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Pre-Contract Formation

Editor: Albert H. Kritzer

Introduction

There is a rich, diverse, evolving body of law on precontractual liability in civil law and common law regimes. Is this body of law now to be governed by the Convention? Concern has been expressed that interpretation of the CISG can present "for Americans, unfamiliar limitations on the right of a party to withdraw before the formation process is complete."[1] So far the prevailing view in legal writing is that precontractual liability is outside the scope of the Convention:

"The fact - it is argued - that all proposals aiming at the adoption of a general provision on precontractual liability were rejected, clearly demonstrates that the drafters of the Convention preferred to leave the issue to the existing non-unified laws. Consequently it will be up to each single national legal system to determine if and the extent to which a party is liable vis-à-vis the other party for its conduct during the negotiations."[2]

Theories have, however, been advanced to support Convention coverage of certain aspects of precontractual liability.[3]

Precontractual Liability Under Domestic Law

There are a variety of precontractual fact patterns for which domestic legal systems afford varying degrees of relief for aggrieved parties. Most have to do with evolving negotiations. Domestic legal regimes have devised responses - sometimes via case law. Lake & Draetta cite as examples civil law rules concerning:

"[L]imitations of various kinds on the freedom of parties to a contract to break off negotiations at any time; limitations of various kinds on the freedom of parties to a contract to conduct parallel negotiations; and duties of parties to a contract negotiation to inform the other parties of their authority to conclude the contract. . . ."[4]

In the United States, Farnsworth examines the situation in which the negotiations have failed and no documents are signed and exchanged. He asks:

"May a disappointed party have a claim against the other party for having failed to conform to conform to a standard of fair dealing? If so, what is the meaning of fair dealing in this context? And may the disappointed party get restitution? Be reimbursed for out-of-pocket expenses? Recover for lost opportunities?"[5]

In his analysis of U.S. law, he states that existing contract doctrines, imaginatively applied, are adequate to the task of protecting the parties.[6] He also calls attention to French and German courts that have been "willing to go well beyond American courts and find liability where after a party has 'conducted himself in such a fashion that the other party could, and did, justifiably count on a contract with the negotiated content coming into existence, he refuses to contract without an appropriate ground'."[7] Citing an exception[8], whose impact "has not lived up to its promise"[9], he states:

"American courts, however . . . have declined to find a general obligation that would preclude a party from breaking off negotiations, even when success was in prospect. . . . Their reluctance to do so is supported by the formulation of a general duty of good faith and fair dealing in both the Uniform Commercial Code and the Restatement (Second) of Contracts that, at least negative implication, does not extend to negotiations. . . ."[10] [Cf. Article 7(1) of the Convention which contains a reference to good faith that applies to formation of the contract.]

Farnsworth groups possible grounds for precontractual liability under four headings. He states "The first three, unjust enrichment resulting from negotiations, misrepresentation made during the negotiations, and specific promise during the negotiations, have been recognized by courts in the United States; the fourth, general obligations arising out of the negotiations themselves, has not."[11]

For present purposes, it is not necessary to go into the "good faith", "fair dealing", "culpa in contrahendo" or other concepts that may be drawn upon to grant relief in civil regimes, or approaches followed in the United States or in other common law jurisdictions; it is sufficient to note that in this evolving area of the law there are cases in which different results may be achieved dependent upon the domestic legal regime that rules on the fact pattern considered.

Precontractual Liability Under the Convention

In the deliberations that led to the Convention, there is no record of any effort to array the different domestic approaches to precontractual liability and from that develop for international traders a common denominator. There were, however, specific proposals that would have impacted upon precontractual liability (they were rebuffed), and general proposals - primarily dealing with "good faith" - which, depending on the interpretation given to the compromise language that emerged, may or may not have an impact upon precontractual liability. The records of deliberations on this subject are quoted in the legislative history segment of this presentation.

A universalist argument for including all aspects of pre-contract formation within the scope of the Convention runs as follows. Article 7(1) has an arrow of uniformity that points to the Convention, not private international law. Also, when a matter is governed by the Convention but not expressly settled in it, Article 7(2) ousts private international law whenever applicable general principles can be properly deduced from the Convention. Formation of the contract is a matter governed by the Convention (Article 4). Is not precontract formation a part of formation of the contract? If so, this is a matter governed by the Convention. And where questions arise concerning such a matter which are not expressly settled in the Convention, applicable general principles (various parties have cited "good faith" as one such principle) can presumably be found - particularly if the Convention is imaginatively applied. If this line of reasoning were followed, the sole exception to the primacy of the Convention on all matters of precontractual liability would be validity issues (Article 4(a) - fraud, for example. Rebuttals to this line of reasoning can, however, be addressed to the accuracy of the italicized premise.

