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Reproduced with permission of 40 American Journal of Comparative law (1992) 635-644

Substantive Validity

Ulrich Drobnig [*]

  1. Substantive Validity under CISG
  2. Substantive Validity in the UNIDROIT Principles
    1. Non-competing contractual causes of invalidity
    2. Contractual causes of invalidity competing with remedies for non-performance
    3. General civil law causes of invalidity
    4. Public law causes of invalidity
  3. Conclusions

The issue of substantive validity of international commercial contracts is the most sensitive crossroad of uniform law and of domestic legal systems. Two sharply conflicting interests are involved.

On the one hand, any uniform rules on contracts must assume a valid contract; otherwise they would be built on sand. On the other hand, the grounds of substantive invalidity indicate those points of domestic law which express a country's public policies -- be it in contract law, in civil law generally or in their various ideas of public regulation. Unification of these policies obviously is difficult, although not entirely impossible.

How can this dilemma be resolved? How has it been resolved in the past and what do the UNIDROIT Principles achieve in this regard?

I. SUBSTANTIVE VALIDITY UNDER CISG

The Vienna Convention on Contracts for the International Sale of Goods of 1980 (CISG)[l] provides in article 4:

"This Convention governs only the formation of the contract of sale and the rights and obligations of the seller and the buyer arising from such a contract. In particular, except as otherwise provided in this Convention, it is not concerned with:

(a) the validity of the contract or of any of its provisions or of any usage;

(b) ..."

A very similar exclusion clause was contained in its predecessor, the Uniform Sales Law of the Hague (1964)[2] article 8.

The effect of the exclusion clause is that the substantive validity of the contract itself as well as that of individual contract clauses [page 635] and of usages -- unless covered by CISG -- has to be determined by the applicable domestic law; the issue, which domestic law is applicable, must be solved by the conflict of laws rules of that country or those countries the courts of which have jurisdiction to settle the controversy.

The overall effect on international sales contracts that are governed by CISG is the following: the provisions of this Convention presuppose that international sales contracts to be governed by CISG (and their individual clauses) must be valid in substance under the applicable domestic law. Only under this condition will the contractual rights and obligations of the parties be regulated by the Convention.

Of course, the various domestic legal systems have very different conceptions on the scope and contents of their rules on substantive validity. These may range from various degrees of personal incapacity ultra-vires acts of companies, defects of consent, and illegality or immorality to the field of public law with export and foreign exchange restrictions and many other mandatory rules of different degrees. All of these causes of invalidity may affect either the whole contract or individual clauses; thus disclaimers of contractual liability may invalidate a single clause of the contract only.

Since CISG does not define and thereby limit the term "validity," it is left to the various domestic legal systems to determine when a cause of invalidity exists [3] and which consequences it has.

These problems are complicated by the fact that some causes of invalidity deal with situations which at the same time may give rise to remedies under both domestic sales law and under CISG. Three examples: At the time of contracting the specific goods to be sold had already perished, without either party knowing this; or the goods are owned by a person other than the seller. Under some traditional rules, contracts of sale are void in these circumstances.[4] Or: The buyer has, under the applicable domestic law, the option to avoid a contract of sale on the ground of mistake as to the quality of the goods bought.[5] Or finally: under some legal systems, an open price term makes a contract void since agreement on the price is regarded as one of the essentialia of a contract of sale.[6]

The Hague Uniform Sales law (1964) had in some cases [page 636] expressly provided that its remedies exclude competing remedies under domestic law (cf. articles 34 and 53). Unfortunately CISG did not see fit to adopt these provisions; nor did it otherwise clarify the issue except in article 55 which expressly acknowledges that an open-price term may pose an issue of validity under domestic law.

