise of this right does not cause the buyer unreasonable inconvenience or unreasonable expense. Art. 32 sent. 2 CISG provides a similar right to cure in case of defective documents. Despite these provisions, the seller seems to have no (explicit) right to cure where a third party claims ownership of the goods (see Art. 41 CISG) or claims an infringement of patent rights or trademarks (see Art. 42 CISG) although the seller could potentially c with the third party. The principle of preservation of the contract supports the view that also in these situations the seller should have a right to cure before the date of dispute delivery, This can be achieved by applying Art. 37 analogous way, cure the defect by settling the CISG and 32 sent. 2 CISG in an

<b>b. Revocability of Statements </b>

A buyer who has declared the contract avoided (e.g. because of a fundamental breach) might be interested in revoking the declaration of avoidance. This situation can arise where the buyer gets the possibility to resell the defective goods for a comparatively high price or where he decides to repair the goods due to the fact that a covering purchase would take longer than reparation of the goods. In this situation the question arises whether or not the buyer is bound to his declaration

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of avoidance. The declaration of avoidance can be revoked before it reaches the addressee. In the light of today's fast communication methods such as e-mail or fax it is of probably more importance whether or not the declaration of avoidance can be revoked after it has reached the addressee. This issue is quite controversial. Some CISG commentators hold the view that a declaration of avoidance is irrevocable. This view is mainly based on the concept that a declaration of avoidance transforms the contract into a contractual restitutionary relationship and therefore following the German concept of a "Gestaltungserklärung" this declaration must be clear, unconditional and irrevocable. Taking into account that the CISG is not so much based on thorough dogmatic foundations but rather strives for more or less simple and practical solutions, it can also be maintained that the revocability is not excluded per se. Furthermore, the Convention's international character (see Art. 7(1) CISG) makes it necessary to loosen oneself from national dogmatic foundations. It can therefore be asserted that the Convention does not expressly settle the revocability of a declaration of avoidance. This gap primarily needs to be filled with the Convention's general principles. Art. 16(2)(b) CISG expresses the principle that a declaration cannot be revoked if the addressee has relied on the irrevocability and acted in reliance on the declaration. Art. 29(2) sent. 2 CISG also expresses that induced reliance should be protected. For these reasons a declaration of avoidance can be revoked as long as the addressee has not relied on it.

<b>b. Freedom of Form (Art. 11, 29 CISG) </b>

Following Art. 11 CISG contracts of sale need not be concluded in or evidenced by writing. It is not subject to any other requirement as to form. Moreover, Art. 29(1) CISG provides that contracts may be modified or terminated by the mere agreement of the parties. From theses two provisions the general principle of freedom of form can be derived. This general principle can only be restrained by Art. 12 CISG (and correspondingly a reservation under Art. 96 CISG). For this reason a declaration of avoidance, a declaration of price reduction, a notice of lack of conformity and other kinds of declarations or notices need not follow any form.

<b>c. Principle of Simultaneous Exchange of Performance and Right of Retention </b>

As laid down in Art. 58 CISG, in the absence of special agreements the buyer must pay the price when the seller places either the goods or documents controlling their disposition at the buyer's disposal. The buyer must nevertheless be given the possibility to examine the goods (Art. 58(3) CISG). Before this relevant time the buyer has a right of retention with regard to the payment of price. From Art. 58 CISG as well as Art. 81(2) CISG and 85 CISG the general principle of simultaneous exchange of performance can be derived. Correspondingly, a right of retention exists until the other party is willing and able to perform. It stems from the abovementioned articles as well as Art. 71 CISG and 86 CISG.

<b>d. Burden of Proof (Art. 2(a), 79(1) CISG) </b>

In procedural aspects it is of great importance which of the parties bears the burden of proof, a question that often decides who wins or loses a case. Art. 79(1) CISG is the only provision that explicitly governs the burden of proof ("A party is not liable [...] if he proves []"). Although some authors and judges hold the view that the burden of proof is not governed by the Convention, it is rather widely acknowledged both in scholarly writings as well as court decisions that following from Art. 2(a), 35(2)(b) and 79 CISG a party bears the burden of proof for those prerequisites of a provision that are profitable to him. If a party wants to rely on an exception he too has to prove the factual prerequisites of that exception.

