PART II.
[D] More Courts Confront the CISG
[E] What to Do About Significant Issues That the CISG Does Not Address?

[PART I: 27 Uniform Commercial Code Law Journal (1995) 331-370]

[A] The CISG May Govern Most U.S. International Trade

[1] Overview of the CISG and Recent Case Law

U.S. attorneys and traders can think of the Convention on the International Sale of Goods (hereafter the CISG) as an alternative to [page 331] Article 2 of the Uniform Commercial Code. The United States is part of the first group of nations for which the CISG has come into force, and U.S. lawyers and traders, as well as lawyers and traders throughout the commercial world, need to understand the impact of the CISG. This article reviews the major provisions of the CISG in light of the forty-four cases from around the world involving the CISG that have thus far been reported.[1] Courts in ten countries, plus International Chamber of Commerce (ICC) arbitral panels and the Iran-United States Claims Tribunal, have issued written opinions in these forty-four cases thus far reported. The cases are distributed as follows:

The CISG has just begun to be construed by the courts. The number of reported cases during the first several years following adoption of a new body of statutory or code law is generally small because of the time involved in getting the first generation of cases under the new law into and through the trial courts and then through the appellate process. An initial six-year gestation period of CISG litigation has now transpired. The first generation of cases litigated on a global basis has been introduced into the system. The number [page 332] of reported CISG cases will undoubtedly significantly increase during the next few years as international traders and their counsel become more familiar with the CISG's content and more states ratify it. An analysis of the initial body of forty-four reported cases at this early stage in the litigation history of the CISG nevertheless provides some preliminary insights about the CISG in practice.

The distribution of these forty-four cases reported to date among tribunals in ten countries and in the International Chamber of Commerce and the Iran-United States Tribunals illustrates the practical needs that the CISG is fulfilling. Traders from many jurisdictions are finding that the CISG provides a source of rules for the resolution of their contract disputes. Although these decisions come from many diverse countries and tribunals, the results reached are generally in accord with what one would anticipate from a reading of its text. The cases also are beginning to provide rules for specific application of the general principles the CISG enunciates. The relevance of the CISG and its reported cases to international traders and their counsel obviously extends far beyond the litigation that occurs within the borders of their own countries. For example, although only two CISG cases [2] have been thus far reported in the United States, U .S. entities have already been parties in an additional six cases litigated outside the United States.[3] [page 333]

One of the difficulties of the CISG as a source of rules governing the formation and performance of contracts for the sale of goods is that there is no supreme body for its interpretation.[4] The goal of achieving harmonization not only by agreement on the uniform text of a convention but also by developing a reasonably consistent body of case law and practice in the application of the uniform text is patently more difficult in the international arena than within the limited geographic area of a single country. This is not only because of the absence of a supreme body for its interpretation, but also because of a divergence in legal traditions, culture, and language that generates differences in national approaches to commercial law as well as to law in general. For example, the two U .S. decisions involving the CISG contain the usual common-law style recitation and analysis of the facts underlying the contract dispute. All of the other reported judicial decisions are from civil-law countries, and the recitation and analysis of factual background is in general much sketchier, consistent with the civil-law view that judges should simply apply the law rather than elaborate or discover it in the common-law tradition of reasoning by analogy to prior cases.[5] The institution of mechanisms for collecting reported cases, such as the reporting systems upon which this article relies,[6] provides an avenue [page 334] for continuing worldwide communication regarding the evolving case law. This can be helpful in developing a well-reasoned, harmonized body of law to be used in applying and interpreting the CISG, as well as in promoting future constructive debates about the CISG and its application.

The CISG has governed the formation of certain international contracts for goods by U.S. international traders and the rights and obligations of the parties to such contracts since January 1, 1988.[7] [page 335] Despite efforts to educate traders about the CISG, many have undoubtedly entered into contracts governed by the CISG without any awareness of its existence, content, and how it has affected their transactions. The CISG has now been ratified and is positive law in thirty-eight countries, including all three of the North American Free Trade area countries (i.e., Canada, Mexico, and the United States) and most of the European Community member states as well as China and Russia. It covers much of the same ground as Article 2 of the Uniform Commercial Code. The work of Professors Allan Farnsworth and John Honnold, in their capacity as official U.S. representatives during the CISG drafting process, is reflected by some similarities between the CISG and the Uniform Commercial Code. However, as this article illustrates, the CISG handles many important issues in ways different from the UCC.

[2] Consequences of Failure to Know About the CISG

International traders and their counsel should carefully review the CISG to determine circumstances under which it would or would not be desirable to have it made applicable to their transactions. Increased coverage in continuing legal education courses and in the curriculum offerings of law schools around the world is needed to sensitize lawyers and their clients to the contents and importance of the CISG.

The serious consequences of failure to know about the CISG are illustrated by the case of Filanto, S.p.A v. Chilewich International Corp.[8] In that case, much to the chagrin of the plaintiff Filanto and much to the elation of the defendant Chilewich, both parties unexpectedly discovered they were subject to the CISG at the litigation stage of their relationship rather than having knowingly [page 336] negotiated their contract with an awareness of the impact of the CISG. Plaintiff Filanto found that application of the CISG by the federal district court resulted in the incorporation, from a separate but related contract, of an arbitration clause requiring disputes to be settled by arbitration in Moscow. Filanto was therefore barred from initiating a breach of contract suit against Chilewich in the U.S. Federal District Court of New York. The case dramatically indicates the need for lawyers and traders involved in international transactions to be informed of the circumstances in which it would be advantageous to make the Convention applicable to their transactions or, alternatively, to use the opt-out procedure of CISG Article 6 when application of the CISG would not be in the party's best interest.

For the unwary international lawyer or trader, failure to understand the CISG can lead to catastrophic business results. The CISG reflects compromises between common-law and civil-law traditions as well as between developing and developed and controlled economy and free-economy countries. It incorporates these compromises in order to facilitate subsequent adoptions of the Convention throughout the world and to make it more useful in meeting varying needs of ratifying states. The fundamental compromises mean that the CISG corresponds to the pre-CISG law of no country in the world. Thus, any party potentially subject to the CISG must learn its principles -- or at least enough of them to understand how to elect a preexisting body of national law to govern an international contract for the sale of goods.

Unless the parties expressly waive the application of the CISG either totally or in part (as Article 6 of the CISG permits them to do),[9] it applies to certain contracts for the international sale of goods. Accordingly, those involved in international trade should be aware of the CISG even if they prefer not to adapt their practices to the new law. It is also important to be aware of the CISG because parties to contracts may find that it is desirable to rely on it.

In the United States, the CISG is important because it overrides the applicability of the Uniform Commercial Code in certain international sale of goods transactions unless the parties opt out. In other countries, domestic law can similarly be overridden. Lawyers [page 337] negotiating contracts concerning U .S. international trade will have to recognize that, while there are similarities between the CISG and the Uniform Commercial Code, important differences also exist. Judgment will have to be exercised as to whether parties to the contract should avail themselves of the opportunity the CISG gives them to opt out of its coverage.

[3] History, Ratification, and Organization of the CISG

For over fifty years countries tried to formulate a uniform law on the international sale of goods.[10] The CISG was ratified as of January 1987 by the United States and ten other countries and became effective on January 1, 1988. As of June 20, 1994, the following thirty-eight states are parties to the Convention: Argentina, Australia, Austria, Belarus, Bosnia and Herzegovina, Bulgaria, Canada, Chile, China, the Czech Republic, Denmark, Ecuador, Egypt, Estonia, Finland, France, Germany, Guinea, Hungary, Iraq, Italy, Lesotho, Mexico, the Netherlands, Norway, Romania, the Russian Federation, Slovakia, Slovenia, Spain, Sweden, Switzerland, the Syrian Arab Republic, Uganda, the United States of America, Ukraine, and Zambia.[11]

The CISG is divided into four parts. Part I (Articles 1-13) [page 338] addresses the sphere of application of the Convention. It also contains general rules pertaining to statutory interpretation and the filling of gaps regarding situations not covered by the specific text of the Convention. Part II (Articles 14-24) addresses issues regarding formation of the contract. Part III (Articles 25-88) concerns itself with substantive rules regarding the sales contract. Part IV (Articles 89-101) addresses issues regarding obligations or parties to the Convention.

[B] What Triggers Application of the CISG

[1] Four Bases for Applying the CISG

The CISG is applicable if:

[2] Place of Business

Seven of the forty-four cases currently reported applied the CISG under the place of business basis of Article 1(1)(a).[15] This [page 339] basis for application of the CISG is illustrated by the previously mentioned Filanto case,[16] in which the Italian seller had its place of business in Italy and the U.S. buyer had its place of business in the United States. It appears that in some cases, the courts, without specifically citing Article 1(1)(a), have merely assumed the applicability of the CISG where the parties to the contract had their places of business in different contracting states.

To avoid situations in which parties find themselves unexpectedly bound to the CISG, Article 1 further provides that the fact that the other party's place of business is in a different state must be recognizable no later than at the time of the making of the contract by being apparent (1) from the face of the contract; (2) from the dealings between the parties; or (3) from the information they have disclosed to each other.[17]

[3] Private International Law: Conflict of Laws

Twenty-three of the forty-four cases thus far decided under the CISG have applied the Convention on the basis of the "private international law-conflict of laws" standard of Article 1(1)(b).[18] Under this provision, if one of the parties to the international sales [page 340] transaction has its place of business in a Contracting State and the other does not, the CISG will be applicable if the conflicts of law rule (i.e., the private international law-conflict of laws rule) applied by the forum court makes the law of the state that has ratified the CISG applicable. Of the seventeen court decisions rendered by German courts involving the CISG, nine were decided on the basis of the private international law- conflict of laws standard for application of the CISG.

