REVOCATION OF AN OFFER – CISG ARTICLE 16(1)

Article 16 CISG of the U.N. Convention on Contracts for the International Sale of Goods (the Convention) and Article 2:202 of the Principles of European Contract Law (PECL) deal whether an offer is binding and when it is irrevocable.

Both the Convention and the PECL distinguish between the revocation of an offer and the withdrawal of an offer. In the Convention, revocation of an offer that has reached the offeree and is effective is regulated by Article 16; withdrawal of an offer that has not yet reached the offeree is regulated by Article 15(2).

Similarly, under the PECL, an offer becomes effective when it reaches the offeree (Article 1:303(2) and (6)), and a subsequent revocation of the offer is regulated by PECL Article 2:202. However, the offer may be withdrawn before it reaches the offeree. In that situation, it will not become effective (PECL Article 1:303(5)).

There is divergence in the way in which different legal systems deal with the matter of revocation of an offer. In common law systems, the offeror, in the absence of consideration given by the offeree, has been granted the freedom to revoke the offer before the contract is concluded (e.g., in the case of written assent, before the offeree dispatches the acceptance), thus weakening the binding force of an offer.

INTRODUCTION

Article 75 of the Convention is part of the set of rules and principles that provide the law of damages in the CISG. CISG Article 75 regulates the operation of a substitute transaction, which is adopted in most legal systems as well as in basic multilateral instruments, such as the CISG and the PECL. Pursuant to CISG Art. 75, as a result of a breach of contract the aggrieved party may carry out a substitute transaction in a reasonable manner and within a reasonable time after avoidance and may recover the difference between the contract price and the price of the substitute transaction.

The same issue is regulated in substantively identical terms in PECL Art. 9:506. However, the drafters of the PECL go further and in other provisions of the European Principles define terms that may help the interpretation and application of PECL Art. 9:506 and its counterpart CISG provision.

CISG Article 75 provides a method for measuring damages when a party avoids a contract, usually because of a fundamental breach by the other party. This provision represents a specific application of CISG Art. 74, which states the general rule for the measurement of damages.

Both CISG Art. 75 and PECL Art. 9:506 stipulate the same basic premises that have to exist before the substitute transaction takes place.

• First, one of the contracting parties must breach the contract, and in consequence the innocent party must undertake action to terminate the contract. As far as concerns this premise, a problem may arise in determining the moment when the contract is declared avoided.

• […]

One of the salient characteristics of american civil and criminal justice, which causes and explains many other significant structural and procedural differences from corresponding civil law institutions, is the use of a lay jury to decide disputes of fact in civil and criminal cases. It can be fairly said that the role of the jury in civil and criminal trials is central not only to the structure of the proceeding and functions of its participants but also to the fundamental values that the civil and criminal justice system protect and promote.

HISTORICAL BACKGROUND OF AMERICAN JURY TRIAL

Trial by jury developed in England and was exported to the American colonies along with the other features of English civil and criminal justice. The Anglo-American jury has its roots in the Middle Ages, when English judges assembled groups of knowledgeable citizens from the locality where a crime was committed to assist in the determination of the identity of the wrongdoer. Over the centuries, this early inquest jury evolved into two subforms: the grand jury and the petit or trial jury.

Grand juries have the responsibility of determining whether the facts relating to a particular event justify the lodging of a criminal charge, or indictment, against a particular person. In this sense, they are investigative in nature. Grand juries function ex parte and in secret. Generally, they hear only the prosecution's evidence, although grand juries have been known to subpoena evidence sua sponte.

ACCEPTANCE OF AN OFFER

Under the Convention and also under the UNIDROIT Principles, the contract is concluded when an offer is accepted. Art. 18(1) of the Convention defines acceptance in the following terms:

Thus, the acceptance must be in the form of an active assent to an offer. Art. 2.6(1) of the UNIDROIT Principles defines acceptance in an identically worded provision:

In general, it is accepted that under both instruments the contract is perfected when the offer and the acceptance coincide. The acceptance may be given in several ways, and it does not necessarily have to consist of an expressed act of declaration of will. Both the Convention and the Principles establish that the acceptance can consist of a declaration or an act of the offeree that indicates assent.