<b>3.3.3. General principles derived from a single article which is not a clause with general applicability but where its ruling can be generalised </b>

<b>a. Dispatch Principle (Art. 27 CISG) </b>

If a declaration of avoidance gets delayed or even lost in the mail, it is still effective and the contract is avoided provided that the declaration of avoidance is made my means appropriate in the circumstances. This follows from Art. 27 CISG which constitutes the dispatch principle for notices, requests and other communications. This dispatch principle expressly

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only applies to communications of part III of the Convention, so e.g. to the notice of non-conformity or of third party claims (Art. 39 CIGS and 43 CISG), to requests of specific performance (Art. 46 CISG), the fixing of an additional period for performance (Art. 47 CISG and 63 CISG) and price reduction (Art. 50 CISG). However, from Art. 27 CISG a general principle can be derived. Therefore, also other communications are effective despite getting lost unless the Convention requires the communication to actually reach the addressee (e.g. Art. 15(1) and (2), Art. 16(1), Art. 18(2), Art. 48(4) CISG) or where the parties have agreed otherwise.

<b>b. Receipt Principle (Art. 24 CISG) </b>

Art. 24 CISG defines when an offer, a declaration of acceptance or any other indication of intention "reaches" the addressee. As this provision clearly states, this receipt principle only applies to part II of the Convention, i.e. to the formation of the contract. By doing so, the Convention does not answer when other communications reach the addressee although this can be a prerequisite for the notice to be effective (cf. Art. 47(2), Art. 48(4), Art. 79(4) CISG). This gap can be filled by applying Art. 24 CISG as a general principle.

<b>c. Interpretation of "Reasonable Time" within Art. 39(1) CISG and Art. 49(2)(b)(i) CISG </b>

Reasonableness is specifically mentioned in thirty-seven provisions of the CISG. As a general principle of the CISG, reasonableness has a strong bearing on the proper interpretation of all provisions of the CISG. No provision of any law can purport to expressly settle all questions concerning matters governed by it. The CISG recognizes this and provides in its Article 7(2).

Van der Velden interprets the concept of reasonableness as connoting, a other things, "an ethical standard of behavior so that [one] must... be judicious a fair". Maskow calls attention to the fact that reasonableness is to be defined according to its meaning in socialist, developing and developed market economy countries, n simply in developed market-economy countries. Bonell also states that "in applying.. the reasonableness' test in order to determine whether a party in a particular circumstance has been (re-)acting with due diligence, a judge of a highly industrialized country may not automatically refer to the standards of care and professional skill normally required from national business people in domestic affairs. The answer should be found either in the Convention itself or at least on the basis of standards which are currently adopted also in other legal systems." not among

Recourse to the general principle of preservation of the contract can also facilitate the interpretation of the term "reasonable time" within Art. 39(1) CISG and Art. 49(2)(b)(i) CISG. Both the notice of non-conformity of the goods (Art. 39(1) CISG) as well as the declaration of avoidance (Art. 49(2)(b)(i) CISG) have to be given within a "reasonable time" after the buyer "has discovered or ought to have discovered" the lack of non-conformity and after "he knew or ought to have known of the breach" respectively. In case of non-conformity of the goods, both reasonable times (i.c. the reasonable time for notice of non-conformity of the goods and the reasonable time to declare the contract avoided) start to run after the period for examination of the goods (Art. 38 CISG). For this reason it is sometimes maintained that both time limits are of the same length. This is not convincing because it would force the buyer to give notice of non-conformity and at the same time declare the contract avoided. This is contrary to the general principle of preservation of the contract. That is why, the reasonable time to declare the contract avoided as provided by Art. 49(2)(b)(i) CISG must be longer than the reasonable time to give notice of non-conformity as stipulated by Art. 39(1) CISG.