Schlechtriem sees the Vienna Conference's rebuff of a specific proposal to place facets of precontractual liability under the aegis of the Convention as concrete evidence that claims for damages for precontractual liability should be ruled upon under domestic law, not the Convention. He states:

"[T]he Conference rejected a proposal by the German Democratic Republic which would have introduced a general culpa in contrahendo (= precontractual) liability. . . . The proposal was especially intended to cover those cases in which contract negotiations have already progressed so far that one side relying on the belief that a contract would materialize, has made considerable expenditures . . . [T]he motion by the German Democratic Republic failed. Damages caused by one party to the other in the course of contract negotiations, therefore, remain subject to regulation by the domestic law applicable according to conflict rules . . . "[12]

However, in a classic offer and acceptance situation, Honnold states:

"The Convention - and only the Convention - controls the question whether the revocation of the offer is rightful. The Convention provides one remedy for wrongful revocation - the offeree can accept the offer in spite of the revocation. But when special circumstances . . . make this remedy ineffective, it would be reasonable for a tribunal to close the gap . . . Response to [the need for a remedy addressed directly to the damages caused by a wrongful revocation] by filing a gap in the Convention [pursuant to Article 7] could promote the declared goal of uniformity, since solutions applying the Convention would be taken into account by other tribunals and a common jurisprudence would develop . . ."[13]

Precontractual liability in the context of offer and acceptance (Honnold's example) makes perhaps the strongest case for coverage under the Convention. Offer and acceptance is addressed by the Convention. Part II contains rules on that subject - rules addressing fact patterns that have existed for centuries. Part II of the Convention can be said to be a unification of domestic responses to these fact patterns. However, much of the domestic law on precontractual liability is associated with evolving negotiations - a creating of a newer age - and fact patterns that simply do not fit classic rules of offer and acceptance.[14] This means that the Convention can only be artificially made to apply to such fact patterns. A response is that equally difficult fits have evolved into coverage under domestic regimes. However, to do so under the Convention calls for two extrapolations: general principles to cover fact patterns not specifically addressed; and an extrapolation of remedies.[15] Bonell, recognizing that the prevailing view in legal writing is today to the contrary,"[16] nevertheless believes that the Convention, if imaginatively interpreted, seems able to provide a solution to both problems: "first of all that of determining if and the extent to which a party can be held liable for its improper behavior during the negotiations and, secondly, that of the remedies available to the innocent party."[17] Colloquys in the legislative history on fair dealing, care and good faith,[18] and on precontractual liability (which led to the rejection of proposals to incorporate this in the Convention) are reported below as is the separate basis for Bonell's minority opinion.

Legislative History and Post-Conference Rebuttal

Legislative History

At its ninth session (September 1977) the UNCITRAL Working Group completed a "Formation" draft which included a requirement of "fair dealing" and "good faith". The record of deliberations on this requirement is as follows:

"70. During the eighth session of the Working Group the representative of Hungary submitted paragraphs I and II of the proposal set out below, the consideration of which was deferred by the Working Group to its ninth session . . . The German Democratic Republic suggested that a third paragraph be added to the proposal of Hungary . . . The composite text reads as follows:

'I

'In the course of the formation of the contract the parties must observe the principles of fair dealing and act in good faith. [Conduct violating these principles is devoid of any legal protection.]

(. . .)

'III

'In case a party violates the duties of care customary in the preparation and formation of a contract of sale, the other party may claim compensation for the costs borne by it.'

"The general concept of provisions on good faith and fair dealing.

"71. The general concept that the draft Convention should contain provisions relating to good faith and fair dealing was supported by a majority of the representatives. It was pointed out that such principles are expressly stated in many national laws and codes and that it was thus appropriate that similar provisions be found in international conventions. It was also pointed out that provisions on good faith and fair dealing contained in national laws had in some legal systems become useful regulators of commercial conduct. It was suggested that, over time, the same process may occur on an international level, particularly if national jurisprudence and doctrine were used to assist in the interpretation of such provisions in the draft Convention.

'72. Although the majority of the representatives were in favour of including a provision on good faith and fair dealing in the Convention, there was considerable opposition to the specific formulation of each paragraph of the proposed text.

"Paragraph I

"73. Paragraph I was supported on the basis that it incorporated a desirable standard of business conduct in the process of formation of contracts, a standard which was recognized and codified in many legal systems and there was no reason for not having a similar rule in international trade. Although there might be difficulty, in particular at the beginning, in obtaining a uniform interpretation of this provision in all legal systems, this would not be worse than the situation that prevailed in national laws after such kinds of general clauses were enacted. The existence of a uniform might encourage future uniformity of interpretation of such matters.

"74. On the other hand it was noted that the general principle enunciated in the first sentence would not have much effect until it had been judicially interpreted and applied over a long period of time. In addition, the view was expressed that the sentence was too vague and imprecise. In particular, one representative noted that as it would be difficult to enumerate 'the' principles of fair dealing it might be preferable to refer to 'principles of fair dealing'. . . .

"75. The second sentence failed to attract widespread support, largely because it was considered to provide vague and unclear standards which would be unlikely to receive a uniform interpretation.

"76. One representative was opposed to the entire first paragraph because it contained vague rules whose meaning would depend upon value judgments which would vary greatly.