The unfortunate consequence of this gap is that the interpretation of the scope of CISG in this respect is already now subject to heavy debate. It is interestedly and highly relevant to note that authors tend to construe the scope of CISG Article 4 in the light of their respective domestic legal system. In accordance with German case law, German commentators disallow the avoidance for mistake of an international sales contract if the miskake relates to a quality of the goods sold.[7] By contrast, Austrian writers give the buyer an option either to invoke his sales remedies under the uniform sales law or to avoid for mistake under the applicable national law, in accordance with Austrian domestic law.[8]

In these circumstances, particular weight must be attached to those authors who come from countries which have not taken a pronounced position on the issue,[9] and even more to those who argue for CISG a solution which differs from that of their home country.[10] These authors also offer the most convincing arguments: the remedies offered by CISG should exclude all, and only, those remedies of national law which are essentially based upon the same facts upon which the non-conformity of the goods is based,[11] since in these cases the rules of CISG are exhaustive.[12]

This brief excursion into the issue of substantive validity under CISG demonstrates that in border-crossing contracts we are confronted by four different types of causes of invalidity:

  1. causes of invalidity which compete with remedies for non-performance (= competing causes of invalidity);

  2. causes of invalidity rooted in the general law of contract where there is no competition with, remedies for nonperformance (= non-competing contractual causes of invalidity); [page 637]

  3. causes of invalidity in the general area of civil law outside contract law (= general civil causes of invalidity); and

  4. causes of invalidity located in the area of public policy (i.e., illegal and immorality) as well as in the public law regulation of business and business transactions by mandatory rules (= public law causes of invalidity).

It will be readily seen that the sequence of the four types of causes of invalidity as presented here is also indicative of both the urgency and the chances of harmonization.

It is true that a first attempt at achieving some uniform regulation in CISG failed. When the deliberations of UNCITRAL on CISG were already well advanced, UNIDROIT presented, in 1972, a draft Uniform law on the Substantive Validity of Contracts for consideration and possible inclusion in CISG.[13] This draft covered types (1) and (2) of the aforementioned scheme, i.e., competing and non-competing contractual causes of invalidity. However, after discussion of some of the proposed rules, UNCITRAL regarded the problems raised by the draft as too complex to be settled quickly; and also as too marginal for an international sales law.[14]

This short exposé on the issue of substantive validity under CISG was not only an historical survey. It was intended to present the rather complex problems of substantive validity that arise in connection with international commercial contracts; and also to indicate directives for solution.

II. SUBSTANTIVE VALIDITY IN THE UNIDROIT PRINCIPLES [15]

The 21 provisions that make up Chapter 3 address directly the most important problems of substantive validity in international commercial contracts. But in addition there are a few other rules which explicitly or implicitly are relevant.

Rather than following the sequence of the text of the Principles, I propose to set out the various rules by reference to the systematic sequence developed before (supra I in fine). I shall first turn to non-competing contractual causes of invalidity, and then deal with competing contractual causes. Thereafter some brief remarks on general civil and finally on public law causes of invalidity will follow. [page 638]

1. Non-competing Contractual Causes of Invalidity

      a) Article 3.2, by requiring "mere agreement" of the parties for the conclusion, modification or termination of a contract, embodies the principle of consent, of nudum consensus. Further requirements, such as consideration or the cause of Romanic countries. therefore, are unnecessary. I need not explain that in international commercial contracts consideration practically is irrelevant. The various aspects of cause have been split up and are dealt with under specific heads, especially under those of illegality and immorality (infra 3).

      b) Defects of consent are regulated by articles 3.3 to 3.8: mistake, fraud, and threat.

           (1) Articles 3.3 to 3.6 deal with mistake. The 19th century Continental Civil Law had, under the impact of the will-theory, considerably broadened the scope of mistake. Modern conceptions have reacted against these excesses by striking a more appropriate balance between the interests of both parties by emphasizing much more the interests of the mistaken party's contract partner: This modern approach is clearly reflected in the Principles.

The central provision is article 3.4 which narrows the scope of mistake very considerably. This narrowing is achieved first, by allowing avoidance to the mistaken party only (article 3.4(1), when the other party either caused the mistake (e.g., by an innocent misrepresentation); or if it knew or ought to have known of the mistake but did not clarify it. Even if any of these conditions on the part of the other party are fulfilled, avoidance is still excluded (under paragraph 2) if the mistaken party committed the error with gross negligence or had assumed the risk of mistake.

