Excerpt from John O. Honnold, Uniform Law for International Sales under the 1980 United Nations Convention, 3rd ed. (1999), pages 115-123 Reproduced with permission of the publisher, Kluwer Law International, The Hague.
§104 Article 7 dealt with interpretation of the Convention; the present Article deals with the interpretation of the statements and conduct of the parties.
"(1) For the purposes of this Convention statements made by and other conduct of a party are to be interpreted according to his intent where the other party knew or could not have been unaware what that intent was.
"(2) If the preceding paragraph is not applicable, statements made by and other conduct of a party are to be interpreted according to the understanding that a reasonable person of the same kind as the other party would have had in the same circumstances.
"(3) In determining the intent of a party or the understanding a reasonable person would have had, due consideration is to be given to all relevant circumstances of the case including the negotiations, any practices which the parties have established between themselves, usages and any subsequent conduct of the parties."
§ 105 A. The Function and Scope of Article 8
In discussing Article 7 (§103.1, supra), attention was drawn to the need to apply rules for statutory construction with close attention to the [page 115] character of the statute and the texture of the statutory provision in question. This principle applies with even greater force to Article 8’s rules for the interpretation of contracts. Article 7 on interpretation of the Convention was drafted by the body that drafted the language of the Convention to which Article 7 applies; the provisions of Article 8 on the interpretation of contracts apply to language used by others—private parties acting in a remarkably wide variety of situations. The settings range from brief telephone or telex communications for small or routine purchases to detailed contracts negotiated for large and complex transactions. The provisions of Article 8 apply and are relevant to these various types arrangements but have special significance for agreements that have not resulted from detailed negotiations; even detailed agreements are often modified by informal communications. Article 8 is also applicable to questions of interpretation that arise under the contract when the contract is made by an exchange of communications and also when the parties join in executing a single instrument. And, since Article 8 is broadly applicable to "statements made by and other conduct of a party," it reaches post-contract communications and actions, many of which have legal effect and may raise significant problems of interpretation.[page 116]
§106 B. Basic Approaches to Interpretation: Subjective Intent v. Objective Meaning
In preparing the present article, UNCITRAL had to face and reconcile conflicting theories about the fundamental nature of the process of contracting. According to one early theory, a person should be bound by contract only when he subjects his "will" to the terms of the contract. In some legal systems this contributed to the view that one’s obligation was defined by his "intent" or "consent," or that making a contract required a "meeting of the minds."
The image of a meeting of two minds is attractive but it raises practical difficulties. When a dispute arises over the "meaning" of a contract, the contending parties are scarcely reliable witnesses as to what was in their minds when they made the contract. Moreover, language is such an imprecise medium that shades of differences of understanding are latent in many of the agreements on which commerce depends; a purely "subjective" approach could undermine protection for reasonable reliance on expectations created by another.
These difficulties led many jurists and legal systems to reject "intent" as a basis for the contract. This view was vigorously expressed by Oliver Wendel Holmes: "The law has nothing to do with the actual state of the parties’ minds. In contract, as elsewhere, it must go by externals, and judge parties by their conduct." Some legal systems, while clinging to the "subjective" or "mutual intent" theory, have limited this approach to prescribed categories, and have devised remedies to protect a "speaker" when the "hearer" knew or should have known of the ambiguity. However, for the most part, current references to "will" as the basis for contract resemble the echoes of distant thunder from a storm that has passed.[page 117]
Paragraph (1) is built on the "subjective" approach: Interpretation is to be based on a speaker’s "intent"—but only "where the other party knew or could not have been unaware" of the intent. However, because of the practical barriers to proving identity between the intent of the two parties (particularly when they are involved in a controversy) most problems of interpretation will be governed by paragraph (2) which follows the "objective" approach: Statements by a speaker (Party A) "are to be interpreted according to the understanding that a reasonable person of the same kind as the other party " (Party B) " would have had in the same circumstances."
FR. CA Grenoble, RG/3275, 22 February 1995. SARL Bri. "Bonaventure" v. SPAE. S "could not have been unaware" of B’s intent to resell in France; consequently, S was bound to follow French standards. CLOUT 154, UNILEX D. 1995–7. See: Schlechtriem, Com. (1998) 71–72.