[4] Opt-In

The CISG may also be applied where the parties in their agreement have so provided, even though it would not otherwise be applicable under the "place of business" or "private international law-conflict of laws" bases discussed above. For example, if the parties include in their contract a provision to make the CISG applicable,[19] it will be applied if such a provision is permitted under domestic law.[20] [page 341]

A caveat is in order at this point. Unlike the 1964 Uniform Law on International Sales (ULIS), the CISG does not have a specific clause permitting election of its application even when the CISG would not by its terms apply.[21] However, private international law principles ordinarily allow the parties to select the law by which they desire to be governed. An additional caveat is warranted here for U.S. traders. Under U.S. private international law (i.e., conflicts of law), the parties' right to choose applicable law may require the parties' choice to be "reasonable."[22] That is, the parties' choice of applicable law may not be totally unrelated to the transaction, nor may it be too obscure for the court.[23]

[5] Lex Mercatoria

A fourth method for application of the CISG has been established by the early reported litigation in those cases in which neither the "place of business," the "private international law-conflicts of law," or the "opt-in" bases are applicable. The Court of Arbitration of the International Chamber of Commerce and the Iran-United States Claims Tribunal have applied the CISG as a part of lex mercatoria (i.e., the customs and practices governing commercial law).[24] [page 342]

In one case, the buyer and the seller (neither of which were located in Contracting States) entered into three separate contracts for the sale of goods. The goods delivered under the second contract did not conform to the contract specifications, and the buyer did not pay the seller the entire purchase price. The seller brought the dispute to the Court of Arbitration of the International Chamber of Commerce pursuant to an arbitration clause, seeking payment of the balance due. The buyer counterclaimed for its direct losses, costs, lost profits, and interest. Because the contract contained no choice of law clause, the Court of Arbitration determined the applicable law governing non-conformity of goods by looking to the ICC rules. Article 13(5) of those rules required the court to consider the relevant trade usages in making its decision. The court found that

"There is no better source to determine the prevailing trade usages than the terms of the United Nations Convention on the International Sale of goods of 11 April 1980, usually called the 'Vienna Convention.' This is so even though neither the [country of the Buyer] not the [country of the Seller] are parties to that Convention."[25]

The potential for expanded use of the Convention on International Sale of Goods on the "lex mercatoria" basis is potently conveyed by this language of the arbitration panel of the International Chamber of Commerce.

In another case,[26] the Islamic Republic of Iran entered into a contract with a U.S. company for the sale of electronic communications equipment and related services. When the buyer did not pay the seller the entire purchase price, the seller notified the buyer of its intention to sell the equipment not yet delivered; it then sold that equipment. This dispute reached the Iran-United States Claims Tribunal, which applied the CISG as part of the "lex mercatoria" and held that the seller had the right to mitigate its damages by selling the undelivered equipment, noting that this right was "consistent with recognized international law of commercial contracts." The Tribunal found for the seller, because the conditions of [page 343] CISG Article 88(1) [27] were satisfied since the buyer had unreasonably delayed its payment of the purchase price without giving any assurances that payment would be made and the seller had notified the buyer of its intention: to sell the undelivered equipment.

A line of cases holding that the CISG is inapplicable to operative facts that occurred before the effective date of the Convention in the countries involved is also worth noting.[28]

[6] Individual Parties With Places of Business in More Than One State

Where individual parties to the sales transaction have places of business in more than one state, selection of the states to be used in determining whether the parties' places of business are in different Contracting States is made under Article 10's "place of business" definition. This provides that for purposes of the CISG, the "place of business" shall be the one "which has the closest relationship to the contract and its performance, having regard to the circumstances known to or contemplated by the parties at any time before or at the conclusion of the contract." The term "conclusion of the contract" is used in this context to refer to the time of formation of the contract.[29]

No multiple "place of business" case had yet been reported at the time this article was written. However, this provision may become relevant in the future. For example, assume that an Argentine buyer by telephone orders for its dealership "Swedco" cars from the Swedish manufacturer in Sweden. Since both Sweden and Argentina are contracting parties to the Convention, the Article l(l)(a) [page 344] "Place of Business" basis for its application clearly controls. However, if the same buyer by telephone orders "Swedco" for its inventory from a division of the "Swedco" company based in Belgium (we are assuming that "Swedco" also has a plant and offices in Belgium for purposes of this hypothetical), the question then arises as to whether the place of business for the "Swedco" company should be Sweden, where its home offices and plants are located, or Belgium, where facilities are also in existence and where the order was accepted. The Article 10 "place of business" definition [30] would make the place of business in Belgium controlling, and the Article l(l)(a) "place of business" basis for applying the Convention would not come into play because Belgium is not a contracting party.

The "place of business" definition in Article 10 may also become relevant in a case involving the "conflict of laws" basis of application of the Convention. For example, assume an Argentine buyer orders "Swedco" cars for its inventory by telephone from the Belgium branch of the "Swedco" company, and the Argentine buyer has a place of business not only in Argentina (a Contracting State) but also in Brazil (a non-Contracting State). In such a situation, it becomes crucial to determine whether or not the place of business of the buyer for purposes of the CISG should be Brazil or Argentina. If it is Brazil, there would be a contract between two parties neither one of which has a place of business in a Contracting State. However, if the court determines that the law of Argentina is applicable and that, under the Article 10 definition of "place of business," Argentina is the place of business, there would be a contract between a seller in a non-Contracting State (Belgium) and a buyer in a Contracting State (Argentina) whose law has been found to be the applicable one. In this latter case, the Article l(l)(b) "private international law-conflict of laws" basis for jurisdiction would make the Convention applicable. [page 345]

[7] Declaration by Ratifying State Not to Be Bound by the "Private International Law-Conflict of Laws" Applicability Rule

As noted previously, the CISG is applicable if the rules of private international law lead to the law of a state that has ratified the CISG.[31] The United States chose to exercise the right given to ratifying states under Article 95 [32] of the CISG to declare at the time of the deposit of its instrument of ratification that it would not be so bound. As part of the ratification process, it was apparently decided that because of the availability of the sophisticated body of sales law provided by Article 2 of the UCC, that body of law would be preferable to the more general provisions of the Convention in cases in which U.S. law would otherwise be applicable under private international conflict of law rules. For reasons not explicitly articulated, the Peoples Republic of China and Czechoslovakia (now the Czech Republic and Slovakia) have also made such an Article 95 declaration in connection with their ratification of the Convention.[33]

[8] Freedom of Contract Preserved; Parties' Right to "Opt Out" of the CISG

If the parties so choose, they may waive (i.e., opt out of) the applicability of the CISG under the terms of Article 6, which provides that the "parties may exclude the application of this Convention or ... derogate from or vary the effect of any of its provisions." This provision gives the parties the option to "opt out" of the application of the Convention in its entirety, or to exclude the application of designated articles of the Convention.

While the opt-out choice may be inferred from the circumstances surrounding the transaction, because of uncertainties on how the courts would rule, this is not the preferable procedure. If opting out is desired, the cleanest way to accomplish it is to waive explicitly the application of the Convention or to waive designated articles and provide alternative terms. This also avoids the need for discussion or litigation of nebulous conflict of laws issues. Reference merely to the law of a state that is a Contracting State leaves ambiguous the [page 346] question of whether such a reference is to that state's law, including the CISG, or to the domestic law of the state, not including the CISG. This ambiguity should be avoided by use of appropriate explicit language indicating, for example, that the choice of' "the law of the State of New York, excluding (or including if such is the case) the Convention on Contracts for the International Sale of Goods," is to be applicable.

The importance of explicitly excluding or including the CISG is illustrated by Nuova Fucinati S.p.A. v. Fondmetal International A.B.,[34] in which the Italian Court: (1) held the CISG inapplicable to a contract between an Italian seller and a Swedish buyer under the Article 1(1)(a) "place of business" standard where the contract between the parties was entered into after the effective date of the CISG in Italy but prior to entering in force in Sweden; and (2) also ruled that even though the parties had chosen Italian law as the law governing the contract, the CISG was inapplicable under the Article 1(1)(b) "private international law-conflict of laws" standard, because Article 1(1)(b) operates only in the absence of a choice of the applicable law by the parties. In addition, the parties had chosen "Italian law," not "Italian law including the CISG." It is entirely possible that another court could construe the phrase "Italian law" to mean the opposite (i.e., Italian law including the CISG).

[9] Applicability to "Contracts for Sale of Goods"

[a] "Contract of Sale" and "Goods" Not Defined

Although the text of the CISG does not contain any definition of "contract of sale" or "goods," it does refer in various provisions to "contracts for sale of goods." For example, in setting forth the geographical application rules, Article 1 states that the Convention applies "to contracts of sales of goods between parties whose places of business are in different states. ..." (emphasis supplied).

The underlying assumption would appear to be that there is a general consensus in the international community that a contract for "sale of goods" involves a contract for transfer of ownership from [page 347] a seller to a buyer for a price [35] and that "goods" generally refers to items that are movable.[36] Such references in Article 1 and in other articles of the CISG lack the specificity of definitions provided by Sections 2-106(1) [37] and 2-105(1) [38] of the UCC. Nevertheless, this is the framework within which the CISG operates.

Despite its lack of explicit definitions of "contract for sale of goods,"[page 348] the CISG does exclude specified types of transactions from "contracts for the sale of goods." These explicit exclusions are discussed immediately following this part of this essay. Note however, that questions of the exclusion or inclusion of particular types of transactions have arisen and will continue to arise independently of the specific exclusion provisions contained in the CISG. For example, a Dutch court [39] recently decided that a distribution contract did not by itself constitute a "contract for the sale of goods," where an Italian manufacturer and Dutch buyer entered into an agreement for distribution of cabinets. The agreement prohibited the Dutch buyer from reselling the cabinets in France and Italy. Although Italy and the Netherlands were both Contracting States and the Article l(l)(a) "place of business" basis for applying the CISG generally subjected the transaction to the CISG, the court concluded that the subject matter of the transaction was not so covered because the agreement was not a contract for sale, but rather a distribution agreement. The court did note, however, that the CISG would have been applicable had the parties entered into any contracts of sale under the distribution agreement.

