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Reproduced with permission of 22 Yale Journal of International Law (1997) 111-170

I. INTRODUCTION

This Article will attempt to ferret out factors that may lead to unintended contractual liability for American business persons involved in international transactions. The focus will be on two distinct issues. First, this Article will examine the presumption of enforceability placed on certain types of business correspondence by foreign legal systems. Legal hybrids, such as comfort instruments,[2] are more likely to result in contractual liability in civil law systems than in the Anglo-American legal system. Comfort instruments can be found in both the private and public domains. In the private domain, they can be found in the validity agreement in asset-based financing,[3] letters of understanding or intent in business purchases,[4] and restrictive agreements used in purchase negotiations.[5] In the public arena, governmental agencies have resorted to comfort instruments either to provide guidance to private applicants or to deal with daunting delays due to administrative manpower shortages. Corson v. Rhuddlan Burough Council,[6] for example, involved the [page 112] use of a comfort letter by a local municipality regarding its intent to renew a land lease. More recently, the European Directorate IV [7] has used the comfort letter in the area of trade practices. Despite the lack of a legislative mandate to create such a device, the Directorate has informally used it to reassure companies contemplating a merger or an acquisition.[8]

The second issue of concern is the U.S. ratification of the Convention on Contracts for the International Sale of Goods (CISG),[9] and whether it may result in unexpected liability for the business person with only a working knowledge of the Uniform Commercial Code (UCC). A 1995 U.S. court of appeals case noted that analogous case law interpreting the UCC "may also inform a court where the language of the relevant CISG provisions tracks that of the UCC."[10] The court concluded, however, that such "case law is not per se applicable."[11] Article 7(1) of the CISG asserts that courts' interpretations of the Convention should be "informed by its international character and ... the need to promote uniformity in its application."[12] Thus foreign court decisions that construe the Convention's provisions should play a greater role in its interpretation than analogous UCC case law. The continuing globalization of U.S.business interests will force the legal and business communities to focus on the legal intricacies of international business transactions.[13] As Dennis Tallon has noted, a factor "of prime importance in our times is the internationalization of commercial law."[14] These [page 113] developments will require the successful international entrepreneur to familiarize herself with the CISG and with the contract law of the foreign country in which she plans to do business .

II. CONTRACTUAL LIABILITY FOR COMFORT INSTRUMENTS

A search of English case law from 1989 reveals twenty-seven cases dealing with liability based upon representations made in business correspondence.[16] Generally considered to be non-legal business assurances, these letters of commerce are being increasingly scrutinized for possible promissory or reliance-based liabilities.

Generally, the objective of comfort instruments is credit value or exchange enhancement. A seller or a lender wants assurance as to certain factors that she determines to be important in contemplating a transaction. A refusal of a formal guaranty or surety [17] by another party may result in a termination of the negotiation. Comfort letters are therefore issued as a compromise in order to salvage the transaction. They are hypocritical instruments intended to serve two masters. While wanting to avoid liability for nonperformance, the writer hopes the receiver of the writing will enter into a legally binding transaction. Consequently, many letters of assurance are characterized by an internal repugnancy or inconsistency. They contain language that could induce reliance while they attempt to disclaim any liability as a guaranty.

The classic discussion of the doctrine of repugnancy can be found in the 1923 English case Rose & Frank Go. v. Grompton Bros.[18]The letter at issue contained both promissorial language and the language of disclaimer. The court utilized a "dominant language" test to determine if legal liability should be ascribed to the assurance language.[19] It compared the strength of the assurance language with the disclaimer language and concluded that the letter was neither intended nor should have been relied upon as a contractually enforceable document. The court focused on the clause in the letter claiming that it was not a "formal or legal agreement" and asserting that the document was rather" only a definite expression and record of the purpose and intention of the three parties concerned to which they each honourably pledge[d] [page 114] themselves."[20] The court held that "an honourable pledge"[21] implies only a moral and not a legal obligation.[22]

Ultimately, the value of the assurance depends upon its degree of detail. The use of detailed assurance language may lead a court to characterize such letters as guaranty substitutes and thereby impose liability upon the issuing party .The greater the detail of the representations and the stronger the assurance language, the greater the likelihood of reliance by the receiving party. When such a promise crosses the line from simple assurance to justifiable reliance, then a binding contract is created.[23] As more cases are brought to bar involving comfort instruments, it is increasingly likely that courts will find them legally binding.

Historically, the civil law provides an analogue for the evolution of a presumption of enforceability for previously unenforceable instruments of commerce. The centuries old lex mercatoria helped "codify" day-to-day uses and practices into customary law. Commentators have recognized the prevalence and binding nature of such merchant-generated law: "[The] law merchant presents a universal character thanks [in part] to the cohesiveness of the milieu in which it developed."[24] The increased use and recognition of comfort instruments in the commercial world may provide the milieu for a regime of enforceability.

The next two sections of this Article explore factors that will greatly influence the development of any such regime. Section II.A analyzes the differing presumptions of enforceability found in the Anglo-American and civil law legal systems. It is followed by an analysis of common factors used in making the enforceability decision.

A. Differing Presumptions of Enforceability

An estimated ninety-five percent of all comfort letters are issued by a parent company to obtain financing for a subsidiary.[25] In Chemco Leasing S.p.A. v. Rediffusion Pic., Justice Staughton recalled Justice Vaisey's sardonic definition of such letters as a" gentlemen's agreement ... which is not an agreement, made between two persons neither of whom is a gentleman, whereby each expects the other to be strictly bound without himself being bound at all."[26] [page 115] Although English and American courts have generally held these letters to be nonguarantees, the potential for liability remains. The court in Heisler v. Anglo-Dal Ltd.,[27]for example, harkened back to the lex mercatoria when it described the genesis of customary law:

It is in this customary law of business that the law often creates new rules of contractual liability.

The potential for liability may be even greater under civil law legal systems. The civil law seems to place less weight upon the semantic labeling of instruments when determining the existence of a legally enforceable obligation.[29] A brief comparative review of civil law and common law jurisprudence illustrates the potential for liability for representations made in letters of assurance.

1. Anglo-American Law

Commercial and legal practitioners in the Anglo-American system have generally regarded comfort instruments as nonbinding instruments of commerce. The court in K/S A/S Bani v. Korea Shipbuilding & Engineering Corp. [30]confirmed this view. A bank that had taken over a financially distressed shipbuilding company sent comfort letters to the shipbuilder's customers and creditors that expressed confidence that the shipbuilder would meet its obligations in the future. Despite the letter's clear potential for inducing reliance, the court held that such letters were nonbinding. The court concluded that there was little doubt that the letters were "written in good faith. [They] can be treated as a source of comfort but no more than that."[31] This conclusion, however, suggests that bad faith may be a basis of liability. For example, what if the issuer had little intention of providing future credit to the company or was privy to important information concerning the troubled nature of the company?[32]

The number of reported cases involving the enforceability of comfort [page 116] letters has been growing. Nowhere has the increase been more pronounced than in the English courts. Many of these English cases have raised new issues concerning the enforceability of comfort letters while also providing guidance on how to avoid liability. A review of the case law shows that although such instruments remain generally unenforceable, the outlines of a jurisprudence of enforceability have begun to come into focus. For example, the English case of Compagnie Generale D ' lndustrie et de Participations v. Solori S.A.[33]avoided the issue of comfort letter enforceability by holding that the unsigned comfort letter failed to satisfy the statute of frauds.[34] However, the case made clear that such instruments were not innately unenforceable.[35] The potential for contractual liability was further confirmed by the 1986 case of Chemco Leasing S.p.A. v, Rediffusion Plc.[36] There, the court made clear that assurances made by a parent company in a letter that it would "undertake to take over the remaining liabilities" of its subsidiary were fully enforceable legal promises.[37]

Some believed that the 1987 case of Kleinwort Benson, Ltd. v. Malaysia Mining Corp.[38] would become a watershed decision in favor of comfort letter enforceability.[39] That belief, however, proved short-lived when the court of appeal quickly reversed the lower court holding that the letter at issue was binding.[40] The proliferation of cases since Kleinwort Benson, however, indicates that it was not a deathblow to the issue of liability.

An analysis of the lower court decision, therefore, is useful in predicting a future jurisprudential basis for comfort instrument enforceability, Kleinwort Benson confirmed that courts will no longer treat such instruments as per se unenforceable. Instead, they will look to the specific language of each instrument when making an enforceability determination. For example, the letter in Kleinwort Benson confirmed the parent company's knowledge of a loan to a subsidiary and assured the lender that it was its policy "to ensure that the business of [the subsidiary was] at all times in a position to meet its liabilities."[41] Justice Hirst implied a binding obligation into the comfort letter by interpreting the "policy to ensure" language as a "promise to ensure. " The court of appeal reversed, reasoning that the policy to ensure was a statement of current policy; as such, it did not constitute a promise that the policy would continue into the future.[42]

Despite its reversal, Justice Hirst's opinion renewed interest in the [page 117] potential for comfort letter enforceability, especially because the court of appeal reversed on such narrow grounds. The court of appeal did not hold comfort letters to be per se unenforceable. Instead, it held that the specific language used in this case was not sufficient to find a legally binding obligation. The potentially limited nature of the reversal became evident in a 1990 New Zealand decision.[43] There, the court held that a reference to future policy raised a letter to the level of a guaranty. The court reasoned that "the wording of the present letter goes further than the mere declaration of existing policy which led the Court [in Kleinwort Benson] to conclude that [the issuer] was not bound by its letter of comfort."[44] In the court's view, the operative language of enforceability concerned the issuer's policy that its subsidiary would meet its obligations, and that the issuer would use its "'best endeavors to see that [the subsidiary] continue[d] to do so."[45] The court interpreted the phrase "best endeavors" to mean a future promise of a binding nature.[46]

Taken together, Bank of New Zealand and Justice Hirst's opinion in Kleinwort Benson question the soundness of the presumption that such informal letters are unenforceable. Justice Hirst argues that the "onus of proving that there [is] no such intention [to create legal relations] is on the party who asserts that no legal effect is intended, and the onus is a heavy one."[47] Bank of New Zealand seems to agree. Placing such a burden on the writer of a comfort letter would be tantamount to creating a presumption of enforceability.