"77. After considerable deliberation, the Working Group decided to adopt the first sentence of paragraph I. One representative expressed a reservation in respect of this decision. The Working Group deleted the second sentence of the paragraph.

"Relationship to CISG

[NB: At this point in the development of the Convention there was a "Sales" draft, referred to here as the CISG, and a "Formation" draft. The provisions in question were being considered in the context of the "Formation" draft.]

"78. The Working Group decided to append a footnote to the text of the draft Convention noting that there was no provision in CISG equivalent to the first sentence of paragraph I which has now been included in this Convention.

(. . .)

"Paragraph III

"84. In support of paragraph III it was stated that prior to the formation of the contract the parties had duties and responsibilities toward each other. The proposal recognized these duties and provided compensation for costs in the event of their violation. The fact that a contract had not yet come into existence was recognized by the fact that the sanction provided by the provision was limited to the recovery of costs and did not include other items of damages such as recovery for loss of profit. It was also suggested, however, that the paragraph should provide for recovery of all damages.

"85. However, the generally prevailing view was that the paragraph was too vague and uncertain to be usefully included in the draft Convention. Furthermore, the inclusion might lessen the chances of widespread ratification of the Convention.

"86. After deliberation, the Working Group decided not to retain paragraph III. [At the Vienna Conference, a version of paragraph III was again introduced and again rebuffed (see below).]

"Decision

"87. The Working Group adopted the following text (which was later numbered as article 5):

At its eleventh session (May-June 1978) the UNCITRAL "Committee of the Whole" reviewed the 1977 Working Group "Formation" draft and integrated this draft with the Working Group "Sales" draft. This integration, the 1978 UNCITRAL Draft Convention, was the work product presented to the delegates to the Vienna Conference for their consideration. The UNCITRAL record of deliberations on article 5 of the "Formation" draft reads as follows.

"42. The text of article 5 of the Draft Convention on the Formation of Contracts for the International Sale of Goods, as adopted by the Working Group on the International Sale of Goods, is as follows:

"43. Article 5 was the subject of lengthy discussion which revealed a difference of opinion as to whether the draft Convention should contain a provision on fair dealing and good faith.

"Arguments against inclusion of a provision on fair dealing and good faith.

"44. There was considerable support for the deletion of article 5. This support was based on a number of grounds. It was stated that the provision merely contained a moral exhortation, which should not be included in the draft Convention. If such a moral principle were elevated to the status of a legal obligation, it became imperative to determine how it would be applied to particular transactions. Although there could be no disagreement with the principle stated in article 5, the development of a coherent body of case law was unlikely to take place, since national courts would be influenced by their own legal and social traditions in applying the article to individual cases. The resultant uncertainty was said to be detrimental to international trade. Another view against the inclusion of article 5 in the draft Convention was that the requirement of acting in good faith was implicit in all laws regulating business activity and it was consequently unnecessary to include the requirement in any specific text.

"45. The retention of article 5 was also criticized on the basis that the draft Convention did not specify the consequences of a failure to observe the principles which were made binding on the parties. This failure meant that the consequences of a violation would be left to national law with the result that no uniformity of sanctions would be achieved. An illustration of this type of problem was said to be the UNIDROIT draft text on validity, which considered it necessary to regulate in great detail the consequences of fraud and threats which were clear violations of good faith. It was even more difficult to envisage uniformity in dealing with the consequences of less obvious violations of the principle of good faith. It followed that, if the draft Convention were to contain a provision on good faith, it should also contain detailed provisions spelling out the consequences of failure of a party to comply with the requisite standard, but the place for such detailed rules was in a Convention on validity of contracts rather than in a Convention on formation. It thus also followed that the proper place for a provision on good faith and fair dealing was in a Convention which dealt with the validity of contracts.

"Arguments for inclusion of a provision on fair dealing and good faith

"46. There was also considerable support for the retention of article 5. It was stated that, since principles of good faith were universally recognized, there seemed little harm in including them in the draft Convention. This was particularly the case when it was recalled that many national codes contained provisions similar to article 5 which had played an important role in the development of rules regulating commercial activity. It was considered that the extension of this provision into an instrument regulating an aspect of international trade was a valuable extension of a widely recognized norm of conduct. Furthermore, deletion of the provision would open the Commission to the criticism that it opposed such principles when it was clear that this type of rule was needed in international trade, particularly in relation to trade with developing countries. It was also pointed out that the concept of good faith was well recognized in public international law and was referred to in the Charter of the United Nations.

"47. Although it was generally agreed that it would be useful to set out the consequences of a violation of article 5, it was stated that it was not necessary to specify the consequences of a violation of the article, as this could be determined by the courts in a flexible manner having regard to the particular facts of each case. The development of a body of case law would reduce initial uncertainty as to the effects and scope of the provision. In any case, even without sanctions the existence of the provision would draw the attention of the parties and the court to the fact that high standards of behaviour were expected in international trade transactions.