United States courts have reached conflicting results on the question of whether distribution agreements are subject to the UCC's Article 2 on "Sales" and its Section 2-201 Statute of Frauds. This divergence is illustrated by Lorenz Supply Co. v. American Standard, Inc. [40] In Lorenz, a plurality of the Michigan Supreme Court ruled that a distributorship agreement was not a "contract for the sale of goods" within the meaning of the Section 2-201 Statute of Frauds provision of the UCC where the distributorship agreement did not explicitly state the quantity of goods to be purchased. The oral distributorship agreement was therefore enforceable because no writing was required. The concurring opinion in Lorenz on different grounds also ruled that the oral distributorship agreement was enforceable. However, contrary to the plurality opinion, it concluded that (1) distributorship agreements are within the scope of Article 2, which applies not only to contracts for sale of goods but [page 349] also to "transactions in goods";[41] and (2) a letter that the supplier wrote to the distributor containing language intimating that a distributorship agreement had been created met the writing and quantity requirements of the UCC Section 2-201 Statute of Frauds, which requires "a writing evidencing the contract" also to contain a quantity term.[42]

In another CISG case, the German buyer and the Italian seller had places of business in different Contracting States and met the place of business requirements for application of the CISG. However, finding no applicable rule in the CISG, the German court applied German law to enforce liability on the German entrepreneur who had acted under the name of a company that did not exist in entering into a contract with the Italian seller. Since the company named as the buyer did not actually exist, the seller was allowed to pursue the entrepreneur to recover the purchase price and interest under German law.[43]

In determining whether a particular transaction qualifies as a "sale of goods" and is therefore subject to the CISG, the general understanding within the international community of what constitutes a "contract for the sale of goods" (subject to any specific provisions in the CISG to the contrary) would therefore appear to be applicable. Such an approach would be consistent with the [page 350] rule of construction set forth in Article 7, which specifies that in interpreting the Convention, "regard is to be had to its international character and to the need to promote uniformity in its application and the observance of good faith in international trade. ..."[44] CISG Article 7 further provides that questions concerning matters governed [by the CISG] "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."[45] Having discussed the lack of definition of "contract for the sale of goods" and whether certain transactions not covered by the specific exclusions in the CISG are subject or are not subject to the CISG under the undefined "contract for sale of goods" references in the CISG, we now turn to the specific exclusions provided in the CISG.

[b] Exclusion of "Consumer" and Other Enumerated Transactions

The Convention provides that it does not apply to sales of goods for "personal, family or household" use unless the seller at any time prior to the formation of the contract did not know or should not have known that the goods were bought for any such use.[46] No such limitation is found in Article 2 of the UCC which is therefore applicable to consumer and commercial transactions.[47]

Also included from the CISG are:

The Supreme Court of Hungary has ruled that, although the CISG does not apply to the sale of aircraft because of the Article 2(d) exclusion of "aircraft," it does apply to transactions involving an attempted sale of component parts of aircraft. Applying Article 14(1), the court concluded that no contract for sale of such component parts was formed because the offer of the U.S. vendor to the Hungarian offeree did not adequately specify the price and was not sufficiently definite as to quantity to meet the definiteness requirements of the CISG.[49]

The UCC does not exclude the transactions listed above, but it does provide for coverage of sales of stocks, shares, and investment securities primarily by Article 8 rather than by Article 2. It also covers transfer of negotiable instruments in Articles 3 and 4. Case law is split on the applicability of Article 2 to sales of electricity.[50]

[c] Special Provisions

The CISG specifies that it is applicable to contracts for the supply of goods to be manufactured unless the party who orders the goods "undertakes to supply a substantial part of the materials necessary for such manufacturing production."[51] The French Cour d'appel de Chambry has held the CISG inapplicable where a French seller was to manufacture goods according to the Italian buyer's specifications and was not to sell the goods to third parties or use them for other purposes. The CISG was held inapplicable because the buyer had provided a "substantial [page 352] part of the materials necessary ... for production."[52] Regrettably, the case as reported does not indicate what percentage of the materials constituted a "substantial part."

The CISG also does not apply to contracts in which "the preponderant part of the obligation of the party who furnishes the goods consists in the supply of labor or other services."[53] The International Chamber of Commerce's Court of Arbitration recently ruled that the CISG was applicable to a contract between a Yugoslavian buyer and an Austrian seller, which called for the provision and installation of materials used in hotel construction. The court held that the seller's provision of services did not put the contract beyond the scope of the CISG, because the contract was primarily a contract for the sale of construction materials. The specific factors that the court relied on to reach this result are not contained in the report of this decision.[54]

Questions of whether Article 2 of the UCC applies to transactions in which one party provides a "substantial part of the materials" necessary for the manufacture or production of goods by another, or in which the "preponderant part" of the obligation of the party who furnishes the goods consists in the supply of labor or other services, essentially must be resolved (1) under Section 2-102, which provides in part that Article 2 applies to "transactions in goods"; or (2) by applying UCC provisions by analogy for policy reasons to nonsale of goods or mixed transactions. U.S. court decisions have not been consistent in treatment of these "scope" issues.[55] While some of the UCC cases have adopted the [page 353] "predominant" purpose standard in refusing to apply Article 2 in certain "mixed" or "hybrid" transactions, others have emphasized the Section 2-102 "transactions in goods" provision or extended application by analogy as the basis for using Article 2 to resolve applicability issues in "mixed" or "hybrid" transaction cases. A substantial body of case law has extended the applicability of Article 2 beyond the area of "sale of goods" or "transactions in which the sale of goods predominates" to a broader area of transactions in which the sale of goods does not predominate.

For example, in Providence Hospital v. Truly,[56] the plaintiff patient recovered for breach of an implied warranty of merchantability under the "transactions in goods" provision of Section 2-102, where application of a defective cleansing solution to her eye after a cataract operation caused serious injury. The court allowed recovery even though the bulk of the amount paid to the hospital and surgeon was for services rendered in connection with the cataract operation and the cost of the cleansing solution was only a few dollars. Similarly, in New Mart v. Gimbel's, Inc.,[57] the court held that the plaintiff was entitled to recovery for breach of an implied warranty of merchantability, where a defective cleansing solution and hair dye was applied to her scalp as part of a beauty treatment by a beauty parlor. The New Mart court so ruled essentially by a process of analogy without even specifically mentioning the extended "transaction in goods" applicability provision of Section 2-102. However, in a comparable case involving washing and dyeing of a customer's hair in a beauty parlor, the court, in Epstein v. Giannattasio,[58] ruled that the "predominant" nature of the transaction was a service rather than a sale of goods and denied implied warranty of merchantability recovery to the customer whose scalp was burned by the application of the cleansing and dyeing materials.

Interests of injured plaintiffs in such cases would not be adversely impacted by the "predominant part" standard for application of the CISG, because consumer transactions are explicitly excluded from its coverage by Article 2 of the CISG and non-CISG law would accordingly be applicable to these cases.

The relevant proposed revisions to UCC Article 2 appear to [page 354] recognize the broad applicability of the Code to consumer as well as to commercial transactions. While these revisions to UCC Article 2 recommend elimination of the "transactions in goods" provisions of Section 2-102, a new Section 2-103 is proposed that would inter alia provide:

It should also be noted that the applicability of this new Section 2-103 approach under the UCC would not be limited to consumer transactions. For example, it would apply to sales of businesses involving transfer of realty, good will, accounts, and the like, as well as of "goods" and would adopt the position of some of these cases that carve out the "goods" portion of the "mixed" or "hybrid" contract and subject only that part of the transaction to the provisions of UCC Article 2.[60]

The CISG also does not address questions of its applicability to lease transactions that are now addressed by the new UCC Article 2A (Leases).[61] Many other types of "mixed" or "hybrid" transactions will have to be addressed within the framework of both the [page 355] CISG and the UCC. One such subject currently receiving substantial attention is the treatment of software contracts.[62]

[10] Exclusion of Matters Pertaining to the "Validity of the Contract" and "Property" Issues

The CISG further provides in Article 4 that:

Questions of contract validity and transfer of title are therefore not governed by the Convention. In a recent German case, a Dutch buyer and a German seller entered into a contract for the sale of a cruiser. The seller delivered the cruiser, but the buyer was declared bankrupt. The seller claimed it had a right to repossess the cruiser under the contract's "retention of title clause." When the buyer challenged the validity of that clause, the court found that the CISG was inapplicable as to the validity of the "retention of title clause" [64] because of the Article 4 exclusion.

Another recent German case illustrates the need to resolve a specific problem by domestic law rather than by the CISG, even though the CISG is found generally applicable under the Article l(l)(a) "place of business" standard. In that case, a German seller and an Italian buyer entered into a settlement agreement after the buyer informed the seller that it was not going to perform. When the buyer failed to abide by the settlement agreement, the seller brought suit. The German court held that, although the CISG was applicable to the basic contract, it was inapplicable on the question of the validity of the settlement agreement since the CISG excludes [page 356] contract validity questions.[65] This case further highlights the need to include a choice of law clause to cover issues not otherwise covered by the CISG, even if the CISG is applicable to the contract.

Validity and passage of title issues are addressed by various provisions of the UCC. However, to the extent that issues are not addressed by the UCC, Section 1-103 provides that "the general rules of law and equity" shall be applicable. Explicit "validity" or "passage of title-property" provisions of Article 2 include sections pertaining to passage of title;[66] rights of seller's creditors against sold goods;[67] third party rights as "good faith purchasers for value" or "buyers in ordinary course of business;"[68] procedures for excluding or modifying express, and implied merchantability and fitness warranties;[69] liquidation or limitation of damages;[70] and contractual modification or limitation of remedies.[71] Depending on the circumstances, U.S. parties to such contracts subject to the CISG may want to use a conflict of laws clause to incorporate U.S. law to cover issues not governed by the CISG.

