The Rules on Communication of Defects in the CISG: Static Rules and Dynamic Environments. Different Scenarios for a Single Player [1]
David Ramos Muñoz [2]
December 2005
The law constitutes a body of rules to regulate the society. As such, law and society are called to closely interact and evolve together. A slow pace of evolution of the law creates mismatches with the reality it is supposed to regulate, and the law becomes too obsolete. Though not infrequent, this defect is not desired. The present work intends to illustrate a possible mismatch between law and reality. The piece of law studied is the regime on notification of defects in the 1980 United Nations Convention on Contracts for the International Sale of Goods, signed in Vienna the 11th April 1980 (hereinafter: CISG). It is submitted that such regime is suited for certain types of economic transactions that comply with particular features. What is more, in this work it is suggested that, in a classical context, where all contracts were assumed to comply with such pattern, the drafting and interpretation of the rule could not be otherwise. However, in a context of an ever-changing business setting, it is suggested that a re-assessment of the issue of communication of defects is needed in order to adapt it to other kinds of contractual relationships. It is concluded that such re-interpretation of the communication of defects regime is needed in order to avoid the obsolescence of the CISG rules. The process to reach those conclusions is explained as follows.
Section II addresses the business perspective. It is obvious that patterns of social interactions have experienced great changes. When that process of change is examined in the business context, the conclusion is that such changes have occurred at even a faster pace. This process of change, with an assessment on how the needs of business agents have been studied by economic and business theory is addressed in that Section.
Section III contemplates the legal changes or, in other words, how the process of change in the business arena has affected the legal environment. Numerous scholars have started to rethink old foundations of contract law, and to wonder whether they adapt to the new needs of society. Without the aim of ascertaining which of the approaches is the most adequate, Section III intends to deliver an overview of the different proposals (classical, neoclassical and relational).
With Section IV, I begin to analyze the particular piece of law involved. This Section contains an explanation on why does the CISG and, in particular, the regime on communication of defects, constitute an adequate legal instrument to test the challenges posed by new economic and legal conceptions. Section IV has to be complemented with Section V, which addresses the legal regime on notification of defects. The examination of the law is made from the perspective of the policies and ideas underlying the legislative process in the past, and which are the challenges posed by the new types of commercial relationships and the new theories. The conclusion is that although the current regime as such is very adequate for a certain type of commercial contracts, it is misconceived for others, and thus, needs to be complemented by other provisions on the CISG.
The effort of finding the legal instruments to adapt such regime to the new needs of international trade is made in Sections VI to VIII. In Section VI, I address the issue of the reasonable excuse as an attempt to temper the demands of the regime on defects notification, and conclude that it does not serve that purpose. In Section VII, I make a strong case for the need to take a provision like Article 40 CISG from oblivion and bring it to the front scene, as it is concluded that it could constitute a good instrument to balance the rigidities of the regime on communication of defects. In Section VIII, I propose the need of a new perspective on the role played by the exercise of party autonomy. In that Section, I submit that an increased importance of party autonomy together with the new role of Article 40 CISG argued in the previous Section could help to turn originally rigid rules (i.e. those of notification of defects) into a flexible regime better suited for commercial practice. Section IX analyzes a different proposal. If complex relationships involve constant dealings between the parties, a way to introduce flexibility in the regime on communication of defects could be through usages and practices. The analysis will conclude that those constitute a good element to complement the proposals formulated under Sections VII and VIII, but not an alternative to them.
Section X contemplates a different scenario. Flexibility is important in international transactions. However, there are many cases where the parties simply prefer to tailor their own devices to solve the potential problems. In such a case, the parties should be permitted to do so, and thus, a strong case is also made for the explicit exercise of party autonomy, as an alternative to tackle the problems on notification of defects. Finally, an appraisal of all the findings is made under Section X, labeled "Conclusions".
II. MARKETS, FIRMS AND MIXED STRUCTURES. THE BUSINESS PERSPECTIVE
Reality of commercial transactions is complex. Economic agents find numerous ways to interact among themselves in the context of business transactions. Nowadays this complexity is somehow acknowledged by business and economic theory. However, that has not ever been the state of the art. In its beginnings, classical economic theory tended to explain all types of contractual settings on the basis of simplified models that assumed the existence of purely commoditized goods, and spot contracts subscribed between perfect strangers, absent any sophistication or degree of commitment between the parties. How economic and business theory has evolved to introduce complexity in the old models constitutes a long process, where the development of the theory has been helped by the evolution of a business arena that, by increasing its own intricacy, obliged the classical economic theory to progress in order not to become obsolete. Before I proceed to analyze how the needs of the new environment have affected contract law, I think it is worth to have an overview on which have been the processes of change in the economy and business, as well as in economic and business theory.
1. Classical view of transactions. The market
For classical economic theory, men are rich or poor according to the degree in which they can afford their necessities, conveniences or amusements of human life.[3] However, once the division of labor has been operated, a man's own labor can supply very few of them.[4] Thus, a social mechanism of exchange is needed in order for individuals to be able to exchange labor for goods and services necessary for subsistence, comfort and amusement. That social mechanism is the market, through which parties organize their transactions in order to obtain the necessary product in exchange for the effort displayed to get them.[5] Therefore, in the classical foundations of capitalist economics, the first idea that has to be kept in mind is that the market constitutes the paradigm of any kind of economic interaction. However, how this whole setting managed to work with so different types of individual willing to exchange their goods and services? The answer would be, the rules on private property (a legacy from the Romans [6]), and the price mechanism. It would be really hard for individuals to exchange their work for goods and services. For that reason, the easier way is to exchange that work for money, and the money for goods and services.[7] The relevant elements of the choice of a commodity to act as a currency would lead us outside the scope of our work. However, the price mechanism is important for setting the basis of classical economic thought in a relevant sense for our study. The market, with its price mechanism, appears as the capitalist alternative to planned economies where the control of the transactions is effected by a central authority.[8]
This price mechanism is formed, according to the rules of classical economics, by the meeting of demand and supply. For that purpose, some simplifications need to be made, which are the ones that characterize classical economic thought. Those simplifications consist, first, in the commoditization of all the goods sold. Indeed, classical economists like Adam Smith or Alfred Marshall talk about the price of "commodities."[9] In particular, Marshall stated that:
Thus, classical economic theory simplifies the reality, assuming that all transactions are for standardized goods. In such contracts, it was not necessary that parties knew each other for accomplishing the transaction. What was simply necessary is that the description of the goods transacted was clear (something easy, provided the simple nature of the goods). That way, individuals could go to the market like perfect strangers, contract with perfect strangers, and, once the transaction was accomplished (in few steps, since it only consisted on a matter of quantity, minimal quality standards, and money), the parties could be kept as perfect strangers again.