"48. Adoption of the provision was also considered to be a modest implementation of some of the principles of the new international economic order and could have the practical effect of lessening undesirable or discriminatory trade practices, particularly if a similar provision were inserted into the draft CISG.

(. . .)

"Possible compromise solutions

"53. In view of the serious differences of opinion as to the inclusion of article 5 in the draft Convention, there was general agreement that strenuous efforts should be made to seek a compromise solution. The alternative of either deleting or retaining article 5 by a slender majority was considered unacceptable to most representatives.

"54. A number of possible compromise solutions were canvassed. The proponents of these compromise solutions noted that in all cases the absence of sanctions did not raise the problems encountered in relation to the formulation contained in article 5. It was suggested that the substance of article 5 could be contained in a preamble to the Convention, but this was met with the objection that this would make it devoid of effect. Another suggestion was that the requirement of the observance of good faith could be incorporated into the rules of interpretation of the statements and conduct of the parties. [This suggestion was re-introduced, but rebuffed at the Vienna Conference (see below).] Against this suggestion was the view that article 5 was not concerned with the intent of the parties, but sought to lay down a standard of behavior to which the parties must conform. A more widely supported compromise suggestion was that the principle of the observance of good faith could be incorporated into an article on the interpretation and application of the provisions of the Convention. This suggestion was criticized on the basis that it was not really appropriate to direct the requirement of good faith to the courts rather than to the parties.

"Establishment of a Working Group on article 5

"55. The Commission established a Working Group on article 5, composed of the representatives of Finland, Hungary, Mexico, Singapore, Uganda and the United Kingdom of Great Britain and Northern Ireland, and requested the Working Group to formulate a compromise proposal taking into account all the views expressed during the course of the discussion on article 5.

[Article 13 of the Working Group "Sales" draft (referred to below as the "draft CISG") stated simply that "In the interpretation and application of the provisions of this Convention, regard is to be had to its international character and to the need to promote uniformity."]

"56. The Working Group proposed that the following new article, based on article 13 of the draft CISG, should be adopted:

"57. In explanation of this proposal it was stated that the Working Group had attempted to find an acceptable compromise on a question which had sharply divided the Commission. The first part of the proposal reproduced article 13 of the draft CISG and sought to require courts and arbitral tribunals to promote uniformity of interpretation of the Convention. The second part of the proposal was intended to direct the attention of the courts in resolving disputes to the fact that the acts and omissions of the parties must be interpreted in the light of the principle that they observe good faith in international trade. The provision was intended to apply to both the rules on formation and the rules on sales.

"58. Although several representatives still preferred the original version of article 5, while other representatives still favoured deletion of all reference to the need to observe the principles of good faith, the proposal was generally supported as containing a realistic compromise solution. It was stated, however, that the proposal did not make it clear that the need to observe good faith in international trade was also directed to the parties to an international sales transaction. It was also stated that the proposed wording did not make it clear that the need to promote uniformity referred to the need to promote uniformity of interpretation and not uniformity in international trade in general.

"59. Under one view, the Convention should not contain a provision on interpretation because, according to the constitutions of some countries, it was not possible for a legal text to instruct the courts on the manner in which it should be interpreted. It was also stated that the requirement to promote uniformity should be imposed on States and not upon courts and arbitral tribunals, since this requirement was contained in a public international law convention. However, the generally accepted view was that the provision was properly directed to courts and arbitral tribunals, since it was these bodies which would resolve disputes between the parties to an international trade transaction.

"Decision

"60. As a result of the decision to integrate the draft Convention on Formation with the draft CISG (para. 18 of the Commission's report), article 5 of this draft Convention was merged with article 13 of the draft CISG and became article 6 of the [1978] draft Convention on Contracts for the International Sale of Goods. The Commission adopted the following text of article 6:

'Article 6

Article 6 of the 1978 Draft, with certain modifications, became Article 7(1) of the Official Text. For further information on the UNCITRAL debates that led to this provision, see the commentary on Article 7, supra.

At the Vienna Conference:

-First, the above compromise was challenged. This challenge did not succeed. As reported above, in 1977 East Germany had proposed a certain paragraph III which specifically referred to precontractual liability. This proposal was rejected. At the Vienna Conference, a direct reference to precontractual liability was again proposed by East Germany. This proposal was also rejected.

The Summary Records of Conference dialogues on these matters are quoted below.

- First, the challenge to the 1978 UNCITRAL compromise. The two articles considered in this challenge were Article 6 of the 1978 Draft [This became Article 7 of the Official Text (It has to do with interpretation of the Convention)] and Article 7 of the 1978 Craft [This became Article 8 of the Official Text (It has to do with the interpretation of statements or other conduct of a party)].

The proposals were:

Italy. Delete the words "and the observance of good faith in international trade" from Article 6 of the 1978 Draft.

"Add a new article 6 ter to read as follows:

Norway. Delete the words "and the observance of good faith in international trade" from Article 6 of the 1978 Draft.