           (2) Article 3.7 on fraud requires only brief comment. Fraudulent non-disclosure where disclosure was required is put on the same level as a fraudulent misrepresentation.

           (3) The provision on threat (article 3.8) tries to delimit unjustified from other pressures. A threat is unjustified if the threatened act itself is wrongful, especially if it is criminal. However, even if the threatened act in itself is not wrongful, e.g., the threat of a criminal prosecution for a crime actually committed, it may be wrongful to use it in order to force an unrelated promise from the criminal.

      c) Redress for substantive injustice is sought to be given by article 3.9 on gross disparity. The criterion is an unjustifiably excessive advantage which is granted to the other party, either by the contract as a whole or by an individual term.

Letters (a) and (b) of paragraph 1 flesh out this general criterion:

                 (a) by directing attention to the personal circumstances of the disadvantaged party; [page 639]

                 (b) by drawing attention to the commercial setting and purpose of the contract.

One may, of course, ask whether these rules on gross disparity are appropriate in Principles for international commercial contracts. There may indeed be very little, if any scope for them in dealings between experienced merchants. Matters may be different, however, if one party comes from a former socialist country in Eastern Europe or from a Third World country.

      d) Remedies for relevant defects of consent as well as for gross disparity are avoidance and damages.

           (1) The major remedy is, of course, avoidance (articles 3.14 to 3.17). Avoidance by a mistaken party may be prevented if the other party declares himself willing to perform, or does perform, the contract as it was understood by the mistaken party (article 3.13). In a case of gross disparity, both the disadvantaged party and the other party may request the court to adapt the contract to bring it in accordance with reasonable commercial standards of fair dealing (article 3.9 paragraph 2-3).

The mechanism of avoidance is the usual one: There must be a notice of avoidance to the other party (article 3.14); avoidance does not require a judicial proceeding, as it does in many Romanic countries. The notice must be given within a reasonable time after the avoiding party knew or ought to have known of the relevant facts which entitle him to avoid (article 3.15). Avoidance is limited to an individual term if that term only was affected, provided it is reasonable to uphold the remainder of the contract (article 3.16). And finally: avoidance takes effect retro-actively; therefore, the parties may claim restitution of every performance they had already rendered before avoidance (article 3.17).

           (2) As an alternative to avoidance, or in addition to it, the affected party may claim damages from the other party, provided the latter knew or ought to have known of the ground of avoidance. Measure of damages is the reliance interest: the affected party must be put into the same position as if it had not concluded the contract (article 3.18).

Except for the rules on disparity, the preceding provisions on defects of consent are, in substance, fairly classical, although formulation and arrangement may be unfamiliar for Common Law lawyers.

2. Contractual Causes of Invalidity Competing With Remedies for Non-performance

We now turn to another set of rules which, expressly or implicitly, raise the issue or classification: do these rules affect the validity of contract or rather its non-performance? The issue arises because, [page 640] as we know already (cf. supra I), domestic laws differ on this point or allow the parties to invoke different remedies.

      a) The best known examples for the legal ambiguity and the resultant doubts are mistakes as to the quality of goods or as to the seller's title in them. Should the buyer be restricted to the general remedies for non-performance? Or to those for mistake? Or should he be able to choose between these two remedies? Domestic legal systems give different answers; and these divergent views tend to be extended to CISG [16] since this law -- contrary to the Uniform Sales Law does not contain appropriate "conflict rules".

By contrast, the UNIDROIT Principles deal with this issue. Article 3.6 solves the conflict between the two possible sets of remedies in favour of those for non-performance. This rule generalises the corresponding provisions of the Uniform Sales Law (arts. 34, 53).

      b) A comparable conflict arises with respect to the so-called initial impossibility of performance. The Roman rule "impossibilium nulla est obligatio" had been adopted by many countries.[17] French law had even extended it to the situation where the seller, at the conclusion of the contract, does not have title to the goods sold.[18] However, in more and more countries it is today recognized that this ground of invalidity is based on too naturalistic a conception of a contract; and it is usually unjust towards the party who had relied on performance. There is a noticeable trend to abolish the traditional rule and to apply in these situations the general rules on non-performance.[19]

Article 3.10 deals with these cases by saying, in essence, that initial impossibility as such does not affect the validity of the contract. Of course, there may be a common mistake that may give rise to avoidance. In other circumstances of an impossibility ab initio, the remedies for non-performance apply.

      c) A somewhat different situation is presented by two cases of considerable practical importance that are regulated outside Chapter 3.