<b>d. Maturity without Demand (Art. 59 CISG) </b>

As stipulated by Art. 59 CISG, the buyer must pay the price on the date fixed without the need for any request on the part of the seller. This rule is quite important as with maturity the seller is entitled to claim interest (see Art. 78 CISG). Art. 59 CISG only applies to the payment of the purchase price, However, from this provision the general principle can be derived that all pecuniary claims (e.g. repayment following Art. 81(2) CISG; reduction of the purchase price because of non-conformity following Art. 50 CISG; damages) become due without a request on behalf of the entitled party

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<b>e. Principle of Full Compensation </b>

According to some court decisions the principle of full compensation is also a general principle in the light of Art. 7(2) CISG. In case the buyer does not pay the purchase price, the seller is entitled to interest (Art. 78 CISG). But following the general principle of full compensation the seller is also entitled to damages for those sums that he had to pay due to higher credit costs that were customary in the particular market. This principle can be derived from Art. 74 CISG.

<b>CHAPTER 4 INSIGHT INTO CONTRACT FORMATION AND DRAFTING UNDER CISG 4.1. Negotiation of the Contract </b>

There is no record of any effort to array the different domestic approaches to precontractual liability and from that develop for international traders a common calability rever, specific proposals that would have impacted upon precontractual liability they were rebuffed), and general proposals - primarily dealing with "good faith" - which, depending on the interpretation given to the language that emerged, may or may not have an impact upon precontractual liability. The records of deliberations on this subject are quoted in the legislative history segment of this presentation. compromise A universalist argument for including all aspects of pre-contract formation within the scope of the Convention runs as follows. Article 7(1) has an arrow of uniformity that points to the Convention, not private international law. Also, when a matter is governed by the Convention but not expressly settled in it, Article 7(2) ousts private international law whenever applicable general principles can be properly deduced from the Convention. Formation of the contract is a matter governed by the Convention (Article 4). Is not precontract formation a part of formation of the contract? If so, this is a matter governed by the Convention. And where questions arise concerning such a matter which are not expressly settled in the Convention, applicable general principles (various parties have cited "good faith" as one such principle) can presumably be found - particularly if the Convention is imaginatively applied. If this line of reasoning were followed, the sole exception to the primacy of the Convention on all matters of precontractual liability would be validity issues (Article 4(a) fraud, for example. Rebuttals to this line of reasoning can, however, be addressed to the accuracy of the italicized premise. Schlechtriem sees the Vienna Conference's rebuff of a specific proposal to place facets of precontractual liability under the aegis of the Convention as concrete evidence that claims for damages for precontractual liability should be ruled upon under domestic law, not the Convention. He states:

"[T]he Conference rejected a proposal by the German Democratic Republic which would have introduced a general culpa in contrahendo (= precontractual) liability....

The proposal was especially intended to cover those cases in which contract negotiations have already progressed so far that one side relying on the belief that a contract would materialize, has made considerable expenditures ... [T]he motion by the German Democratic Republic failed. Damages caused by one party to the other in the course of contract negotiations, therefore, remain subject to regulation by the domestic law applicable according to conflict rules..." As a general principle, a contract should be clear about the obligations of each party. However, clear obligations are not always agreeable between the parties. In such cases, the principals may work based on some vague wording of intention, materiality or reasonableness. Remember, however, that if an obligation is not clear, the strongest contracting party will have the benefit of the doubt as to whether it did perform duly.

<b>4.1.1. The Gentlemen Agreement </b>

To warn traders of the dangers of contracts based on a "handshake" of "gentlemen's agreement" the following humorous detinition is provided to gentlemen's agreement: "An unwritten agreement, not a contract, between two parties-neither of which may be a gentleman-under which each party believes the other side is fully bound, while its own performance is strictly optional."17 A gentlemen's agreement, or gentleman's agreement, is an informal and legally non-binding

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agreement between two or more parties. It is typically oral, but it may be written or simply understood as part f an unspoken agreement by convention or through mutually-beneficial etiquette.