A presumption against the drafter of an instrument has a long history in English common law. The contra proferentem rule holds that "in the case of ambiguity when all other rules of construction fail, the doubt is removed by construing the document adversely to the [drafter]."[48] The key element of ambiguity, however, is often found to be lacking by the courts when not enforcing a comfort instrument against its writer. Thus, an "arrangement ... binding in honour"[49] and a "policy to ensure"[50] have been held to be unambiguous statements of intent that do not create a legal obligation.

Modern legal philosophy has provided justification for increasingly active [page 118] judicial intervention in the finding of constructive agreements. In addition to the contra proferentem rule, limiting principles such as good faith and fair dealing may be brought to bear against the writer of letters used to persuade another party to enter into a business transaction.[51] The development of the broad concepts of good faith, unconscionability, and reliance or promissory estoppel have given courts tremendous leeway to intervene in contractual and quasi-contractual situations. Professor Macneil refers to these grounds for enforceability as the "linking norms" of restitution, reliance, and expectation.[52] If one of the linking norms is present, or if an intent to be bound can be inferred, an instrument should be held to be binding. Justice Hirst, in Kleinwort Benson, enlisted the help of the reliance and intent pillars of contractual enforceability. First, the lender in that case relied on the letter in granting the loan. Second, the. issuer acted pursuant to a formal authorization of its board of directors, implying an intent regarding the seriousness of the assurance. Furthermore, the court found that the strength of the assurance language placed a burden on the issuer to state explicitly a disclaimer of liability.

Since the decision in Kleinwort Benson, English case law has continued to question the strength of the presumption of nonenforceability. For instance, the court in Capital Landfill (Restoration), Ltd. v. William StockIer & Co.[53] applied a heightened level of scrutiny that belied the existence of a presumption of nonenforceability:

The type of language and evidence that is most likely to result in a legally binding obligation will be determined by legal evolution. The fact remains that recipients of comfort letters often believe that they are within the contractual domain. They continue to bring suit in the hope of persuading a court to find such letters to be legally enforceable.

U. S. courts have rarely shown such a propensity to push the contractual envelope to include traditional types of comfort instruments. Recent cases, however, indicate that the possibility of liability remains. Following Anglo-American common law, U.S. courts have tended to place great weight upon the use or nonuse of contractual nomenclature. If a comfort letter issuer avoids the operative words [55] of contract or guaranty, then she will probably [page 119] avoid contractual liability. However, the use of operative phrases such as "we agree," "we undertake," or "we promise" generally will lead U.S.courts to find contractual intent. Thus, the U.S. district court in Mutual Export Corp. v. Westpac Banking Corp.[56]held that the use of words of promise, although not conclusive, should be viewed as a strong indication of an intent to form a contractually binding obligation. The court explained that a letter writer's "use of the word 'undertakes' ... while not mystically transforming [the instrument] into a contract, nevertheless reinforces [that conclusion]."[57] Aptly worded comfort instruments, therefore, avoid using the operative phraseology of law or custom. Avoiding the operative words of contract and using clear disclaimer language should insulate the issuing party from contractual liability irrespective of evidence of reliance upon the instrument.[58]

A comfort letter issuer who uses overly assuring language can incur liability. For example, a U.S. district court placed little significance upon the affixation of the term "comfort letter" to the instrument in question.[59] The case involved the issuance of a letter from the purchaser of a borrower's oil products to the borrower's bank. The letter assured the bank of the issuer's intent to purchase oil from the borrower, and that it would pay the purchase amounts directly into an account at the bank. Partially based upon the letter, the bank extended credit to the seller-borrower. The court stated that "[n]o matter how the language ... is characterized -- as a 'guarantee' ... or merely a 'comfort letter'... the [instrument]... could arguably be deemed inseparable from the [underlying] contract."[60] The letter writer could thus be liable for justifiable reliance and the resultant damages. These Anglo-American cases indicate that the trend in the United States, and especially in England, is toward a greater likelihood of enforceability. "No longer is it safe [under Anglo-American law] for difficult negotiations over the inclusion in a letter of comfort of an express statement as to its legal effect to end on the tacit understanding ... that the letter is not of contractual effect."[61] The following civil law comparison provides even greater support for the potential of comfort instrument enforceability.

2. A Civil Law Comparison

A number of features unique to various civil law legal systems, inside and outside the area of comfort instruments, may trap the unwary American [page 120] attempting to transact business with a foreign entity.[62] A selected review of some of these idiosyncrasies will show the daunting task that faces the American businessperson abroad.

The first set of idiosyncracies encountered abroad can be found in European contract formation doctrine. Article 1590 of the French Civil Code, for example, implores the use of the doctrine of arrhes.[63] It refers to a buyer who gives money or a thing of value to a seller to evidence the making of a contract. It is akin to the earnest money deposit used in Anglo-American law to bind a contract.[64] Unlike Anglo-American contract law, the use of arrhes gives the buyer and the seller an option to terminate the contract. The parties are "at liberty to withdraw."[65] In the case of withdrawal, whether in good faith or in bad, the buyer forfeits her deposit while the seller must return double the amount."[66] Thus, a comfort letter coupled with such a good faith deposit can result in an unintended loss of money.

The French Civil Code also adopts the Roman law notion of laesio ultra dimidium vel enormis, in which a contract is subject to attack if it is determined that the price paid is one-half or less the value of the item purchased.[67] Originating in the Middle Ages, the notion of inequality of consideration is now codified in article 1647 of the French Civil Code: "If the price of an immovable object is inadequate by more than seven-twelfths, the seller has the right to demand rescission of the sale."[68] This is true even if the seller had renounced her right to rescission in writing. The right of rescission gives the purchaser two options: to return the item or to pay "the balance of the just price."[69] Unlike the just price theories of the Middle Ages, the purchaser does not have a right of rescission if she has paid more than one and seven-twelfths the item's value. Thus, under European law, a bid or offer letter to purchase at a below-market price may be subject to rescission or reformation.

Another concept foreign to Anglo-American contract law is the civil law notion of nachfrist notice, which allows a buyer or seller to fix an additional time for performance beyond that which is specified in the contract. [70] This [page 121] concept was adopted in articles 47 through 49 of the CISG. The buyer may give notice to the seller that she will accept delivery beyond the time prescribed.[71] The buyer is then enjoined from taking legal action during the nachfrist period and must accept any proper tender of performance during that period.[72] If the seller makes a request for a nachfrist extension, the buyer is obligated to respond to the request. Failure to do so results in an automatic grant of additional time.[73] The failure of the breaching party to perform during the extension allows the other party to declare an immediate avoidance of the contract.[74]

An American business person unaware of this practice may face unintended liabilities. She may mistake a nachfrist notice as a meaningless, non-legal request for more time. If she fails to respond properly, she could unintentionally grant additional time and freeze her legal options. Moreover, were she to reject the delivery of goods during the nachfrist period, she might incur liability for the purchase price and, possibly, for additional freight and storage costs. The existence of an express "time of the essence" clause is unlikely to provide a party with any protection from the use of nachfrist notice. Therefore, it is important for a business person to realize that the legal consequences of seemingly meaningless communications should be investigated fully. In this context, a comfort instrument assuring performance within the extended time period would be of greater legal significance.

Other significant differences in the use and interpretation of comfort instruments can also be found in Germany. The Patronatserkliirungen, or letter of responsibility, is a commonly used instrument in German business and finance transactions.[75] One commentator has predicted that these informal instruments will be used increasingly in the future: "[T]hese parental letters of support in their numerous variants have been consistently on the onward march during the last 10 to 15 years and ... they rank, in terms of numbers particularly for large corporations as issuers, on an equal footing with the 'old fashioned' guarantees."[76] This presumption of enforceability is grounded upon the fact that German contract law is less dependent upon legal literalism than much Anglo-American jurisprudence. Contracting parties are given free reign under the Bürgerliches Gesetzbuch (BGB), or Civil Code, in structuring their contractual relationships.[77] For example, unlike the mandates of the statute of frauds in Anglo-American law, German law [page 122] provides that "a merchant's guarantee is valid even if given only verbally."[78] In fact, there are no provisions in the BGB that deal specifically with guarantee-type agreements.[79] This legal informalism provides parties with greater flexibility to structure transactions and, accordingly, with additional types of instruments to effectuate their intent: "They are at liberty to agree to variants [of accepted contract types] ... or to develop entirely new types."[80] Thus, the evolution and enforceability of comfort-type instruments is a likely response to this underlying informalism in German contract law.

Furthermore, the German approach to contractual liability is more consequence-based than that of the common law system. German law places less emphasis on the types of legal instruments used, the labels applied to these instruments,[81] and the legal meaning of the words used within the instruments.The German approach, rather than literally interpreting the language used, attempts instead to give effect to the purpose of the instruments:

Enforceability is therefore unlikely to be determined by formalistic labeling or by a disclaimer that an instrument is an assurance rather than a formal guaranty. Instead, the importance of context in determining actual, subjective intention is the cornerstone of German contract interpretation. Article 133 of the BGB states that "[i]n interpreting a declaration of intention the true intention shall be sought without regard to the declaration's literal meaning."[83] One commentator has construed article 133 to encourage the interpretation of contracts "in light of [their] contractual economic purposes."[84] Thus, the full breadth of a relationship can be relied upon to find contractual intent in an instrument that, on its face, indicates otherwise. This is reflected in the fact that the European guaranty, despite being very [page 123] short in length, is generally enforceable.

Informal letters of assurance or comfort, generally unenforceable in American and English courts, are more likely to be taken seriously under this purpose-oriented jurisprudence. For example, recording a comfort instrument on the company's financial statements may give it an aura of legal consequence: "[A] letter which does not have to be shown on the balance sheet is usually of questionable value to the bank."[85] In addition, one commentator on German law reasoned that if a comfort letter given by a parent company stated that it would provide its subsidiary "the financial means" to meet its obligations, then the recipient would have a direct claim against the parent.[86]

In sum, a number of factors in the German legal system weigh in favor of the enforceability of certain "informal" letters used in the business world. First, German jurisprudence encourages the creation of legal hybrids. Second, there is a general belief in the business community that "parents do back their subsidiaries."[87] Third, there is a general presumption in favor of enforceability. For example, in the area of financial reporting, any uncertainty as to the binding nature of such letters is resolved in favor of reporting them as a potential liability." [T]he parent [company] must prove that both sides have agreed only to a moral commitment if it wants to avoid" the notation of the assurance on its financial statements.[88] Given the brevity of formal guaranty instruments, the informal categorization of legal instruments in general, and the underlying teleological jurisprudence, American companies should be cautious in issuing comfort instruments in jurisdictions following the German approach.

