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2. CRITICAL ANALYSIS OF THE U.S. CASE LAW ON CISG - AN INTERPRETATION OF CISG BASED ON DOMESTIC LAWS AND PRACTICES

• Introduction
• The factual setting of Delchi Carrier, S.p.A. v. Rotorex Corporation
• The decision in Delchi Carrier, S.p.A. v. Rotorex Corporation
• The methodology followed in the Delchi case
• Crticism of the Delchi method
  -     Damages and foreseeability
  -     Mitigation and reasonable expense
  -     Lost profits
  -     Pre-judgment interest
  -     Conversion of award to dollars
• Conclusions on the Delchi case

(a) Introduction

Very few cases interpreting the Convention have been reported in the courts of the United States to date,[788] despite the broad scope of CISG, which applies to all international sales contracts where the seller and the buyer maintain their places of business in different Contracting States, unless expressly opted out of by the parties.[789]

Unfortunately, the first major U.S. Circuit Court decision interpreting CISG is disappointing.[790] The court recognised superficially its additional charge, under Article 7(1) CISG, to interpret CISG in light of its "international character and the need to promote uniformity" in its application, but ultimately failed to articulate a method of interpretation that took into account CISG's international character and the stated goal of uniformity in its application.[791]

(b) The factual setting of Delchi Carrier, S.p.A. v. Rotorex Corporation

The second application of CISG by a U.S. court occurred in 1994. The Circuit Court in the Northern District of New York summarily applied CISG, and that case is the subject of this analysis. The Circuit Court in Delchi Carrier, S.p.A. v. Rotorex Corporation interpreted the damage provisions of CISG, namely Articles 74-78, and discovered gaps that it filled in a variety of ways.[792]

Delchi, an Italian corporation with its principal place of business in Italy, sued Rotorex Corporation, a New York corporation with its principal place of business in Maryland, for damages arising from Rotorex Corporation's breach of a contract to supply Delchi with compressors, with which Delchi would produce air conditioners. Delchi sought consequential damages from the breach and lost profits from the reduced sales of air conditioners.[793]

Apparently, the compressors sent to Delchi were non-conforming. There appears to be no dispute over whether Delchi had the right to cancel the contract, or whether Rotorex was afforded the opportunity to cure. Before the time for delivery had expired, and after having received the first shipment of compressors, Delchi discovered the defect, rejected the compressors and canceled the contract. At the time Delchi canceled the contract, the second shipment was already on its way to Italy. Funds were expended in attempts by Delchi to remedy the defect in the compressors, but to no avail. Through letters of credit, Delchi paid for two shipments that were subsequently held in storage. Previously ordered Sanyo compressors were then shipped by air in order to maintain production, yet Delchi could still not fill all of its orders.

It is noteworthy that the style and format of the judicial opinion are more congruous with civil law opinions than with common law memoranda, since its analysis is concise and conclusory. Rather than employing the language of CISG, such as "avoidance of the contract", the court utilizes the language familiar to those versed in the Uniform Commercial Code. More questions are raised than answered in the court's recitation of the facts and conclusions of law. Oddly, in its recitation of the facts, the court made legal judgments [794] such as declaring that Delchi received fewer compressors than "reasonably expected". The meaning of "fundamental breach" under CISG was not analyzed in Delchi, and is yet to be addressed by U.S. courts.

(c) The decision in Delchi Carrier, S.p.A. v. Rotorex Corporation

The court determined that the compressors failed to conform to the specifications and to the sample provided by Rotorex to Delchi prior to execution of the contract. After Rotorex failed to cure the defects, Delchi brought suit for breach of contract and recovery of damages, including consequential damages for lost profits and certain incidental damages.

Once the court finally addressed the conclusions of law, CISG was identified as the applicable law under Article 1(1)(a). Rather than citing the language of the article and applying it to the facts of the case, the court cited two cases: Filanto, S.p.A. v. Chilewich Int'l Corp.,[795] the first U.S. judicial interpretation of CISG, and Orbisphere Corp. v. United States, an international trade court case that discusses, in a footnote, that CISG is the applicable law to some international sales contracts between the U.S. and foreign parties.[796]

The court awarded consequential damages for the following: expenses incurred as a result of Delchi's attempt to remedy the non-conformity of the goods, due to the foreseeability of the result of Rotorex's breach; expenses for expedited shipment of the Sanyo compressors, since Delchi was required by Article 77 CISG to mitigate its loss; handling and storage expenses of the rejected compressors, as a reasonable expense; and lost profit, as a foreseeable and direct result of the breach. Fixed costs of production were disallowed, since they were accounted for in lost profits; pre-judgment interest was awarded, and when the judgment was converted into dollars Delchi was awarded approximately $1,248,000.