At the end of paragraph 3 of Article 7 of the 1978 Draft, add the words:

The Conference dialogues and decision read as follows:

"40. Mr. BONELL (Italy), introducing his delegation's proposal for a new article 6 ter . . . said that there had been an exhaustive discussion in the UNCITRAL Working Group as to whether a reference should be included in the Convention to the principle of good faith which, in the view of some delegations, was liable to misinterpretation in an international instrument. His delegation had therefore added a reference to international co-operation to make it clear that only those aspects of the principle of good faith which were internationally acceptable would apply. The exact wording was open to discussion and a formula such as that proposed by the Norwegian delegation . . . might serve the purpose. In any case, article 6 was not the appropriate place for a reference to a principle of major importance in international trade relations. A separate article was required.

"41. Mr. ROGNLIEN (Norway) said his proposal . . . was that the reference to the observance of good faith should be transferred from article 6 to article 7. He was not opposed in principle to the inclusion of such a reference, but it was not clear from the existing text of article 6 how good faith was to be interpreted in practice to general rules of law. It might possibly mean, for example, that if a court were to find that one of the provisions of the Convention ran counter to the observance of good faith in international trade, it need not require it to be applied. As he saw it, the observance of good faith related not to the interpretation of the provisions of the Convention but rather to the contract between the parties, and its proper place was therefore under article 7(3), which concerned intent. His proposal was similar to that of Italy . . . which also proposed the transfer of the reference to good faith to a separate article, but he was opposed to the reference in that proposal to the principle of international co-operation. Parties to a contract were not bound to further international co-operation, at least in their contracts of sale.

(. . .)

"43. Mr. KIM (Republic of Korea) said that, as far as the principle of the observance of good faith in international trade was concerned, a distinction should be made between three possible areas of application. The first area was the interpretation and application of the provisions of the Convention, the second (as in the Italian proposal) was the relationship between the parties to a contract of sale, and the third was the determination of the intent of such parties. He believed that the application of the principle of good faith should be restricted to the second area, namely, the relationship between the parties to a contract.

"44. Mr. SAMI (Iraq) said he supported the Norwegian proposal, since he shared the view that the principle of observance of good faith should be applied not to the interpretation of the Convention but rather to the contract between the parties.

"45. Mr. HJERNER (Sweden) said that the problem of wording the provision dealing with the need to observe good faith had been under discussion in the UNCITRAL Working Group for some considerable time, and the present text represented a delicately-balanced compromise. He did not think that the proposals by Italy and Norway added very much to the original formulation. In his view it was not really necessary to have any provision on the subject of observance of good faith, but if it were decided to include it he would prefer the existing text.

"46. Mr. BUHOARA (Romania) said he had substantial difficulties with the Norwegian proposal. Although he could see some merit in the Italian proposal, he would prefer to see the existing text retained.

"47. Miss O'FLYNN (United Kingdom) said that, although it was desirable that parties to a contract of sale should act in good faith towards one another in the formation and performance of their contract, she did not think it appropriate to add to the Convention a new article of uncertain meaning such as that proposed by Italy. The principles of good faith which the parties were called upon to observe were not defined; were they to be understood to be principles operating in all Contracting States, or only in those States where the buyer and seller had their places of business? What would happen if the two sets of principles were found to be mutually conflicting? In addition, the legal effect of the Italian proposal was unclear; although it was couched in mandatory terms, there was no provision for the application of sanctions in the event of failure by one of the parties to observe good faith. It was true that article 6 made no provision for sanctions, either, but that article was directed towards the courts in the interpretation of the Convention, and not towards the parties to a contract. She was unable, therefore to support the Italian proposal.

"48. If the Committee should decide to delete or modify article 6, she could support the Norwegian proposal, but would prefer to see the existing text retained.

"49. Mr. MATHANJUKI (Kenya) said that he had serious doubts as to the possible effect of transferring the reference to the principle of good faith from article 6 to article 7. There had already been a lengthy discussion on how the provision on that principle was to be formulated, and the wording of the existing article 6 represented a compromise between various proposals. He did not think the Italian proposal expressed the concept as clearly as the original wording, and it referred only to the contract of sale, whereas article 6 referred to the need to observe good faith in interpreting the Convention. He would prefer the original wording.

"50. Mr. FARNSWORTH (United States of America) said he too preferred the existing text, which, while not perfect, represented a useful compromise. As had been pointed out, there was some degree of uncertainty as to how the concept of good faith was to be interpreted in an international context. In the discussion in the UNCITRAL Working Group, it had been found difficult to produce concrete examples of how the principle would be applied when proposals similar to the Italian one had been put forward. Although all would agree that, in theory, it was desirable to behave in good faith, he felt that a provision such as the one proposed would be uncertain and dangerous in practice.

"51. Mr. EYZAGUIRRE (Chile) said he too preferred the existing compromise text. With regard to the Norwegian proposal, the interpretation of the Convention and the law of contract were two completely different issues, and with regard to the Italian proposal, the existing text of article 6 already made explicit the general principles on which the Convention was based.