That simplification of classical economic theory left all the relational aspect of trade outside every economic model. However, this fact was never considered as a serious problem by economic theory. Instead, what caused the postulates of the theory to be revised was a different simplification made by the model, i.e. to leave outside the economic model all transactions celebrated inside firms.
2. Coase and transaction costs economics. Contractual theory of the firm
The above described was the view of markets and businesses in the early stages of economic theory. The economic system was not operated by anybody, but simply, operated by itself.[11] Society was, thus, not an organization, but an organism.[12] In such environment, where everything was led by the price mechanism, there was no room for any relational aspect of transactions, as said before, but, what is more, there was no room for any sort of organization and planning. In other words, classical economic theory did not have room for firms.
In this sense, for classical economic theory firms were kind of "black boxes"[13] and the view assumed was that of spot transactions in the market with no ongoing relationship between the parties. A wide range of transactions was organized within the firms, though. When an employee was sent from one department to another, he did not do that because the price had changed and his work was better paid there, but because he was ordered to do that by his manager. The lack of interest about business organizations, though, had led to discard any attempt to explain the reasons why the economic agents, resorted either to markets or to firms (thereby organizing the transactions themselves) in order to obtain their resources.
This constituted the departing point for Ronald H. Coase to formulate, mainly in two articles,[14] his theory of transaction costs. From the perspective of classical economists, markets were always efficient, and mutual exchange was the best way to achieve the most efficient result. Therefore, concluded Coase, absent any other consideration, all the production of goods and services should be carried on a completely decentralized basis, through contracts with other parties.[15] Then, why do firms exist, if that does not lead to an efficient result? Coase concluded that, in order to complete a market transaction there are costs derived from ascertaining the person with whom it is convenient to contract, as opposed to those with whom it is not; costs arising from the need to communicate to those persons the intention to contract; costs derived from the necessary negotiations to achieve a satisfactory result; costs of drafting a contract and, finally, costs of inspection and enforcement to make sure the performance of the contract is the adequate.[16] These are grouped as a whole within the definition of transaction costs.[17] Therefore, following this line of thought, firms would flourish to organize what otherwise would be market transactions, when the costs of carrying on those transactions within the firm were less expensive and burdensome than to do it through the market.[18]
This theory supposed an earthquake to economic thought. Firms were not mere "black boxes" that transformed inputs in outputs with the inside process lacking of any interest at all. Suddenly, a new view had come up: that of the firm as a nexus of contracts. However, what is more important, this new theory highlighted the flaws and threw some uncertainties over the idea that purely spot market exchanges were the most efficient kind of transactions. In the presence of high transaction costs, it could be preferable to organize those transactions within a firm. Thus, the decision on whether to make or buy had to be taken with the aim of reducing all costs (now including transaction costs) to the maximum extent possible.
The introduction of transaction costs constituted the departing point to address the complexity of certain transactions through economic and business theory. However, in the beginning it only constituted a way to dichotomize it over either markets or firms. Aspects of "mixed" contractual relationships were still excluded from the lens of economic theory.
3. Neither firms nor markets. Towards cooperative relationships
Coase supposed a revolution on classical economic thought. Suddenly, markets and firms (or hierarchies) constituted alternatives to achieve a same result, the production of goods and services. However, using the transaction cost approach did not only contribute to understand the nature of firms as alternative to markets, but also to blur the boundaries of the firm. Indeed, it would not be proper anymore to talk, in economic terms, of contracts and firms, but to define the relationships in terms of 'market-like' or 'firm-like' contracts, being the latter those that govern long term relationships.[19] The main aim has been to combine the flexibility and incentives of market transactions with the close collaboration typical of transactions within a firm (i.e. vertical integration).[20] As a result, the new approaches encompass a view of companies embedded in networks of exchange relationships, either vertical (supplier or customers) or horizontal (competitors).[21] As a result, rather than factors purely internal or external to the company, it is the kind of relationships that the company has what becomes increasingly important in understanding its success.[22] It is easy to find multiple examples of the quality and management of close relationships as a source of competitive advantage in the automotive industry,[23] biotechnology industry,[24] R&D consortia of companies of computers, energy, raw materials and telecommunications,[25] textiles[26] or packaging machine industry.[27] In any event, a source of advantage or not,
Therefore, the current trends point to a closer relationship within parties, where markets or corporations only constitute the edges of a whole range of mixed relationships, where price mechanism and hierarchical mechanism are combined. The aim is to encompass the flexibility of the market mechanism as well as the coordination of the hierarchical mechanism. In order to set up such device, it is necessary that parties renounce to specify all the possible contingencies in the contract they draft, since those costs may turn the transaction impracticable.[29] In this scenario, organizational theory suggests that the best arrangement may be to define ex ante a set of essential terms, rules and bodies that facilitate the way to take decisions in the future, thereby creating what is called a "relational contract".[30]
4. A different approach. The deterministic contracts approach
In previous Sections it has been examined a classical scenario with spot transactions guided by the price mechanism. Then, Coase and those who followed his path, brought to the analysis the concept of transaction costs as an explanation to the dichotomy between firms and markets. Later business theory added to the analysis other types of liaisons in an intermediate way between markets and firms, depending on the degree of commitment between the parties.