[11] Exclusion of Death and Personal Injury Cases

Article 5 of the CISG provides that it does not apply' 'to the liability of the seller for death or personal injury caused by the goods to any person." The consequential damages provisions of Article 2 of the UCC do allow recovery for death and personal injury claims resulting from breach of the sales contract.[72]

[C] Rules of Construction

[1] Interpreting the Convention

Under the innocuous caption of "General Provisions," the CISG sets forth important rules of construction that already have [page 357] and will continue to have substantial impact in interpreting the Convention and ascertaining the intent of the parties to sales agreements. Article 7 provides that in interpreting the CISG, the international character of the Convention, the need for uniformity, the observance of good faith, the general principles on which the Convention is based, and the rules of private international law (i.e., conflict of laws) are to be considered. It states that "regard is to be had to its international character and to the need to promote uniformity in its application and the observance of good faith in international trade."[73] In addition, questions concerning matters governed by the Convention that 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."[74]

Three recent decisions have applied this latter rule of construction. In a recent German case between a German entrepreneur and an Italian seller, the entrepreneur acted under the name of one company when ordering the goods and under the name of another company when authorizing payment. The former company actually did not exist, and the seller sued the entrepreneur to recover the purchase price and interest. Since matters of agency law are not covered by the CISG, the court ruled that German law would determine whether the entrepreneur was acting as an agent and was personally liable when he authorized payment.[75]

In another case, an Argentine court held that, absent a CISG rule, the time for which interest should accrue should be determined by a usage widely known and regularly observed in international trade.[76] In a third case applying Article 7, the court of arbitration of the International Chamber of Commerce ruled that Austrian law should be applicable in determining the validity of a liquidated damages clause (referred to as a "penalty" clause in the decision) [page 358] and the rate of interest payable where no provision of the CISG covered these matters.[77]

[2] Ascertaining the Intent of the Parties

[a] Consideration to be Given to "All Relevant Circumstances-Including the Negotiations"-Parol Evidence Consequences

Article 8 of the CISG provides that for purposes of the Convention, statements made by, and other conduct of a party are to be interpreted according to that party's intent where the other party knew or could not have been unaware what the intent was.[78] However, if such is not the case, statements made by, and other conduct of a party are to be interpreted according to the understanding that a reasonable person of the same kind as the other party would have had in the same circumstances.[79] This provision concludes by specifying that, in determining the intent of a party or the understanding a reasonable person would have had, due consideration is to be given "to all relevant circumstances of the case including the negotiations, any practices which the parties have established between themselves, usages and any subsequent conduct of the parties."[80]

In the previously discussed case of Filanto S.p.A. v. Chilewich International Corp.,[81] the New York District Court had to determine whether the parties had intended a clause in a master contract between Chilewich and the U.S.S.R. for the sale of shoes that required arbitration of disputes before the arbitration court in Moscow to be included in the subcontract that Chilewich had entered into with the Italian manufacturer Filanto for the purchase of shoes to be shipped to the U.S.S.R. in fulfillment of the master contract. Applying CISG Article 8(3), the court found relevant circumstances in the form of prior practices that the parties had established between themselves, as well as subsequent conduct of the parties, to support its conclusion that the arbitration clause from the master contract [page 359] was included in the subcontract. So ruling, it noted that a five-month delay on the part of Filanto (the seller) in notifying Chilewich of its objection to the incorporation of the arbitration clause into the subcontract was untimely in light of the practice the parties had followed in their prior dealings. The court also noted that the seller (Filanto) had attempted to rely on portions of the master contract in asserting claims against the buyer (Chilewich) after execution of the subcontract and after it had claimed that the arbitration clause was excluded from the subcontract.

In the previously discussed case involving the German entrepreneur who claimed he was buying goods for a principal who subsequently was shown not to exist, the German court looked to the precontract statements and conduct of the Italian seller and German entrepreneur to determine whether a contractual relationship existed between the two or whether the entrepreneur had been acting as an agent at the time the contract was formed. Applying Article 8(3), the court held that the entrepreneur was liable to the seller for the purchase price of the goods because the seller did not know and could not have known that the entrepreneur intended to obligate any other party.[82]

The language in Article 8(3) of the CISG, which inter alia states that in determining the intent of the parties or the understanding of a reasonable person "due consideration is to be given to all relevant circumstances of the case including the negotiations ..." may significantly alter the common-law and U.C.C. parol evidence rule.[83] Attention should therefore be given to drafting merger clauses to counteract these provisions of the CISG. [page 360] The parol evidence issue was avoided in the recent case of Beijing Metals & Minerals Import/Export Corp. v. American Business Center, Inc.[84] In Beijing, the court somewhat cavalierly stated that "we need not resolve the choice of law question of whether Texas or the CISG is applicable because our discussion is limited to application of the parol evidence rule" (which applies regardless).[85] In that case, a Chinese seller contracted with a U.S. buyer for the sale of weight-lifting equipment. After a dispute as to the performance of the contract, the parties entered into a modified written assignment for payment. The buyer refused to pay the amount claimed by the seller, alleging that at the time of the modified written agreement two contemporaneous oral agreements relating to the seller's obligation to deliver the goods had been concluded. Erroneously concluding that the CISG and the Texas law of parol evidence were the same and would both require exclusion of parol evidence, the court ruled in favor of the seller. Since both China and the United States are contracting parties to the CISG and the seller had a place of business in China and the buyer had a place of business in the United States, the CISG was applicable under the "place of business" standard of Article l(l)(a). The provision of Article 8(3) requiring consideration of all relevant circumstances including negotiations would therefore appear to have required the court to permit the introduction of the oral evidence regarding the two contemporaneous oral agreements.

[b] Usages and Practices

Socialist states resisted inclusion of the notion that usages should be binding in the CISG. This, in part, may have been due to their almost exclusive use of standard form contracts and also in part because of their suspicions that international law, and particularly customary public international law, is essentially a bourgeois Western phenomenon. However, they ultimately agreed to a compromise that effectively makes applicable any usage to which the parties have agreed and any practices established between the parties, unless they expressly provide otherwise.[86] The relevant CISG provision further provides that: [page 361]

"[t]he parties are considered, unless otherwise agreed, to have impliedly made applicable to their contract or its formation a usage of which the parties knew or ought to have known and which in international trade is widely known to, and regularly observed by, parties to contracts of the type involved in the particular trade concerned."[87]

This rule of construction was applied in the previously mentioned case of Elastar Sacifia v. Bettcher Industries, Inc.,[88] in which the court held that, since the CISG does not contain a rule determining when interest should accrue, the accrual of interest should be determined under CISG Article 9 by a usage widely known and regularly observed in international trade. These CISG provisions on usages and practices are substantially similar to the usage of trade,[89] course of dealing,[90] and course of performance [91] provisions of the UCC.[page 362]

[...]

[PART II: 29 Uniform Commercial Code Law Journal (1996) 99-167]

[D] More Courts Confront the CISG

Since the 1995 installment of our review [1] of "Practice Under the Convention on International Sale of Goods,"[2] the number of reported [page 101] cases involving the CISG has increased from 44 to 142 and the number of states which have ratified the CISG has grown from 38 to 47.[3] [page 102] In this installment, we address developments pertaining to contract formation, performance, and remedies in connection with contracts for international sales of goods. We also amplify in light of recent cases our earlier discussion of the "applicability" provisions of the CISG to suggest the desirability of including a supplementary choice of law clause in the sales contract to cover issues which the CISG does not address. Our goal is to address issues raised by practice under the CISG, with particular emphasis on issues raised by reported cases.

As of January 1, 1996, 142 CISG cases (mostly from courts of first instance) have been reported as noted in the following chart.

[E] What to Do About Significant Issues That the CISG Does Not Address

Fifty-two of the 142 cases of disputes thus far reported arising from contracts to which the CISG applies in fact involve disputed issues of law that the CISG does not address. In some instances, the parties wisely specified in a contractual choice-of-law clause that the law of a given nation should govern the issues to which the CISG does not speak. In the case of the United States, the preferred way to do this would be to choose the law of a specific state with particular reference to the UCC. In some instances, the parties included specific contractual provisions to cover the disputed issues to which the CISG does not speak. The risk, of course, with reliance on specific contractual provisions to address issues to which the CISG does not speak as an alternative to a general choice-of-law clause, is that the parties may not be able to anticipate all of the issues that they may eventually dispute with each other. The reported cases discussed in this article in which the parties failed to agree to a contractual choice-of-law clause or to a contract clause pertaining specifically to the disputed issues illustrate the uncertainties that the parties face when the judge of their dispute must apply conflict of laws, (that is, private international law,[page 104] rules of the forum state to determine what provisions of positive law govern the disputed point.[4]

The CISG specifically provides that it does not cover "validity" and "passage of title" issues.[5] The cases discussed in the balance of this heading illustrate other legal issues that have substantial practical significance and to which the CISG does not speak. Of the issues in this category, it is not surprising that issues related to the payment of money have to date been the most frequently litigated.

[1] What Interest Rate on Late Payments?

Forty-two of the 142 CISG cases reported thus far deal with the determination of the rate of interest applicable to late payment by the buyer or to refund of a purchase price payment due to the seller.[6] This [page 105] group of cases illustrates the importance of using a choice-of-law clause that specifies what law will govern questions to which the CISG does not speak, or in the absence of the ability to agree to such a clause, at least including a provision that specifies the rate of interest to be applied to late payments and refunds. Although the CISG contains specific provisions awarding interest for late payment to buyers [7] and reimbursement of the purchase price by sellers required to refund the price,[8] it does not specify which country's law should be applied in determining the applicable rate of interest.[page 106]

Thus far the reported cases have generally ruled that the law of the country of the creditor's place of business applies, an unsurprising result given that creditors are likely to bring their actions in their home country. The implicit reasoning behind this kind of holding appears to be based on the hypothesis that in the absence of timely payment, the creditor will cover its need for funds by borrowing in the credit markets of the country in which it has its place of business. In simple cases this reasoning appears plausible. However, it does not address the realities of currency exchange risks, differing national inflation rates, multinational corporate creditors and debtors, the availability of hedging instruments, and the international character of financial markets. Because of these realities, both parties to a contract are well advised to address the issue at the time of contracting rather than rely on a judge or arbitrator attempting to identify a private international law criteria to determine what interest rate should apply.