(d) The methodology followed in the Delchi case

The methodology that has been advanced in the present writer's thesis is underpinned by the opinion that a domestic law resolution of an issue does not promote the creation of a uniform and coherent trade law, because decisions based on domestic law are less likely to be adopted by foreign courts.[797] Instead of reverting to domestic rules, courts are urged by Honnold to fill gaps through an analogical application of the Code, a civil law approach.[798] And as noted by Lookofsky, one

"… can hardly expect a totally uniform application, but in the hands of the internationally minded judge or arbitrator, the CISG can serve as a starting point, a good common ground."[799]

The court in the Delchi case set the stage in its decision by pointing out that the case "is governed by the CISG" - an international agreement which requires

"… that its interpretation be informed by its 'international character and ... the need to promote uniformity in its application and the observance of good faith in international trade'."[800]

Interpreting Article 25 CISG, the court held that Rotorex' failure to deliver conforming goods constituted a "fundamental" breach, which is a breach that substantially deprived Delchi of "[what] it was entitled to expect under the contract."[801] Having found a "fundamental" breach, correctly according to the present writer, the court examined Article 74 CISG to determine the recovery amount that would "equal ... the loss" suffered by Delchi, including consequential and incidental damages "suffered by [Delchi] as a consequence of the breach."[802] The court then proceeded correctly to identify "the principle of foreseeability" as the applicable limitation to recovery under Article 74 CISG. However, at this point the encouraging initial signals emitted by the court were replaced by a sudden turn to a domestic analysis of the principle of foreseeability. The court held that "the familiar principle of foreseeability established in Hadley v. Baxendale" [803] applied without any deviation to the principle of foreseeability established in CISG.[804] The court ignored its introduction and proceeded in its analysis in much the same manner as if it had been interpreting a domestic statute. For guidance, it consulted exclusively U.S. decisions and U.S. commentators;[805] no international sources or methods of analysis can be found anywhere in the judgment.

(e) Criticism of the Delchi methodology

The nonchalance of the court's determination that CISG was the applicable law is striking. Furthermore, the judgment in Delchi is more noteworthy for the dearth of analysis and the methodology utilised to support the conclusions, than for the actual reasoning employed.[806]

CISG needs to be examined as an integrated whole rather than through piece-meal interpretation of its articles analysed in isolation from other relevant provisions. As one of the first U.S. courts to interpret CISG, the court in Delchi should have conducted a careful and detailed analysis of all the relevant provisions applied to the facts, including the legislative history of these provisions. Such a thorough application would have been invaluable to the development of the CISG case law. By focusing only on the remedy provisions, the court missed an important opportunity to contribute to the international jurisprudence on CISG.

The critical analysis of the Delchi judgment involves issues of both form and substance. The two main questions to be examined involve the court's methodology (concerning the deference afforded by the court to the international character of CISG), as well as the correct application of CISG on the facts of the particular case. The answers to these questions shed light on how future U.S. courts might interpret CISG.[807]

The court in Delchi seemingly ignored the general consensus concerning the appropriate method of analysis to be employed when interpreting the provisions of CISG.[808] Article 7(1) CISG directs that the language of CISG must be carefully interpreted in accordance with CISG's "international character", the need to promote uniformity in CISG's application and the observance of "good faith in international trade." The present writer argued in Chapter 3 of this work that in CISG the elements of "internationality" and "uniformity" are not only inter-related but also inter-dependent. International (rather than national) interpretation is necessary in order for uniformity in the application of CISG to be achieved and uniformity of application is vital if CISG is to maintain its international character; a goal supported by the language of CISG. On the other hand, an autonomous and uniform interpretation would go a long way towards completing the process of unification and achieving the aims of the drafters of the international instrument.

It was also argued in Chapter 3 that in interpreting CISG the rules and techniques traditionally followed in interpreting ordinary domestic legislation should be avoided and that Article 7 CISG represents an implied provision in the body of the law for the undertaking of a liberal approach to CISG's interpretation. The Delchi case provides a perfect example of the shortcomings that a rigid and narrow approach entails.

It is part of the present writer's thesis that the ultimate aim of CISG - to achieve the broadest degree of uniformity in the law for international sales - cannot be achieved if national principles or concepts, taken from the law of the forum, or from the law which in the absence of CISG would have been applicable according to the rules of private international law, are allowed to be used in the interpretation of CISG. The court in the Delchi case failed totally in these respects.[809] For instance, when the court had to deal with the issues of pre-judgment interest and the conversion of the award into dollars, it failed to follow the methodology demanded by Article 7(2) CISG and, instead, it followed domestic tradition. It showed a complete disregard of the international jurisprudence and doctrine.

The Delchi decision has also been criticised for the conspicuous absence of any reference by the court to the "general principles" on which CISG is based, such as such as the requirement to interpret CISG in "good faith" and to generally "act reasonably".[810] The handling of the foreseeability issue in examining the damages in the case, which will be discussed below, evinces the confusion in which the court was enveloped and exemplifies the approach not to be followed in similar cases.

The court's statement that there was "virtually no case law under the Convention" [811] was probably correct with respect to U.S. case law at the time, but without merit with respect to foreign case law since numerous decisions interpreting Articles 25 and 74 CISG, which would have assisted it, have been rendered by European courts.[812] Thus, foreign case law was either rendered irrelevant, or was completely overlooked and its persuasive value missed.[813]

The court's lack of the requisite international perspective is admitted in its observation that decisions rendered by a U.S. court under the Uniform Commercial Code are very relevant and that such decisions "may also inform a court where the language of the relevant CISG provisions tracks that of the UCC."[814] The court cautioned, however, that the "UCC caselaw is not per se applicable."[815] The court never explained why the Uniform Commercial Code was relevant at all, or why it was not per se applicable. Unfortunately, the court showed a complete lack of appreciation of the nature and importance of CISG's new lingua franca.[816]

(i) Damages and foreseeability

The court in Delchi awarded damages without discussing the CISG provisions dealing with breach and cure. The absence of any discussion of the conduct required by an injured party before it may recover damages is a critical flaw in the court's analysis. Remedy provisions of CISG cannot be completely understood without taking basic concepts, such as fundamental breach, reasonable notice of defect and time to cure,[817] into consideration. The buyer's rights and subsequent recovery of damages are affected by the seller's right to cure.[818]

The facts of the case supported a finding of the requisite amount of foreseeability under both the Article 74 CISG definition of foreseeability, as well as under the Hadley v. Baxendale rule of foreseeability, but doctrinal clarity requires further analysis of the two rules to reach this result.[819]

The dissimilar content of the two formulations of "foreseeability" has been examined by scholars.[820] Article 74 CISG limits recovery for consequential damages to those matters that

"… the party in breach foresaw or ought to have foreseen at the time of the conclusion of the contract, in the light of the facts and matters of which he then knew or ought to have known, as a possible consequence of the breach of contract."