However, to explain everything in terms of degree of commitment still gives an incomplete picture. Thus, the problems and uncertainties can be solved by the parties through a high degree of formalism rather than a high degree of commitment. By formalism it is understood the degree of detail and specification ex ante (i.e. in a contract document). There can be arrangements with a high degree of commitment between the parties as well as a high formalism (i.e. in cases where transactions are organized within a firm and all the proceedings are set up ex ante), but others where a high commitment does not encompass a high formalism (i.e. think about certain long-term relational contracts, or some joint ventures). Similarly, there can be some transactions where a low degree of commitment does not come together with a high degree of formalism (i.e. purely spot market transactions), though in others a similar or slightly higher degree of commitment may encompass a disproportionately higher degree of formalism (i.e. case of deterministic contracts.[31]).
Extensive planning is utilized when that planning, together with the threat of legal sanction, is more advantageous. Nevertheless, it seems that the solution in an uncertain environment is a higher degree of commitment. What can lead to use such formalistic contracts with an extraordinary degree of detail?
Some reasons for this extensive planning have been offered by Professor Macaulay.[32] The first reason is that a detailed contract may serve as a communication device within a large corporation.[33] This arguments stems from the fact that contracts are devices crafted to organize transactions that are subscribed by some agents on behalf of the firm (for example, sales management and house counsel), but whose performance has to be implemented by different agents within the firm (for example, production managers). That agent wants to know which parameters must he stick to. Moreover, even among the agents who negotiate the contract, there are some aspects that the management may want to keep its salesmen from negotiating. Finally, having the specifications present in the contract is useful for the agents who subscribed it in order to fight with the production and finance departments if the latter resist to comply with certain requirements.
The second reason to use detailed contracts is the likelihood that problems may arise,[34] this being related to the complexity of the contract performance and its length. The use of formal contracts rather than "mixed" relationships (neither markets nor firms)[35] may turn a cooperative business into an antagonistic one.[36] However, this problem may be offset by gains in predictability in cases where, say, the degree of prejudice in case of breach may be great.[37] Examples refer mainly to cases where consequential losses may be great and either the buyer is interested in carefully defining the obligations and standards of performance of the seller,[38] or the seller is interested in inserting clauses on limitation of damages.[39]
In conclusion, business theory and practice has significantly evolved, making the analysis of business relationships more and more complex. While in previous sections it has been shown that a wide degree of trust and flexibility constitutes a solution to adapt to an ever-changing environment, under this heading some concerns have been expressed that that may not always be the only option. Formalistic relationships, with or without a high degree of commitment may introduce more rigidity, but constitute a valid alternative in some scenarios.
5. Conclusions from the perspective of business theory and practice
Along the previous sections an attempt has been made to explain the evolution of business theory in its aim to explain the evolution of business relationships in order to adapt to an ever-changing environment. From the foundations of classical markets economics, where price mechanism was the only organizational tool, a concept like that of transaction costs was introduced in order to explain the dichotomy between markets and firms. Further business theory explained that markets and firms were just poles of a scale where many kinds of relationships were possible to carry out transactions, depending on the degree of trust and commitment between the parties. Finally, further analysis showed that, in order to deal with uncertainty, as an alternative to commitment it was possible to introduce more formality in the relationship.
In consequence, a proper analysis should classify the different kinds of liaisons according to their degree of commitment and formality. Usually business theory tends to include vertical integration, partnerships, joint ventures, agency agreements or franchises. However, the aim of this work is to focus on a pure example of contract, like the contract of sale. Therefore, all the previous types will be excluded. Nevertheless, still within the scope of sales contracts we may find three different types of transactions.
Spot transactions. In this first category a transaction exists at only one point in time and there is no ongoing relationship between the parties. Moreover, since the product or service provided is of standard nature, the only benefit is upon the price, and the transaction is completely driven by the price mechanism. Not much attention may be paid to negotiate the contract and the parties either stick to a form or base their agreement in an exchange of e-mails or a telephone call. In the absence of a carefully negotiated contract, contract law, as a "default" rule, must necessarily provide for certainty and predictability.
Flexible and interactive relationships. In this case, there is an ongoing relationship between the parties. Consequently, the basis should be placed in the trust and confidence between them. Furthermore, it is hardly possible to anticipate all the possible contingencies that may happen in the performance of the contract. Therefore, the parties solve the problems on an ongoing basis through cooperation. In such a case, the law has to become a flexible instrument to evaluate the diligence of both parties to enhance the duty to cooperate to the maximum extent possible.
Formal and planned relationships. In this case, although the contractual relationship may be of complex nature and lack the simplicity of the spot transactions, confidence is not a strong element. For that reason, rather than introducing flexibility through framework agreements and constant communication, the parties try to anticipate all possible contingencies in the contract, with stipulated consequences for every possible event. For this type, the law has to allow the parties to derogate from or vary the applicable legal rules and set their own contract rules.
III. INFLUENCE OF THE NEW BUSINESS THEORY AND ENVIRONMENT IN CONTRACT THEORY AND PRACTICE
The previous Sections traced a timeline that reflects the evolution of industry practice and theory. Contract law needs to provide an answer to different contractual realities. This heading serves the purpose of studying whether and to what extent has the theory of contract law adapted to the needs of the new environment.
1. Traditional view of contracts
New theories surge as a response to new problems, and it is tempting to adopt them without further discussion. However, before adopting new theories, the first step should be to evaluate the features of traditional thought, in order to see whether it is robust enough to face the defiance posed by changes. The following lines will briefly display the archetypical perspectives of contract law. Firstly, classical theory of contract law will be examined. Then, a scrutiny will be made of neoclassical contract law, which has attempted to conciliate the new challenges with the traditional bases of contract theory.