§107.1 (a) Article 8(2) and Protective Legislation
Article 8(2) places the burden on one who prepares a communication or who drafts a contract to communicate clearly to a reasonable person in the same position as the other party. This provision has roots in the classic rule that doubts are to be resolved against the drafter (contra proferentem), but the application of this principle has special significance in international sales. When the parties are based in different language and legal settings, the party who makes a proposal must avoid using expressions that are obscure, or, even worse, are "false friends" (des faux amis) with one "clear" meaning to the one who writes and a different "clear" meaning to the one who reads. These problems, intrinsic to language, rise to a higher power in our area through the use of legal terms with different meanings in different legal cultures ( e.g., "warranty", "condition", "disclaimer", "trust") and mercantile terms with divergent meanings in different areas or settings. CISG 8(2) does not, of course, give binding effect to what the listener or reader (Party B) personally understood but, instead, to the understanding of "a reasonable person of the same kind " as the "other party"—a principle that responds to the fact that only the one who communicates has an opportunity to consider and choose among alternative modes of expression and also takes account of a drafter’s opportunity to hide an unpleasant meaning through "the intellectual superiority of the legal virtuoso".[page 118]
Article 8(2) has interesting points of contrast and similarity in relation to various types of domestic protective laws. Some of these laws apply only to sales to consumer as defined in Article 2(a), §50, supra, and consequently are outside the scope of the Convention. However, some protective legislation may overlap with CISG. See §§232, 236, infra. Hence a preliminary analysis of these laws in relation to Article 8(2) can provide helpful background for problems that we shall meet later.
One type of domestic legislation denies effect to contract terms on the ground that they impose excessively harsh consequences even though these contract terms were (or should have been) understood by the other party. Article 8(2) is quite different for it is concerned only with the interpretation of the contract. A second type of domestic law denies full effect to standard terms and form contracts prepared by one party on the ground that the other party may not grasp their full import; this type is closely related to Article 8(2). A third type restricts the effect of standard terms or forms on the ground that their use is so widespread that they deny contractual freedom to the other party. Other laws are difficult to classify for they may reflect concern for both clarity and fairness, or the basis for the law may be unclear.
Determining the basis and impact of these laws is important in deciding whether they are displaced by the Convention. The first and third types, above, do not invade the area of interpretation occupied by Article 8 and are preserved by Article 4 which states that the Convention "is not concerned with: (a) the validity of the contract or of any of its provisions..." The relationship between the second type of domestic law and the Convention will be explored in more detail in discussing Article 35 on conformity of goods to the contract (§§230–234, infra ).
The above suggestion that under Article 8(2) ambiguity in a statement [page 119] is to be resolved against the party who formulated this statement has considerable significance in view of the wide disparities between the modes of expression and expectations in the different areas and types of enterprises that may meet in international trade. Although this interpretation of Article 8(2) may be disputed, it will at least be prudent for a party in formulating a proposal or other statement to take care that it not be given a different understanding by (Art. 8(2)) "a reasonable person of the same kind as the other party".
Following are decisions applying Art. 8(2): (1) GER. LG Hamburg, 5 O 543/88, 25 September 1990: B claimed not obligated to pay S, on the ground that B was acting on behalf of a third party, X. The court rejected this defense: There was no reason for S to understand that B was acting for X. CLOUT 5; UNILEX D. 1990–6. Cf. GER. OLG Karlsruhe, 15 U 29/92, 20 November 1992; GER. LG Oldenburg, 12 O 2943/94, 28 February 1996. UNILEX D. 1996–3.2.0. (2) GER. OLG Hamm, 11 U 206/93, 8 February 1992 (application of trade usages under Art. 8(2) & (3)). See: Rider, C., Who Bears the Cost of Misunderstanding? 61 NY State Bar. J. (Oct. ’89) 56–61. Cf.: General provisions on trade usages in Art. 9, infra.