Like the German legal system, the French legal system creates a presumption in favor of enforceability. French law approaches the efficacy of informal letters of business in a direct, common-sense way by asking: Would two sophisticated commercial entities intend to create a meaningless unenforceable instrument? To the French, "the creation [in the commercial world] of a meaningless instrument is unthinkable."[89] Comfort instruments are more likely to be considered obligations de faire [90] that commit the issuer to some level of performance. In comparing English law with French law one can conclude that the "French analysis of contracts may make the courts [more likely] to enforce promises in a parent company's comfort letter about repaying its subsidiary's debts than in English law."[91] This may even be the case when assurances are made orally. Unlike the common law statute of frauds requirement that guaranty instruments be in writing, the French Civil Code states that "[w]ith respect to merchants, acts of commerce may be [page 124] proved by all means."[92]

Like German and French contract law, the Belgian Civil Code reflect a purpose- or consequence-oriented jurisprudence. The language used in the instrument is but one factor influencing interpretation and enforcement decisions. Article 1156 dictates that the jurist seek "the common intention of the contracting parties rather than stop at the mere literal sense of language."[93] Courts that interpret contracts or instruments must attempt to effectuate the document's intended consequences. In ambiguous cases, the courts are to choose a meaning that "would have some effect" rather than a meaning "which ... could not produce any [effect]."[94] Furthermore, the Belgian Civil Code requires all contracts to be executed in good faith [95] and their interpretations to be supplemented by custom and usage.[96] Article 1135 states that "[a]greements obligate not only for what is expressed therein, but also for all the consequences which equity, usage or the law gives to an obligation according to its nature."[97] If the essence of a letter is to induce reliance, then the possibility for enforceability exists. Moreover, the facilitating factors of equity and usage may add or subtract from the enforceability decision.

Second order rules of interpretation are also codified in the Belgian Civil Code. First, a counterpart to the English contra proferentem rule construes ambiguities in written instruments against the drafters.[98] Second, "customary usage" and usage found in a particular region are implied in contracts that are created in such a region.[99] Third, the integrity of the entire instrument is to be maintained. Article 1158 states that terms are to be interpreted in "the sense which is most suitable for the subject-matter of the contract."[100] Courts may use these factors to construe a comfort instrument against its issuer and to find its representations enforceable.

Despite the discretion that it allows judges in determining the essence of a contract, the Belgian Civil Code also restricts the type of evidence that a court may consider reducing the potential for comfort letter liability emerging from outside of the language of the document. It combines a statute of frauds requirement with a strict parol evidence rule. All contracts for sales of more than three thousand francs must be in writing and executed before a notary or by private signature.[101] Oral evidence is inadmissible regardless [page 125] of whether it contradicts or simply clarifies the written agreement. Furthermore, "[n]o evidence by witnesses against and outside of the content of instruments is allowed, nor as to what is alleged to have been said before, at the time of, or after the making of the instruments."[102] As a result, the receiver of a comfort instrument is unlikely to be able to reach the evidentiary threshold for enforceability.

The jurisprudence of comfort letter enforceability is still evolving internationally. The parties' presumption of nonenforceability no longer determines issuer liability in all cases.[103] In practice, the presumption may be in favor of enforceability. Whereas in common law countries, formality is a prerequisite to enforceability, in civil law countries the "formal contract is not the dramatic event. ... [A]s a result, the courts in civil law [countries] are more likely to declare the parties legally bound at an earlier stage of the negotiation process than courts in common law countries."[104] At those earlier stages of negotiation, comfort instruments are likely to be considered in determining precontractual liability. Commercial literature in Spain, for example, has discussed the dilemma that the presumption of nonenforceability has created: Once the legal and business communities infuse these instruments with the trappings of a contractual undertaking, it becomes difficult to avoid attendant promissorial or reliance-based liabilities.[105] The infusion of these trappings is growing more evident on two fronts. First, the business and legal communities are developing standards regarding the contents of such letters. Second, there is increasing incorporation of customized detailed representations and assurances in the letters. One can argue that the greater the detail and acceptance of such letters, the closer they will move into the domain of legally enforceable contractual obligations. The next section analyzes the factors that a court may weigh when rendering an enforceability decision.

B. Common Factors Affecting Enforceability

The courts have long looked to the circumstances surrounding the issuance of a written instrument to determine whether the required intent to create legal relations exists. Lord Wilberforce restated the notion of the totality of the circumstances analysis: "In commercial contracts it is certainly right that the court should know the commercial purpose of the contract and this in turn presupposes knowledge of the genesis of the transaction, the [page 126] background, the context, the market in which the parties are operating."[106] Relevant information includes oral representations, prior dealings, usage and custom, reliance, and professional standards.

1. Oral Representations and Prior Dealings

The lack of a writing requirement in the CISG and some civil law systems allows a party to submit evidence to overcome the contractual shortcomings of a comfort instrument. Prior dealings between the parties may be used to bolster the enforceability claim of the comfort letter's receiver. Prior dealings may be regarded ''as establishing a common basis of understanding for [purposes of] interpreting [the parties'] expressions and conduct"[107] relating to the transaction in question. Comfort instruments are generally a product of "vigorous negotiations."[108] Consequently, freed from the limitations of the parol evidence rule, courts in international contract cases have a greater variety of admissible evidence to consider. Plaintiffs may attempt to use prior dealings and oral representations to show that the comfort instrument, despite its vagueness, was intended to be a legally enforceable assurance.

Other party-specific factors on which courts often focus include the sophistication of the parties [109] and the content of the communications or advice that each of the parties received from its attorneys. If a defendant argues that she did not intend to create a legally binding obligation, then the advice that she received from her legal counsel will be directly relevant to the issue of intent. Also, if the plaintiff argues that she had relied upon the comfort letter, then the advice she received from counsel regarding the enforceability of such a letter will bear upon the reasonableness of her reliance. A Canadian court, holding that such evidence was admissible, concluded that since the plaintiff must prove reliance, "it would be relevant to show that at the time of the loan, the plaintiff had been advised by its solicitor that it could not rely on those letters."[110] Thus, the scope of the comfort letter negotiations, prior dealings, and the legal advice that the parties "received are important factors in determining the parties' states of mind regarding the legality of the comfort instrument."

2. Custom and Usage"

Just as domestic contracts are supported by local custom and trade [page 127] usage,[111] international transactions are formed and performed within a milieu of customary law: "Usages of trade furnish the background and give particular meaning to the language used [in agreements to provide] the framework of common understanding controlling any general rules of law."[112] In 1961, Professor Goldstajn boldly stated that "a new law merchant is rapidly developing in the world of international trade. It is time that recognition be given to the existence of an autonomous commercial law that has grown independent of the national systems of law."[113] The enforceability of a commercial instrument such as a comfort letter will be affected by these general customs of international business transactions, the usage of a particular business or trade, and the usage of the locality in which it is to be performed.[114]

The custom or usage pertaining to the enforceability of comfort instruments is likely to change as they become increasingly detailed and are used as guarantees or assurances. Until the middle of this century, U.S. courts held that once a custom was established, it became "a rule of law that supplemented the common law."[115] Business deals have collapsed because of a bank's request that a parent company "effectively act as a guarantor by submitting a 'letter of comfort.'"[116] The more that such instruments are referred to in legal terminology, the greater the likelihood that custom and usage will evolve so as to support comfort instrument enforceability. One commentator has noted that "the term and concept has been freely adopted in ... business transactions ... giving substance to the generalization that such [instruments] provide some legal comfort."[117] The enforceability of comfort instruments, however, varies from one trade or business to another depending upon its particular customs and usage. For example. a validity letter in asset-based financing is generally considered to be enforceable against the officer or shareholder providing the assurance.[118] In contrast, a comfort letter given by a parent company stating that it will monitor the liabilities of a subsidiary is likely to be construed as a nonbinding, good faith [page 128] assurance.[119]

3. Reliance

Anglo-American contract law has often used reliance theory to fill in gaps in the enforceability determination. The concept of reliance has been used to overcome shortcomings in contractual intent, lack of consideration, and failure to satisfy statute of frauds requirements. As a result, there are several reasons for avoiding the use of a formal guaranty.[120] It can induce actual reliance on the part of the comfort instrument receiver, or it can result in a strong case for promissory estoppel.[121] If the failure to use an instrument of formal guaranty was an accommodation to the letter writer for a reason other than liability avoidance, then the use of an informal comfort letter should not be conclusive as to enforceability. It may be shown, however, that the letter writer intended to be bound. Furthermore, proof of reliance would strengthen the plaintiff's case. Such reliance would be shown if the recipient would not have consummated the transaction but for the assurances given in the comfort instrument. For example, the plaintiff in Lloyd's Bank Canada v. Canada Life Assurance Co.[122] argued in favor of reliance liability based upon the issuance of a comfort letter and providing certain oral assurances." [Lloyd's Bank] alleged that [Continental Bank] made the loan in reliance on comfort letters and related oral assurances given by the defendants ... to induce the loan. It plead[ed] that those letters and the oral assurances constituted a 'support agreement.'"[123] In the common law, liability may be affixed, if not through the clear expression of contractual intent, then by a finding of reasonable reliance. The quasi-contractual nature of comfort instruments makes them susceptible to the ever-expanding doctrines of promissory estoppel and detrimental reliance.[124]

4. Professional Standards

Court decisions may bring greater certainty to the issue of comfort issuer liability. In order to manage such liability, particular groups of comfort issuers have begun to develop guidelines for the contents of their comfort instruments. This standardization of comfort instruments has initially come from professional groups that wish to avoid liability. One commentator has [page 129] cited "self-regulatory rules of professional organizations" as a source of international business law.[125] Both the German Institute of Certified Public Accountants and the American Institute of Certified Public Accountants have issued guidelines and standards for comfort letters. An American Institute task force, anticipating increased liability, recommended restricting the availability of comfort letters from accountants.[126]

In international banking, the Basle Committee on Banking Supervision has developed monitoring guidelines for transnational banking activities.[127] Its revised Concordat of 1983 [128] recognized concerns over the use of comfort instruments by parent banks and their subsidiaries and in banking consortiums and joint ventures: "Banks ... cannot ... be indifferent to the situation of their joint ventures and may have commitments to these establishments beyond the legal ... for example, through comfort letters."[129] Individual countries have also acted to regulate these instruments in international commerce. For example, partly in order to preempt the use of comfort instruments as devices to avoid formal guarantees in cross-border financing, the U.S. Congress passed § 13228(b) of the Omnibus Budget Reconciliation Act of 1993.[130] This section adopts a very broad "guarantor classification rule" that effectively includes comfort letters.[131] The development of these types of professional standards and governmental regulations provides additional sources that may assist a plaintiff in reaching the evidentiary threshold for enforceability.