A. Classical contract law
Classical contract law focused on the role of a contract as a promise. According to the Restatement Second:
Moreover, the classicists gave paramount importance not to the actual intent of the parties, but to the external expression of such intent, thereby arguing that it was the reasonable observer's interpretation controlled, not the actual parties' will.[41] Therefore, classical contract law stood for formal promises (interpreted in the light of the declarations and not the actual intent) that determined what the parties compromised at the moment the promise was made. This concept of contract as a promise emphasizes two facts: first, that the law of contract is concerned with future exchanges, since a promise is a commitment to future behavior [42] and, second, that the contents of the promise are determined since the beginning. This contract theory thus enhanced two elements: discreteness and presentation.[43] By enhancing presentation is simply meant to consider the course of the future inalterably bound by present conditions.[44]
Increasing discreteness, though, is a more complex work for contract law, since it takes several tasks. A purely discrete transaction occurs between strangers brought together by market mechanisms. It is entirely driven by price mechanism and separate from other past, present or future relations so that the parties can be assumed not to have dealt in the past, or to deal in the future.[45] Therefore, in the words of Professor Macneil:
Classical theory, thus, fits perfectly an environment of spot transactions, or even planned transactions. Relevant risks can be assigned either by legal rule or through agreement, as future contingencies are known, understood, and addressed at the time the conclusion of the contract takes place.[47] However, as seen before, the tendency of business practice is, in many cases, towards interactive and closely intertwined relationships, which can be problematic for this background. First, it is hard to plan every single contingency. Second, in a planned transaction the parties' main efforts are placed in the process of drafting the agreement. At that stage both parties do not have any project in common, and their interest is more to get the best deal than to make the thing work, since in case it fails they may contact another party. The environment is confrontational rather than cooperative. On the other hand, in an intertwined relationship the emphasis is placed on the performance stage. That means, first, that the parties have a common project, and thus are more likely to be loyal. Second, it means that they have invested time and money. Thus, the interest to make it work is prior to the interest of getting the best for their side. In consequence, the parties have more incentives to share both benefits and burdens;[48] the environment is more cooperative, and this element might not be enhanced enough through classical rules.
B. Evolution. Neoclassical contract law
Classical contract law enhances presentiation and discreteness. However, considering these two features as the basis of a contract law only reveals a compromise of the legal system, since they are never going to be complied with in their entirety. Indeed, business and practice contract practice reveals that, first, it is hard to foresee all the possible consequences in the framework of a contractual relationship. Second, practice also reveals that numerous transactions fit rather more comfortably under that label of "contractual relationship", than that of pure "contracts", understood as a spot transaction. Many contractual arrangements are not mere casual contacts that exist at a very specific point in time, but stem from previous contacts between the parties, and will be the source of further contacts, that are themselves placed within a whole network of connections between the parties, which in itself is located and interrelated within a larger network of connections with other economic agents, which defines the structure of the industry.[49]
For this reason, given the lack of adaptability of the old conceptions to the new patterns of business relationships, classical contract law evolved into what has been called "neoclassical contract law".[50] In order to cope with the presentiation problem, neoclassical contract theory developed a less formalistic approach. Neoclassical theorists held the belief "in bargain and consent as the basis of contract, provided the contract is cleansed of the bargaining improprieties and the archaic and formalistic rules that were accepted by the classical approach".[51] For this reason, from the original concept of contract as a "promise" theory evolves to consider the contract as an "agreement" enforceable at law.[52] This perspective, thus, fictions about the original intention of the parties,[53] but allows to introduce some dynamic elements in contract interpretation.[54]
The way to adapt a system based on discreteness to long-term relationships that require adjustment is to insert rules that prevent disruption of the parties' performance, often through gap-filling techniques [55] and incentives to the variation of the parties conduct.[56]
The criticism to this evolution of contract law argues that the switch has come only in the details, not in the overall structure of the system.[57] The new perception of contracts is better adapted to change. However, it still has the rigidities of a system that was born on the basis of discrete spot transactions. Therefore, argue its detractors, it is not a valid tool to cope with the burgeoning types of new types of business relationships that constantly mushroom in business practice. As a result, more and more parcels are taken from contract law and regulated separately under specific legislation that adapts to their needs,[58] since "traditional" contract law is not anymore a valid tool to address the new challenges.
2. New perspectives of contract theory
New theories of contract law allege that old conceptions hardly adapt to the new types of relationships. However, a first point that needs to be made is that, although this criticism has important grounds, much of the business traffic is still carried on through spot transactions (i.e. think about the commodity markets). For those cases, the old rules that enhance certainty and predictability through discreteness and presentiation still seem to be an adequate solution. Moreover, in other types of transactions, though the new elements are present, the archetypical factors are there as well, and many aspects of classical contract law should be present. Once this has been precised, the new elements put forward by the relational theory of contract will be described under the following sub-sections.
A. Relational contracts from a contract formation perspective. Agreements to agree
A contract that stipulates ex ante all possible contingencies will contain multiple clauses of the kind "If situation X occurs, the parties undertake to do Y". Foreseeing and providing for every single eventuality may prove to be a nearly impracticable solution in certain cases, especially if the relationship is a long-term relationship, which may change and need redefinition with the time.[59] Although typical examples of these relationships may be found in labor contracts or in the agreements that govern the relationship of a corporation/partnership with its shareholders/partners, most of the long-term contractual relationships enjoy some of the same characters.[60] That implies to change the concept of a contract. From the classical notion of contract as a promise, through the neoclassical definition of contract as agreement, relational theory characterizes contract as "the relations among parties to the process of projecting exchange into the future".[61] This concept considers the relationship between the parties broader than the traditional "promise" or "agreement". The parties' relationship is thus a complex environment influenced not only by the exchange of promises, but also by practices, custom, the parties' roles, notions of good faith, and assumptions made by the parties albeit not spoken.[62] This view enjoys a comprehensive and forward-looking view of the contract.