Any study as to the nature of gentleman's agreements has to come to terms with me proper meaning of the notions agreement and contract. This is so, since these otions appear to have a different meaning depending on the perspective from which ey are viewed, e.g. from language, sociology, or law, i.e. from an external or an ternal perspective. So for a conclusion it may be said that generally speaking the greement and the contract have to be distinguished from one another. There appear to ist two categories of agreements with which legal systems should come to terms: gally non-binding agreements and legally binding agreements, only the latter category being able to form a contract. This raises the question of what makes an agreement legally binding, i.e. what constitutes a contract.

Obviously the interplay between agreement and contract has an overlap with the problem of precontractual liability. The key issue with regard to the latter concerns cases of broken off negotiations, the regime of precontractual liability commonly described as a form of culpa in contravened.

Civil law and common law jurisdictions tend to differ from each other as to the sources of such precontractual liability. In civil law jurisdictions either specific legislation or the customary principles of good faith, tort, negotiorum gestio, or restitution may be referred to. In common law jurisdictions case law, in the absence of a general principle of good faith in bargaining, has developed general provisions and precedents. Traditionally, the main question to be answered here is whether in the absence of consideration the prospective parties to a contract may be held liable under negligence, estoppel or restitution. 17 Besides, it is understood that precontractual liability based on negotiations may have different legal consequences depending on whether or not a contract ensues. It follows that the overlap between the issue of the legal status of gentleman's agreements and that of precontractual liability lies in the fact that gentleman's agreements, like comparable instruments such as binders, heads of agreements, letters of intent or memoranda of understanding, play an important role in the documentation and consolidation of the negotiation process from contact to contract. These so-called precontractual agreements have been mainly developed in commercial practice and are generally referred to as forms of the pactum de contrahendo. As has been rightly observed by Van Dunné there is little consistency in the range of precontractual agreements as to their contents and legal effects. 19 As will be discussed more in detail in paragraph II.B., they can be placed on a scale, running from no-law to law. Here it is important to determine the status of these precontractual agreements in the bargaining process, and to decide, if precontractual lialbility is found, upon its source. This is particularly true for the rules with regard to offer and acceptance. Three indicating factors may offer guidance in this respect: the intention of the parties to be legally bound (a), based on (e) nable mutual expectations (b), taking the courtief the dreamstances of the case Leaving aside aspects of (b) taking account of the crising out of negotiations or otherwise, emphasis will be put here on the intention of the parties.

So according to classical contract law the formation of a contract is governed by fixed rules dictated by the law. If these rules are not complied with, the parties are not contractually bound. Under the CISG, precontractual liability in the context of offer and acceptance makes perhaps the strongest case for coverage under the Convention. Offer and acceptance is addressed by the Convention. Part II contains rules on that subject - rules addressing fact patterns that have existed for centuries. Part II of the Convention can be said to be a unification of domestic responses to these fact patterns. However, much of the domestic law on precontractual liability is associated with evolving negotiations - a creating of a newer age - and fact patterns that simply do not fit classic rules of offer and acceptance.

<b>4.1.2. Preliminary Agreement </b>

Preliminary agreements in international transactions are particularly likely to be used when parties participate in acquisition and disposition agreements, construction contracts, long-term supply contracts, and technical assistance agreements because of the complexity of the negotiation stages which can last years. 20 These preliminary agreements are often used to obtain documentation for third parties for financing, Insurance, and other purposes. Preliminary

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agreements may be referred to as letters of Intent, commitment letters, binders, agreements in principle, and memoranda of understanding.

Regardless of the apparent obstacles concerning the good-faith provision of rticle 7, precontractual liability can nonetheless be imposed under the Convention. ommon-law-type remedies exist as a means upon which courts may impose liability. milar to the treatment of precontractual liability in the United States, courts deciding cases under the Convention may base liability upon the intent of the parties or upon the theories of detrimental reliance or restitution.