§109 D. Interpretation in the Light of Surrounding Circumstances
Paragraph (3) (unlike Paragraph (2)) states rules of interpretation that, inter alia, apply to statements embodied in an agreement formulated by both parties. (See §105, n. 3, supra. ) Article 8(3) cuts through technical rules that might bar access to relevant materials: "Due consideration" is to be given to " all relevant circumstances of the case," including (a) negotiations, (b) practices established between the parties (Art. 9(1)), (c) usages (Art. 9(2)) and (d) the parties’ subsequent conduct.
Let us suppose that one party contends that the agreement, although not expressing result "X," should be construed to reach this result. May a tribunal consider evidence that this party proposed that the contract state result "X" but that this proposal was rejected? Under Article 8(3), such negotiations are "relevant" to the interpretation of the agreement and should be given "due consideration"; of course, they are not conclusive.
Party’s Standard Terms: AUSTRIA, [page 120] ObG (Sup. Ct.), 10 Ob 578/95, 6 February 1996. A German buyer (B) ordered goods from an Austrian seller (S). S refused to deliver; B sued for loss of profit (Art. 74, infra). S claimed that there was no valid contract since a clause in S’s standard terms required contracts to be in writing. S’s claim was rejected: there was no express or implied agreement concerning the clause in S’s standard terms. UNILEX D.1996–3.1. See Bonell/Ligouri, ULR (1997–3) 583, n. 66.
Jurists familiar with the common law will be intrigued by the relationship between Article 8(3) and the "parol evidence rule." This so-called "rule" (as aptly named as the Holy Roman Empire) has been used to bar the consideration of any agreement (whether or not "parol") that contradicts a contemporary or subsequent writing "intended by the parties as a final expression of their agreement"; the rule also bars a prior agreement in relation to a writing which was intended "as a complete and exclusive statement of the terms of the agreement." (The quoted phrases are taken from the relatively mild version of the "parol evidence rule" of (U.S.A.) UCC 2–202.)
Article 8 does not directly address the "parol evidence rule"; references to this and other technical domestic rules would have cluttered the draft and would have mystified jurists from legal systems that have no such rule. But the language of Article 8(3) that "due consideration is to be given to all relevant circumstances of the case" seems adequate to override any domestic rule that would bar a tribunal from considering the relevance of other agreements. Jurists interpreting agreements subject to the Convention can be expected to continue to give special and, in most cases, controlling effect to detailed written agreements. And contract terms (often called "integration clauses") that any contemporaneous or prior agreement shall be without effect would be supported by Article 6, which gives effect to the contract. But Article 8(3) relieves tribunals from domestic rules that might bar them from "considering" any evidence between the parties that is relevant. This added flexibility for interpretation is consistent with a growing body of opinion that the "parol evidence rule" has been an embarrassment for the administration of modern transactions.[page 121]
A lawyer preparing for trial at common law may note that the parol evidence rule has its greatest significance in restricting the role of juries in the field of contract interpretation. The Convention, of course, does not interfere with domestic rules on the allocation of authority between the judge and jury, and would not interfere with the decision to exclude from a jury evidence of prior or contemporaneous agreements if (in the apparently circular language of UCC 2–202) "the court finds" (after giving due consideration to all relevant circumstances) that the writing was "intended also as a complete and exclusive statement of the terms of the agreement."
"Parol evidence rule", decisions: (1) U.S. Court of Appeals (11th Cir. 29 June 1998) 47–4250; MCC-Marble Ceramics (US; B) v. Ceramica Nova...(Ital.; S). In October 1990, following an oral agreement by S and B on terms, at S’s request B signed one of S’s standard order forms, on which the agreements, noted above, were entered. The front of the form, in Italian, stated that the buyer "is aware of the sales conditions stated on the reverse and approves them". B did not understand Italian. In February 1991 S and B agreed on a requirements contract; B signed a number of S’s standard order forms for deliveries under this agreement. B sued S for breach of the 1991 contract; S counter-claimed on the ground, inter alia, that B had defaulted on payment for prior shipments. The District (lower) Court, relying in part on the printed provisions in S’s standard forms, entered summary judgment (i.e. without further examination of facts offered by B) in favor of S.