MODE OF ACCEPTANCE

Express acceptance

The acceptance of an offer can be express or tacit. The first is expressly presented as the assent of the offeree. The second, when it is an act that constitutes acceptance, is expressed by means of acts that denote such an assent (i.e., acts of contractual execution). This form of acceptance has been called “acceptance by conduct or an act of dominion.”

a. Remedies available to a party are a key consideration for that party, particularly if the contract is breached. However, issues relating to the remedial provisions are difficult and have been the focus of a large part of the discussion and deliberation surrounding the application of commercial law. At the same time, no aspect of a system of contract law is more revealing of its underlying assumptions than is the law that prescribes the relief available for breach of contract. It is where a system's solutions to a large proportion of real-world disputes in commercial transactions are to be found. In practical terms, it may be said that the remedial scheme is the substantive heart of a particular system of contract law, which will be a powerful support for the harmonization of actual outcomes and will improve the reliability of the often unpredictable results of disputes.

b.Generally speaking, the remedies available to an aggrieved party for a breach of contract can in all significant legal systems be classified into three basic categories.

• First, an aggrieved party may be able to claim specific performance. As such, specific performance hardly gives the aggrieved party exactly the performance to which he was entitled to, unless it is supplemented with some kind of an additional remedy, such as monetary relief.

• Second, the aggrieved party may have the right to require substitutionary relief. A relevant relief here is compensation, and almost always a monetary compensation, for the loss that the party has suffered for performance not received.

• […]

GENERAL SCHEME OF INTERPRETATION AND SUPPLEMENTATION IN THE CISG AND PECL

The nature and content of PECL Art. 1:106, as well as its function within the instrument to which it belongs, are very similar to those of CISG Art. 7. In both cases, the respective provisions provide the built-in interpretation and supplementation mechanism that the drafters have embedded in their corresponding instruments. The relevant provisions provide that the interpretation of the law in both instruments must pay regard to the concept of good faith.

The Notes to PECL Art. 1:106(1) confirm that the basic elements found in the structure of Art. 1:106 either are virtually identical or express similar ideas to the ones of the corresponding provision in CISG Art. 7(1).

GOOD FAITH AND FAIR DEALING IN THE INTERPRETATION OF THE CONTRACT

The concept of “good faith and fair dealing” does not operate merely as a rule of interpretation of each PECL article. The duty of good faith, as this is embedded in PECL Art. 1:201, is mandatory on the parties.

In contrast to CISG Art. 7(1) (or any other CISG provision), PECL Art. 1:201 imposes upon each party a positive duty of good faith and fair dealing in exercising its rights and performing its duties under the contract. The PECL Comments to Art. 1:201 not only refer to good faith as “a basic principle running through the Principles” but also expressly state that “[g]ood faith and fair dealing are required in the formation, performance and enforcement of the parties' duties under a contract, and equally in the exercise of a party's rights under the contract” (see PECL Comment A).

a. Article 29 of the CISG deals with the requirements for the modification and termination of contracts. It further entrenches the principles of party autonomy, freedom of contract, and freedom from formalities contained in Article 11 of the CISG. These principles also form the foundation of the UNIDROIT Principles of International Commercial Contracts as expressed in Articles 1.1, 1.5, and 2.18 and should therefore form the governing principles in the interpretation of any contract as well as its modification or termination.

b. Article 2.18 of the UNIDROIT Principles in itself sheds little light on the interpretation or augmentation of Article 29 of the CISG as both Articles are formulated in almost exactly the same words, with one insignificant exception. Where Article 2.18 of the UNIDROIT Principles deals with the abuse of the written modification clause, it refers to the prohibition to rely on such clause to the extent that the other party has “acted in reliance” on that conduct. The CISG merely refers to the extent that the other party has “relied on that conduct.” It is submitted that nothing turns on this divergence as reliance in itself implies some action or failure to act on the part of that party.

c. In interpreting the scope of Article 2.18 of the UNIDROIT Principles, regard should also be had to the provisions of Article 3.2, which deals with freedom of form and formalities.

GENERAL

Avoidance (“termination” in the context of the PECL) of the contract is normally the most extreme measure a party may take in response to a breach (“non-performance” in the context of the PECL) of contract. Avoidance puts a stop to any future performance, except for contractual performances designated to take effect upon avoidance, such as dispute resolution clauses or liquidated damages. (Any restitution following avoidance is not, properly speaking, a contractual performance, but a statutory or common law requirement, as the case may be). Both the CISG and the PECL offer aggrieved parties less extreme measures to deal with breach or with anticipatory breach, such as suspension of performance and requirement of assurances, requirement of performance, or unilateral price reduction. They likewise contain various cure measures that – when applied or applicable – allow for delayed or remedial performance and thus either delay recourse to avoidance or render it unnecessary. In this, both the CISG and PECL manifest a “relational” bias; namely, they attempt to salvage fractured contractual relations by providing an escalation of remedial measures, whose eventual failure ultimately leads to breaking up of the contractual framework through avoidance. In this, the CISG and PECL differ from several national systems that either allow for avoidance in cases of lesser breaches or simply fail to offer such sliding scales.