On this basis, the long-term contracts subscribed by the parties should be concluded on the basis of framework agreements, which, rather than providing for the solution to all possible events, regulates the formulae that permits the parties to provide such solution. There are many different possibilities, including the determination of such solutions through negotiation, unilaterally by one of the parties (i.e. the typical example is that of labor contracts or those where one of the parties is subordinated to the other), or by a third party.[63] However, obligations may also arise from interdependence, custom, previous transactions or the developing relationship between the parties.[64]
Consequently, the relational perspective calls for a more open view on contract formation. According to relational contract theory, the contents of the contract are not all determined at the moment when the parties sign a document or express their will to be bound. Those contents are determined on an ongoing basis through the interaction of the parties. Therefore, relational theory assumes a view of "alive contracts".
B. Relational contracts from the enforcement perspective
Traditional theory tends to liquidate the business relationship rather than to maintain it alive. In relational contract theory, the enforcement is more flexible and proactive.
In the traditional view, litigation is arranged as a contest between two enemies, where the aim is, by a backward-looking examination of the facts, determine which of the parties was aggrieved or whose right was violated and, as a result, provide for an adequate remedy to compensate for the loss of that right or the existence of such prejudice.[65] As opposed to that, under this new system dispute resolution should be organized as a cooperative system where the fact examination is also prospective and forward-looking, and the remedy sought is negotiated and its purpose is not to compensate for the grievance, but to set the best burden distribution in order to maintain the ongoing contractual relationship.[66]
Although this approach may seem way ahead of the existing contract law, its use is widespread, yet not legally sanctioned, among business partners. Exchanges may be adjusted informally during the life of the contractual relationship. If the buyer under a long-term contract that includes delivery of goods in installments requests the seller to cancel the delivery of part of the goods and the seller agrees, they adjust the relationship without recourse to any formal mechanism.[67] If the problem is more complicated, like one of untimely or defective performance, the solution encompasses requesting the other party for negotiations to negotiate a solution, in order to continue the business relationship. Often that solution will be reached without referring to the original contract. Only in cases where the proposal by one of the parties is unreasonable may the other party refer to the terms of the agreement.[68]
This understanding of relational contracts considers them as agreements that provide necessary mechanisms to settle the existence of a disagreement over how to tackle the problems arising out of unforeseen events.[69] In relational transactions, when problems arise the main aim is not to terminate the contract, but to re-arrange it as to make continuation of performance feasible.[70] First, companies are organized to comply with contracts. Sales personnel have to face complaints of angry customers in case of late or defective performance, which incentives them to press on personnel in charge of implementing the transaction (through delivery of goods or rendering of services).[71] Second, personal or business boundaries across the levels of organizations make desirable that the contractual relationship continues or comes to a satisfactory end.[72] Finally, companies are, above all, interested in continuing doing business. Therefore, they will strongly try to avoid dissatisfying any counterpart. The first reason is that they will obviously lose the transaction with that party. The second, and even more important, is that their reputation will be damaged if a contract comes to an abrupt end, which may cause them to lose other contracts with other parties. In this sense, reputation acts as a powerful means of contract enforcement. As a consequence, most times these mechanisms are successful, yet not having legal ways of enforcement. It would thus be desirable that the law acknowledged this prospective and forward-looking view of contract enforcement. Hence, the law should have in mind the importance of maintaining a relationship and, therefore, take into consideration the attitude of the parties towards that end.
In conclusion, relational contract theory provides a new outlook of contract law. From the emphasis on discreteness and presentiation of the classical and neoclassical contract law, relational contract theory highlights the importance of a flexible and forward-looking view of contracts. This conclusion can be extracted from either the perspective of relational contracts as framework agreements (or "agreements to agree"), or the characterization of them as agreements encompassing flexible and prospective means of enforcement. Furthermore, this view seems to shape better some of the new business trends, where trust and higher degree of commitment are increasingly common, and, although not addressed by legal theory, it seems to be quite common among private companies, although on an informal basis. Both features contribute to a great extent to the importance of these new trends, which is the reason why their potential influence should be examined under the following section.
C. The potential influence of the new approaches into contract law
It has been said that relational contracts suppose a challenge to the old conceptions about contract law. There are some particular fields of contract law where new trends may influence the conventional wisdom. First, relational contract theory would imply a more flexible view on the determination of contract contents than those of classical or neoclassical theory.[73] Under this approach the contents of the contract could be determined on an ongoing basis through the interaction of the parties, rather than in a preliminary moment, where the parties have not yet faced all the difficulties of the performance. Some changes have been experienced in this direction on the issue of formation of contracts (i.e. the admission of open price contracts is just an example of this), although there will always be the difficulties derived from ascertaining the parties' real intention.[74]
Secondly, on performance (and non-performance) of the contract a more flexible setting should be considered as well. The traditional role of law and courts has been a backward-looking one where the purpose is to properly liquidate the relationship. An approach is demanded of a more forward looking examination of the facts and needs. Some of this effort has been accomplished through private dispute resolution, either in informal (negotiation between the parties) or formal way (mediation or arbitration). Nevertheless, it would also be desired that the law, as interpreted by courts, gave more importance to the parties' behavior towards cooperating and maintaining the contractual relationship.[75] In this sense, if the natural behavior in a relational context is to cooperate and maintain the relationship alive, it should be rewarded by the law.
It is acknowledged, though, that relational theory, though introducing more flexibility, poses additional challenges. The most important of them is that, as stated before, business practice does not divide into relational and non-relational transactions, but the majority have some of both. Therefore, together with interpreting legal rules, courts should discern where and when to apply relational principles. Relational contract theory thereby implies a trade-off in the law between fitness to commercial practice and higher complexity.
D. The duty to communicate
The scope, contents and meaning of the duty to communicate are highly influenced by the kind of relationship between the parties. In a traditional spot transaction the parties are supposed to be perfect strangers. In case something goes wrong, the parties should be able to go to the market again to contract with a different party. Therefore, since they come to contract together in the marketplace simply by reason of the price mechanism, they have no reason to trust each other.