On review by the Court of Appeal, one issue was whether B was bound by certain provisions on S’s standard forms signed by B. The crucial question was whether the lower court erred in entering summary judgment for S without considering B’s claim that these standard provisions were inconsistent with provisions on which the parties had agreed orally before signing the standard forms. In support of the decision, S invoked the domestic "parol evidence rule" denying effect to such oral agreements. (See §110, above.)
The Court of Appeals ruled that the domestic "parol evidence rule" was inconsistent with the CISG, Article 8(3) of which provided that, in [page 122] determining an intent or understainding, "due consideration" must be given to "all relevant circumstances...including negotiations..." (See the full text of Article 8, supra.) In this decision, the court relied on the approach of the present author (§110, supra) and the conclusions of other writers, including: Del Duca, Lookofsky, Flechtner, Murray and Winship (op. cited supra, I. OVERVIEW at 2(b). See also: U.S. Dist. Ct. (S.D.N.Y. 6 April 1998) 96 Civ. 3253, C. Claudia v. Olivieri F., Dicta: Contracts under CISG are free from the parol evidence rule (1998 U.S. Dist. LEXIS 4586); U.S. Filanto S. v. Chilewich I. Corp., 789 F. Supp. 1229 (S.D.N.Y. 1992), id. at 1238 n. 7. CLOUT 23, UNILEX D. 1992–9.
Parol Evidence Rule: Law or Procedure. In MCC-Marble Ceramics (29 June 1998), supra, S argued that the parol evidence rule was a rule of procedure (i.e., like exclusion of hearsay) rather than of law, and therefore was not governed by legal rules under CISG. The Court of Appeals rejected this argument, citing Farnsworth on Contracts, §7.2 at 194 & 196 n. 16, citing cases (1990).
Article 8(3) authorizes "due consideration" for conduct subsequent to the agreement since this may shed light on the intentions and expectations of the parties. Under UCC 2–207(3) "conduct by both parties which recognizes the existence of a contract is sufficient to establish a contract for sale...." And UCC 2–208(1) states that under some circumstances a "course of performance accepted or acquiesced in without objection shall be relevant to determine the meaning of the agreement." On the other hand, English case law has been hostile to evidence of subsequent conduct—an approach that has met resistance and criticism.[page 123]
FOOTNOTES: Chapter on Article 8
1. Art. 8 is substantially the same as Art. 7 of the 1978 Draft Convention, which was closely based on a provision in the Working Group’s 1977 "Formation" draft. W/G 8 paras. 155–168 and Annex I (Art. 14), VIII Yearbook 86–87, 90, Docy. Hist. 287–288, 291; W/G 9 paras 11–47 and Annex (Arts. 4 of Formation Draft), IX Yearbook 62–64, Docy. Hist. 294–296;. In 1978 the Commission merged the "Formation" and "Sales" drafts, and placed the present provision in Part I of the Convention. As a consequence, the rules on interpretation of the offer and acceptance became applicable to statements and conduct after formation of the contract. UNCITRAL XI, Annex I paras. 38–41 (summary of discussion of Art. 4 of Formation Draft, renumbered Art. 7 of the 1978 Draft Convention), IX Yearbook 33–34, Docy. Hist. 367–368. Cf. ULF 4(2) and 1972 UNIDROIT Draft of a Law on Validity of Contracts (LUV) Arts. 3–5. See VIII Yearbook, 104–105 (text of LUV with Secretariat analysis), Docy. Hist. 268–269.
2. Some domestic rules for sales of goods were designed to counteract patterns of interpretation that developed under a pre-commercial static economy typified by transactions in land—unusual and important arrangements prepared cautiously and in detail; at that stage, sales of goods involved simple items purchased after inspection. Steps toward relaxing rigid patterns for construing such contracts are found (e.g.) in the English Sale of Goods Act 1893, §14 (implied obligations of merchantable quality). See Benjamin (3d ed.) §779–790; Llewellyn, 52 Harv. L. Rev. 725 and 873 (1939); Honnold, Sales (5th ed. 1984) 33–35.