If the parties fail to address the issue at the time of contracting, the judge of their dispute may be forced to select an interest rate that will hopefully approximate the creditor's loss.[9] The general principles of the CISG are that damages for breach of contract are to consist of a sum equal to the loss suffered by the aggrieved party as a consequence of the breach.[10] The common-sense approach of the reported cases in selecting the interest rate indicated by the law of the creditor's country is generally consistent with this notion; however, as the CISG comes to be used for larger and more complex contracts, the parties to such contracts may wish to avoid arguments about what kind of risk as to the cost of money a debtor contracting party assumed by simply specifying the applicable interest rate, and of course currency in which overdue funds are to be paid. [page 107]

At least one reported case makes the further point that, in addition to specifying the country whose law should be applied to govern issues to which the CISG does not speak, it is also desirable to specify a specific interest rate because national law as to the applicable interest rate may itself be unclear. In that case, the German court, after deciding that Swedish law governed the question, wrestled with whether Swedish law made applicable a Swedish statutory or a Swedish discount banking rate, which at the time differed by 8 percent.[11] Thus, the well-drafted contract will specify a governing law to address questions to which the CISG does not speak, and it will also specify the parties' contractual agreement as to the specific interest rate payable by either party in the event of a late payment or a refund.

[2] Other Issues That the CISG Does Not Address

Other recent CISG cases that have required courts to use private international law (i.e., conflicts of law rules of the forum state) to determine which state's law should apply in resolving non-CISG issues pertain to:

If international traders become more sophisticated in explicitly resolving in their contracts the issues not covered by the CISG, or at least sophisticated enough to realize that the choice of the CISG to [page 109] govern their contracts does not obviate the need to select a national law to govern issues to which the CISG does not speak, they will achieve greater predictability in their contractual relations.

[F] Update on Recent Applicability and Scope Cases

[1] More on the "Four Bases For Applying The CISG"

Part One [20] of this article notes that the CISG is applicable if:

A recent International Chamber of Commerce arbitration award involves an interesting interplay between the "opt-in" and Article 1 "conflicts of law" basis for applying the CISG. In that case, an Italian seller and Czech buyer agreed to a contract that provided that Austrian law governed, without, however, specifying "including" or, "excluding" the CISG.[21] The arbitral court reached the right result by holding that Austria's ratification of the CISG made the CISG part of Austrian law, and that therefore Austrian law "including" the CISG should be applied. Although the logic of the arbitral court's ruling is so clear that it is hard to understand how the parties could litigate the point in good faith, drafting a choice-of-law clause to specify a governing national law "including" the CISG would seem to obviate any basis for such a claim. [page 110]

A recent German case reached the same result.[22] In response to a party's claim that contractual reference to German law as the law governing the contract impliedly excluded application of the CISG, the German court concluded that in the absence of explicit exclusion, a clause choosing the law of a Contracting State as applicable law will not constitute an "opt-out" under Article 6 of the CISG.[23] Similar reasoning was applied by another German court in a case between a Swiss buyer and a German seller in which the CISG was applicable under the Article 1(1)(a) "places of business" rule. The court there ruled that reference by the parties in their pleadings to provisions of the German Civil Code was not sufficient to exclude application of the CISG even though the reference to German law was a valid choice of law under German conflicts of law.[24]

In all three of these cases, the court reached the right result by holding that a reference to the law of a Contracting State, that is, a state that has ratified the CISG, included application of the CISG as well as the other law of the Contracting State. Other courts in the absence of compelling circumstances requiring a contrary ruling should reach the same result because the CISG becomes part of the law of a Contracting State, and also because CISG Article 7(1) calls upon all courts to attempt to interpret the CISG in a uniform manner. However, there is no "Supreme" Court to provide authoritative rulings as to CISG issues. Parties to contracts would therefore be well advised to more firmly close the door to unfounded litigation claims by clearly "including" or excluding" the CISG as the law to be applied in such situations.

[2] What Is a "Contract For Sale of Goods"?-Transactions Included or Excluded by CISG

Article 1 of the CISG states that the CISG applies "to contracts of sales of goods between parties whose places of business are in [page 111] different Contracting States."[25] The CISG does not contain any definition of "contract of sale of goods."[26] However, Article 2 inter alia excludes from CISG coverage sales of goods for "personal, family or household" use and other sales such as sales by auction, execution, or otherwise by authority of law.[27]

Questions regarding what types of transactions qualify as a "sale of goods" subject to the CISG will have to be resolved without the availability of a UCC § 2-106 definition of "contract of sale"[28] or a Section 2-105 definition of "goods."[29]

In a recent case, a German company ordered market research from a Swiss company.[30] The German court held that the CISG was not applicable because the contract was neither a contract for the sale of "goods" as required by CISG Article 1(1) nor a contract for the "supply of goods to be manufactured or produced" governed by CISG Article 3(1). Instead, the court found the contract to be one for performance of work rather than for sale of goods.[31]

On the matter of sale of "made to order" goods, the CISG specifies that it is applicable to contracts for the sale of goods to be manufactured unless the party who orders the goods "undertakes to supply a substantial part of the materials necessary for such manufacturing production."[32]

Exclusion of contracts in which the party who orders the goods undertakes to supply a "substantial part of the materials necessary [page 112] for such manufacture or production" under CISG Article 3(1) has been litigated in several cases. For example, where a German buyer and a French seller entered into a contract ordering textiles to be produced by seller, the German court found the contract to be one for "supply of goods to be manufactured or produced," because the buyer had not undertaken to supply a substantial part of the materials necessary to manufacture or produce the textiles.[33] However, in a 1994 Austrian case,[34] the court ruled the CISG inapplicable where an Austrian company had entered into an agreement with a Yugoslav company to deliver to the Yugoslav company the necessary raw materials for processing finished goods thereafter to be delivered back to the Austrian company.

With reference to mixed transactions involving labor or services, the CISG also does not apply to contracts in which "the preponderant part of the obligation of a party who furnishes the goods consists in the supply of labor or services."[35]

Where the charge for the services of dismantling a second-hand airplane hangar that a French seller sold to a Portuguese buyer was approximately only 25 percent of the total purchase price, a French court applied the "preponderant part" provision of Article 3(2) to the hybrid "sale-service" transaction and held the contract subject to the CISG.[36]

[G] When the CISG Creates a Contract; Oral Contracts Are Binding: No Statute of Frauds

Article 11 of the CISG [37] abolishes the statute of frauds for contracts to which it applies. Unlike the statute of frauds requirement of [page 113] UCC [38] § 2-201,[39] a contract for the sale of goods can be concluded under the CISG without any written agreement.

However, the CISG provides a compromise between nations that utilize a statute-of-frauds requirement as a prerequisite for enforcing an oral contract for the sale of goods and those that permit enforcement [page 114] of oral contracts for sale of goods. CISG Article 96 permits a ratifying country to make a reservation [40] that has the effect of nullifying the CISG Article 11 abolition of the statute-of-frauds requirement.

The United States has not filed an Article 96 reservation to the abolition of the writing requirement. (...) Accordingly, while United States domestic contracts for the sale of goods are subject to the UCC § 2-201 [41] statute of frauds, United States international sale of goods contracts to which the CISG applies are not normally subject to the statute-of-frauds writing requirements.

A recent Mexican case [42] illustrates this difference in handling statute-of-frauds issues in transactions subject to the UCC as distinguished from transactions subject to the CISG. In that case, the Mexican Commission for the Protection of Foreign Trade (COMPROMEX) held enforceable an oral contract for the sale of twenty-four tons of garlic between a Mexican seller and California buyer. The seller delivered the goods and an invoice with the purchase price to the buyer, who then refused to pay the balance due. In the arbitration proceeding, COMPROMEX found that because of the CISG's applicability, the contract need not be in writing. In addition, the invoice and documents of carriage were deemed sufficient proof of the contract's existence. It also found that buyer had breached its obligations under the contract and ruled that the purchase price be paid.[43]

In another interesting case,[44] a German court applying the CISG held enforceable an oral contract between a German buyer and a [page 115] French seller noting that, "a contract of sale ... may be proved by any means, including witnesses."[45] The court utilized order forms that contained the signatures of the parties and the testimony of two witnesses to conclude that a valid contract had been entered into.[46] Although different legal routes would have to be followed, the result in this case probably would be the same under the UCC or the CISG. Under the UCC § 2-201 statute of frauds,[47] the order forms would probably qualify as a writing sufficient to indicate that a contract of sale was made and therefore enable the plaintiff to then attempt to actually prove the existence of the oral contract.

One United States case suggests that many international traders and perhaps some judges are as yet unaware of the CISG and in particular of how it changes the substantive law otherwise applicable to statutes-of-fraud issues. In GPL Treatment, Ltd. v. Louisiana-Pacific Corp.,[48] the Oregon state court appellate judges adhering to the majority opinion appear to have overlooked the applicability of the CISG. As a result of not focusing on the applicability of the CISG, they undertook a complicated application of the UCC statute-of-frauds requirement. The decision that they reached, as the dissenting opinion makes clear, is consistent with the result provided by the CISG; however, had they relied on the CISG as the dissenting opinion required, their reasoning would have been better founded. The responsibility for overlooking the applicability of the CISG cannot, however, be squarely assigned to the appellate judges authoring the majority opinion; the reported opinions of the appellate court suggest that the plaintiff failed to timely raise the applicability of the CISG in the trial court. [page 116]

In GPL Treatment, Ltd., a Canadian Seller of wood products sued a U.S. Buyer for breach of an oral contract in the Oregon trial courts. The majority opinion of the Oregon state appellate court ruled that Buyer's silence in response to confirming communications sent by Seller to Buyer constituted confirmation of the oral agreement. In the absence of a response by Buyer objecting to its contents, Seller's confirming communication was deemed to satisfy the UCC § 2-201 statute-of-frauds writing requirement against the nonobjecting Buyer and therefore could be used as a basis for enforcing the oral agreement against Buyer.[49]

The dissenting appellate opinion in GPL Treatment, Ltd. concluded that the communication sent by Seller to Buyer after the alleged oral contract was entered into did not qualify as confirmation of an oral contract. Accordingly, Seller would be barred by the U.C.C. statute of frauds from enforcing the oral agreement. However, the dissent noted that application of the CISG would enable Seller to enforce the oral agreement. The CISG's treatment in the court's opinions is limited to a footnote in the dissenting opinion, which states:

This footnote reference recalls the kind of "surprise" reflected in Part I's discussion of the Southern District of New York's Filanto decision. That is, at the time of contracting, just as the Italian and the U .S. parties to the contract for the sale of shoes at issue in the Filanto case had no clue what law really governed their contractual relationship, so the Canadian and U.S. parties to this contract had no clue at [page 117] the time of their dialog about what law governed when that dialog gave rise to the formation of a contract. And, just as the plaintiff's failure in the Filanto case at the time of trial court proceedings to understand the applicability of the CISG and the implications of the applicability led the trial court to reject its effort to bring suit in the United States, so the Canadian plaintiff's apparent failure in the instant case to raise in timely fashion the CISG's applicability led to the case's resolution on principles of law other than the CISG. The Filanto and GPL Treatment, Ltd. cases just discussed suggest several lessons for U.S. international traders in respect of the statute of frauds. First, the CISG elimination of the statute-of-frauds provision requires additional caution on the part of sales and procurement personnel in the negotiation of contracts for the international sale of goods in order to avoid unintentionally becoming contractually bound. At the very beginning of the negotiation process, the U.S. participants would be well advised to state in writing that no agreement will be concluded until a formal writing is executed and that all negotiations are simply to be considered negotiations on which the other party has no right whatsoever to rely until the formal writing is executed. Once a contract is made, it is generally advisable to also provide that contractual modifications are to be in writing because the CISG provides that a contract in writing that contains a provision requiring any modification or termination by agreement to be in writing may not be otherwise modified or terminated by agreement.[51] The UCC contains a comparable provision.[52]

It is prudent to include as part of any written offer a requirement that any acceptance must be in writing. In addition, the offeree may wish to include in a written acceptance the terms of the original offer and further specify that the acceptance contains all the terms and conditions of the parties' agreement, which are not subject to variation except in writing. [page 118]

[H] Offer and Acceptance Rules

Articles 14 through 24 of the CISG contain special rules pertaining to offer and acceptance. Comparison of these rules with the UCC "mailbox," "firm offer," and "battle of the forms" rules illustrates some of these provisions.

[1] Status of the "Mailbox" Acceptance Rule

Under the CISG, acceptances are effective when received.[53] Under the U.S. common-law "mailbox" rule, acceptances are effective on dispatch. On its face, this is an important difference between the UCC and the CISG. Although no cases directly on point on this issue have yet been reported, it should, however, be noted that the impact of the CISG "receipt rule" may be softened by Article 16(1),[54] which on the important issue of timeliness of revocation of offers provides:

For the limited purpose of determining the timeliness of a revocation of an offer, this CISG provision in substance arguably makes the acceptance effective on dispatch rather than on receipt.

[2] Unintentionally Irrevocable Offers

Both the UCC and the CISG permit irrevocable offers to be made without consideration. However, the CISG broadens enforceability of such offers beyond the scope of the UCC rule.

The UCC provides that "an offer by a merchant to buy or sell goods in a signed writing which by its terms gives assurance that it [page 119] will be held open is not revocable for lack of consideration…."[55] (emphasis supplied). The CISG instead provides that an offer is irrevocable if:

Unlike the UCC, this CISG provision does not require a "signed writing which by its terms gives assurance that it will be held open" as a condition for making the offer irrevocable. In addition, under the CISG, an offer is irrevocable merely because it was reasonable for the offeree to rely on the offer as being irrevocable and its offeree acts in reliance on the offer. To avoid accidentally making an irrevocable offer under the CISG as a result of stating a fixed time for acceptance, such offers should state something like, "[t]his offer expires after thirty days, but can be revoked at any time."

[3] Battle of the Forms Lives On

The CISG initially makes most "acceptances" with different or additional terms a counter-offer rather than an acceptance.[57] It does not explicitly contain the UCC concept of an "expression of acceptance," which has the same effect as an acceptance.[58] However, the CISG compromises between the old common-law "mirror image" approach and the UCC approach to contract formation, which merely looks to agreement on essential terms.

Under the CISG [59] a reply to an offer that purports to be an acceptance but which contains additions, limitations, or other modifications is initially classified as a rejection of the offer and constitutes a counter-offer. However, the rigidity of this counter-offer approach is softened by the language immediately following it, which by [page 120] implication adopts an "expression of acceptance" type approach. This language states that a reply to an offer that purports to be an acceptance but contains additional or different terms that do not "materially" alter the terms of the offer constitutes an acceptance, unless the offeror, without undue delay, objects orally to the discrepancy or dispatches a notice to that effect.[60] If the offeror does not so object, the terms of the contract are the terms of the offer with the modifications contained in the acceptance.[61] This movement in the direction of permitting a contract to be created on the basis of agreement on essential terms is in turn altered by the immediately following provision, which states:

Despite this broad coverage of what constitutes a "material term" making the response to an offer a counter-offer under the CISG, some cases involving "non-material" additional or different terms have already been reported. An example of a non-material modification is found in a recent German case in which a German buyer had ordered goods from an Italian seller.[63] Seller replied in a writing that included a provision calling for all claims of defect to be made within thirty days. When buyer alleged that the goods were non-conforming and refused to pay the entire purchase price, the court held that the additional term in seller's acceptance requiring notification of defect within thirty days had become a part of the contract because the offer had not been materially altered.[64]

Even the addition or alteration of those terms that under CISG Article 19(3) are stated to materially alter the terms of an offer and therefore create a counter-offer may not necessarily be held to do so. Recall that CISG Article 19(3) inter alia provides that: "The settlement of disputes are considered to alter the terms of the offer [page 121] materially."[65] In Filanto v. Chilewich,[66] seller (offeree) claimed that its response to buyer's offer, which contained an objection to the incorporation of an arbitration clause in the buyer's offer, constituted a counter-offer. The Southern District of New York Court held otherwise. Citing CISG Articles 18(1) and 18(3),[67] it found that seller's conduct and delay of five months in replying to buyer's offer indicated its intention to accept it. The court held that seller was under a duty to notify buyer in a timely fashion of its objections to the arbitration terms due to the parties' extensive prior dealings. The court also noted that the seller had begun its performance under the contract by shipping part of the goods, and buyer had issued a letter of credit naming seller as beneficiary to cover part payment of the goods during the five-month delay period.

Unlike the UCC, the CISG does not address the question of what happens when conflicting offers and acceptances are exchanged, performance nonetheless begins, and problems then arise.[68] Because the CISG does not provide an answer in such cases, recourse will have to be to general principles of the CISG and private international law to resolve such questions.[69]

[I] Selected Performance Issues

[1] Open Price Term

The CISG permits a contract to be formed even if the parties have not specified the price by providing that a proposal is sufficiently definite if it indicates the goods and expressly or implicitly [page 122] fixes or makes provision for determining the quantity and the price.[70] In addition, where a contract has been validly concluded but does not expressly or implicitly fix or make provisions for determining the price, in the absence of any indication to the contrary, the market price charged at the time of the conclusion of the contract for such goods sold under comparable circumstances in the trade is applicable.[71] The open price term provision of the UCC [72] produces essentially comparable results. However, the UCC provision provides that in such a case the price is a reasonable price at the time for delivery rather than the market price at the time of the conclusion of the contract. Because of the currency exchange risks associated with international contracting, the establishment of the CISG rule as the market price at the time of contracting was an essentially foregone conclusion.

[2] Warranties

The CISG warranty provisions [73] produce seller warranty accountability substantially similar to the express and implied merchantability [page 123] and fitness quality warranties of the UCC. However, the CISG does not contain any provisions comparable to the disclaimer procedures [page 124] sellers are authorized to use under the UCC.[74] This omission may result from the fact that such disclaimer provisions may be considered to address issues pertaining to the validity of the contract and therefore would be excluded from CISG coverage under Article 4 [75] of the Convention. The CISG also contains provisions that are substantially in accord with the implied warranty of title provided for by the UCC.[76] [page 125] These provisions require the seller to deliver goods that are free from any right or claim of a third party, including claims based on industrial property or other intellectual property, unless the buyer agreed to take the goods subject to such rights or claims.[77] In the case of claims based on industrial property or other intellectual property, the CISG explicitly specifies that the obligation of the seller does not extend to cases where, at the time of the conclusion of the contract, the buyer knew or could not have been unaware of the right of claim, or the right of claim results from the seller's compliance with technical drawings, designs, formulae, or other such specifications furnished by the buyer.[78]

[3] Risk of Loss

Risk-of-loss rules are based on the premise that a buyer's obligation to pay arises when the seller has performed its obligations. Once the seller has performed, because the risk of loss has passed to the buyer, the buyer is required to pay, even if the goods are subsequently destroyed or damaged.

The CISG provides that once the risk has passed to the buyer, buyer must pay the full price, even if the goods have been accidentally damaged or destroyed. However, the buyer is not required to pay the price if the loss or damage was "due to an act or omission of the seller."[79] In this latter situation, the loss or damage is not an accidental [page 126] loss, but rather a loss for which the seller is responsible. The seller's action releases the buyer from its obligation to pay and also gives the buyer a claim for damages for breach of contract.

The CISG sets forth three sets of risk of loss rules for:

The third category involves pickup of the goods by the buyer at the seller's place of business or at some third location, as for example when the goods are in the hands of a third-party bailee.

[a] Sales of Goods Involving Carriage

If the contract of sale involves carriage of the goods and the seller is not bound to hand them over at a particular place, the risk passes to the buyer when the goods are handed over to the first carrier for transmission to the buyer in accordance with the contract of sale.[83] If the seller is bound to hand the goods over to a carrier at a particular place (i.e., a destination contract), the risk does not pass to the buyer until the goods are handed over to the carrier at that place.[84] These provisions do not split the risk in cases of multimodal transportation involving a combination of road, sea, or air transportation unless special provisions of the contract specify otherwise.