When parties have utilized preliminary agreements, courts may impose precontractual liability based upon the intent provision of Article 8 of the Convention Article 8(3) states that "[i]n 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. Because U.S. courts have imposed precontractual liability in similar circumstances based upon the same factors, international courts, relying upon Article 8, could likewise impose liability. Preliminary agreements have become valuable tools in international trade. Parties are often unfamiliar with the ethical rules and legal ramifications of the negotiating process in other countries and, therefore, parties are likely to write out their goals at an early stage of the negotiation. It is quite probable that, as case law continues to develop under the Convention, international courts will depend upon Article 8 in finding precontractual liability when preliminary agreements are utilized

The theory of detrimental reliance creates another possibility for imposing liability when a contract has not been consummated. Article 16(2) of the Convention indicates that an offer cannot be revoked if the offeree has reasonably relied on the offer and has acted in reliance on the offer. As under the UCC, detrimental reliance could be utilized as a means of establishing precontractual liability under the Convention in the future.

Restitution is additionally mentioned in the text of the Convention and could potentially be relied upon where a contract implied-in-law has been created. When

parties have conferred a benefit upon another, they may be able to receive the value of that benefit conferred under Article 81 of the Convention. Although Article 81 anticipates that a contract has been fully concluded and partially performed in order to receive restitution, parties could argue that the contract was implied-in-law and therefore, within the scope of Article 81. No case law under the Convention indicates that parties have attempted to argue that Article 81 applies in this type of situation but again, in the future courts may be addressing this issue.

<b>4.2. Formation of the Contract </b>

Part II of the CISG defines how and when an international contract of sale comes to existence. Thus, in accordance with Article 23: "A contract is concluded at the moment when an acceptance of an offer becomes effective in accordance with the rovisions of this Convention".

The rules regarding the acceptance of an offer for an international sale of goods e contained in Articles 18 to 22 CISG. These provisions deal with how an offer can accepted (Article 18), modifications to an offer (Article 19), the time limits for ccepting an offer (Article 20), late acceptance (Article 21), and withdrawal of an ceptance (Article 22 CISG). Articles 18 to 22 are non-mandatory and the parties can clude them or derogate from them. 21

<b>4.2.1. Offer </b>

A contract is concluded when the offeree communicates a clear assent to the terms the offer in a timely fashion 22 An offer is an act of law; therefore, it has to comply th the applicable national laws, aside from the CISG. Pursuant to CISG, Article 14, proposal for concluding a contract addressed to one or more specific persons nstitutes an offer, if it is sufficiently definite, and indicates the intention of the offeror be bound in the event of acceptance." It can be derived from

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this definition that in Her to establish an offer, two conditions should be present, the intention of the offeror be bound, and a sufficiently defined proposal.

<b>a. Sufficient Definiteness </b>

Article 14 provides that "a proposal is sufficiently defined if it identifies the goods, and expressly or implicitly fixes, or makes provision for, determining the quantity and price." Another component of the proposal is the intention of the offeror to sell the product. An offer does not always seem like a proposal. It can be in the form of an invoice or a letter of acknowledgement.

Articles 8 and 9 will also find its place in understanding the principles: of a surrounding party is in accordance with his intent. Article 9 provides that parties are bound by usages and formation. In a general sense, Article 8 stipulates that the intent practices that have been agreed upon between them. interpreted

Other articles of the CISG can also be in question in relation to Article 14. Article 14 can be interpreted as an offer not being made where the price is not designated. On the other hand, it can be derived from Article 55 that a contract can be validly established without determining the price, expressly or implicitly. This article allows an open-price mechanism under the CISG. While open-price mechanism could protect the validity of long-term business dealings, the CISG courts tend to validate open-price term dealings under Article 55 subject to the fulfilment of Article 14(1). Hence a more flexible interpretation of Article 55 of the CISG could be given since the current interpretation does not exactly allow a workable open-price mechanism, a useful contracting mechanism to cope with market price changes.