In contrast, the Hadley v. Baxendale rule of foreseeability tends to restrict recovery to a greater degree, in that it requires the loss to have been

"… such as may reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract, as the probable result of the breach of it."[821]

The two foreseeability formulations bear a superficial similarity, but apply different threshold levels. For example, the Hadley v. Baxendale "probable result" limitation appears to be much more restrictive than the "possible consequence" limitation of Article 74 CISG. Article 74 CISG provides the general rule for a calculation of damages for losses suffered by the buyer, or seller, as a result of a breach and seeks to place the injured party in the position it would have been had the other party properly performed the contract.[822] Similar to the U.C.C., the consequences of the breach need only be contemplated by the breaching party.[823] Thus, the foreseeability standard is less stringent under CISG, which increases the liability of the breaching party.[824]

The court did not cite the pertinent language of Article 74 CISG. Instead, it merely declared that the damages sustained by Delchi in its attempt to remedy the nonconformity of the compressors were a foreseeable result of Rotorex's breach.[825]

Despite the lack of analysis on foreseeability and certainty of damage, Delchi received most of its claimed consequential damages, thereby supporting the assertion that there is a trend of liberal recovery of consequential damages in U.S. courts.[826]

(ii) Mitigation and reasonable expense

Even the standards for proving damages were relaxed by the Delchi court. Without citing authority, the court awarded a "reasonable expense" for storage of the non-conforming goods, when Delchi was unable to establish the exact expenditure. This language used by the court echoes that of Article 86(1) CISG,[827] which the court may have read in order to reach its conclusion. It is unclear, however, whether the court was actually referring to CISG, since the court does not cite Article 86 CISG.

In awarding the cost of the expedited shipment of substitute compressors, the Delchi court recognized that Article 77 CISG bars recovery for damages that could have been mitigated. However, the court refused to classify the purchase of substitute compressors as cover, thereby precluding the recovery of direct damages under Article 75 CISG. Paradoxically, it was determined that the shipment of other compressors at an earlier date than was originally planned was an attempt to mitigate damages. However, the court found that they did not replace the non-conforming compressors since they had been previously ordered. Again, the court did not cite the language of Article 75 CISG, which would have supported its conclusion.[828]

(iii) Lost profits

A large portion of the award in Delchi consisted of damages for lost profits arising from Delchi's lost sales of air conditioners. Professors Honnold [829] and Sutton [830] were cited as the only authorities to support the assertion that CISG permits recovery of diminished volume of sales. Honnold discusses the availability for recovery of lost volume of sales only in situations where Articles 75 and 76 CISG provide no redress. However, in Delchi, Articles 75 and 76 CISG were not applicable since the court had held that there was no market differential, or cover. Article 74 CISG explicitly allows the recovery of lost profit, thus rendering the question of recovery of lost volume of sales under the other remedy provisions a moot point.

(iv) Pre-judgment interest

Article 78 CISG authorises recovery of interest on the payment price, or any sum in arrears. Under CISG it is not clear whether a party is entitled to recover interest on an unliquidated amount, which was the case in Delchi. Given the internationally controversial nature of interest,[831] the final language of Article 78 CISG - entitling a party to interest if the other party fails to "pay the price or any other sum that is in arrears" - was a drafting compromise among the Contracting States.

Professor Honnold discusses two situations that fall within the scope of Article 78 CISG; when a buyer delays paying the seller, and when a seller delays refunding the purchase price for defective goods.[832] However, neither of these two situations was applicable in the Delchi litigation.

Honnold also discusses the question of liquidated sums and observes that some jurisdictions do not recognise interest accruing until the amount in arrears is made certain.[833] The U.C.C. makes no mention of the ability to recover interest on incidental damages.[834] A U.S. federal court has commented on the wide availability of pre-judgment interest as follows:

"[u]nless there is a statutory provision to the contrary, the court has broad discretion in deciding whether to award prejudgment interest".[835]

The Delchi court followed the domestic tradition of discretionary awards of pre-judgment interest of unliquidated sums.[836] However, it is far from clear that the drafters of CISG intended that interest on consequential loss, including lost profits, be awarded and calculated at the rate of the debtor's country.[837]

Even if recovery of pre-judgment interest was warranted, there still remains a question of what rate should be used in calculating the interest. Noting that Article 78 CISG does not specify an applicable interest rate, the Delchi court awarded interest at the rate established by U.S. federal law for the award of post-judgment interest.[838] The court made no reference to Article 7 CISG, which provides a uniform application for gap-filling. Nor did it examine the legislative history of CISG or refer to scholarly opinion. Ironically, the court, which was so receptive to scholarly authority on the issue of lost profits, does not follow Professor Sutton's recommendations for interpretations of the gap in Article 78 CISG, which were made in the same journal article that the court cited earlier in its opinion.[839]