In this scenario, the parties have no incentive to communicate and cooperate. Therefore, legal rules on communication should oblige the parties to do so to a minimal extent. Moreover, the rules on communication and cooperation in this scenario need to be clear and discrete, so to provide the party who respects them a safe harbor. Consequently, the best suited rules in this setting are those that encompass a simple and straightforward proceeding, in the way "When contingency X happens a communication stating Y should be made". The conclusion we may draw from this is that, in spot transactions, the distrust between the parties, who are, indeed, perfect strangers, is compensated by a higher degree of formalism in order to enhance a minimal degree of cooperation.
The context is different if the contractual relationship is complex or long-term, or both. In that case the parties have all incentives to cooperate, and will do so by the means chosen by them as the most adequate for their particular relationship. Therefore, the law should acknowledge the parties' own means of cooperation rather than imposing formal proceedings that may be different from those expected by the parties, and reward the parties' cooperative behavior exercised through communication.[76] Hence, the duty to communicate is purpose-oriented towards enhancing the parties' own cooperation means, and not compelling the use of the laws' own proceedings. In second place, an emphasis should be placed in informal means of communication. In a cooperative environment, communications are usually not formal. For that reason, informal communications should be given the same importance than formal ones.[77]
3. Conclusions
The previous sections have showed the general basis of economic, business and legal theory where the following analysis will be developed. From an initial simple assumptions of a world of spot transactions business theory has evolved to classify numerous types of business relationships on the basis of commitment and formalism. Many of those have been purposefully excluded from this work, since the aim is to focus in contracts of sale, to analyze whether the most classical form of contractual liaisons may also be affected by the challenges posed by the new environment.
With that purpose, the preliminary conclusions reflect that the new contract practice entails the need to look at the rules on the determination of contract contents from a different, more dynamic perspective. They also require to appraise the parties' conduct from a singular, purpose-oriented perspective, with the importance placed in the preservation of the contractual relationship, and evaluate the behavior of the parties on that basis. If spot transactions enjoy a higher need for certainty and predictability, complex transactions with a higher degree of commitment imply a superior degree of cooperation, and the duty to communicate has to empower that. In the same way, transactions where the parties derogate from the regime set by the law, the latter has to respect that, by emphasizing the parties' autonomy. In the end, it is party autonomy what is best served by these differentiations. As stated by Professor Arthur Rosset,
Consequently, different types of relationships call for different solutions, and for a different role of the law, the contract, the environment, and the duty to communicate. In the following Sections I will try to address which are those differences and propose some new approaches in relation to the duty to notify defects in the 1980 Vienna Conventions on Contracts for the International Sale of Goods.
IV. THE DUTY TO NOTIFY IN THE CISG AS THE SUBJECT OF STUDY
Once the framework of the different approaches has been set, it is appropriate to proceed to apply this framework to concrete legal provisions. There are multiple texts on contract law that could have been chosen to test the above-described setting. So, this heading should begin by responding to a very simple question, why the CISG? At least five arguments could justify that choice. The first is that the CISG is a contract law instrument, which suits it for an analysis based on contract theory. Secondly, as a statute of pure classical contract law, the CISG is well suited for an analysis of the influence of the new business environment in traditional law.[79] In third place, the CISG rules only on the private interests of the parties, without regard to other elements more influenced by public policy issues. In fourth place, the CISG is the result of a global consensus on contract law matters.[80] If the intention of this work is to address general problems of contract law, the CISG is the most adequate instrument, since it encompasses the legal rules on which the different legal traditions coincide. Finally, the CISG is an international instrument specifically tailored to solve problems arising out of international transactions. The new perspectives of business theory are equally addressed to cope with the problems of a global environment (with global competition).
Hence, the CISG is contract law, is "pure contract law", is not biased by public policy issues, constitutes an instrument to respond to general contract law problems, and, finally, is specifically tailored to resolve the problems of international transactions. For all those reasons, it constitutes an adequate subject of study.
Once the CISG has been selected, the next question would be, why select the regime on notification of defects? I must confess that the selection of that field of study came from my initial puzzle on how such an apparently simple regime could give rise to so much litigation. The reason could be that the regime could somehow be misconceived for the transactions to which it was applied. I came to conclude that even the simplest underlying assumptions supporting a legal regime can be unfit if they do not adapt to commercial practice. The present work suggests a new approach on how to deal with the problems of the notification of defects regime in the current environment. Finally, the other purpose of this study is to raise the debate about whether the rules of the CISG should be re-interpreted to adapt to existing business practices.
Once the general bases have been settled, and the subject to test the theory has been chosen, what is left is to analyze the concrete provisions. In this Section, the study is referred to Article 39 CISG. This provision has been subject of much debate, especially in courts, since it is designed to constitute a threshold to the exercise of actions by the buyer. Many courts have denied such actions on the basis of the absence of a proper communication of defects pursuant to Article 39 CISG, as will be seen below. The position held in this work is that Article 39 CISG perfectly suits a scenario of spot transactions, where traders are in search of transactions with the only aim of getting the best price. Article 39 CISG suits that environment. However, in a context where parties enjoy a close and non-formalistic relationship, characterized by constant informal dealing, Article 39 CISG may introduce undesired distortions and be an unexpected rule for commercial parties.
1. Meaning and importance of Article 39 CISG
The text of Article 39 CISG reads as follows:
"(2) In any event, the buyer loses the right to rely on a lack of conformity of the goods if he does not give the seller notice thereof at the latest within a period of two years from the date on which the goods were actually handed over to the buyer, unless this time-limit is inconsistent with a contractual period of guarantee."