Fexample, explained that socialist countries object to the idea of an open price because they need to ensure that their contracts adhere to the predetermined macroeconomic governmental plan. In such a planned economy, open-price contracts are invalid. Other states also perceive open-price contracts with hostility, particularly when the unilateral fixing of the price causes disadvantage to the weaker party. Within developing countries, the argument has been that an open price does not serve their interests due to the unfavourable terms of trade for raw materials, in contrast with the ever increasing price of manufactured goods. Conversely, the US takes a far more liberal approach; it validates open price and quantity under Sections 2-305 and 2-306 respectively, to allow price and quantity to be adjusted in the light of sellers' output and buyers' requirements. As a result of the diverging view of the Member states, the CISG has a two-part rule. Contracting states under the CISG may opt for the traditional fixed-price method under Article 14(1), or for an open price under Article 55. Article 14 serves well for the policy of Member States that do not favour open price, while Article 55 is purposeful for parties that are receptive to open price. Article 14(1) is under Part II, on the formation of contracts, while Article 55 falls under Part III, on the sale of goods. Article 14(1) arguably fits the needs of a simple and straightforward, rather than complex, type of business dealing. An example of a simple and straightforward dealis where parties may expressly agree on a price of videomedented through an exchange of calculation charts, and the buyer may agree to the invoicing of the seller (German Case of 90) ar 2000 CLOUT Case No 343 [Lathgericiting of the de, Germany, 9 May 2000). If parties were to agree for an implicit price, the buyer sends an order for goods listed in the seller's catalogue or where he orders spare parts, he may decide to make no specification regarding price at the time of placing the order. He may not have the seller's price list, or he may not know whether the price list he has is current. Nevertheless, the buyer is implicitly offering to pay the price currently being charged by the seller for such goods. Article 14(1) provides that if this is the case, the buyer has implicitly made provision for the determination of price and his order for the goods would constitute an offer.

Despite allowing an implicit price, it appears that Article 14 renders unenforceable those contracts that deliberately leave price and quantity open, although it does uphold intention to be bound as a prerequisite of a valid offer. Article 14(1) still requires the price to be determinable, at least implicitly, regardless of whether the contract is discrete or relational.

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This implicit price requirement is favoured by countries that hold a more restrictive view of contracting, such as the former USSR and France. Conversely, it is less appealing to the sales practice of states with a more flexible view of formation, such as the United States and Scandinavian states such as Denmark, Finland, Norway and Sweden, and therefore these states have opted for reservation from the rules of Part II on contract formation, as permitted by Article 92(1) of the CISG. Effectively, the Scandinavian states are in favour of open price, leading to the adoption of Article 55 in Part III of the CISG.

Article 55 is drafted in contrast with Article 14(1), whereby a contract may be valid even without an implicit price. At first glance, it seems that Article 55 approves the realities of relational, complex contracts that demand flexibility in the price term.

In the absence of an express or implicit price, the effective price will be the price enerally charged at the time of the conclusion of the contract for such goods, sold nder comparable circumstances in the trade concerned. This is the price which would presumably have been agreed upon by the parties at the time of contracting had they agreed upon one at that time. The Commentary states that the seller should not later be of the delivery of the goods, if price wadhin for the price that he seller was charging at the time of the conclusion of the contract.

Generally, both articles deal with two different matters, yet the interpretation of the two is inter-related Article 14 is concerned with offers and the formation of a contract, and Article 55 with the obligations and performance of the contract. Article 55 only operates its contract has been validly concluded under Article 14(1). The problem arises if a state is to ratify the entire CISG, including Part II, making it arguable that Article 14 prevents a contract with an unstated price from being validly concluded. This suggests the impossibility of Article 55 to take effect. In addition, Article 55 refers to 'the price generally charged in the trade at the time of the conclusion of the contract,

In contrast, Honnold viewed both elements of Article 14(1), namely 'definiteness? and the 'offeror's intention to be bound', as key elements, but the latter as the chief element of a valid contract. 23 Honnold (1999) nonetheless admitted that as a price term was crucial to economic success, parties would rarely enter into a binding contract without at least an implicit understanding of the price, or a means of determining the price. A lack of clarity regarding price may occur in emergency situations, such as urgent orders for the manufacture of minor replacement parts, or requests to rush a shipment of goods where the buyer may not have access to the seller's price list. Such situations may be common also due to the ever-increasing spread of standardised goods that have standardised prices, along with modern means of communication that facilitates ordering without bargaining. In this case, following negotiations, the seller and the buyer signed a contract of sale that called for the seller to manufacture and ship goods according to the specifications and quantity stated in the agreement. The agreement did not fix a price, and instead stated that it derogates from any implication of Article 14(1). The seller manufactured and delivered the goods, which the buyer accepted and used, but no price could be agreed between the parties.