The legislative history of Article 78 CISG indicates that it is a controversial provision, because during its drafting there was much debate over its wording.[840] A rule on interest was omitted in earlier drafts of the CISG and there is no commentary, as is provided for other CISG articles,[841] to allow insight on its development. However, a 1976 draft included a provision for interest awards to the seller.[842] Article 58 CISG of this draft provided for interest at the rate of the country of the seller's principal place of business.[843]

While a court is not bound by the rationale employed in previous drafts of CISG, which at times could even mislead the interpreter, it would be wise to examine these drafts in order to get a better understanding of the scope and content of the specific article in the overall context of CISG.[844] There is academic opinion supporting the view that the appropriate interest rate would be the interest rate of the country where the injured party has its place of business, since this is the cost of credit.[845]

In addition, foreign courts have addressed the interest issue, albeit in fact scenarios where the buyer was the breaching party due to nonpayment. Applying a conflict of law analysis, German courts have held that the law of the aggrieved party's country should be applied when determining the interest rate.[846] The International Court of Arbitration applied the law of the place of payment to determine the interest rate owed on an unpaid balance to the seller.[847]

The objections of the present writer on the issue of resorting to domestic laws for settling disputes that arise in connection to the application of CISG, as expounded in earlier chapters of this work, provide criticism for the conflict of laws approach (for hindering uniformity by producing diversity) and favour an approach based on general principles instead.[848] According to the methodology provided in Article 7(2) CISG, determining the method of calculation of interest by a domestic conflicts of law analysis should only be employed as a last resort by a court once general principles of CISG cannot be ascertained.[849] In conformity with the general principles of CISG - specifically, those in Article 74 CISG, which strives to award recovery of suffered losses, and Article 75 CISG, which calculates compensation by the cost of the substitute transaction - interest should be calculated by the cost of credit faced by the injured party.[850] This position is preferable to the other ones noted above, because it keeps the rules of private international law out of the application of CISG and thus supports the thesis of the present writer on the point. By applying the U.S. federal rate, which is the rate of the country of the breaching party, the Delchi court did not promote the uniformity that is the goal of CISG.[851]

(v) Conversion of award to dollars

The Delchi court, citing New York precedent, converted the damages into dollars at the exchange rate effective at the date of the breach.[852] There is no provision in CISG that addresses the proper date for currency conversion. A court may engage in gap-filling, according to the procedures of Article 7(2) CISG, only when a matter is governed by CISG.[853] Obviously, the court did not consider the determination of a date for exchange rate conversion as being governed by CISG, since no gap-filling analysis took place. The rate of conversion may indeed be beyond the scope of CISG since none of the commentaries, including those of Professor Honnold, make mention of the issue.[854] If the matter were governed by CISG and a gap existed, the court would be required to look to the general principles upon which CISG is based.[855] The court offered no discussion on this point, thus missing another opportunity to contribute to CISG's jurisprudence, and simply applied New York law to determine the date for conversion following the "breach-day rule".[856]

The main problem that the conversion of the award could impose on the aggrieved party is that, depending on the relative strength of the dollar to the aggrieved party's home currency, the date of breach may not satisfy the aggrieved party's expectation interest.[857] If a court paid closer attention to this issue and found that CISG governs the matter of conversion, then Article 7(2) CISG could be applied to solve the uncertainty in this area as well and thereby provide greater uniformity in the law. This could happen through analogy to other CISG provisions and by an examination of the general principles of CISG, which could include the protection of an injured party's expectation interest, so that a court may not be required to apply a rigid State law to this issue. However, this would require the court to indulge in a more thorough analysis of CISG's application than the one offered by the court in the Delchi case.

(f) Conclusions on the Delchi case

It is submitted that the court in Delchi failed in its attempt to apply CISG, in both form and substance.

The method of interpretation employed by the Delchi court was completely off the track designed for CISG. It showed good intentions initially, but ultimately failed to live up to the importance of the moment. Commentators have cautioned courts against issuing unnecessarily broad interpretations of the CISG, in order to avoid the establishment of erroneous precedent.[858] The Delchi court appears to have taken their advice to the extreme. The discussion and application of CISG was cursory. Special care and thoroughness were not taken and, thus, the opinion does not provide the much-anticipated insight into a U.S. court's rationale and interpretation of CISG. While the court initially offered encouraging general statements on the scope of CISG's application and the international nature of its interpretation, ultimately it fell back to the familiar and domestic practices and laws and did not engage in the requisite statutory analysis, thereby missing an opportunity to contribute to the international jurisprudence of CISG.

The court missed an important opportunity to engage in an international dialogue with references to foreign decisions and commentaries, civil law principles and the international legislative history of CISG itself. According to an American commentator, the court

"… understood its special mandate to be mindful of 'the international character' in the interpretation of the Convention and 'the need to promote uniformity in its application,' but was clearly unable to overcome its own ethnocentric bias."[859]

Note, however, that more recently there have been encouraging U.S. reports of judicial attention to rulings on the CISG by tribunals and scholars of other jurisdictions. In MCC-Marble Ceramic Center, Inc. v. Ceramica Nuova D'Agostino S.p.A., the key issue of the case is whether CISG Article 8 overrides the U.S. parol evidence rule.[860] The U.S. Circuit Court of Appeals ruled, it does. In its decision, the court paid close attention to CISG doctrine, citing a number of commentators, as well as U.S. case law, in marked contrast to the methodology of the Delchi court. In support of its holding that the CISG rejects the parol evidence rule, the court cited "the great weight of academic commentary on the issue."[861]

This is significant not only because it incorporates an aspect of civil law methodology, but also because it brings an international perspective to the analysis of the Convention as some of the authors cited by the court are prominent scholars trained in the legal traditions of continental Europe.[862]

The court also searched vigorously for guidance from foreign case law applying the Convention, even venturing onto the Internet in hopes of finding relevant decisions from other jurisdictions and lamented the fact that it could locate no relevant foreign CISG case law on the parol evidence issue. This action take by the court is noteworthy, not only because its search for guidance from foreign CISG decisions serves as a precedent, but also because its opinion will alert lawyers to a very valuable research resource mentioned by the court - the Pace Law School web site devoted to the CISG, even though the court missed several other CISG-related resources.[863]

While not citing foreign precedents, as there was none on the issue considered, the court pointed out the need to consider such precedents and discussed relevant U.S. decisions.