C. No Per Se Rules of Enforceability

The previous review of national laws and common factors pertaining to potential liability for assurances given in informal letters of commerce reveals that there are no per se rules of enforceability. However, as a general rule, the broader and the more vaguely drafted the letter, the lower the likelihood of enforceability. For example, in the area of international project financing, lenders frequently require a comfort letter from principal shareholders in the [page 130] hope of obligating the latter to keep the project corporation in sound financial condition. The shareholders' attorneys generally draft these letters with vague assurances. One commentator concluded that "since these obligation clauses are usually very broadly worded, the enforceability of these commitments is often questionable under any legal system."[132]

The initial presumption against enforceability in English and American law was probably due to the vagueness and breadth of the first generation of comfort instruments. Comfort letters were often used to mask fundamental differences between the parties involved in a transaction. The use of comfort letters or letters of assurance to mask gaps in a business deal has been documented:

The more detailed a comfort letter, the greater the likelihood that a court will find contractual intent or allow reliance-based recovery. Providing greater contextual detail in a letter "offer[s an attorney] considerable factual representations and promises on which to argue detrimental reliance."[134] If, for example, the issuer agrees not to sell its ownership interest in a subsidiary or to notify the recipient of any change of ownership, then the operative words of promise and obligation are more likely to be implied. The comfort letter recipient, however, would still have the burden of proving damages related to the breach of the assurance. Would notice have allowed the party to takes steps to safeguard her position? The strongest type of representation, short of a formal guaranty, would occur when the letter writer promises to take affirmative steps to ensure that its affiliate meets its obligations. Moreover, language that suggests that a present policy will remain the company's policy until an obligation is satisfied [135] or that a parent company will use its "best endeavors"[136] to assist its subsidiary in the future, would be considered tantamount to a guaranty.

In short, the international business person should operate under the assumption that there are no per se rules of enforceability for comfort instruments. As a result, the business person should undertake an analysis of the common factors that courts use to affix liability. She should scrutinize the wording in comfort instruments for potentially enforceable assurances with a full understanding of the legal idiosyncrasies found in the world' s different legal systems. She should also consider the impact of the enactment of the CISG because as a source of international contract, the CISG may become the [page 131]vehicle for comfort instrument enforceability.With this review in mind, the remainder of this Article will explore the substance and relevance of the CISG to the future of comfort instrument enforceability.

III. THE CONVENTION ON CONTRACTS FOR THE INTERNATIONAL SALE OF GOODS:
A POSSIBLE INTERNATIONAL RESOLUTION OF COMFORT INSTRUMENT ENFORCEABILITY

The issue of comfort instrument enforceability is considerably more complex within an international context than in one's own national legal system. Idiosyncrasies found in most national legal systems make the use of foreign counsel in international contract negotiations a necessity. However, the movement towards convergence among the world's different legal systems in the area of transactional law offers hope for a less complicated future.

The impetus to unify contract law stems from three sources: the increase in economic and legal unions, most noticeably in Europe; the use of "neutral" country laws; and the increased recognition of general principles of contract law. The most profound evidence of the move towards the unification of contract law is the ratification of the CISG. The development of a new contracts jurisprudence to interpret and bolster the CISG is likely to have important consequences for comfort instrument enforceability. In the long term, the movement towards the internationalization of contract law offers the hope for a more unified approach to comfort instrument enforceability. In the short term, however, the ratification of the CISG, coupled with the existing differences in national legal systems, further complicates the issue of enforceability. The following section will first review the internationalization of contract law through the enactment of the CISG and the use of general principles. The section will then conclude with a review of the informality of contract formation under the CISG and its potential impact on comfort instrument enforceability.

A. History and Underlying Principles

The CISG is the most recent attempt at contract law unification, which reaches back to the medieval lex mercatoria." Besides retention of the principle of the freedom of contract ... [its] essential characteristics are simplicity, practicality and clarity. It is free of legal short-hand, free of complicated legal theory and easy for businessmen to understand."[138] A quest for uniformity in international business transactions motivated States to [page 132] adopt the CISG. Yet the CISG was forged from the world's different national legal systems. In order to promote uniformity, it had to detach itself from the idiosyncrasies of anyone legal system; however, it is a product of the civil, socialist, and common law systems of contract. As such, It is a unique hybrid of all three.

The Convention is meant to be interpreted based upon its uniqueness and not its similarities to anyone of the systems from which it was created. Article 7 mandates that the Convention be interpreted in a way that would "promote uniformity in its application."[139] One commentator has noted that this dictate of uniformity was meant to allow individual judges to sever their thinking from domestic law mind-sets. It was an attempt "to free judges, particularly in countries of the common law tradition, from the iron chains of precedents, thus permitting them to examine foreign cases as well in order to attain uniformity."[140] Thus, national stare decisis is to be supplanted by an informal supranational stare decisis.

1. CISG Past: Sources and Scope

The simplicity of the Convention masks fundamental differences between the positions of its civil law and common law signatories. One commentator has noted that "divergency in the interpretations of civil law and common law judges [seems] to be inevitable."[141] In order to avoid this divergence, common law and civil law judges must alter their approaches in a number of ways. First, the civil law judge is asked to search other cases throughout the world and follow precedent in much the same way the common law judge does within her national system. Second, the common law judge is asked to look to the travaux préparatories, or legislative history, and to general principles when making a decision involving an original interpretation of the Convention. These are the techniques of interpretation in which civil law judges feel most at home:

The job of the American jurist has been made easier in a number of ways. First, "many rules of the Convention [are] ... sufficiently akin [to the UCC] so that experience with one will be readily translatable for use with the other."[143] Second, the language is simple and not nation-specific, which invites original interpretation. "To prevent problems of ... interpretation the [page 133] Convention' s language is terse and clear, and its concepts are uncomplicated."[144] Furthermore, the rules of the Convention are expressed in terms of the events found generally in international trade and are not tied to thematic, abstract elements of contract law.[145] Third, the Convention provides a cross-referenced road map for the jurist to follow in reasoning by analogy. There is a "considerable amount of cross-reference to other pertinent articles, which reduces substantially that perennial difficulty encountered [by common law judges and lawyers] in dealing with civil law."[146]

The backdrop to the CISG was international commercial law, or the lex mercatoria. The lex mercatoria can be seen as the world' s first uniform law, albeit in an uncodified form. Merchants have long developed usage and practice that have given them the ability to communicate with one another without the distractions presented by the nuances of culture, language, and national legal systems. Professor Honnold has noted that successful sales law unification entails a body of rules that are event-specific and devoid of unnecessary legalese. An international sales law needs to cut out legal idioms, and write the rules in terms of commercial events that happen around the world. Without knowing the languages of the world you can be sure that there have to be words for these commercial events wherever there is commerce."[147]

Professor Goldstajn has attributed the current rise of a supranational commercial law to two key factors. First, the "optional character of the law relating to the sale of goods"[148] has enabled merchants to transform customary law. Under international law, most rules of sales law are not immutable and can be varied by agreement. The CISG has preserved the optional nature of international sales law. The CISG allows the parties to an international sales contract to "exclude the application of [the] Convention or derogate from or vary the effect of any of its provisions."[149]

The second factor that Professor Goldstajn has identified as contributing to the development of an independent international sales law is the increased use of arbitration to settle contractual disputes. The Council of Europe, for example "started work as early as 1959 on the preparation of a convention on arbitration."[150] The European arbitration convention is to "a large extent based on the various legal systems involved and on the fruit of practical experience."[151] Commercial arbitrators are more likely to make decisions based upon pro arbitration norms than on any predisposition toward a domestic [page 134] law.[152] In turn, this developing international law of commerce has infused domestic legal systems. Professor Schmitthoff has noted that "[t]he legal techniques of carrying on international trade are the same everywhere, irrespective of the political, ideological or economic orientation of the countries [involved]."[153] These factors, along with widely accepted supranational rules of commerce, have led to the creation of a law of business for international transactions.

The movement toward free trade areas has also directly impacted the unification of sales and contract law. Nowhere has the need for harmonization of national laws been more pronounced than in Europe.[154] "Typical features of the current business scene in Europe include a growing number of international commercial transactions and the expansion of trade as a result of economic interdependence. ... At the same time, there are still broad discrepancies between legal systems. ..."[155] The Council of Europe has specifically addressed the importance of uniform rules and their uniform application.[156]

However, in spite of these sources of internationalization, the CISG has failed to adopt formal recommendations to encourage information exchanges that would have facilitated the uniform interpretation of supranational legislation.[157] The Council of Europe's commitment to uniformity in interpretation would be served by adopting enhanced procedures for communications between member States. In the absence of such procedures, it will be interesting to see whether European signatories to the CISG will keep each other informed of CISG-related decisions through their existing European channels of communication.[158] [page 135]

2. CISG Present: Application and Motivation

The CISG is only the most recent attempt at unifying international commercial law.[159] The most apparent problem, however, with this attempt to unify commercial law is that it has to be applied through a nonunified court system. The Convention envisioned the use of an informal system of stare decisis to help ensure uniformity of interpretation. However, the potential for diverging interpretations by national courts has proven to be a problem of all international uniform laws.[160]

The drafters envisioned that the national trial courts called on to interpret the Convention would act as informal international appellate courts. These courts were seen to have two primary functions. First, they would look to decisions of foreign courts for guidance. Second, they would actively unify international sales law by distinguishing seemingly inconsistent prior decisions and by harmonizing differences in foreign interpretations. The preamble to the Convention envisions national courts "contribut[ing] to the removal of legal barriers in international trade" by performing these appellate functions.[161] In sum, the removal of legal barriers to trade is to be accomplished by interpreting the Convention with "regard to its international character and to the need to promote uniformity in its application."[162]

In reality, the Convention exhibits characteristics of acute legal schizophrenia. It is a product of the rules and exceptions of various national legal systems, including the civil, common law, and socialist systems.[163] In its application, however, it is intended to divorce itself from the idiosyncratic meanings of the legal systems from which it came. The rules and terms of the Convention are to be given original interpretation. A priori meanings taken from national legal systems are to be abandoned in favor of independent meanings consistent with the Convention's objectives.[164] These objectives include the establishment of a "New International Economic Order"[165] and the creation of a uniform international law of sales. Article 7(2) mandates that [page 136] interpretation of the Convention is to be guided by its general principles and by the rules of private international law. Matters of interpretation are "to be settled in conformity with the general principles on which it is based"[166] or, failing that, with general principles of international contract law.