           (1) The first concerns "open-price terms." Article 5.7 deals with various instances of such terms. There is one common [page 641] denominator for paragraphs 1-3 of that rule: if there is no other method available for determining the price, when a reasonable price is applicable, however that is to be ascertained in any specific case.

This general rule implies that under the Principles the validity of a contract cannot be questioned on the ground of an "open-price term," for two reasons: First, because in the exhaustive regulation of contractual grounds of substantive invalidity in Chapter 3 "open-price terms" do not occur. And secondly, this negative finding is confirmed by the regulation of the topic in article 5.7 which implicitly validates such a term.

           (2) The same arguments apply to another important aspect of substantive validity, namely limitations and disclaimers of liability. Of course, what is involved here is not the validity of the whole contract but that of a specific clause.

I am referring to article 7.4.13 on exemption clauses. Under this provision, the parties may agree in advance to limit or to exclude their liability for non-performance of their obligations, unless there is a deliberate non-performance or the clause is otherwise unconscionable.

This exception makes it very clear that, as a rule, an exemption clause is valid.

      d) Let me briefly summarize: In all the four instances in which causes of substantive invalidity compete with other remedies, mostly for non-performance, substantive invalidity is excluded. It is replaced by general contractual remedies which presuppose the existence of a valid contract.

3. General Civil Law Causes of Invalidity

Civil law cause of invalidity that are located, and regulated, outside contract law are not covered by the Principles. Article 3.20 enumerates three examples of such reserved heads of invalidity, namely incapacity, lack of authority as well as immorality and illegality.

Whether any of these three heads of substantive invalidity affects a contract, is left to be determined by the applicable domestic law; and that, in turn, is selected by the conflict of laws rules of the forum.

4. Public Law Causes of Invalidity

Even more removed from contract law, although usually more forceful, are causes of invalidity created by public law, such as export or import or foreign exchange restrictions. It goes without saying that the Principles cannot regulate any aspects of domestic public law. This general rule underlies the provisions of articles 6.1.15 to 6.1.18 which lay down some civil law-aspects of a public [page 642] permission which affects, inter alia, the validity of the whole contract or of an individual term. The merely passive role of the Principles is clearly expressed by article 6.1.18 paragraph 1; its first sentence reads:

"The refusal of a permission affecting the validity of the contract renders the contract void."

What is spelled out here for a public permission, is equally true for any other rule of public law which affects the validity of a contract.

Here again, as in the case of general civil law invalidities, the question arises, the public law of which state governs, or even: the public laws of which states govern. This issue is, as is well known to conflicts lawyers, highly controversial. A first draft text of article 1.5 expressly reserved the supermandatory rules of the law of the forum. This solution, however, was too narrow and has been broadened in the final text. Article 1.5 now covers mandatory rules not only of national origin but also those from supranational and international sources. Because of this broadened slope it is now also said that the question whether such rules are applicable is determined by the relevant rules of private international law; "relevant" are the conflict of laws rules of the respective forum.

III. CONCLUSIONS

Let me conclude by returning to the problems of validity of international contracts of sale under CISG (supra I). In the light of the typology of causes of invalidity that I have established, I would like to draw three consequences.

First, in a future revision of CISG which, I suppose, may be called for after 15 or 20 years of practical experience, a genuine effort should be made to integrate certain causes of invalidity. I am referring to those that I have called here contractual (supra II 1 and 2); they are so intimately connected with the parties contractual rights and obligations and their remedies for non-performance that it is most desirable to insulate them from the impact of the diverging rules on invalidity in the various domestic laws.

Second, among the two types of contractual causes of invalidity, a particular need for uniform regulation exists for those that compete with the remedies for non-performance under CISG (supra II 2).