While the language of the CISG differs from the analogous UCC provisions, these risk-of-loss rules applicable to sales of goods involving carriage appear to be essentially similar to the rules applicable to shipment and destination contracts under the UCC.[85] [page 127]

[b] Sales of Goods in Transit

Under the CISG, the risk of loss of goods sold in transit passes from the seller to the buyer at the time of the making of the contract.[86] Professor John Honnold, who was intimately involved in the drafting of the CISG, has advised:

[c] Sales of Goods Not Requiring Carriage and Not in Transit

Where the sales contract does not require carriage of the goods and the buyer is to pick up the goods at the seller's place of business, the CISG provides that the risk passes to the buyer when it takes over the goods. If the buyer does not do so at the time specified by the contract, risk of loss then passes at the time when the goods are placed at buyer's disposal, and buyer commits a breach of contract by failing to take delivery.[88] If the goods are in the hands of a third-party bailee and the buyer is bound to take over the goods at a designated place, the risk passes when delivery is due and the buyer is aware that the goods are at his disposal at that place. This latter situation requires that the buyer have a receipt or notice that the goods are ready for delivery.[89] If the contract relates to goods not then identified [page 128] the goods are considered not to be placed at the disposal of the buyer until they are clearly identified to the contract.[90]

The UCC risk-of-loss rules where the goods are held by a bailee to be delivered without being moved, or where delivery is to be at the seller's place of business, are set forth in Sections 2-509(2) and 2- 509(3).[91] They are substantially similar to the CISG rules.

[d] Effect of Seller's Breach on Risk of Loss

Both the CISG and the UCC have provisions pertaining to the effect of a seller's breach on the risk of loss. The CISG provides that the normally applicable risk-of-loss rules discussed previously do not impair the buyer's remedies if the seller has committed a fundamental breach.[92] The UCC provides that where a tender of delivery of goods so fails to conform to the contract as to give a right of rejection, the risk of their loss remains on the seller until cure or acceptance.[93]

[e] Overview

Like the UCC, the CISG's rules on risk of loss have abandoned the approach of making risk of loss turn on the question of whether "property" (i.e., title) has passed from the seller to the buyer. Both the CISG and UCC risk-of-loss rules are applicable on the basis of concrete commercial events such as handing over the goods to the carrier or the buyer taking over physical possession from the seller. To the extent that these physical events rather than metaphysical concepts [page 129] of passage of title determine the substantive rights of the parties, a great improvement in achieving predictability and certainty of results has been made. However, the CISG risk-of-loss rules are stated in language yet to be interpreted by courts. In addition, no definitions of transportation terms are contained in the CISG. Accordingly, where negotiation postures permit, the parties may wish to insert their own specific risk of loss clauses into their contract utilizing the authorization granted by Article 6 of the CISG.

[4] Excuse for Changed Circumstances (Exemptions)

The CISG addresses under the heading of "Exemptions" the common-law concepts of "force majeure" or "excuse by failure of presupposed conditions." The CISG provides that a party is not liable in damages for failure to perform if the failure was due to an "impediment beyond his control and that he could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract or to have avoided or overcome it or its consequences."[94]

If a party's failure is due to the failure by a third person whom it has engaged to perform the whole or a part of the contract, such party is exempt from liability only if the party is exempt under the immediately previously stated exemption rules, and the person whom it has so engaged would be so exempt if the exemption rule were applied to that person.[95]

Like the term "impracticability" used by the UCC in its statement of excuse for non-performance,[96] there is considerable ambiguity [page 130] as to whether the term "impediment" includes cases of frustration of purpose of the contract as well as cases of physical impossibility. It is also important to note that excuse for non-performance under the CISG only exempts the non-performing party from liability for damages,[97] thereby entitling the aggrieved party to an action for interest, reduction of the price, and, in cases where the delay in performance amounts to a fundamental breach, also a right to avoid the contract. In addition, the aggrieved party would continue to have a right to specific performance after the extinction or termination of the event on which the exemption was based, even though for a period of time failure to perform was due to an unforeseen "impediment beyond its control."

The CISG makes its exemption provisions applicable to both sellers and buyers by stating that "a party is not liable for failure to perform" if the required conditions are met.[98] This avoids the problems created by the manner in which UCC § 2-615 is drafted, which, if read literally, would make the excuse for non-performance provisions applicable only to sellers and not to buyers. Fortunately, case law interpreting Section 2-615 has not read these provisions literally.[99]

The ambiguities indicated in the CISG "exemption" provisions are further aggravated by the fact that common- and civil-law lawyers come from systems in which the basis for imposing liability depends on differing strict or fault liability theories. Where the negotiation posture of the parties is such that agreement may be reached on a "force majeure-excusable delay" clause, inclusion of such a clause would therefore appear to be desirable in order to avoid uncertainties left unresolved by the CISG provisions.[page 131]

[J] New Concepts in Breach and Remedies

[1] The Preferred Remedy: Specific Performance or Damages Remedies-How to Choose by "Selective Opt-Out" or Choice-of-Forum Clause

A basic assumption of the remedies provisions of the Convention is that the contract of the parties should normally be specifically performed.[100] This is unlike the UCC, pursuant to which damages rather than specific performance is the preferred remedy.[101] However, by providing that in a case involving application of the CISG a court is not bound to enter an order for specific performance if it would not be required to do so under the law of the forum state in which litigation is initiated, the CISG makes it possible to bypass its normally applicable specific performance remedy.[102] Thus, if a U.S. court is selected as the forum for resolution of disputes, award of damages rather than specific performance will be the remedy. However, this approach would require litigation to take place in a U.S. court, involving probable trial by jury, liberal discovery, contingent fees, generally substantially higher levels of liability, and so forth. Because of such considerations, a U.S. seller's counsel may decide that the appropriate approach might be to use the "opt out" procedure of Article 6 [103] by including a clause that excludes application of the [page 132] CISG specific performance provisions [104] and, if necessary, litigate in a non-U.S. forum.

It is interesting to note that no cases reported to date raise the issue of specific performance. While the CISG gives the parties the right to choose between specific performance and damages, the limitations placed on the exercise of the specific performance remedy, as well as the infrequency in which aggrieved sellers and buyers opt to exercise it, suggests that this difference in civil and common-law systems may not be as substantial as it initially appears. The CISG specific performance provisions are further softened by their inclusion in a mixed traditional and sometimes innovative set of breach and performance rules addressed in the remainder of this article. These provisions pertain to: (1) requiring buyers to give timely notice of lack of conformity;[105] (2) giving sellers opportunity to cure defects;[106] and (3) utilizing innovative concepts like "fundamental breach,"[107] "Nachfrist,"[108] and "avoidance,"[109] and "reduction in purchase price to the extent of the defect."[110]

[2] Buyer's Duty to Discover and Give Notice of Defects- Estoppel

The CISG requires the buyer to examine the goods, or cause them to be examined within as short a period as is practicable in the circumstances.[111] The buyer loses the right to rely on a lack of conformity of the goods if notice is not given to the seller specifying the [page 133] nature of the lack of conformity within a reasonable time after buyer has discovered it or ought to have discovered it.[112] Said time in any event is not to exceed two years from the date on which the goods were actually handed over to the buyer, unless this time limit is inconsistent with a contractual period of guarantee.[113] The difficulty of determining whether a buyer has complied with this "reasonable time" requirement for examining the goods and giving notice of any non-conformities has led to considerable litigation and is responsible for twenty seven [114] of the 142 CISG cases reported to date.[page 134] This difficulty is primarily due to the factual sensitivity of determining whether the buyer has examined the goods within a "reasonable time" and has given timely notice of any non-conformity to the seller. In reaching these determinations, the court must take into account the circumstances of the case and the opportunities of the parties to the contract to examine the goods.[115] CISG Article 40 limits the extent to which a seller can rely on the provisions of Article 38 and 39 "if the lack of conformity relates to facts which he knew or could not have been unaware and which he did not disclose to the buyer."[116] Thus, this section allows the buyer in certain cases to avoid the application of Articles 38 or 39 by showing that the seller was aware of the defect and did not disclose it to the buyer.

A Netherlands court [117] recently held that a Dutch buyer could not rely on a lack of conformity, where the cheese that the Italian seller delivered to the buyer was later discovered to contain maggots, because buyer had failed to comply with the examination and notice requirements of Articles 38 and 39. However, the court noted that, should buyer succeed in proving that the maggots were in the cheese before carriage, seller would be prevented by Article 40 from relying on Articles 38 and 39.[118] In another case,[119] an arbitrator held that an Austrian seller was estopped from alleging that the German buyer's notice of non-conformity was untimely. Noting that the question of estoppel is not expressly settled under the CISG, the arbitrator applied Articles 7(2), 16(2)(b), and 29(2) [120] and held, nonetheless, that [page 135] estoppel (venire contra factum proprium) is a general principle underlying the CISG. In this instance, seller's behavior [121] had led the buyer into believing that the untimely notice defense would not be raised.

[a] Duty to Examine Within a Reasonable Time

The Article 38 requirement for discovering a defect within a reasonable time has been litigated in a number of cases. In Fallini Stefano & Co. S.n.c. v. Foodic BV, the Dutch court held that the buyer bears the burden of proving that the goods were inspected within a reasonable time.[122] Although the cheese ordered by buyer had been delivered frozen, buyer was not exempt from the duty to make timely examination. According to the court, buyer could have defrosted a portion of the cheese and discovered the non-conformity.[123]

A German court has recently held in a similar case [124] that a German buyer lost the right to rely on lack of conformity by failing to promptly inspect ham delivered by the seller. Because the alleged defect (inadequate seasoning) was easily recognizable, buyer should have examined the goods within three days. It should be noted that the time period in which to examine goods is very fact specific. For example, even where a buyer had to install seller's engines in order [page 136] to discover possible defects, a German court [125] has held that the duty to examine promptly imposes a duty on the buyer to examine the goods as soon as practicable. In that case, waiting to examine the engines "a full four months" after delivery could not be considered ''as short as is practicable under the circumstances."[126] In transactions between merchants, courts have held that the duty to inspect is an immediate one. For example, a Swiss court held that because both parties were merchants, buyer should have examined the goods upon delivery.[127] In that case, a Swiss buyer of furniture discovered a defect in the seller's couches only when an unsatisfied consumer complained about the upholstery. The court held that buyer should have inspected the couches upon delivery instead of doing so only following customer complaints.