Compared to the approach taken by the court in Delchi, the methodology employed in MCC-Marble represents real progress. The latter represents a reasonably successful attempt to implement the mandate of CISG Article 7(1) to interpret the Convention with regard for its international character and the need to promote uniformity in the Convention's application and a positive development for CISG jurisprudence in the United States.

The MCC-Marble decision has been welcomed by the academic community [864] and has generated justifiable optimism that the U.S. courts are starting to approach the task of interpeting CISG with the requisite attitude and methodology that respects CISG's international character and promotes uniformity in the Convention's application.[865]

It is hoped that the above critical analysis of the U.S. case law has highlighted the practical dimensions of the theoretical difficulties associated with the interpretation of CISG, thus putting the issue of CISG's interpretation and application in its functional context, over and above the academic one. At the end of the day, the litmus test of CISG's function as the uniform law of international sale of goods will take place at the practical level - in courts and arbitral centres.

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Go to entire text of Felemegas commentary

FOOTNOTES

* Based on Doctoral Thesis submitted to the University of Nottingham in June 2000, with subsequent revisions in response to Professor Kritzer's critique.

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788. By January 2001, the Pace website had reported few more than a dozen cases where a U.S. court was called to rule on or mention the CISG. For citations to the other U.S. rulings, see: <http://www.cisg.law.pace.edu/cisg/text/casecit.html#us>. However, very few of these cases deal with the interpretation the CISG; see Filanto, S.p.A. v. Chilewich Int'l Corp., 789 F. Supp. 1229 (S.D.N.Y. 1992); Delchi Carrier, SpA v. Rotorex Corp., 71 F.3d 1024 (2d Cir. 1995). A more recent case that deals with CISG's interpretation is MCC-Marble Ceramic Center, Inc. v. Ceramica Nuova D'Agostino S.p.A., (29 June 1998, U.S. Cir. Ct.), supra note 765. See also Medical Marketing International, Inc. v. Internazionale Medico Scientifica, S.r.l. (17 May 1999, U.S. Dist. Ct.), supra note 768.

789. Article 1(1) CISG provides: "This Convention applies to contracts of sale of goods between parties whose places of business are in different States: (a) when the States are Contracting States; or (b) when the rules of private international law lead to the application of the law of a Contracting State." Article 6 CISG states that "the parties may exclude the application of this Convention …"

790. Note that the U.S. Circuit Court of Appeals (5th Circuit) had come up with an earlier dissapointing decision. In Beijing Metals & Minerals Import/Export Corp. v. American Business Center. Inc., 15 June 1993 (CLOUT no. 24), a Chinese manufacturer and a U.S. importer agreed to develop the North American market for the manufacturer's weight lifting equipment. Following a dispute, the parties concluded a modified payment agreement in writing. When the Chinese manufacturer sought to enforce the payment agreement, the U.S. importer raised defences under alleged contemporaneous oral agreements with respect to the manufacturer's supply obligations. The lower court excluded the testimony about oral agreements under Texas state's "parol evidence" rule.

The appellate court declined to resolve the dispute about whether CISG or state law applied to the parties' contract because it concluded that to do so would be unnecessary to its decision. Nevertheless, the court stated expressly that the parol evidence rule "applies regardless" of whether CISG applied or not; see <http://cisgw3.law.pace.edu/cases/930615u1.html> for Prof.Kritzer's editorial note. Also see MCC-Marble Ceramic Center, Inc. v. Ceramica Nuova D'Agostino S.p.A., supra note 765, where the 11^th Circuit of the U.S. Court of Appeals had the following to say about the 5th Circuit ruling in the Beijing Metals case:

"Without resolving the choice of law question, the Fifth Circuit cited Filanto for the proposition that there have been very few reported cases applying the CISG in the United States, and stated that the parol evidence rule would apply regardless of whether Texas law or the CISG governed the dispute. […] The opinion does not acknowledge Filanto's more applicable dictum that the parol evidence rule does not apply to CISG cases nor does it conduct any analysis of the Convention to support its conclusion. In fact, the Fifth Circuit did not undertake to interpret the CISG in a manner that would arrive at a result consistent with the parol evidence rule but instead explained that it would apply the rule as developed at Texas common law. […] As persuasive authority for this court, the Beijing Metals opinion is not particularly persuasive on this point".

791. See Cook (1997), supra note 750, who is of the same opinion with the present writer.

792. See Delchi Carrier, S.p.A. v. Rotorex Corp., No 88-CV-1078, 1994 WL 495787 (N.D.N.Y. Sept. 9, 1994); 71 F.3d 1024 (2d Cir. 1995).

793. From the facts in the opinion, Delchi made no claims for direct damages.

794. While courts have great discretion to award damages due to the vague and uncertain rules of both civil and common law, questions of law or of secondary facts as they are named in the U.K. are reviewable on appeal since they are not pure questions of fact; see G.H.Treitel, Remedies for Breach of Contract (1988) 176.