Third, it may seem easy for 15 legal experts to propose more internationally minded rules on substantive validity for international commercial contracts. And it is probably characteristic for worldwide uniform provisions, like those in CISG, to be less international than those in the regional, i.e., European context of the Uniform Sales Law of 1964. Nevertheless, it is remarkable that 15 experts [page 643] from various parts of the world were able to agree upon a wider scope of international regulation than is today contained in CISG. This gives hope for future progress also on the diplomatic level. At the least, the degree of unification reached by ULIS should be a realistic aim for a revised CISG. [page 644]


FOOTNOTES

* ULRICH DROBNIG is director at the Max-Planck-Institute for Foreign Private and Private International law in Hamburg.

1. The six official texts and two translations of CISG (into German and Italian) are published by Bianca and Bonell (ed.), Commentary on the International Sales law. The 1980 Vienna Sales Convention p. 681 ss (1987).

2. Records and Documents of the Diplomatic Conference on the Unification of Law Governing the International Sale of Goods (The Hague, 2-25 April 1964) p 333 ss.

3. Herber in v. Caemmerer and Schlechtriem, Kommentar zum Einheitlichen UN-Kaufrecht (1990) Article 4, no. 7. Cf. also Honnold, Uniform Law for International Sales under the 1980 United Nations Convention (1982) Article 4 B (1), p. 96 ss.; Khoo in Bianca and Bonell, supra n. 1, Article 4, no. 2.6 and 2.7.

4. English Sale of Goods Act 1979 s. 6; French Civil Code of 1804, article 1599, 1601, par. 1; German Civil Code of 1896 306; Netherlands Civil Code of 1838, article 1508, par. 1.

5. Short comparative review in Rabel, 2 Das Recht des Warenkaufs 116-18 (1958).

6. French Civil Code of 1804, articles 1591-1592.

7. Herber, supra n. 3, Article 4, no. 13; Huber in v. Caemmerer and Schlechtriem, supra n. 3, Article 45, no. 86; Schlechtriem, Einheitliches UN-Kaufrecht 19, 66 (1981).

8. Austria: Bydlinski, "Das allgemeine Vertragsrecht," in Doralt (ed.), Das UNCITRAL-Kaufrecht im Vergleich zum österreichischen Recht 57 ss. (86) (1985); Lessiak, "UNCITRAL-Kaufrechtsabkommen und Irrtumsanfechtung." 111 Juristische Blätter 487 ss. (1989).

9. Honnold, supra n. 3, no. 240 (article 35 D (2)).

10. Audit, La vente interntationale de marchandises. Convention des Nations-Unies du 11 avril 1980 (1990), no. 121, although not without some doubt.

11. Honnold, supra n. 3, no. 73 (article 5 B (1)); cf. no. 65 in fine (article 4 B (1) (a)) and no. 240 (article 35 D (2)); cf. also Khoo, supra n. 3, article 4, no. 3.3.5.

12. Audit, supra n. 10, no. 121.

13. Text in Revue de droit uniforme/Uniform law Review 1973 part I 61 ss. and in United Nations Commission on Internationa1 Trade law [UNCITRAL]. VIII Yearbook 104 ss. (1977).

14. UNCITRAL, IX Yearbook (preceding n.) (1978) 65 s.

15. References are to the text established in January 1992 (UNIDROIT Study L -- Doc. 40 Rev. 9).

16. Supra text accompanying on. 7 and 8.

17. References supra n. 4.

18. French Civil Code of 1804, article 1599; Netherlands Civil Code of 1838, article 1507.

19. In the Netherlands, articles 1507 and 1508, paragraph 1 of the Civil Code of 1838 (supra nn. 4 and 18) have not been adopted by the New Civil Code of 1991, Books 3, 5-8.

In Germany, the official Commission for the Revision of the Law of Obligations has proposed to abrogate Civil Code 306, supra n. 4 and to apply to cases of impossibility at the time of conclusion of contract the general rules on non-performance (Bundesminister der Justiz, ed.), Abschlussbericht der Kommission zur Überarbeitung des Schuldrechts 145 (1992).


Pace law School Institute of International Commercial law - Last updated June 26, 2006
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