The unifying principles that govern the interpretation of the Convention include the unification of law,[167] the internationally recognized principle of good faith,[168] and the increase in the certainty and predictability of international transactions.[169] Secondary norms of interpretation include filling gaps with internal references, analogy, and the use of the international reasonable person standard. In filling gaps in the Convention, courts are to use the techniques of analogy and expansive construction in order to promote original, uniform interpretations.[170] Article 9(2) authorizes the courts to imply terms "which in international trade [are] widely known ... and regularly observed."[171] The Convention makes clear that the customs and usage are to be international in character and shall preempt any conflicting national equivalents. The parties must submit evidence that establishes the putative custom or usage as a "ruled governing international trade and not just domestic transactions."[172]

In interpreting the Convention, the jurist should make use of both civil and common law interpretive tools. The courts should look within and outside the Convention for uniform, rational interpretations.[173] From a civil law standpoint, the courts should look to interpret each article of the Convention in order to maintain its internal integrity. In interpreting an article, the courts should look to the meaning of other articles and their relationship to the one in question.

Common law interpretation should use external principles to dress the newly crowned "emperor" [174] of international sales law. By way of comparison, Professor Hillman describes the UCC's interpretive approach as [page 137] a combination of methods found in the common and civil laws. He advises: "Look first at the explicit language of the Code, next to the Code's purposes and policies and finally, to the common law."[175] This approach is adopted under articles 7(1) and 7(2) of the Convention and consists of a number of steps. First, the courts are to look to the express language of the Convention and reason by analogy among its different provisions. Second, the courts are to advance the general principles upon which the Convention was drafted when making such an interpretation.[176] Third, if an interpretation is not clear, the court is to make use of private international law as defined in a relevant national legal system.[177]

The quest for uniform application of the CISG will not be a smooth one. The threat of national courts placing a "domestic gloss"[178] on cases of first impression is real. The ultimate impact of domestically slanted opinions will depend on the soundness of their reasoning and analysis. Ultimately, the way in which foreign courts reconcile divergent opinions will determine if uniformity of application will be achieved.

Fortunately, courts concerned with uniform application of the CISG have a number of techniques and tools at their disposal. The first is to use the CISG as a fully integrated statute. This will allow a court to use unrelated or tangentially related articles of the Convention to interpret a given article without recourse to "domestic gloss." Second, the legislative history of both the Convention and previous attempts at contract law harmonization will provide ready-made rationales that will help bridge the divergence among [page 138] national legal systems. Third, a court may seek the guidance of the universalized reasonable person as a device for supranational interpretation. Employing international usage and custom in conjunction with a notion of the internationalized "reasonable person"[180] will help courts to avoid national legal bias. Finally, uncovering and using general principles of contract law, such as good faith and fair dealing, will help internationalize judicial interpretation of the Convention.

The path to uniformity in the application of the Convention is likely to be a rocky one, given the nuances of meaning and the differences among the national legal systems. The ultimate success of the Convention may turn on the benefits that it bestows upon commercial parties to "be able to fashion transactions under a neutral international body of law."[181] The Convention promotes this benefit by facilitating contracts that otherwise would have been precluded because of disagreement over the choice of law. Article 7 of the Convention, for example, implies that national courts have an obligation to recognize foreign court decisions by stating that the Convention should be interpreted with regard to its "international character and to the need to promote uniformity in its application."[182]

One area of contract law that the Convention needs to unify is the disparate treatment of comfort instruments. Multi-jurisdictional uniformity can be seen in American states' interpretation of the UCC and the European Union's meshing of national and supranational legal systems.[183] These examples of multi-jurisdictional uniformity are more likely to be due to other factors, such as the formal nature of stare decisis in the United States and the enactment of a formal legal framework in Europe. Nonetheless, the quest for multi-jurisdictional uniformity is not without hope or precedent.

The move toward uniformity is supported by several factors. First, the principle of international comity should encourage judicial deference to opinions of foreign courts. In Hilton v. Guyot, the U .S. Supreme Court explained the importance and meaning of comity: "Comity is neither a matter of absolute obligation, nor of mere courtesy and goodwill."[184] To ignore previously rendered foreign court decisions would "adversely affect the integrity of the principle of comity."[185] Consequently, comity may increase uniformity. Second, a related principle and a cornerstone of civil law jurisprudence is the use of scholarly writings [186] and legislative history. The [page 139] use of such common sources should positively impact the convergence of national court interpretations of the Convention. Third, the language of the Convention was specifically chosen to avoid nationally based meanings. The courts are invited to develop an original meaning for the words and articles of the Convention.[187] Fourth, customary international law pertaining to treaty construction encourages uniformity of construction. The Vienna Convention on the Law of Treaties directs the initial interpretive inquiry to focus on the" ordinary meaning" of the Convention's terms in the "context and in the light of its object and purpose."[188] Furthermore, the Vienna Treaty Convention "views subsequent judicial decisions as relevant evidence"[189] in the subsequent application of the Convention.

Courts will ideally look to the general principles of treaty interpretation to foster a uniform application. These principles include the reading of the Convention independently of nation-specific meanings. The Convention should be read with reference to its internal "structure and [the] logical interrelationship of ... [its words] and articles."[190] This approach will be more difficult for common law judges. Civil law judges are adept at reasoning by analogy within the confines of a code because they generally decide civil law cases by reference, at least tangentially, to some article of a national code. In contrast, common law judges often have looked outside of a given code to external principles and sources in order to fill in gaps. Thus, as Professor Honnold notes, the success of uniformity of application will be decided by the ability of common law judges "to resist hasty recourse to domestic rules, and instead to develop the approach ... of gap filling by analogical application of the [Convention] in order to effectuate its purpose."[191]

Fortunately, a number of English court cases have upheld the notion that preserving the uniformity of international conventions is a paramount goal of national courts. The House of Lords in Midland Silicones, Ltd. v. Scruttons, Ltd. stated that in the application of an international convention by different national courts, "it is very desirable that the same conclusions should be reached in whatever jurisdiction the question arises."[192] The importance of international uniformity of interpretation was reiterated by Lord Diplock in the 1980 case of Fothergill v. Monarch Airlines, Ltd: "The language of an international convention is addressed to a much wider and varied judicial audience ... [than] purely domestic law. It should be interpreted ... unconstrained by technical rules of English law ... on broad principles of general acceptance."[193] In the short term, the internationalization of contract law presents a [page 140] complicated duality.[194] In the hope of simplification and uniformity in the long term, there is a likelihood of increased complexity in the short term. Until the jurisprudence surrounding the CISG is universally accepted with uniform interpretation and application of its provisions, the international businessperson will have to confront a number of contract law regimes. The international lawyer will be "called upon to synthesize diverse and sometimes conflicting national and supranational policies and supporting legal rules."[195]

For example, a practitioner in Europe will need to be familiar with domestic laws, the law of the European Union, and the CISG. This is the state of the current legal milieu in which issuers of international comfort instruments are to be judged. On the positive side, courts will have another opportunity to reexamine the degree of clarity and intent needed to make these instruments enforceable. The use of the CISG's notion of original interpretation may unify the diverging national opinions regarding comfort letter enforceability.

3. CISG Future: Prospects and Expansion

All legal systems look to commercial practice, trade usage, and custom to breathe meaning into contracts. The objective theory of contract describes the reasonable person as possessing the knowledge and sophistication of the average business person in a given trade or profession. This knowledge includes the meanings, trade usage, and practices generally known and accepted in that business or profession. This knowledge is the merchant's tool to communicate and to effectuate commerce. In the Middle Ages, usage and practice became a portable law that merchants carried with them from town to town. "The merchants carried their law, as it were, in the same consignment as their goods, and both law and goods remained in the places where they traded and became part of the general stock of the country."[196] This base of knowledge is implied into merchants' contracts to imbue express terms with their technical or trade meanings and to imply usage and custom to fill in gaps. The importance of trade usage in contractual interpretation was adopted by the CISG. Article 8 states that in determining the knowledge of the reasonable person "due consideration is to be given to all relevant circumstances including ... usages and any subsequent conduct of the parties."[197] Article 9 solidifies the binding nature of trade usage in [page 141] international contracts:

An International Chamber of Commerce (ICC) arbitration tribunal posed an interesting question regarding trade usage in relation to the CISG: Can the CISG itself be considered a usage of trade and be applied outside the scope of its direct jurisdiction? Can it be used within domestic law as evidence of trade usage in the area of international transactions? The tribunal reasoned that "there is no better source to determine the prevailing trade usages than the terms of the [CISG]."[199] As such, the Convention can be implied into international contracts not only as substantive law but also" as the best available evidence of international usage of trade."[200] The issue in this ICC arbitration case was the type of notice required regarding the non-conformity of certain goods. Instead of looking for guidance in the domestic law, the arbitrators looked to the CISG as a convenient tool to determine customary notice practice.[201] The two-year statute of limitations provision for giving notice on nonconformity in the CISG is generally longer than those found in most domestic laws.[202] For example, the Danish Sales Act of 1906 provides for a one-year limit to raise claims of defects.[203] The statutory period under the German Civil Code time-bars claims "after only six months."[204] An arbitrator or judge may be tempted to choose between the different notice provisions found in the CISG and domestic law in order to achieve a certain result." [T]he Convention may be applied virtually anytime an arbitrator [or judge] believes that it produces the proper result."[205] The ICC Arbitration Tribunal adopted just such a position.

The seeds of evading domestic laws when it is convenient to do so can be found in the Danish Sales Act. The rules of the Sales Act are not immutable and "may be modified by way of agreement or by commercial usage."[208] The recognition of the CISG notice provision as representative of commercial usage would allow a court to extend the limitation period from one to two years and thereby prolong the buyer's ability to bring suit. Thus, the CISG may be seen as a vehicle for a new international law merchant.[209] Like the medieval lex mercatoria, it can be seen as a "collection of usage ... a sort of international custom"[210] that international merchants may use in their transactions. In the framework of a new international law merchant, the treatment of comfort instruments under the CISG could lead to their recognition as enforceable instruments of international custom or usage. This could result in two regimes of enforceability: one under the decisional law of a given national system and a second under the CISG.