795. Filanto, S.p.A. v. Chilewich Int'l Corp., 789 F. Supp 1229 (S.D.N.Y. 1992), appeal dismissed, 984 F.2d 58 (2d Cir. 1993).

796. Orbisphere Corp. v. United States, 13 C.I.T. 866, 726 F. Supp. 1344, 1355 fn.7 (Ct. Int'l Trade 1989). The court fails to note that according to Article 95 and the reservation by the U.S., CISG does not apply to transactions between U.S. parties and foreign parties whose principal place of business is not in a contracting party's State.

797. See Chapters 3 and 4 of this work, supra; see also, Honnold (1988), supra note 367, at 211.

798. See Honnold (1988), supra note 367, at 211.

799. J.M.Lookofsky, Consequential Damages in Comparative Context (1989) 294.

800. Delchi, 71 F.3d, 1024 (2d Cir. 1995), at 1027-28.

801. Ibid., at 1028. Article 25 CISG provides: "A breach of contract committed by one of the parties is fundamental if it results in such detriment to the other party as substantially to deprive him of what he is entitled to expect under the contract, unless the party in breach did not foresee and a reasonable person of the same kind in the same circumstances would not have foreseen such a result."

802. Delchi, 71 F.3d, at 1029.

803. (1854) 156 Eng. Rep. 145.

804. Delchi, 71 F.3d, at 1029.

805. In a literal sense, the Delchi court quotes one foreign source, Hadley v. Baxendale. However, this 1854 English decision has been an integral part of U.S. jurisprudence for many years. See Murphey (1989), supra note 716, at 416, fn.5 (stating that Hadley "has been one of the more important cases for students in American law schools".); see also Delchi, 71 F.3d, at 1028 (referring to the Hadley rule as "the familiar principle of foreseeability").

806. For similar academic criticism of the Delchi case, see Cook (1997), supra note 750; Darkey (1995), supra note 564; both available on the Pace Law School website.

807. In addition, Delchi creates precedent for the application of the damage provisions of CISG.

808. See, e.g., Honnold, (1991), supra note 53, at 135-161; Darkey (1995), supra note 706, at 140-142; see also F.Ferrari, "Specific Topics of the CISG in the Light of Judicial Application and Scholarly Writing", 15 J.L. & Com. (1995) 1, at 8-13.

809. In the context of the Delchi case, Cook is of the opinion that "good faith" mandates an interpretation that takes account of non-U.S. principles and interpretations developed by the other Contracting States to the Convention; see Cook (1997), supra note 750.

810. See Cook, ibid.

811. Delchi, 71 F.3d, at 1028.

812. See, e.g., 2 Guide to Int'l Sale Goods Convention (Business Laws, Inc.) 201.070, 201.167 (June 1996) (providing annotations of domestic and foreign courts for each CISG article, specifically Articles 25 and 74). See also 9 Pace International Law Review (1997) 218-220, containing citations to 37 case law interpretations of Article 82 ULIS. The significance of this additional body of case law is:

When the CISG legislators undertook their work they commenced with the text of ULIS. In certain cases, ULIS language was carried forward and put into the CISG in precisely the same setting as under ULIS. This was the case with Article 82 ULIS. Its effect is substantively the same as the text that became Article 74 CISG. Hence, case law on Article 82 would also appear relevant to the proper interpretation of Article 74 CISG. As stated by Mann, in Mann (1983), supra note 359, at 383: "It is simply common sense that if the Convention adopts a phrase which appears to have been taken from one legal system … where it is used in a specific sense, the international legislators are likely to have had that sense in mind and to intend its introduction into the Convention."

813. See Honnold (1988), supra note 367; Cook (1988), supra note 363.

814. 71 F.3d, at 1028 (citing Orbisphere Corp. v. United States, 726 F. Supp. 1344, 1355 (Ct. Int'l Trade 1989)).

815. 71 F.3d, at 1028.

816. For a discussion of the nature and importance of CISG's language, see Ch. 2 of this work, supra.

817. See J.Vilius, "Provisions Common to the Obligations of the Seller and the Buyer", in P.Sarcevic & P.Volken eds., International Sale of Goods: Dubrovnik Lectures (New York: Oceana, 1986), at 239-40. Article 25 CISG defines fundamental breach and Article 37 delineates the seller's right to cure nonconformity.

818. See E.C.Schneider, "The Seller's Right to Cure Under the UCC and UNCISG", 7 Ariz. J. Int'l & Comp. L. (1989) 69, at 102.

819. See Murphey (1989), supra note 716 (analyzing the differences between Article 74 CISG and Hadley v. Baxendale); J.S.Ziegel, "Canada Prepares to Adopt the International Sales Convention", 18 C.B.L.J. (1991) 1, at 14.

820. See Murphey (1989), supra note 716, at 420, 430-31; Ziegel (1991), supra note 819, at 14.

821. Hadley (1854) 156 Eng. Rep. 151.

822. See Murphey (1989), supra note 716, at 420.

823. See U.C.C. § 2-715(2)(a) (1987).

824. Article 74 CISG provides both an objective and subjective test for foreseeability, and the consequence of the breach need only be possible; see Murphey (1989), supra note 716, at 439-40.

825. In contrast, the court refused to allow recovery for the cost of production line employees' down time, which occurred because there were not conforming compressors to be installed. Making no mention of foreseeability, the court denied recovery on the basis that the costs were fixed and as such, they were accounted for in recovery of lost profits.