"52. Mr. MASKOW (German Democratic Republic) said he agreed that article 6 should remain unchanged. Some reference to the need to observe the principles of good faith should be included in the Convention, in order to allow some flexibility in interpreting its provisions in the interests of furthering international trade.

"53. Mr. FRANCHINI-NETTO (Brazil) pointed out that good faith was already understood to be one of the underlying principles of law and was implicit in any legal transaction. He thought it unnecessary, therefore, to mention the principle in article 7. In view of the complexity of the two proposals that had been put forward, he would prefer to see the text of article 6 remains unchanged.

"54. The CHAIRMAN [Mr. LOEWE (Austria)] said that there appeared to be little support for the Norwegian proposal.

"55. Mr. ROGNLIEN (Norway) said that, under these circumstances, he would withdraw his proposal.

"56. The CHAIRMAN said that the Committee now had before it only the Italian proposal. In the absence of any objections, he would take it that there was a consensus, first, against the adoption of that proposal, and secondly, in favour of the retention of the existing reference to good faith in article 6.

"57. It was so agreed"[22]

"77. The CHAIRMAN [Mr. LOEWE (Austria) drew attention to the proposal by the German Democratic Republic (A/CONF.97/C.1/L.95) for a new article to be added to Part II.

"78. Mr. PLUNKETT (Ireland) asked whether the proposal envisaged that compensation would be payable even if no contract had been concluded, or if a contract had been concluded, whether it should be payable for something other than breach of contract.

"79. Mr. MASKOW (German Democratic Republic) replied that it was the essence of his proposal that compensation for expenses could be claimed even if there were no contract.

"80. Mr. BONELL (Italy) strongly supported the proposal. His delegation had already submitted a proposal along similar lines. The existing text of the Convention did not take sufficiently into account cases where no contract was concluded but the parties had engaged in detailed negotiations at the precontractual stage. Such cases needed regulation because of the risk that one of the parties might abuse its position and act in such a way as to damage the interests of the other party. He thought the drafting of the proposal could be improved, notably by the deletion of the phrase 'in the course of the preliminary negotiations', and also by the inclusion of a phrase to cover the situation in which the party had not necessarily had expenses, but had suffered damage. He suggested that an ad hoc working group be set up to produce an agreed text.

"81. Mr. SCHLECHTRIEM (Federal Republic of Germany) sympathized with the object of the proposal but considered it much too far-reaching. Such a general clause might change some of the solutions of the draft, e.g., the provisions dealing with the obligations of the parties or with the revocability of the offer. It would touch on the problem of form requirements and would also affect matters outside the scope of the Convention such as the avoidance of the contract for errors, or the authority of agents.

"82. Mr. BENNETT (Australia) said that he had great difficulty with the proposal. It referred to a failure in duty to take reasonable care, a notion that was not found anywhere else in the Convention. It was not clear what was the standard of reasonable care that was envisaged. The problem was an important one and not merely one of drafting.

"83. Mr. KRISPIS (Greece) said he was inclined to support that view. He wondered whether there was any connection between the concept of reasonable care and the concept of good faith in general.

"84. Mr. DABIN (Belgium) supported the proposal of the German Democratic Republic which should serve to resolve some difficult issues, e.g. the confidential nature of technological information, raised by the conclusion of international contracts where preliminary negotiations were lengthy. He admitted that the draft Convention before them did not in fact cover the precontractual phase other than the most standard of its aspects, the making of a specific offer and its corresponding acceptance. Although the proposal raised some difficult issues, they might be resolved by discussion in a working group.

"85. Mr. DATE-BAH (Ghana) could not accept the proposal, which he saw as a further attempt to import the concept of good faith into the Convention, a concept which had caused great difficulty to the common law countries. It had been agreed as a compromise to introduce that concept into article 6, but it was not appropriate in the present context.

"86. The CHAIRMAN said that as there appeared to be a majority against the proposal by the German Democratic Republic (A/CONF.97/C.1/L.95) he would, if there was no objection, consider it rejected.

"87. It was so agreed."[23]

Minority Opinion

Despite the rejection of the DDR proposal, there is a minority opinion that would have tribunals invoke the principle of good faith to respond to issues such as those encompassed by this proposal and would reason by analogy to fashion appropriate remedies under the Convention. Bonell states:

[Premise] "The fact that CISG does not have a provision expressly dealing with the precontractual liability of the parties for their conduct during the negotiations does not necessarily mean that the issue falls outside the scope of the Convention. In fact, precontractual liability could simply be - to use the language of Article 7 - one of those 'questions concerning matters governed by [the] Convention which are not expressly settled in it'. . . . Issues which are outside the scope of the Convention continue to be governed by domestic law which, in the case of a simple lacuna, the solution has to be found primarily within the Convention itself, i.e., in conformity with the general principles on which it is based, and only in the absence of such principles, may resort be had to the law applicable by virtue of the relevant conflict of law rules (Cf. Article 7(2). . . .

[Conclusion] "The opinion according to which precontractual liability would be completely outside the scope of the Convention is questionable. . . .