FUNDAMENTAL BREACH

Due to its extreme nature, both the CISG and the PECL reserve avoidance to special cases, namely to fundamental breaches (non-performances) of the contract.

SIMILARITIES BETWEEN THE COUNTERPART PROVISIONS ON THE EFFECT OF CONTRACTUAL AVOIDANCE IN THE CISG AND THE PECL

The operation of CISG Article 81

In Section IV of the Convention, entitled Effects of Avoidance, Article 81 provides that an avoidance of the contract allows parties to terminate their respective obligations arising out of the contract: “Avoidance is a process through which an aggrieved party, by notice to the other side, terminates the contractual obligations of the parties. If the contract is not avoided, the Convention contemplates that the basic exchange of goods and price will be completed despite a breach, with damages or other remedies to compensate for defects in the exchange.”

“The primary effect of the avoidance of the contract by one party is that both parties are released from their obligations to carry out the contract. The seller need not deliver the goods, and the buyer need not take delivery or pay for them.” However, avoidance of a contract does not affect any provision of the contract that governs the rights and obligations of the parties subsequent to the avoidance of the contract, nor does it eliminate the right to seek damages for breach of the contract. Furthermore, the enumeration in Article 81(1) of two typical contract clauses that are not terminated by the avoidance of the contract is not exhaustive. Some continuing obligations are set forth in other CISG provisions, whereas others may be found in the contract itself or may arise out of fairness considerations.

LOOKING AT LAW COMPARATIVELY

There are many ways in which a body of law can be studied and learned. At this point, we can probably ignore obsolete approaches such as rote memorization. Among the current methods, the historical approach focuses on the evolution of law and legal institutions over time, the systematic method looks at the way with which the various elements of the law work together as a system, and law and economics analyzes the way legal precepts form and reflect economic interrelationships.

The comparative method of law pedagogy attempts to analyze the way legal doctrine and institutions of the body of law under study compare with doctrine and institutions of other legal systems. The techniques of comparative law enable the student to take a social, economic, or governmental problem common to the respective political economies of both of the legal systems under study and study how the respective systems address and solve this particular problem. The solutions can be compared in terms of economic efficiency as well as systemic consistency and harmony with common social, political, and moral values.

For students already familiar with the doctrine and systemic elements of one legal system, the comparative method presents particular advantages in learning and coming to terms with a new body of law. Comparative analysis enables one not only to acquire familiarity with another legal system but also to obtain new and critical insights into one's own legal system.

SIGNIFICANCE OF A BREACH BEING FUNDAMENTAL

The CISG uses the term “fundamental breach” in various settings. This concept is a milestone in its remedial provisions. Its most important role is that it constitutes the usual precondition for the contract to be avoided (CISG Art. 49(1)(a), Art. 51, Art. 64(1)(a), Art. 72(1), and Art. 73).

In addition, where the goods do not conform to the contract, a fundamental breach can give rise to a requirement to deliver substitute goods. (CISG Art. 46(2)). Furthermore, a fundamental breach of contract by the seller leaves the buyer with all of his remedies intact, despite the risk having passed to him (CISG Art. 70).

DEFINING FUNDAMENTAL BREACH

Article 25 attempts to define fundamental breach in terms of (foreseeable) “substantial detriment.” This chapter focuses on the meaning of substantial detriment and foreseeabilty, as understood by Article 25.

SUBSTANTIAL DETRIMENT

Under the CISG, the basic criterion for a breach to be fundamental is that “it results in substantial detriment to the injured party.” The substantial detriment test is one of the innovations of the Convention as compared with the ULIS. However, the CISG does not define the term “detriment.” Van der Velden argues that

a. The right to claim damages as a result of a breach of contract is probably the single most important remedy available to the aggrieved party. The law of damages is a complex set of rules and principles hiding behind fairly simple-looking formulas, such as those found in CISG Articles 74 to 76. The interpretation of Article 74 CISG is therefore fraught with all kinds of difficulties of which the interpreter should be aware. Not the least of these difficulties could be the different notions and understanding of damages in the particular legal system of the interpreter.

b. Although the CISG deals with damages in some detail, several vexing practical issues, which are dealt with in most legal systems and also in the UNIDROIT Principles, have been left open or unresolved. These issues include the time at which damages are to be calculated, the liability and calculation of future damages, contributory conduct of the claimant that increases the amount of damages, saved expenses, loss of an opportunity or chance, penalty clauses, and proof of damages. The provisions of Articles 7.4.1 and 7.4.2 of the UNIDROIT Principles may be helpful in interpreting and applying Article 74 CISG.