The Convention may act not only as a source of customary international law or usage, but also as a vehicle to transform substantive national law. For example, Norway has enacted the Convention as its domestic law. The Convention's grounding in generally accepted principles of contract law makes a reconciliation between the CISG and most national laws a much less daunting prospect. Jan Hellner sees such a possibility for a convergence of German law and the CISG: "Since the Convention ... to a large extent applies general principles of contract to sales, the Convention's substantive contents can fairly easily be reconciled with the previous principles of German law, which in the main are also general and abstract."[211] Finland and Sweden have also revised their domestic sales laws in light of the Convention.[212] Developing countries still struggling to formalize their substantive laws may look to the Convention as an international "model" statute.[213] "It provides these countries with a ready-made legal framework [page 143] for contracts, which otherwise would take too long to develop."[214] In the United States, article 2 of the UCC is being revised. It will be interesting to see how the revising committee elects to recognize and incorporate the Convention into the Code. Revising article 2 to eliminate differences between it and the Convention would help unify U.S. domestic and international sale of goods laws. The ultimate beneficiary would be the American businessperson whose legal transaction costs would be reduced in the current era of free trade.[215]

The CISG, like most codes, reflects a recognition of generalized principles of law. Professor Schmitthoff, in making reference to the development of an international trade law code, notes that it should possess "principles which should apply to all international trade transactions."[216] One can argue that it is the evolution of general principles of law that makes an international code possible. It is unlikely, however, that a code can create new principles that will be universally accepted and applied. A code is most likely to be successful if it recognizes and harmonizes existing general principles of contract law. For example, despite the Convention's failure to incorporate a full-fledged good faith requirement, as is found in the UCC,[217] such a requirement is likely to be read into the Convention due to its prevalence in most legal systems. "It has been predicted that the good faith requirement will mean, at a minimum, that the parties have an affirmative obligation 'to communicate during performance and to cooperate in the cure of defects and the modification of obligations in unforeseen circumstances.'"[218]

B. General Principles of Contract Law Recognized by the CISG

The International Court of Justice recognizes general principles of law found in the legal systems of all civilized societies as a source of international law.[219] This can also be said of contract law, whether referring to civil or common law. There are universalized principles or norms of contract law that are found in some form in most national legal systems.[220] "Despite the [page 144] variety of ways in which the conclusions are reached and articulated, concrete commercial issues tent to have similar resolutions in [both civil law and common law] Western systerns."[221] The arbitration panel in Libyan American Oil Co. v. Libyan Arab Republic offered a definition of generally recognized principles: "These general principles are usually embodied in most recognized legal systems. ... They thus form a compendium of legal precepts and maxims, universally accepted in theory and practice. Instances of such precepts [include] ... the principle of sanctity of property and contracts."[222]

The notion of universal rules or norms of contract has been formulated in many ways. For example, principles of contract law may be motivated by "the goal of full compensation, the moral convention of promising, a community's sense of justice, relational and cooperational norms, or the goal of unification and certainty in international sales contracts."[223] The meta-principles of good faith, fairness in the exchange, and the duty to inform are implied by most legal regimes of contract. Viewed expansively, good faith "imports affirmative obligations on the parties to communicate during performance and to cooperate in the cure of defects and the modification of obligations in unforeseen circumstances."[224] I now turn to these meta-principles or norms of contract law.

1. The International Duty of Good Faith

" [G]ood faith is a legal principle that forms an integral part of the rule pacta sunt servanda ... Manner of performance ... is one of the oldest and most clearly established of the major elements of the principle in international law."[225] The CISG surprisingly did not adopt a specific implied duty of good faith provision for sale of goods transactions.[226] It does, however, state that the CISG is to be interpreted to promote "the observance of good faith in international trade."[227] Other provisions of the Convention may also be read to imply a good faith obligation. The statements and conduct of the [page 145] parties to a contract are to be "interpreted according to the understanding [of] a reasonable person."[228] A reasonable person is generally taken to act and react in a good faith manner. In addition, article 9(2) implies trade usage and custom into every contract of sale.[229] A strong argument may be made that good faith is a universal trade usage or custom. From the medieval lex mercatoria to the present, most specific rules of business can be traced to the norm of good faith and fair dealing. The duty of good faith is consistent with the goals of the Convention and may be implied through purposive reading of its express articles. For example, article 77's express adoption of the duty to mitigate is consistent with a finding of an implied duty of good faith.[230] The nonbreaching party's duty to mitigate is the counterpart to the breaching party's duty of good faith performance.

2. Nationally Recognized Duties of Good Faith

The long-standing obligations of good faith found in national legal systems [231] can also be used in the interpretation and enforcement of contracts under the CISG. The principle of good faith performance has a lineage that can be traced to Roman times. The principle was re-embraced by the mercantile community during the eleventh and twelfth centuries.[232] The notion of good faith performance stemming from Roman law and the lex mercatoria has been brought forward to the present-day civil codes. The German Commercial Code, or BGB, voids any agreements or contractual terms that are considered contra bonos mores, or contrary to the public policy of good faith.[233] The German Law on General Business Conditions, or AGB-Gesetz (AGBG) generally holds that a contract provision is void if it "work[s] to the disadvantage of [a party] in a way irreconcilable with good faith."[234][page 146] The AGBG also provides a number of techniques that can be used in making a good faith determination. First, if a contract provision "fundamentally deviates" from the default rules of the BGB, then it may be considered to have been made in bad faith. Thus, although provisions that are contrary to the optional rules of the BGB are not directly invalid, they may be stricken indirectly if they violate the general principle of good faith. Second, a court will make a "literal and restrictive interpretation" of a contract clause that was not freely negotiated.[235] This interpretation accords with the long recognized duty in the civil law to negotiate in good faith, known as culpa in contrahendo.[236] Third, a court can overcome the presumptive power of a written agreement by considering parol evidence that leads to a more equitable reading of a harsh contract term. Finally, section 242 of the BGB uses the good faith concept of "basis of the bargain," or Geschäftsgrundlage, to excuse a party from performing a contract that has been frustrated.[237] In German law, then, there are a number of ways in which the existence of a good faith excuse for nonperformance may result in an equitable reformation or a rescission of the contract." [T]he courts will in the first place try to adapt the contract to the new circumstances by re-writing it in accordance with what they perceive as the parties' intentions and interests. Only if this fails will the entire contract be declared void."[238]

In the United States, the concepts of good faith and fair dealing can be found in the Restatement (Second) of Contracts and the UCC. Section 1-203 of the UCC states that "every contract or duty within this act imposes an obligation of good faith in its performance or enforcement."[239] The "macro" nature of good faith as an overriding principle of contract law has been duly acknowledged.[240] Expansive interpretations of contractual good faith include good faith in negotiations,[241] the duty to cooperate,[242] the duty to adjust from the express terms of the contract,[243] and good faith in the termination [page 147]of contractual relations.[244]

The universality of good faith in contract formation and performance is evident when reviewing the legal regimes of planned or socialist economies. Private contract law is generally not associated with countries characterized by State ownership of property and centralized planning, such as the countries of the former Soviet Union and Eastern Europe prior to the fall of communism. Contracts of sale, however, were used in those countries to facilitate transactions between state-owned agencies.[245] Implicit in the notion of such contractual interchange was the duty of an enterprise to cooperate in concluding contracts and to "perform its obligations with due care."[246] These duties to cooperate and to act in good faith were required because all agencies were obligated to work toward goals stated in national economic plans.[247] Thus, failure to act in good faith was viewed as harming not only the other contracting party but also the State itself. Failure to perform or to provide defective goods therefore resulted in the assessment of penalties not necessarily related to actual damages. The penalties were intended to be punitive and not primarily compensatory.[248] A party acting in bad faith was subject to damage claims in excess of those granted under the Hadley foreseeability principle found in the common law.[249] Thus, the concept of good faith played an important role in the contract law of Eastern Europe and the Soviet Union.

This review of national laws demonstrates that good faith in the performance and enforcement of contracts is recognized by a broad range of national legal systems.[250] These national good faith requirements can be brought to bear on CISG-governed contracts in two ways. First, the Convention specifically excludes from its scope governance over "the validity of contracts."[251] However, we have seen that in most national legal systems bad faith negotiation or performance will void a provision in a contract that was produced by the bad faith act. Thus, national law may continue to [page 148] determine the impact of bad faith upon the validity of a contract. Second, as discussed above, article 9 of the CISG allows for the consideration of international trade usage. In sum, it is likely that national principles of good faith will be applied to CISG contracts.[252]

3. Fairness in the Exchange

In Contract and Fair Exchange, [253] Professor Atiyah examines the common law's shift from the undaunting allegiance to freedom of contract in classical contracts theory to the "modern growth of statutory interventions in contract law ... designed to ensure substantive fairness in the exchange."[254] Fairness in the exchange has also increasingly been accepted as a major norm or principle of contract law at the supranational level. One commentator on international commercial contracts predicts a continuing shift from the principle of sanctity of contract to fairness in the exchange:

The notion of fairness in the exchange has been traced to the natural law philosophy of Hugo Grotius [256] and Samuel Pufendorf.[257] This philosophy recognized contractual fairness as a relevant factor in the enforceability of contract.[258] The norm of fairness provides an umbrella for a number of doctrines that revolve around the substantive fairness of the exchange. The civil law' s notion of just contract [259] and the common law doctrine of unconscionability [260] come within the fairness penumbra. The divergence between the common law and the civil law in the area of substantive fairness may be merely one of semantics. For example, under article 1674 of the [page 149] French Civil Code, an agreed price that is inadequate by more than seven-twelfths of the value of a good may be rescinded by the seller. The purchaser then has the option of "paying the balance of the just price"[261] or returning the goods.