[Assumed Fact] "[T]he improper behavior of a party during the negotiations has the effect of obstructing agreement, or is [in] any case not followed by the conclusion of a contract . . .

[The Challenge] "[T]he problem is first of all determining if and the extent to which that party can be held liable for its conduct and, secondly, that of specifying the remedies available to the innocent party once the first party's liability has been established.

[Response] "The Convention, if adequately interpreted, would appear to provide the solution certainly to the first and, possibly, even to the second, of the two problems.

[Response to the First Challenge]

[First requisite: To accept the idea that the principle of good faith may be invoked in order to impose on the parties additional duties of behavior even during the negotiating process.] "Article 7(1) contains an express reference to the need to observe the principle of good faith in international trade. Contrary to the view that in the context of this provision good faith is intended to be nothing more than an additional criterion to be used by judges and arbitrators in the interpretation of the Convention, it seems preferable, moving from a broader interpretation of the provision, to conclude that the exhortation to observe good faith in international trade cannot but be directed also at the parties of each individual sales contract. . . . Moreover, there are a number of provisions which indicate that good faith is one of the 'general principles' underlying the Convention as a whole, to which, according to Article 7(2), recourse may be had for the settlement of questions relating to the formation or the performance of the contract for which the Convention does not contain any specific provision.

[Second requisite: To determine the precise content of the duties good faith imposes on the parties.] "In this respect, a first consideration to be made is that, by referring to good faith 'in international trade', Article 7(1) makes it clear that in the context of the Convention the principle may be applied according to standards adopted at a national level only to the extent that they prove to be acceptable also at a comparative level. Thus, taking the most important case of obstruction of the agreement, i.e., the breaking off of negotiations, it is known that while in most civil law countries a party incurs . . . precontractual liability whenever it abruptly and without justification breaks off negotiations at a stage where success was in prospect . . . common law countries are in general more reluctant to interfere with the freedom of negotiations and only require that a party who no longer intends to conclude the contract inform the other immediately. . . . It follows that the solution under the Convention, at least in cases involving parties from the two different legal systems, cannot but fall in between the two extremes, so as to hold a party liable at least whenever it entered into or continued negotiations knowing that it was not able or willing to conclude a contract . . . It goes without saying that a similar approach may be necessary also with respect to other possible applications of the principal of good faith in the formation process, such as the duty of disclosure . . . the duty of confidentiality . . . etc. . . .

[Response to the Second Challenge]

"As to the second question, i.e., that of the remedies available to the innocent party against the other party's improper behavior, it is certainly not an easy one to answer. There is no specific provision on this point to be found in the Convention, and the remedies expressly dealt with therein all refer to a failure to perform an obligation arising out of the sales contract once it has been concluded. They would therefore, at least at first sight, by their very nature appear to be inadequate for cases where no contract has been concluded and the innocent party's disappointed expectations only referred to a positive outcome of the negotiations.

"At a closer examination, however, it should not prove to be impossible to find a solution by applying some of the Convention's provisions on remedies by analogy. Thus, there is no reason why a judgment for specific performance, including injunction, provided for in the Convention for the case of breach on the part of the seller or the buyer of any of their obligations under the contract or the Convention, should not, whenever appropriate and within the limits set by the Convention . . . be granted also in cases of non-disclosure of relevant information or of violation of confidentiality during negotiations. As far as damages are concerned, it is true that, while in cases of breach of contract, damages are intended to put the innocent party in the position it would have been in had the contract been performed, in cases of violation of precontractual duties their purpose is only that of putting the innocent party in the position in which it would have been in had the other party not behaved improperly. However, the formula used in Article 74 of the Convention would appear to be sufficiently flexible to cover, if applied by analogy, also these latter cases: 'loss' would stand for the expenditures the innocent party has made in view of the expected contract, and 'loss of profit' for the opportunity to conclude the contract with others that it has lost, while 'as a consequence of' should be read so as to mean that only those expenses which were justified in connection with the expected contract, and only those opportunities which the innocent party was justified in not pursuing pending the negotiations that ultimately failed, are recoverable. . . . Nor should the application of the mitigation principle [laid] down in Article 77 pose any problems: in other words, also in cases of precontractual liability the innocent party should not be entitled to recover loss that it would have avoided by reasonable efforts, for instance by blocking any future expenditures or pursuing other opportunities as soon as it first had reason to doubt the party's willingness to conclude the contract. Finally, as to the foreseeability test as contained in the second part of Article 74, in the absence of the conclusion of a contract, a new criterion for the determination of the relevant time must be found: reasoning by analogy, the most logical solution would appear to be to adopt that of the time when the conditions for the innocent legitimate reliance on the positive outcome of the negotiations were created."[24]

Other commentaries on the subject

For other commentaries on this subject, go to the bibliography seach form or scroll through the bibliography by entry. Available material includes:


FOOTNOTES

1. Arthur Rosett, "Critical Reflections on the UN Sales Convention, 45 Ohio St. L.J. (1984) 292.

2. Michael Joachim Bonell, "Formation of Contracts and Precontractual Liability Under the Vienna Convention on International Sale of Goods", Formation of contracts and precontractual liability (ICC Publishing Pub. No. 440/9 (1990) 167.