This provision regulates the duty of the buyer to communicate to the seller the lack of conformity of the goods, as a conditio sine qua non to exercise the rights and duties contemplated under the Convention in case of lack of conformity [81] (Part III, Chapter II, Section III). This provision was, together with Article 44, one of the most debated in the drafting of the Convention.[82] In an extremely high number of cases,[83] one of the highest number of cases referring to a single provision,[84] Article 39 constituted the major issue in dispute. Scholars could not ignore this controversy. In this sense, it is remarkable that the CISG Advisory Council, a body composed by some of the major experts in the Sales Convention,[85] has acknowledged this importance, and the second of the Opinions issued by this body concerns the problems of Article 39.[86]
Article 39 CISG obliges the buyer to notify the existence of lack of conformity in the goods. That communication serves different purposes: In the first place, it provides the seller the basis to accomplish its own examination of the goods.[87] That examination will have mainly the purpose of determining whether the buyer's claim is justified.[88] Secondly, if it is justified, the communication allows the seller to substitute for the defective goods or to repair the defect.[89] Moreover, the seller itself will be able to file a timely claim against the carrier or the person in charge of putting the goods at the buyer's disposal.[90] In third place, if the seller considers that the claim lacks sufficient grounds or can be objected, the notification permits the seller to preserve the necessary evidence to prepare for further litigation with the buyer.[91] If there is a delay in the acknowledgement by the seller of the lack of conformity, it will be more difficult to assess whether the buyer's claim was justified.[92] Thus, the duty to communicate contemplated under Article 39 CISG puts the seller on equal footing with respect to the buyer in relation to the information about the state of the goods. Therefore, it has the purpose to avoid that a negligent buyer may take advantage from its negligence.
2. Notify. What and how? Specificity and form of communications
A logical question that may arise after reading the text of Article 39 CISG is what are the requirements a notice of defects must comply with. A buyer who faces the situation of having received defective goods often ignores whether that communication has to comply with any requirements as to contents (specificity of defects, which will be analyzed under letter A) or form (form of the communication, which will be analyzed under letter B).
A. Contents of communication. Duty to specify the lack of conformity
Article 39(1) CISG establishes that the notice must specify the nature of the non-conformity. In order to know which are the requirements of specificity the notice must comply with we should take into consideration the purposes served by the notice.[93] They are: allowing the seller to carry on its own inspection of the goods in order to detect the source of the problem, to assess whether there are grounds for the claim and to secure evidence.[94] Therefore, scholars and case law have held that the notice has to be specific enough to permit all those tasks. A notice with the words "defective goods" is insufficient.[95] Again, it will be necessary to analyze the requirement of specificity in the light of the circumstances of the case.[96] In general terms, the contents of the notice should be sufficient to allow seller to take the appropriate measures: send an expert to examine the goods, take evidence for future disputes, send additional or substitute goods, etc.[97]
That implies, in the first place, to identify the goods in a precise way[98] and, once this is done, to communicate whether an aliud has been delivered,[99] whether there are quantity or quality defects, and to identify their importance, although the concreteness of the specification of defects will depend upon the information available to the buyer, or that the buyer should have obtained.[100] Nevertheless, there will be cases where the buyer will not be able to obtain much information (i.e., cases of machinery or technical equipment). In that case, the notice must state the symptoms, not necessarily to indicate their cause[101] and, if the ascertainment of the defects is preceded by a proper examination of the goods, it will be sufficient to communicate the results of the examination.[102]
Taking that into account, some authors like Professor John Honnold have maintained that the specificity requirement must not be overemphasized, since nowadays, with electronic communications, a seller who wants to know more must be expected to inquire after receiving the notice.[103] Nevertheless, the numerous case law seems to contradict this thoughtful remark. At least, the abundant cases where the buyer lost its rights by not specifying in a sufficient manner evidences the fact that the requirement can constitute a burdensome threshold, and that, for ordinary buyer, it is not always logical that, besides communicating the existence of defects, they have to specify them.[104] It is true that the rule serves the purpose of avoiding the inefficiencies resulting from the moment the defect is discovered until the moment it is preliminary specified, so as to assess what to do next. However, the CISG does so by placing on the buyer the burden of providing the preliminary specification , which may be very well be adequate in some scenarios, but may fit badly on others. This rule obviously seems adequate in cases of spot transactions, where the contacts between the parties are scarce, and thus the buyer's communication should put the seller in a position to have a preliminary idea of what is happening with the goods. Indeed, it makes sense that the buyer communicates all the information it knows, in order to help the seller avoid costs in planning the inspection, selecting the experts, etc. However, in contexts where the relationship between the parties is more fluid it could be reasonable that a brief communication stating the existence of defects could be enough to make the seller take the next step, or at least inquire about the nature of defects.
B. Form of notification
Article 39 CISG, consistent with the "informality principle" of Article 11 CISG, does not impose a determined form on the communication of defects, and thus it is necessary to resort to Article 27 CISG.[105] This provision states that the party who effectuates a communication does not lose the right to resort to it although there may be communication delays or errors, if the communication is made by "means appropriate to the circumstances".
A simple oral communication may suffice, generally by telephone, although there would be problems of proof.[106] In these cases, the general rule adopted by German courts is that, in order to accept the notice, the court should be able to know when the buyer talked to whom about what.[107] For that reason, it is recommended to choose a means that leaves record of the date and contents of the communication.[108]
The parties, by virtue of party autonomy contemplated under Article 6 CISG, may agree in the contract which will be the means of communication adopted.[109] In that case, regard should be had to the agreement of the parties to assess whether or not the communication was by a means appropriate for the circumstances.[110]
3. Notify. When? The period of time for notification
The language of Article 39 CISG that has raised more debate is that referring to the period of time to notify the existence of defects. As will be seen later,[111] the period of time set in Article 39 CISG acts as a deadline, and the provision precludes the buyer from asserting any rights under the CISG if the notice of defects has been given after the prescribed period. The references of Article 39 CISG to a "reasonable time" are very flexible, and thus, have been subject to much debate. However, it makes a big difference to send a notice within or outside the time prescribed. Hence, the dies a quo, i.e., the time when the period to notify begins, and the dies ad quem, i.e., the time when that period ends, will be examined as thoroughly as possible in the following lines.