In contrast, inequality of exchange is not a ground for rescission under the common law.[262] A common law contract need only be supported by some mutuality of consideration. It need not be characterized by an equality or adequacy of consideration."[A] contract does not lack mutuality merely because its terms are harsh or its obligations unequal."[263] The common law premise is that value is to be determined by the parties and is not the proper subject for judicial reformation on grounds of inadequacy of consideration.[264] However, it should be noted that in the area of equitable relief, the common law is closer to the civil law's notion of just contract. While a court faced with a contract of unequal exchange is required to enforce it and assess damages accordingly, that same court faced with the same contract is free to deny a claim for specific performance because of the inequality of the exchange.[265] Section 364 of the Second Restatement expressly states that specific performance should be denied if "the exchange is grossly inadequate or the terms of the contract are otherwise unfair."[266]

Furthermore, despite the general common law principle that courts shall not set aside a contract due to inequality or inadequacy of consideration, there has been a long-standing exception when the inequality is deemed significant. The 1882 case of Wolford v. Powers states the common law exception: "Where the [consideration] is so grossly inadequate as to shock the conscience, courts will interfere."[267] This notion of substantive fairness is the cornerstone of fairness in the exchange inquiries. Under the civil law's notion of just price, this analysis should theoretically be applied before any contract is enforced. In contrast, the voiding or reformation of a contract in the common law on grounds of unfairness is considered an extraordinary remedy. Yet, the enlargement of notions of substantive unfairness or [page 150] unconscionability has helped narrow the gap between the civil and common law and between legal and equitable remedies.[268] For example, the court in Girard Trust Bank v. Castle Apartments, Inc.[269] seemed to adopt the litmus test of the medieval just price theorist: "[I]f [the] value is more than twice the sale price, there is such gross inadequacy as will shock the conscience of the Court and justify setting the sale aside."[270]

Often the substantive unfairness of a contract is a result of a weakness in the bargaining process.[271] In Vockner v. Erickson [272] an elderly woman entered into a contract for the sale of her apartment building. The contract provided for a purchase money mortgage with a monthly payment that was so low that it failed to cover the interest owing on the deed of trust. She would have had to wait until the age of 103 for a thirty-year balloon payment to mature in order to receive the bulk of the money. The court held that the payment terms were unconscionable but elected to reform them instead of striking them entirely. It held that the" aim of reformation in these circumstances is to bring the contract in conformity with minimum standards of conscionability."[273]

In order to strike a contract, an American court is likely to focus on factors that indicate that the stronger party exploited the" gross inequality of bargaining power."[274] The simple fact of disparity in bargaining positions, however, is insufficient to render a contract unconscionable: Superior bargaining power alone without the element of unreasonableness does not permit a finding of unconscionability or unfairness"[275] The court in Tuzlowitzki v. Atlantic Richfield Co. considered the usage and customs of the particular trade in order to determine if a contract term was unreasonable. "The business practices-of-the-community test asks whether the terms are so extreme as to appear unconscionable according to the mores and business practices of the time and place."[276] The court held on the basis of this test that a termination provision in a gas station dealership agreement was "not atypical in the local business community"[277] and therefore was not [page 151] unconscionable despite the disparity in bargaining positions. It is still unresolved whether less than a "gross disparity in the values exchanged"[278] will be sufficient for a common law court to interfere under the rubric of fairness in the exchange. It is clear, however, that an unfair contract in which one party does not take unreasonable advantage of the other is less likely to be reformed. To provide reformation in such a case would be "[Anglo-American] contract theory pushing beyond current substantive unconscionability [and] beyond medieval just-price doctrine."[279] Nevertheless, some level of fairness in the exchange "constitutes a principle of current international practice [and] is regarded as an underlying principle of international commitments and arbitral awards."[280]

4. Duty To Notify

The duty to notify the other party under various situations can also be seen as a generally accepted contract principle found in domestic laws. Notice obligations surface in a number of places along the transactional time line, including anticipatory nonperformance, request for additional time, notice of nonconformity, and notice of contract avoidance. Under Swiss law, the buyer must inspect the goods purchased "as soon as it is feasible."[281] If defects are found, the buyer must "immediately" notify the seller of the defects. "If the buyer fails to so notify recognizable defects, the goods purchased are deemed to have been accepted."[282] The German Civil Code imposes a similar duty of prompt inspection and notification.[283] Failure to fulfill these obligations results in the waiver of the buyer's right of rejection based upon deficiencies in the goods.

Given the relatively short statute of limitation periods found in some national laws, the requirement of prompt notification is very important. For example, the statutory period under the German Civil Code is only six months.[284] Under the Danish Sales Act of 1906, or Købeloven, the buyer must advise the seller of defects within a twelve-month period from the delivery of the goods.[285] The Belgian and French Civil Code's title provisions are particularly idiosyncratic. Generally, ownership passes upon the signing of the contract; however, an exception is made for wine and other goods in "which it is customary to taste before purchasing."[286] There is no sale or duty to notify until the buyer has had an opportunity to taste the goods. Third World countries have generally been concerned that strict notice [152] requirements could be used by more sophisticated business persons to avoid liability for defects in their products.[287] Thus, the good faith nature implicit in the duty to notify was adopted in the notification requirements of the CISG. In order to placate opponents, the maximum time limit of two years to notify is longer than what is found in most national laws of sale.[288]

C. New Contractual Informalities Recognized by the CISG

In comparing the CISG with the common law and the UCC, the most obvious difference is the degree of informality found in the CISG. This informality will be analyzed from three perspectives: writing requirements, the battle of the forms, and oral modifications of contracts. The importance of choice of law clauses will be analyzed as an aside.

1. Writing Requirements

The UCC requires that any sale of goods for a price of $500 or more must be evidenced by "some writing sufficient to indicate that a contract for sale has been made between the parties."[289] Furthermore, the writing must be "signed by the party against whom enforcement is sought."[290] The sanctity of the written contract is protected by the common law and the UCC's parol evidence rule. This rule provides that a written agreement cannot be "contradicted by evidence of any prior agreement or of a contemporaneous oral agreement."[291]

In contrast, the CISG adopts the view of many of the civil law countries that a writing is not a required formality to the finding of a contract. Article 11 states that a "contract need not be ... evidenced by writing."[292] The lack of a writing requirement is coupled with the admissibility of any evidence that may bear on the issue of formation. Proof of a contract or of the terms within a contract may be given "by any means, including witnesses."[293]

The lack of a writing requirement creates a much greater potential under the CISG than under the UCC for liability for representations made during the negotiation phase. "Under [the] CISG ... any relevant statement made in negotiations prior to the signing of the contract [is] admissible into evidence."[294] In contrast, the UCC's parol evidence rule integrates prior statements, written or oral, into the final written contract. A seller could avoid warranty liability for representations made during the pre-contract phase by not memorializing them in the written form. Under the CISG, however, prior oral [page 153] representations regarding quality and performance would be enforceable. This raises the potential for unwanted liability for comfort instruments. The unsophisticated business person could be trapped if she believed that any oral or informal comfort would only create a binding obligation if confirmed in writing.

The requirements to form a contract are further complicated by the fact that articles 12 and 96 of the Convention allow a Contracting State to opt out of the oral agreement provision. Furthermore, countries whose domestic law requires a sales contract to be in writing may opt out of article 11. As a result, a party contracting internationally must inquire not only whether the other party is a resident of a CISG country, but also whether that country has opted out of article 11.[295]

2. The Battle of the Forms

An American party familiar with the UCC can be exposed to unexpected liability due to the battle of the forms. Article 19 of the CISG resolves the battle of the forms dilemma differently than section 2-207 of the UCC.[296] A hypothetical involving the addition of a term in an offeree's response will illustrate the comparative complexities. Suppose that a seller responds to a purchase order (offer) with a confirming invoice. The confirming invoice, however, includes an additional term that limits the ability of the buyer to notify the seller of product defects. What is the legal effect of the additional notice term? The term's legal effect will turn on whether such a modification of the CISG notice provision would materially alter the contract offer. If it were construed as a nonmaterial modification, the CISG and the UCC both would acknowledge a contract that incorporated the offeree's modification. However, if the additional term were considered to be material, the two laws would dictate different conclusions. The CISG would not recognize a contract in this case because the modification would be construed as converting the would-be acceptance into a counter-offer. The UCC, in contrast, would have found a contract under the material terms presented in the original offer. The modification of the notice provision would be stricken. [page 154]

A German court, in fact, held that such a modification was nonmaterial.[297] This is a surprising decision given that most commentators have interpreted article 19 of the CISG as a rejection of the UCC approach in favor of a mirror image rule.[298] This interpretation of article 19 rests on the assumption that the CISG's definition of materiality would be broadly construed. Unlike the UCC, which restricts materiality to a few fundamental terms, the Convention provides an expansive list of contract terms that are to be construed as being material. It states that terms "relating, among other things, to the price, payment, quality and quantity of the goods, place and time of delivery, extent of one party's liability to the other, or the settlement of disputes are considered to alter the terms of the offer materially."[299] The modification of the notice term would thus seem to come within the umbrella of events that impact the" extent of one party's liability to the other."[300] The German court decision is evidence that until the jurisprudence surrounding the CISG is solidified, contracting parties are likely to be surprised by some of the results produced by national courts interpreting the Convention. In the area of comfort instruments, the materiality of the assurance to the underlying transaction is likely to be a pivotal factor in the enforceability determination.

3. Oral Modifications

This clear difference between common law formalities and the CISG is further complicated by article 29 of the Convention, which enforces an agreement that all modifications to a contract must be in writing. What if the parties orally agree that any future modifications must be in writing? The spirit of article 11 of the CISG would indicate that such an oral agreement would be as provable and enforceable as any other contractual term.[301] Although article 29(2) may be interpreted to require that such an agreement be in writing,[302] one could argue that an oral agreement with respect to the requirements for modification is equally binding and in conformity with the spirit of the informality that article 11 represents.

The Convention's article on modification and its interpretation may have an impact upon the enforceability of comfort instruments made subsequent to the formation of a contract. Two issues could arise in conjunction with the use of such instruments to clarify conflicting positions or to assure a party of continuing performance. First, does the use of a comfort instrument to clarify or to assure constitute a contractual modification? Second, if such a modification is intended, does it need to be in writing? The second issue has already been addressed above. The first issue was addressed outside the context of the CISG in the American case of Chelsea Industries v. Accuracy [page 155] Leasing Corp.[303] A lessee under an equipment leasing agreement asked the lessor about a purchase option. In response, the leasing company wrote a letter stating that it was its "policy ... to convert on stated terms"[304] the lease to a purchase contract. The leasing company argued that the policy letter as only a statement of current policy and was intended to be a nonbinding comfort letter. The court disagreed and held that the letter became a part of the total agreement and was a contractually binding promise. The CISG's modification provisions thus contribute to decisions regarding comfort letter enforceability.