3. Id. at 166-172; see also John O. Honnold, Uniform Law for International Sales under the 1980 United Nations Convention, Kluwer (1982) 176-177.

4. Ugo Draetta & Ralph Lake, Letters of Intent and Other Precontractual Documents, Butterworth (1989) 18.

5. E. Allan Farnsworth, "Precontractual Liability", 87 Columbia L.R. 1987) 219.

6. Id. at 220.

7. Id. at 241.

8. Hoffman v. Red Owl Stores, 26 Wis. 2d 683, 133 N.W. 2d 267 (1965).

9. Farnsworth, note 5 supra at 238.

10. Id. at 239.

11. Id. at 222.

12. Peter Schlechtriem, Uniform Sales Law: The UN-Convention on Contracts for the International Sale of Goods, Manz (1986) 57.

13. Honnold, note 3 supra at 176.

14. Farnsworth, note 5 supra at 218-219.

15. Both extrapolations would seem to present challenges. With respect to the latter, damages would normally be the most appropriate remedy. However, Part II of the Convention says nothing on damages as a remedy. Part III, on the other hand, contains a rich collection of remedial provisions - but they are applicable to the contract, not its formation. As stated by Lookofsky, "Part II of the Convention purports only to govern part of the process by which the contract came to be: the mechanics-of-consent part, but not the defenses to enforcement of the promise made" ["the process by which courts 'police' agreements against unfairness . . ."] Joseph Lookofsky, "Loose Ends and Contorts in International Sales: Problems in the Harmonization of Private Law Rules", 39 Am. J. Comp. L. (1991) 405. Can one extrapolate from Part III general principles on remedies for purposes of Part II? Article 92 permits Contracting States to elect to be bound by one of these two Parts but not the other. It would seem odd to be able to extrapolate from Part III to apply Part II in one manner when a State has ratified both Parts of the Convention and to have to apply the very same Part II language in a different manner if a State were to elect to be bound by Part II but not Part III. In the offer/acceptance example he cites, Honnold's fall-back solution to the problem of extrapolation of remedies is, if "a tribunal declines to develop a remedy under Article 7(2) of the Convention . . . the tribunal should . . . work from the premise that, by command of the Convention, the revocation of the offer was wrongful and draw on applicable domestic law for the remedy that is appropriate to this type of wrong," Honnold, note 3 supra at 177. See also Rosenberg who believes that "a promise not to revoke an offer for the sale of goods would be a contract for the sale of goods within the scope of the Convention." Mark N. Rosenberg, "The Vienna Convention: Uniformity in Interpretation for Gap-Filling", 20 Australian Bus. L.R. (1992) 444 n. 18.

16. See, for example, Schlechtriem, note 12 supra, Manz & Padmann-Reich who similarly refer to culpa in contrahendo as a matter that is outside the scope of the Convention ("Introduction of the UN Convention on International Sale of Goods in Germany", Int'l Bus. Law. (June 1991) 302), and Enderlein & Maskow who state "As unconventional or even modern as the CISG may appear to be in solving traditional problems . . . it is predominantly cautious in regard to new legal phenomena. This applies to dealing with the process of negotiating the contract, the pre-contractual relations . . ." Fritz Enderlein & Dietrich Maskow, International Sales Law, United Nations Convention on Contracts for the International Sale of Goods, Oceana (1992) 16.

17. Bonell, note 2 supra at 171.

18. See also the links provided in the Annotated Text of Article 6 and the ; Annotated Text of Article 7 for references to Article 6 language on good faith, diligence and reasonable care that was proposed but rejected, and commentators' assessments of the good faith proviso that emerged in Article 7(1).

19. UNCITRAL Yearbook IX: (1978), A/CN.9/SER.A/1978 at 66-67; John O. Honnold, Documentary History of the Uniform Law for International Sales, Kluwer (1989) 298-299.

20. UNCITRAL Yearbook IX, A/CN.9/SER.A/1978 at 35-36; Honnold, note 19 supra at 369-370.

21. OFFICIAL RECORDS, p. 87.

22. OFFICIAL RECORDS, pp. 257-259.

23. OFFICIAL RECORDS, pp. 294-295.

24. Bonell, note 2 supra at167-171. Rosenberg is also in favor of applying the Convention's remedial provisions "in cases where, while there was no breach of contract, there was a failure by one party to perform an obligation created by the Convention." He states, "Article 61 provides that damages will be available to a seller "if the buyer fails to perform any of his obligations under the contract or this Convention" (emphasis added). While the damages provisions are written in terms of providing remedies for breach of contract, those provisions must be read in light of Art. 61. There is a strong argument that the principle underlying Art. 74 is that damages should be available for both a breach of contract and a breach of obligation under the Convention". Rosenberg, supra note 15 at 455.


Pace Law School Institute of International Commercial Law - Last updated October 28, 2008
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