c. The basic premise underlying both the provisions of Article 74 CISG and Articles 7.4.1 and 7.4.2 of the UNIDROIT Principles is that the breaching party is liable to compensate the aggrieved party in full for all pecuniary damages suffered by the aggrieved party, including the loss of profit.

a. The right to claim interest on amounts due and not paid by a contractual party under the CISG is governed by Articles 78 and 84(1). The issue of interest was one of the topics on which no real consensus could be reached in the drafting of the CISG. One commentator has remarked that “Art. 78 is more conspicuous for the questions it fails to answer than the questions it answers.” The fact that such a right was included at all represents a compromise reached by the various interests groups that held incompatible views on interest. This compromise was achieved with great difficulty in the final phases of the Conference.

b. Article 78 is formulated in general terms, leaving the following issues open or unresolved: the rate of interest, whether interest is payable when the breach of the defaulting party is excused under Article 79, whether the amount due needs to be liquidated before interest accrues, whether interest is payable on any amount of damages due, and whether compound interest may be claimed. The determination of the rate of interest was intentionally left open in the drafting process of the CISG as no agreement could be reached on the approach to be adopted.

c. Because of the controversies and uncertainties that surround Article 78 the provisions of the UNIDROIT Principles must be considered as one appropriate way of solving these issues.

GOOD FAITH IN THE CISG AND THE UNIDROIT PRINCIPLES

The CISG mentions the good faith principle in Art. 7(1), which rules on the interpretation of the Convention as a uniform international law text. According to that provision, the CISG is to be interpreted and applied in a way that “the observance of good faith in international trade” is promoted. The CISG, however, does not contain an express provision that the individual contract has to obey the maxim of good faith as well.

In contrast, the UNIDROIT Principles address good faith as a principle directed to the parties of international contracts: “Each party must act in accordance with good faith and fair dealing in international trade” (Art. 1.7(1) Principles). Even more specifically Art. 4.8(2)(c) of the Principles refers to good faith and fair dealing as a determining element when and which omitted contract term has to be implied. On the other hand, the provision on the interpretation of the Principles (Art. 1.6) does not mention the maxim of good faith.

But despite these obvious differences of wording, both texts accord in their essence. For, it is commonly held that under the CISG the good faith principle also applies to the interpretation of the individual contract and to the parties' contractual relationship as such. On the other hand the UNIDROIT Commentary to the Principles acknowledges that the good faith principle “may also be seen as an expression of the underlying purpose of the Principles” and may be used in interpreting the Principles.

INTRODUCTION

The CISG provisions dealing with contract formation can be found in Part II of the Convention. For the purposes of contract formation, during the exchange of communications of offer and acceptance between the parties, many of the applicable CISG Articles provide that a communication becomes effective when it “reaches” the other party (i.e., the addressee).

It has been correctly identified that “[p]ractical problems of proof would arise if the applicability of [those] provisions depended on evidence that a communication came to the personal attention of the addressee.”

To address such problems, CISG Art. 24 provides the elements of what constitutes an effective communication to an addressee under Part II of the Convention.

The UNIDROIT Principles (UP), like the Convention, adopt the offer and acceptance model of contract formation, which contemplates the exchange of notices and other communications between the parties. In Chapter 1, entitled “General Provisions,” the UP include Article 1.9, entitled “Notice,” which is a provision similar to its CISG counterpart regarding the effectiveness of a notice or other communication of intention between the parties.

TIME WHEN A COMMUNICATION “REACHES” THE ADDRESSEE: CISG ART. 24 AND UP ART. 1.9

Article 24 of the Convention provides that the communication of offer and acceptance – any indication of the intention of the parties in the context of contract formation under the CISG – reaches the addressee “when it is delivered to him, not when it is dispatched.”

INTRODUCTION

CISG Articles 51 and 73 are often considered concurrently as they both deal with the scenario in which only part of a contract has been performed. However, by doing so, some very important distinctions between the two articles may be overlooked. As one would expect, Article 51, which appears under the heading, “Remedies for Breach of Contract by the Seller,” does provide rights that are only exercisable by the buyer. The first two sub-articles of Article 73, on the other hand, are provisions common to both the seller and the buyer.

A further crucial distinction within the subject matter of the two articles is the type of contract considered by each. Article 51 applies where there has been a failure to deliver part of a contract intended to be delivered as a whole. Article 73 applies to installment contracts and the failure to perform an obligation in respect to an installment. Further, although in both scenarios the buyer may ultimately obtain the same remedy, the two Articles follow different paths to that result.