In the above situation, there was not an exchange of offer and acceptance. However, the parties intended to be bound by the contract even though the price had not been fixed. Potentially, an opportunistic buyer could defend himself using Article 14(1) as an excuse to have a non-binding agreementas there was not express or implicit way to fix the contract Honnold(1999) concluded that it was unreasonable for Article 14 to be a prerequisite of Article 55. Article 14(1) clarifies that a communication that does not state or make provision for the price is not an offer, that a reply stating 'I accept' does not necessarily create a valid contract.

However, if there is no clear offer and acceptance, Article 55 resolves the issue, stating that a contract may be validly concluded even if it does not expressly or implicitly fix or make provision for determining the price. Honnold thinks that

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the phrase 'where a contract has been validly concluded' is indicative of a valid contract to be independent from the need for express or implied provision for determining the price, yet enforceable under the CISG.

The trend of the CISG courts, however, is to automatically categorise a case under Article 14(1) when a contract includes an 'implicit method of determining the price. Yet there is no resolution for the conflict between Articles 14(1) and 55. Whether open price under Article 55 is subject to implicit requirement or is independent from Article 14(1) as intended by parties is an issue rarely discussed in most court decisions.

- A case where there is silence as to price in short-term contract Switzerland 27 April 2007 Canton Appellate Court Valais (Oven case)

Facts: In this case, the seller was managing a business covering the manufacturing, repairing, acquiring and selling of kitchen equipment, while the buyer was managing a hotel in Switzerland. The contract was for the purchase of an oven to replace an existing oven that broke down before a particular weekend- a situation of urgency for most hotel businesses. On Friday, 8 March 2002, the oven in the kitchen of Public Utility E broke down and in the same afternoon, its executive chef asked the seller to repair or replace the defective equipment or to replace it. Nevertheless, under undocumented circumstances, the executive chef rejected the repair of the oven. K, the representative of the seller, contacted its oven supplier, Company L, indicating the reasons for urgent delivery of the replacement oven to Switzerland the next day. Company L had only one oven available, and K accepted this oven, of the brand and type Lainox ME 110 P, but did not mention the oven's price to the executive chef. The seller alleged to have sold the oven to the buyer, for which the issued bill remained unpaid. The seller thus based its action on the conclusion of a contract with the buyer for the international sale of goods.

Issue: The primary concern was whether the missing price term of the additional engine caused uncertainty in contract. Decision: The court enforced the inadvertently missing price by deriving the intention of the parties through the behaviour of the buyer after the delivery. When the buyer asked for a copy of the bill, she never contested the price. In addition, the buyer requested the seller to send her a letter of guarantee for the oven. This behaviour, which took place over several months, implied that the sale was concluded even though the seller had not initially indicated the price.

The conduct of the buyer was only a part of the reason used by the court to derive intention. Article 55 resolved the issue, for a contract may be validly concluded without any (express or implicit) reference to price, since the price may be objectively determined according to the price generally charged at the time of conclusion of the contract. In this case, the contract gave no indication as to the price of the oven, it was deemed to be the price currently practised for such goods, and the buyer thus bore the risk of paying more than foreseen if he accepted the delivered goods. Applying Article 55, the court applied the price currently practised, which amounted to 6,972.17 €.

Article 55 fills the gap of a price when parties have indeed validly concluded the contract, even in emergency situations where there was no proper offer and acceptance Naturally in this case, the delivery took place almost instantly after the time o formation of the contract. The 'price generally charged at the time of the conclusion c the contract' under Article 55 was accurately applied for the sale of the oven in th case, which did not involve volatile market as far as the oven is concerned.