4. Choice of Law

The United States has two laws of contracts: a state law of contracts, presented by the UCC, and a "federal" law of contracts, the CISG. It has long been the rule in the United States that there is no general federal common law.[305] The common law remains the domain of the states under Constitution that restricts the authority of the federal government to enumerated powers. However, when the federal government preempts state law by way of statute or treaty, it effectively rewrites that portion of state law. The Supreme Court affirmed this principle in Hauenstein v. Lynham:[306] "[L]aws and treaties of the United States are as much a part of the law of every state as its own local laws."[307] This becomes important when a U.S. citizen attempts to opt out of the Convention through, for example, a choice of law clause. Once again the unwary business person may become trapped in the quagmire of conflicts of law. Suppose a choice of law clause states that the "law of the State of New York" shall apply to any disputes arising out of a contract. What law shall apply: New York's version of the UCC or the CISG? The CISG appears to be the better answer because it is the law of the State of New York in cases in which the contracting parties are from different countries that are both signatories to the Convention. Alternatively, if the court's conflict of law rules refer it to the law of New York, a strong argument arises once again that the CISG preempts the UCC. This will be the case whether the contract is signed in New York or abroad. It will also be the case in contracts involving a foreign company doing business in New York, even if the contract is to be performed within the state. All that is needed is for the parties to have their primary places of business in two countries that are signatories to the Convention.[308]

An ancillary issue is whether a court should admit evidence to rebut the presumption that favors federal law. The parol evidence rule of the UCC would probably preclude such oral admissions in favor of the court's own [156] interpretation of the words of the contract. In contrast, a court applying the "rules of evidence suggested by the CISG would admit evidence showing the parties intended that the UCC govern the case. To avoid this uncertainty in the choice of law, the contracting parties should choose their words carefully when opting out of the Convention. In our hypothetical, the correct phraseology would be that the law to be applied is the "Uniform Commercial Code as adopted by the State of New York as of the date of the contract or as subsequently amended." The choice of law determination is especially important with respect to comfort instrument enforceability. Under current U.S. law, the informality of such instruments, coupled with their inherently ambiguous language, is likely to result in a finding of nonenforceability. A choice of law rule, however, that directs a court to a foreign national law or to the CISG may result in a different holding.

As parties become more knowledgeable and comfortable with the provisions, they may expand the CISG's jurisdiction by private agreement. The law applicable to a given international contract is often determined by an express choice of law clause. Commercial parties have often compromised in choice of law negotiations and forum selection clauses by choosing venues and national laws that are considered fair and advanced. For example, the London Court of International Trade and the International Chamber of Commerce's Paris-based Arbitration Panel are popular compromises for contracting parties from divergent legal systems. This has also been the case regarding Swiss commercial law: "Swiss commercial law appears to be acceptable to parties from different legal backgrounds."[309] The straightforward and uncomplicated nature of Swiss law has made it an appealing compromise for choice of law in contract negotiations.[310] Other popular choices of law in international contract dispute resolution include English, U.S., French, German, and Swedish laws.[311] It will be interesting to see if the CISG becomes an alternative choice of law. Parties may see it as a compromise law to govern contracts not within their jurisdiction.

The remainder of this Article will more carefully analyze the potential impact of the CISG on comfort letter enforceability. Part IV will examine the underlying principles of the CISG and foreign cases that apply the CISG to understand how such courts may deal with comfort instrument enforceability. It concludes with a prediction that it is likely to impact the common law presumption of nonenforceability. Part V will look to the future relevance of the CISG to the internationalization of contract law and to the creation of a uniform jurisprudence for comfort instrument enforceability. It concludes with some advice, to American businesspersons for avoiding unintended contractual liability. [page 157]

IV. THE CISG AND COMFORT LETTER ENFORCEABILITY

How comfort instruments are originally interpreted under the CISG by a court of first impression will play a key role in determining their enforceability. That court will face the daunting task of harmonizing the divergence in the world's different legal systems regarding comfort instrument enforceability. Moreover, how foreign courts recognize such an opinion will determine whether the original interpretation will gain universal precedential value. The courts are likely to look to general principles of contract law for guidance in determining the enforceability of these business instruments. As we have seen, the principles of good faith and fairness in the exchange are widely accepted norms of contract law. Ancillary norms include compensation for justifiable reliance, the belief that one should keep her promises, and the justice-promoting concept of equalizing the exchange. If a party agrees to a seemingly one-sided agreement based on its reliance on a third party assurance, then a court may feel inclined to enforce the assurance as a way of equalizing the underlying agreement. The hard use of comfort instruments to motivate a party to enter into an agreement, followed by refusal to provide such comfort, could be construed under the German AGBG, for example, as something that "works to the disadvantage of a party in a way irreconcilable with good faith."[312] Clearly, the bad faith use of comfort instruments by hard bargainers should subject them to a claim for foreseeable reliance damages. Finally, the great stock that international business persons place on the duty to notify can be applied, by analogy, to comfort instruments. If a comfort issuer's defense is that there has been a policy change subsequent to the issuance of the comfort letter, then at the very least she should be required to notify the other party of that policy change. This would allow the receivers of comfort instruments to seek other assurances in order to protect themselves.

A. General Principles and Enforceability

The enforceability of quasi-contractual and preliminary instruments has long been debated. The line between contract and pre-contract or noncontract has never been precisely fixed.[313] Courts have at times rescued those who relied upon noncontractual instruments by using flexible concepts such as promissory estoppel and good faith to give recourse to those whose claims would have been precluded by one of contract law's formalities. The uncertainty of liability is compounded in the area of international contracts because of variations in contractual formalities among different legal systems. For example, an American businessperson can rely on the statute of frauds to avoid incurring liability when giving an oral assurance or representation. In contrast, a verbal guaranty or assurance is more likely to be enforced under [page 158] the CISG and in some legal systems, such as Germany's. The party seeking enforcement of a comfort letter or an oral assurance would need to show that the parties' actions would indicate to a reasonable person that an agreement had been made or that an intent to be bound had been given.

It should be noted, however, that the importance of the statute of frauds in Anglo-American jurisprudence is often overstated. The lack of a writing or the lack of a final, integrated expression of agreement has rarely prevented a court from admitting evidence in order to fill in gaps in a contract.

Thus, when the parties contemplate a final written agreement, the court may find a contract prior to its final integration: "[T]he mere fact that the parties contemplate memorializing their agreement in a formal document does not prevent their informal agreement from taking effect prior to that event."[315]

Letters of intent and agreements in principle have long tested the ability of American courts to differentiate between contract and mere negotiation, "The 'agreement in principle' may be based on a handshake understanding or memorialized in a preliminary letter of intent."[316] Parties may take three views toward preliminary agreements, letters of intent, comfort instruments, and other inchoate agreements.[317] First, a party may believe that she is not legally bound until a formal writing is signed, despite an oral agreement or assurance. Second, a party may believe that a more formal writing is a mere formality and that the informal instruments or oral assurances are legally binding. If these oral assurances offered in the "precontractual" negotiation constitute misrepresentation, they can result in both moral and legal recrimination.[318] Often the morality of enforcement is equivalent to the legality of enforcement. Indeed, unethical conduct or promises have created legal causes of action.[319] Third, the party may think that the preliminary agreement formalizes the parties' intent to enter into a final agreement pending successful negotiations by their attorneys and other representatives. The party may believe, however, that failure by these representatives to finalize the terms of the agreement releases the principals from their good faith intentions to enter into a formal, binding agreement. [159]

These various views have found expression in American court decisions. A number of courts have ruled that any negotiation not resulting in a formal agreement allows each of the parties to withdraw -- whether in good or bad faith.[320] Other "courts have held the withdrawing party liable as if a fully negotiated contract to consummate the transaction already existed."[321] The enforceability of preliminary agreements and correspondences therefore remains unclear. It is clear, however, that reliance theory has been used to expand the contractual liability net into areas of precontract or quasi-contractual instruments in ways not previously seen.[322] This expansion of contractual liability is likely to include international contract negotiations and the use of comfort instruments.

Given this tendency to use precontractual agreements, "the primary question becomes whether the relevant community would accord binding force to the [instrument]."[324] Ultimately, the potential for liability in the area of precontract or in the area of comfort instruments will be determined by commercial practice. It is recognized that "[s]imilarities of contract practice and contract law are due to common commercial needs shared by all who participate in international trade transactions."[325] The more such instruments are a product of hard bargaining and the more contracting parties rely on them, the greater the likelihood of contractual liability.

B. A Case Study: The Italian Shoe Cases

The enforceability of comfort instruments under the Convention is not likely to be determined in the near future. The lack of clarity regarding the enforceability of these instruments under national legal systems provides little guidance as to the likelihood of enforceability under the Convention. Nonetheless, the aids of interpretation used under the civil law system may be applied in order to predict a possible judicial response. The Italian Civil Code of 1942 provides the means of interpretation that analogously applies to the Convention's dictate that its articles are to be interpreted originally:

There is no article within the Convention that specifically deals with precontractual liability or with liability stemming from informal instruments of business such as comfort letters. Instead, liability will have to be premised on a composite of relevant articles of the Convention. The creation of the composite should be guided by the founding principles of the Convention and general principles of contract law previously discussed. A number of German cases dealing with contracts for the importation of Italian products offer a preview of the CISG in action. These German cases dealt with the issues of implying contract terms and satisfying the notice of nonconformity requirement.

1. Implication of Terms

A German court of appeals held a misuse of specifications by an Italian shoe manufacturer to be a fundamental breach.[327] The German purchaser became aware of the misuse when shoes built to its specifications and bearing its trademark appeared at a trade show. The court implied the notions of exclusivity and confidentiality into the contract and thereby permitted the German company to void its purchase contract with the Italian manufacturer. The court held that the use of the purchaser's specifications was a misappropriation that constituted a breach under article 25 of the CISG.[328] This case illustrates the informality of most sale of goods transactions. Despite the paramount importance of trademark and confidentiality, the parties failed to formalize specific contract language to protect the buyer. Nevertheless, the German court implied the existence of such protections into the agreement. Professors Beale and Dugdale examined the importance of implied assumptions in the types of informal contracts consummated "by telephone or simple exchange of letters."[329] They characterized such agreements as ones in which "only the primary obligations would be planned expressly but the parties to such contracts held unexpressed assumptions about the way in which obligations would be adjusted or enforced, relying either upon custom or a gentlemen's agreement with the other contracting party."[330] Although the [page 161] German court enforced this type of unexpressed assumption, enforceability would have been better supported through an explicit assurance of confidentiality.

Similarly, the Municipal Court of Holstein used both the CISG and German