826. See Murphey (1989), supra note 716, at 422-24. Further, as noted by commentators, CISG increases the breaching party's liability beyond what the party is exposed to under the U.C.C: see Murphey, ibid., at 439-40; F.Ferrari, "Comparative Ruminations on the Forseeability of Damages in Contract Law", 50 Ohio St. L. J., 737. Therefore, given the predisposition of U.S. courts to liberal recovery of damages and the less stringent foreseeability requirement of CISG, an aggrieved party bringing suit on a CISG claim in a U.S. court should be well satisfied.

827. Article 86(1) CISG states that "[i]f the buyer has received the goods and intends to exercise any right under the contract or this Convention to reject them, he must take such steps to preserve them as are reasonable in the circumstances. He is entitled to retain them until he has been reimbursed his reasonable expenses by the seller." (emphasis added).

828. Article 75 CISG states that "[i]f the contract is avoided and if, in a reasonable manner and within a reasonable time after avoidance, the buyer has bought goods in replacement or the seller has resold the goods, the party claiming damages may recover the difference between the contract price and the price in the substitute transaction as well as any further damages recoverable under Article 74." (emphasis added).

829. See Honnold (1991), supra note 53, at 416.

830. See J.Sutton, "Measuring Damages Under the United Nations Convention on the International Sale of Goods", 50 Ohio St. L.J. (1989) 737.

831. See Darkey (1995), supra note 564, the text corresponding to fn.46, where she mentions that some States prohibit or limit the rate of interest due to religious or public policy rationales.

832. See Honnold (1991), supra note 53, at 424-5.

833. See Honnold, ibid.

834. See G.H.Cain, "The Vienna Convention: Posing a New International Law of Sales", 57 Conn. Bar. J. (1983) 327, at 336.

835. Ambromovage v. United Mine Workers, 726 F.2d 972, at 982 (3d Cir. 1984).

836. See In re Vic Bernacchi & Sons, Inc., 170 B.R. 647, 657 (Bkrtcy. N.D. Ind. 1994) (citing Board of County Comm'rs of Jackson v. United States, 308 U.S. 343, 352 (1939)).

837. See Darkey (1995), supra note 564, at fn. 52, where she notes that this "is especially true in view of the reluctance of Muslim nations to include interest as a recoverable damage award at all. It is even unclear under U.S. law whether interest on consequential damages should be awarded. Honnold remarks that an interpretation of the Restatement (Second) of Contract provision for allowance of interest in cases 'as justice provides' could support such an award" and cites Honnold (1991), supra note 53, at 422, fn.7 (citing Restatement (Second) of Contracts § 354, ¶ 2, cmt. d).

838. See Darkey, ibid., at fn.53, who makes this observation: "Even though 28 U.S.C. § 1961 does not set a standard for determining the rate of prejudgment interest, courts have used it for such a purpose."

839. Professor Sutton advocates the use of prior drafts as a source for determining the calculation of interest, see Sutton (1989), supra note 830, at 749.

840. See Honnold (1991), supra note 53, at 422; Sutton (1989), supra note 830, at 749.

841. See Sutton (1989), supra note 830, at 749 (citing "Comments by Governments and International Organizations on the Draft Convention on the International Sale of Goods", in [1977] 8 Y.B. Int'l L. Comm'n 109; U.N. Doc. A/CN.9/125).

842. Ibid., citing "Draft Convention on the International Sale of Goods, Art. 58", in [1976] 7 Y.B. Int'l L. Comm'n 89, at 94; U.N. Doc. A/CN.9/116, annex. I.

843. See Sutton (1989), supra note 830, at 749.

844. Furthermore, the proposal that the rate of interest be determined by applicable domestic law of the forum was rejected at a diplomatic conference; see G.Corney, "Obligations and Remedies Under the 1980 Vienna Sales Convention", 23 Queensland L. Soc. J. (1993) 37, at 56.

845. See Sutton (1989), supra note 830, ibid., at 750, where he comes to this conclusion on a combination of the fact that Article 78 CISG extends interest recovery to the buyer as well as to the seller and by an extension of the analogous provision of the previous draft of the article in question.

846. Landgericht Stuttgart; 3KfH O 97/89 31 Aug. 1989, abstract in 14 J.L. & Com. (1995) 225; Landgericht Hamburg; 5 O 543/88 9 Sept. 1990, abstract in 14 J.L. & Com. (1995) 228; Amstgericht Oldenberg in Holstein; 5 C 73/89 24 Apr. 1990, abstract in 14 J.L. & Com. (1995) 227.

847. International Court of Arbitration (ICA) Matter No. 7153 in 1992, translated in 14 J.L. & Com. (1995) 217. However, the law is unsettled on this issue, as arbitrators have adopted the rate of the country of the creditor or that of the state of the agreed currency. See Callaghan (1995), supra note 423, at 198.

848. See, mainly, Chapter 4 of this work, supra.

849. See Rosett (1984), supra note 114, at 270-71, stating that CISG's drafters explicitly did not want a judge to refer to domestic law. Cf. J.D. Feltham, "The U.N. Convention on Contracts for the International Sale of Goods", J. Bus. L (1981) 346, at 359, where he states that the interest rate is "presumably a matter for appropriate national law".

850. For academic support on this issue, see the views of the major contributor to CISG's doctrinal writings, Honnold (1991), supra note 53, at 423-24.

851. See Article 7(1) CISG. See also, Chapter 3 of this work, supra. Furthermore, the court was incorrect to apply a federal statute rather than a State statute to determine the rate of interest, since in diversity cases federal courts look to State law for rules of computing prejudgment interest; see Oil Spill, 954 F.2d, at 1333.