In a third case, a German court held that a German buyer had not properly examined the goods received from an Italian seller. Because customers who had purchased shoes under a former order from the same Italian seller had complained of imperfect sewing and discoloration, buyer had notice of possible defect. The court found that because buyer had been forewarned by complaints concerning the first delivery, buyer should have examined all of the shoes from the second order, as opposed to just a few pairs.[128]

[b] Duty to Give Notice of Non-Conformity Within a Reasonable Time

Many cases deal with the issue of what constitutes a reasonable time for giving notice of non-conformity under Article 39. For example, the Court of Arbitration of the International Chamber of Commerce [page 137] has held that notice given within eight days after publication of a report by buyer's inspector who had examined seller's goods prior to shipment satisfied the Article 39 requirement. Similarly, a German court [129] recently stated that under normal circumstances in a sale of durable nonseason-dependent goods, eight days is a reasonable time for giving notice. In that case, however, the Austrian buyer who had entered into a contract with a German seller to deliver goods to a Danish company supplied by buyer waited two months after the Danish company received delivery before notifying seller of the non-conformity. It is important to note that the buyer bears the burden to show that notice of non-conformity has been given within a reasonable time.[130]

In another recent case,[131] a German court held that the reasonable time for giving notice started to run at the latest at the moment when buyer had concluded its own examination. Instead of giving notice to the seller of non-conformity following its own inspection of seller's engines, the buyer sent the engines to a university for further examination.

Courts have also held that one of the elements to be taken into account in determining whether notice has been given in a timely manner is the nature of the goods. For example, in the Fallini case [132] a Netherlands court found that the period within which the buyer should have given notice was necessarily short because cheese is a perishable good.[133] [page 138]

As between merchants, under CISG Article 39, if the defect is apparent, buyer should give immediate notice of the non-conformity rather than waiting until after customer complaints are received.[134] Recall the case where the buyer failed to notify the seller of non-conformity until after receiving customer complaints about the upholstery of seller's couches.

Under Article 39, a buyer's notice of non-conformity must also "specify the nature of the lack of conformity."[135] Failure to do so can result in a buyer losing the right to rely on timely notice of non-conformity. For example, under a contract for the sale of shoes between a German buyer and Italian seller,[136] the buyer refused to pay after notifying seller of a non-conformity via telephone. While the German court noted that notice via telephone is not inherently insufficient, buyer had not introduced evidence demonstrating that the notice had specified the nature of the non-conformity. Accordingly, buyer lost the right to rely on Article 39 and was obliged to pay the price of the shoes.

[c] Ineffective Cure-New Notice Required

When receiving goods that are offered as a cure for non-conforming goods, buyer must give new notice of any defects should the new goods also be non-conforming. For example, in one case,[137] a German court held that a German buyer that had claimed that the Italian seller's cure was ineffective lost the right to claim a lack of conformity by failing to renew notice of non-conformity upon discovery that the cure, was also ineffective. Because the court held that a failed repair represents another non-performance of the contract, buyer's exercise of remedies for breach of contract by seller requires another notice.[138] [page 139]

[d] Advantage of Clause Providing for Explicit Time for Giving Notice

In order to avoid litigation over whether examination and notice were performed within a reasonable time, parties may wish to place a clause in their contract to govern the time period when examination and notice should occur. In one case,[139] the parties' agreement provided that any complaints concerning defects in the goods could only be raised within eight days after receipt of the goods. After receiving complaints from its customers about the goods the Italian seller had delivered, the German buyer gave seller notice of the lack of conformity and refused to pay. The German court held that pursuant to CISG Article 6, parties can derogate from CISG Article 39 regarding time of notice. Because buyer did not give notice within the agreed period of eight days, the court held that buyer had lost the right to rely on a non-conformity under CISG Article 39.[140] In another case [141] involving a contract for the sale of tiles, an Italian seller and a German buyer had been in an ongoing business relationship. In its acceptance of buyer's most recent order, seller had referred to its long-standing general condition that notice of defects would be valid only if given "within 30 days after the date of the invoice." The German court held that, since the thirty-day time limit could not be considered a material modification of the terms of the offer under CISG Article 19(2), the time limit for notice of defects as established in seller's general conditions had become part of the contract.[142]

The degree of specificity required for proper notice has also been considered in at least one instance.[143] In that case, a German buyer and Italian seller entered into a contract for the sale of fashion goods. Buyer, claiming that the goods were non-conforming and that its inspection and notice of non-conformity were timely, refused to pay the [page 140] purchase price. The German court held that despite buyer's timely notice, buyer had failed to comply with the CISG's notice provisions because notice of "poor workmanship and improper fitting" was not sufficiently specific. Buyer thus lost its right to rely on non-conformity.[144]

Unlike the notice requirements imposed by the UCC on a buyer who has accepted goods,[145] the CISG imposes the notice-giving requirements on the buyer irrespective of whether the goods have been accepted.[146]

Overall, a buyer who fails to give notice of a defect loses his rights under the CISG. However, a buyer who has a reasonable excuse for failure to give notice may still exercise the remedy of reducing the price to the extent of the defect or alternatively may claim damages, except for loss of profit.[147]

[3] Seller's Right to Cure

A seller's right under the CISG to cure defective performance is substantially similar to that of a seller under the UCC.[148] Under the [page 141] CISG, where the seller has delivered goods before the date for delivery, any defective delivery up to the delivery date may be cured by the seller, provided that the exercise of this right does not cause the buyer unreasonable inconvenience or unreasonable expense.[149] The buyer nevertheless retains any right to claim damages provided elsewhere by the Convention.[150] The seller may, even after the date for delivery,[151] remedy a defective tender if this can be done without unreasonable delay and without causing the buyer unreasonable inconvenience or "uncertainty of reimbursement by the seller of expenses advanced by the buyer."[152] Again, the buyer retains any right to claim damages as provided elsewhere in the Convention.

A recent Swiss case, discussed previously, illustrates this right of the seller. Recall the case where the Swiss buyer notified the Italian seller of defects in upholstery after receiving consumer complaints. Seller offered to cure the defect by replacing the upholstery, but buyer refused. The Swiss court held that buyer erred in refusing to allow seller to cure.[153]

In another previously discussed case, where a French seller and a Portuguese buyer contracted for the sale and dismantlement of a second-hand airplane hangar,[154] seller had delivered non-conforming metallic elements. The court held that although the seller had effectively cured the lack of conformity by repair of the elements, the [page 142] buyer was entitled nonetheless to claim damages because seller had delayed in delivering the conforming goods requiring buyer to arrange for transportation of the goods twice.

In another case,[155] the arbitrator for an International Chamber of Commerce arbitration ruled that where the breach by the seller was of such a substantial character as to constitute a fundamental breach under Article 25,[156] the buyer was entitled to avoid [157] the contract. Furthermore, the seller was not entitled to exercise a right of cure under CISG Article 48(1), apparently because the defect was of such a serious nature in the sole arbitrator's view that seller only had a right to cure after the due date for delivery if the buyer so consented.

[4] Fundamental Breach

If the seller's failure to cure a defective delivery results in such a detriment to the buyer so as to substantially deprive the buyer of what buyer was entitled to expect according to the contract, such a breach is deemed to be "fundamental" unless the party in breach did not foresee the result, and a reasonable person of the same kind in the same circumstances would not have foreseen such a result.[158] Such a breach gives the buyer the right to avoid (i.e., cancel) the contract.[159]

The concept of fundamental breach has been examined in a number of cases. For example, in one recent case involving a German [page 143] buyer and Italian seller,[160] buyer had ordered 120 pairs of shoes from seller through a commercial agent. The contract included a clause that granted buyer the exclusive right to distribute the shoes in a certain geographical district. After selling twenty pairs of shoes, buyer learned that seller had supplied the identical shoe to a competing local retailer who was offering the shoe at a considerably lower price. Buyer attempted to cancel the remainder of the order and avoid the contract. The German court found no fundamental breach of the exclusive contract by seller because seller had no way of knowing that the competing retailer had a branch within buyer's district and that, in the judgment of the court, seller could not reasonably have foreseen.[161] In another case, a German buyer ordered shoes from an Italian seller and provided specifications.[162] Seller produced the shoes, which bore buyer's trademark, and subsequently displayed them at a trade fair. When buyer gave notice of its intention to avoid the contract because of seller's refusal to remove the shoes from the trade fair, seller sued to recover the price of the shoes. The German court found that seller's display of the shoes at the trade fair was a fundamental breach of the contract. It was foreseeable to the seller that its conduct would endanger buyer's interest in controlling all sales of that shoe, under its trademark to such an extent that buyer's interest would be virtually nonexistent.

The issue of fundamental breach also arose in the previously discussed airplane hangar case.[163] There, the court ruled that because the non-conformity related only to a part of the hangar and seller had been able to repair the defective parts, the lack of conformity did not constitute a fundamental breach of contract. So ruling, the court reasoned that buyer had not been substantially deprived of what it was entitled to under the contract and that, therefore, avoidance was not a proper remedy.

Partial delivery of goods as a basis for establishing fundamental breach of contract was recently litigated.[164] In that case, a German [page 144] buyer had ordered eleven computer component parts from an American seller in order to fulfill its contract with an Austrian company. Buyer faxed its order to seller and included the price of only five of the parts. Seller, in turn, delivered only five parts and buyer was forced to obtain substitute goods to cover the remaining six component parts that it needed. Buyer subsequently refused to pay the purchase price of the goods, claiming that seller's partial delivery constituted a fundamental breach of the contract. The court, however, held for seller because seller's partial delivery had not substantially deprived buyer of what it was entitled to expect under the contract because buyer had been able to obtain substitute goods.[165]

Another recent decision [166] also addressed non-conformity of goods as a basis for establishing fundamental breach in a case where a German buyer and Italian seller entered into a contract for the sale of women's shoes. Buyer refused to pay the purchase price, claiming it that delivery had been late and that the goods were non-conforming. The German court held that a contract may be avoided on the basis of non-conforming goods only when that non-conformity constitutes a fundamental breach. Because buyer failed to establish that the goods could not be reasonably used for their original purpose, the non-conformity of the goods under the contract did not amount to a fundamental breach.

A German court has recently found no fundamental breach of a contract involving a Swiss seller and a German buyer in a contract for the sale of New Zealand mussels.[167] Buyer was not entitled to avoid the contract and refuse to pay the purchase price on the grounds that the mussels were not completely safe [168] because of the quantity of cadmium they contained. The cadmium concentration admittedly exceeded the threshold level published by the German Federal Health Department. However, the court concluded that the mussels were none