3. Often an instrument executed by the parties is prepared by one party and, in effect, accepted by the other. In this setting paragraph (2) applies; the party who prepared the instrument is the one who "made" the statement. When both parties participate fully in preparing the instrument, paragraph (2) is not applicable since it distinguishes between one who makes a statement and the one who receives it, but such an instrument is subject to the general rules of interpretation in paragraph (3).
4. Communications mentioned in the Convention include: notification of avoidance (Art. 26, infra at §187); modification or termination of an agreement (Art. 29, infra at §200); notification that goods are defective or that performance will be interrupted (Arts. 39, 48, 68, 71, 72, 79, 88). Communication that call for interpretation also may occur in settings not mentioned in the Convention.
5. Corbin §106; von Mehren & Gordley 850–872; Hoff, Error in the Formation of Contracts in Louisiana; A Comparative Analysis, 53 Tul. L. Rev. 329, 335 (1979) (comparison of civil law of Louisiana and France, and of common law).
6. Holmes, The Common Law 242 (Howe ed. 1963). Corbin (§106) was less unqualified: when a common intent or meaning can be found, it should be given effect. See also Farnsworth, "Meaning" in the Law of Contracts, 76 Yale L.J. 939, 947 (1967). For David Hume’s criticism of the "intent" or "will" theory, see Atiyah, Freedom of Contract 53.
7. Hoff, supra note 4 at 338, 342–353 (error in corpore, error in substantia), 374 (French law may call for compensation of an unerring party for loss based on reliance). "Speaker" refers to one who makes a statement, whether written or oral; "hearer" is the one to whom the statement is made.
8. Ludwig Raiser in The Law of Standard Terms of Business (Das Recht der ABG) 284 (1935) as quoted in II Zweigert & Kötz (1987) 12. Concern over the danger of meanings unclear to one of the parties underlay UNCITRAL’s rejection (§118, infra) of proposals based on ULIS 9(3) to give binding effect to the meaning "usually" given to expressions "commonly used in the trade concerned".
9. E.g. (U.S.A.) UCC 2–718(1): A term in a sales contract "fixing unreasonably large liquidated damages" for breach of contract "is void as a penalty".
10. (U.S.A.) UCC 2–302, authorizing courts to refuse to enforce "unconscionable" contracts or clauses, is accompanied by an Official Comment that states that the provision is directed at "one-sided" contracts but adds: "The principle is one of the prevention of oppression and unfair surprise...and not of disturbance of allocation of risks because of superior bargaining power". This lack of clarity has been sharply criticized. Leff, Unconscionability—The Emperor’s New Clause, 115 U. Pa. L. Rev. 485 (1967). Cf. Hillman, 67 Cornell L. Rev. I (1981).
11. As we shall see, the Convention’s statement in Article 4(1) that it " is not concerned, with (a) validity" must be construed to avoid conflict with express provisions (such as Article 8(2)) that might otherwise be considered as dealing with questions of "validity".
12. This interpretation of Article 8(2) apparently is not accepted by Farnsworth in B-B Commentary 99–100, §§2.4–2.5.
13. The problems of interpretation that have arisen under (U.S.A.) UCC 2–202 are discussed in White & Summers §§2–9-2–12, and in law review articles cited therein. For case law apart from the UCC see Corbin §573 et seq.; Treitel, Contract 150 et seq.
14. The English Law Commission has recommended abolition of the parol evidence rule. Law Commission, Working Paper No. 70, Law of Contract, The Parol Evidence Rule (1976). Accord; Ont. L. Ref. Com., I Sales 110–117. For a comparative study see II Zweigert & Kötz II (1987) 91–93 (French Civil Code Rule similar to the "parol evidence rule" is inapplicable to commercial transactions; no comparable rule in Germany). For indications of increasing flexibility in American law see Farnsworth, Contracts 451–474.
15. See McCormick, The Parol Evidence Rule as a Procedural Device for Control of the Jury, 41 Yale L. J. 365 (1932).
16. Ont. L. Ref. Com., I Sales 117–118, supporting Friedman 251 and Lord Denning, M. R., in Port Soudan Cotton Co. v. Chettiar and Sons  2 Ll. Rep. 5, 11 (C.A.).