The PECL do not draw a distinction between rights of the seller and buyer in the same manner as the CISG. Nor is the PECL intended to relate solely to contracts for the sale of goods. As a consequence of the latter difference the term “delivery” makes way for “performance.”

a. Articles 71, 72, and 73 of the CISG deal with the situation where it becomes apparent or clear that one of the parties to an agreement will or may not perform a substantial part of its obligations in terms of the agreement. The object of Article 72 is to provide the innocent party with a remedy in cases where it is clear that the other party will not perform at all or will commit another fundamental breach. This remedy based on the Anglo-American doctrine of anticipatory breach allows the innocent party to avoid the contract when the breach occurs without having to wait until performance becomes due. Whereas Article 72 is aimed at the phenomenon of anticipatory breach of contract (i.e., a breach of contract that takes place before the performance is due by the party in breach), Article 71 has a wider scope in that it deals with both anticipatory breach and incomplete performance. The remedies in Article 71 are aimed at keeping the contract intact, whereas the remedies in Article 72 are aimed at avoiding the contract. Article 73 provides for anticipatory breach in installment contracts. It is for that reason that these Articles contain different requirements for exercising their respective remedies.

b. The PECL is similarly structured in Articles 9:304 and 8:105. Article 9:304 makes provision for a party to terminate the agreement where it is clear that there will be a fundamental non-performance by the other party.

INTRODUCTION

CISG Article 75 and its counterpart UNIDROIT Principles Article 7.4.5. regulate substitute transaction in a similar manner. Both articles correspond to each other in substance; hence the Official Comments on this Article of the UNIDROIT Principles can arguably be used for the interpretation and gap-filling of the CISG.

The basic premises that must be taken into consideration when interpreting the text of CISG Article 75 are the characteristics of the substitute transaction, the time and manner in which the substitute transaction should be made, the nature of recoverable damages, and any further damages recoverable for additional harm.

Starting with the prerequisite included in both articles – avoidance of the contract (termination of the contract in the terminology of the Principles) by the injured party – it must be noted that this particular element in CISG Article 75 and UNIDROIT Principles Article 7.4.5 provides for a special application of the general rule that is applicable to the proof of the existence and the amount of the harm caused to one of the contracting parties by the other.

The new element that both counterpart Articles introduce is the facilitated mechanism for measuring damages that does not require proof of market price. However, instead it provides for the comparison between the contractual price and the price of the substitute transaction, and it is that difference that defines the amount of the damages.

SUBSTITUTE TRANSACTION

The Official Comments to the UNIDROIT Principles contain several instructions on the particularity of the substitute transaction.

“Over recent years, discussion has intensified on possible harmonization of substantive private law, in particular contract law.”

The dream of unifying, or harmonizing, the law is an old one. For some, especially in Europe, it is a dream of a return to the golden age of a jus commun. For others a unified law is an important symbol of a unified nation. A more immediately pragmatic dream is that the unification of commercial law will reduce the cost of transborder transactions and thereby increase international trade. Although pragmatic, such a dream is still idealistic. As stated in the Preamble to the United Nations Convention on Contracts for the International Sale of Goods (CISG),

The quotation that opens this foreword is from a Communication of the European Commission and was meant to apply primarily to developments in the European Union. However, it applies equally well to developments with a universal application and particularly to the CISG. To date 67 States that conduct more than two-thirds of international trade have made the CISG positive law by becoming party to it. The CISG is directly applicable to international sales of goods in those States, unless the parties to the contract exclude its application.

The important feature of the Swedish system is its long continuity. Although there have been significant moments of constitutional and legal change, there is a great deal of institutional continuity and evolution, rather than revolution. Such a climate naturally leads to a pragmatic and piecemeal approach, rather than a major re-ordering, as in France in 1789 and 1958, or Germany in 1949. The interesting feature is the capacity for change that the Swedish system exhibits. In many ways, it is more modern than either the French or German systems. To a great extent, although outwardly the structures of courts and judicial careers have remained very similar, their character has slowly changed very significantly.

The lack of revolution has perhaps strengthened the process of developing indigenous models of the judicial and legal process. There has not been a marked crisis of confidence in the way in which the domestic system operates since 1809, and even then that crisis was predominantly constitutional, rather than affecting the legal system as a whole. A country with a small population, Sweden has traditionally looked outwards for ideas and has assimilated them as it considered appropriate. Though engaged with the outside world, there has been an autonomous pace of development, enabling Sweden to ‘cherry-pick’ ideas from outside. External influences within Scandinavia have been important, and constitute a constant point of reference, but Sweden has been prepared to develop in its own ways.