852. Citing Middle East Banking v. State Street Bank Int'l, 821 F.2d 897, 902-03 (2d Cir. 1987). The parties in the Delchi case did not dispute that the exchange rate on the date of breach was proper.

853. See Chapter 3 of this work, supra.

854. Although it is probably safer to say that currency conversion goes to compensation, which plainly falls within CISG.

855. For the methodology to be used in identifying the "general principles" of CISG, see Chapter 4 of this work, supra.

856. There is no Federal Rule of Civil Procedure addressing the issue of judgments on foreign money claims. For a discussion of the development of the New York "breach-day rule" and alternative approaches, see R.A.Brand, "Exchange Loss Damages and the Uniform Foreign-Money Claims Act: The Emperor Hasn't All His Clothes", 23 L. & Pol'y Int'l Bus. (1992) 1, at 7.

857. See Brand, ibid., at 7-8.

858. See R.Brand & H.Flechtner, "Arbitration and Contract Formation in International Trade: First Interpretations of the U.N. Sales Convention", 12 J.L. & Com. (1993) 239, at 260.

859. See Cook (1997), supra note 750, at 263.

860. 144 F.3d 1384 (11th Cir. 1998), supra note 765. See also H.M. Flechtner, "The U.N. Sales Convention (CISG) and MCC-Marble Ceramic Center, Inc. v. Ceramica Nuova D'Agostino, S.p.A.: The Eleventh Circuit Weighs in on Interpretation, Subjective Intent, Procedural Limits to the Convention's Scope, and the Parol Evidence Rule", 18 Journal of Law and Commerce (1999) 259; also at <http://www.cisg.law.pace.edu/cisg/biblio/flechtner1.html>.

861. Authorities cited for the proposition that the CISG excludes the common law parol evidence rule include R.A. Brand & H.M.Flechtner, "Arbitration and Contract Formation in International Trade: First Interpretations of the U.N. Sales Convention", 12 J.L. & Com. (1993) 239; H.M.Flechtner, "More U.S. Decisions on the U.N. Sales Convention: Scope, Parol Evidence, 'Validity' and Reduction of Price Under Article 50", 14 J.L. & Com. (1995) 153; J.Honnold, Uniform Law for International Sales Under The 1980 United Nations Convention (2d ed. 1991); A.H.Kritzer, Guide to Practical Applications of the United Nations Convention on Contracts for the International Sale of Goods, (1994 Supp.); J.E.Murray, Jr., "An Essay on the Formation of Contracts for the International Sale of Goods", 8 J.L. & Com. (1988) 11; P.Winship, "Domesticating International Commercial Law: Revising U.C.C. Article 2 in Light of the United Nations Sales Convention", 37 Loy. L. Rev. (1991), 43. Contrary authority cited was D.H.Moore, "The Parol Evidence Rule and the United Nations Convention on Contracts for the International Sale of Goods: Justifying Bejing Metals & Minerals Import/Export Corp. v. American Business Center, Inc.", 1995 BYU L. Rev. (1995), 1347.

862. Citing, inter alia, Herbert Bernstein & Joseph Lookofsky, Understanding the CISG in Europe (1997) 29; see 144 F.3d, at 1390, fn.17.

863. The court apparently was not aware of several other valuable resources for researching foreign CISG case law. These include, in addition to French and German CISG web sites, the CLOUT publication by UNCITRAL (containing abstracts of CISG decisions in the official languages of the United Nations), and the UNILEX database published by the Centre for Comparative and Foreign Law Studies in Rome.

For a more comprehensive listing of CISG-related websites and other useful resources, see Chapter 3, supra. Research in these other sources, however, would probably have confirmed the court in its decision that the parol evidence rule should not bar the buyer's evidence in MCC-Marble. For example, the UNILEX database cites a German case that, according to its English summary, asserts as a general principle that oral agreements are valid under the CISG even if they contradict written versions. See OLG Hamm (Germany), UNILEX, No. 19 U 97/91 (Sept. 22, 1992).

864. See, e.g., Flechtner (1999), supra note 860, at 270, who declares:

"The MCC-Marble opinion reveals a court striving to transcend its background in domestic U.S. law, energetic in pursuing an international perspective on the Convention's meaning, and informed, thoughtful and coherent in its grasp of CISG provisions and their implications. This constitutes genuine progress towards meeting the requirements of Article 7(1). The opinion, however, is not without flaws. Its imperfections highlight the U.S. legal community's ignorance of some of the resources available for understanding and interpreting the CISG, and the resulting difficulty in fully grasping some substantive implications of the Convention's text. Not surprisingly, the court's steps into the unfamiliar territory of international legal methodology are modest, tentative and cautious. On the whole, nevertheless, the Eleventh Circuit's analysis and approach represents an encouraging development in CISG jurisprudence in the United States."

865. For a more recent U.S. judicial reference to an interpretation of the CISG by a court of another Contracting State, see Medical Marketing International, Inc. v. Internazionale Medico Scientifica, S.r.l. (17 May 1999, U.S. Dist. Ct.), supra note 768. Note, also, that in Downs Investments v. Perwaja Steel SDN BHD (17 November 2000), the Supreme Court of Queensland referred to both doctrine and jurisprudence in holding that the buyer's refusal to establish a timely letter of credit was clearly a fundamental breach within the meaning of Article 25 and Article 64(1)(a) of the Convention, supra note 771.

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Pace Law School Institute of International Commercial Law - Last updated April 4, 2001

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