This leads to the question of whether the application of Article 55 would similarly effective for products such as steel and oil, where the relational nature of the contracts creates a large gap between the time of the contract is formed and the time delivery very fare where product's price may fluctuate that the price at the time of delivery far deviates from the price generally charged at the time of conclusion of the contract

Hungary 25 September 1992 Supreme Court (Pratt & Whitney v. Malev)

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Facts: The case involved a proposal for the sale of two jet engines, with an additional engine option. The selection of the engine would depend on whether Malev purchased aircraft of Airbus, or of Boeing. The proposal included prices for both engines, but later, when the proposal was amended to include the additional engine, there was no price stated for this additional engine option, Malev telexed a letter that it had chosen Pratt & Whitney engines for Boeing aircraft. This option took place after various exchanges with Pratt & Whitney on engine maintenance and building a spare parts pool in Hungary. However, three month after signing the acceptance letter, Malev informed that it would not purchase the engines. Issue: The primary concern was whether the missing price term of the additional engine caused uncertainty in contract, Decision: While Malev claimed that there was uncertainty in price as Pratt & Whitney did not indicate its own price index in order to calculate the base price of the additional engine, Pratt & Whitney claimed that the price was determinable in a precise manner. The proposal stated the product, quantity and data on how the price calculation could be made. The Budapest Metropolitan Court held that there was a valid contract between the parties for 'an offer may be valid even without a fixed price or number of goods, if it contains provisions for the definition of the price and quantity'.

The Supreme Court reversed the decision and reached the opposite conclusion; it found that no valid contract had been formed. The court relied primarily on Article 14(1), stating that in order to constitute an offer, a proposal is sufficiently definite if it indicates the product, the quantity and the price or contains directions as to how these terms can be defined. Since a price was not stated for the additional Boeing engine option that Pratt & Whitney had added to the contract, the proposal lacked a sufficient price term that cannot constitute an offer under the CISG. Recognising the approach o Farnsworth, the Supreme Court held that the divergence of Article 14 and 55 implied that both of them cannot be construed together, and that Article 55 applies only if there is a valid contract under Article 14.

As a result, not only did the Supreme Court denied Pratt & Whitney any recovery, but it ordered them to reimburse Malev HUF 15,150,000 for the costs of the litigation, and that Pratt & Whitney was to bear its costs itself. Article 55 did not have any impact on the Supreme Court's analysis. In fact, Article 14(1) 'implicit price' requirement has somewhat constituted a prerequisite to a valid contract under Article 55. The perturbing factor was that the Supreme Court avoided addressing the issue of whether there was an element of intention to be bound between the parties when applying Article 14(1), and that the price of the additional engine was determinable based on the data provided by Pratt & Whitney. Although an aircraft engine is specialised goods, there could have been an acceptable method to determine its price. Koneru (1997) suggested that 'an independent appraiser familiar with the aircraft engine industry' is one possible method of price determination in this case. Hence, there was a possibility of a valid contract not only under Article 55 but also under Article 14(1) as the price of the additional engine were determinable. Koneru(1997) also commented that the court could have derived the parties' intent based on their conduct, under Article 8, and failure of the Supreme Court to address Article 8 reflected the fact that 'not only Malev, but also the Court failed to observe good faith under the Convention'.

The decision would have resulted otherwise under Section 2-305 of the UCC. The contract would have been valid based on the evidence of intention of the parties and thus the UCC courts would not approve of Malev's bad faith in repudiating in agreement that Malev itself almost certainly assumed was binding. This is detrimental to Pratt & Whitney, who have incurred on reliance costs based on the agreement made. Flechtner(1988) added that '[i]magine if the tables were turned, and it was Pratt & Whitney who refused to sell the engines after Malev had committed to purchase Boeing aircraft' Arguably, the Supreme Court's decision ignored the international character of the CISG by straining for an interpretation favourable to the party of the same nationality as the court.

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