A. Beginning of the period
As indicated by Article 39 CISG, the period to notify begins at the moment when the buyer discovers the lack of conformity or should have discovered it. Therefore, we should distinguish two scenarios:
a) The buyer discovers the lack of conformity
If the lack of conformity is manifest and visible to the buyer at the moment of delivery, the period of Article 39 CISG starts to run, without the need to give any additional time.[112] The same rule applies to cases where, although not evident, the lack of conformity is known by the buyer at the time of delivery.[113] Thus it will not be necessary to wait until the end of the period to examine the goods, and the time to notify will start at the moment the defect is known.[114] In cases where the buyer knows the lack of conformity in at a time prior to delivery, the period to communicate defects begins at that time, that is, before delivery takes place.[115]
b) The buyer ought to have discovered the lack of conformity
The time discovery of defects is not the only time from which the period to communicate begins to run, since the period to communicate defects will also run from the time the buyer "ought to have discovered" the lack of conformity. In this sense, there is merit to a brief analysis of Article 38 CISG, which contains the obligation of the buyer to examine the goods. This provision will be useful to determine since when the buyer "ought to have known" the defects and, therefore, when the period of communication starts:[116]
"(1). The buyer must examine the goods, or cause them to be examined, within as short a period as is practicable in the circumstances".
Some remarks should be made about this provision. Article 38 CISG indicates the moment from which the period of Article 39 CISG begins, if, and only if, the defects may be ascertained by an adequate examination of the goods. In that case, the two periods of Articles 38 (examination) and 39 (notice) CISG will be one followed by the other.[117] The reference under Article 38 is made to a "as short a period as is practicable" as opposed to a "reasonable time", in the wording of Article 39 CISG. The aim is to emphasize the importance of a prompt examination as preceding a timely communication.[118] Consequently, the compliance or non-compliance of the duty to examine only makes sense when there are defects in the goods.[119] There is no negative consequence for not-complying with the prompt examination as such. The non-compliance of the duty to examine will only have the consequence that the period to communicate will start to run before and, consequently, it will be shorter. Nevertheless, that may be cured, if the buyer who has unduly deferred examination compensates that leniency with a particularly prompt communication of defects.[120]
Example: B (buyer) receives from S (seller) machinery with defects not evident from visual inspection, but easily ascertainable through the proper tests made by operating the machinery. These tests are customarily done during the first three days after delivery, and a reasonable time to communicate is one month (30 days). B may decide to postpone the tests until ten days later (i.e., 7 days more than what would have been considered a proper time for a prompt examination), but if B communicates the defects within the 23 next days after ascertaining the defect, it would have communicated on time.
However, there would still be a second scenario in cases where defects could not have been discovered, not even through a careful examination the goods. This is the case of "hidden defects" in the goods.[121] Consequently, within the category of cases where the buyer ought to have discovered the lack of conformity, we should distinguish a sub-category of cases where the buyer, not even through the exercise of a diligent examination of the goods, could have been conscious of the defects. In this case, the fact that the moment where defects "ought to have been known" by the buyer will be longer or shorter will depend on the nature of the defects, in the first place, and of the kind of economic activity carried on by the buyer [122] (i.e., whether it is supposed to have some kind of expertise in the goods involved), in the second place. Therefore, it will depend upon both factors that the period to communicate will begin to run.[123] For this reason, according to the regime set in the CISG it is advisable to the buyer to maintain the goods in observation, even after examining them,[124] although this does not create a duty on the buyer to constantly examine the goods.[125]
In any event, it is easily noticeable that the regime established by the CISG is quite rigid. It presumes a time sequence with delivery (as a first step), a brief period to examine the goods (second step) and another period to communicate defects (third step). This regime is necessary in cases where the parties have a formalistic relationship, particularly if trust and commitment are missing. In that case, there is a need to subject the relationship to proceedings. On the other hand, there may be cases where the contractual relationship is characterized by closer ties, informal communication. It may also be that the process is not so "linear" (delivery-examination-notice). In complex transactions, there may be delivery, assembly, again delivery, assembly, correction, and technical assistance being present the entire time. In summary, there are multiple examples where the process is too complex to fit into the simple proceedings set by the CISG. In those situations, the buyer may not accomplish immediately the examination of the goods (it may not proceed to examine the goods at all) not as a matter of leniency, but as a matter of trust in the seller. Although the defects might have been discovered through examination, the buyer's conduct might be reasonable as well (e.g., the trust in the other party helps to save costs in the relationship). As an example, let us think about a supplier of spare parts to a car manufacturer in a "network kind" of relationship: both parties may agree upon different proceedings for quality control: close cooperation between engineers of both companies, inspections by the buyer of the supplier's facilities, joint task forces ... All to save costs of inspection of parts supplied. Although in a case like this, it is predictable that the seller would accept the defective goods no matter whether the communication is late for CISG standards, the law should not protect it in case it suddenly decided not to accept them. In this sense, the mechanism of the CISG is adequate for spot transactions where there is not an ongoing relationship between the parties, but not when trust and confidence lead the parties to alter the CISG proceedings after delivery of goods.[126]
B. Time for notification. The reference to a "reasonable time"
Article 39 CISG has its predecessor in Article 39 of the 1964 of the Uniform Law for International Sales (ULIS). The particularity of the CISG is in the substitution of the ULIS expression "notice [...] promptly" by "notice [...] within a reasonable time."[127] There are no hints in the Convention that allow to generally set a concrete period,[128] which may apparently create uncertainty.[129] Nevertheless, there have been numerous attempts in this sense. Unfortunately, it has been frequent for scholars and case law to be influenced by their own domestic law on the issue. Thus, authority from countries with laws that contemplate short periods of time tend to assume that the "reasonable time" of the CISG calls for a brief period of time as well.[130] On the opposite side, it is expected that authority from countries whose legislations call for wider periods, or no period at all, will also be influenced by the latter in their interpretation of the CISG.[131] Last but not least, there are interpretations that advocate a convergence of views.[132] Those who propose that a compromise should be reached by the different authorities have suggested that a period of one month could be taken[133] as a compromise solution that settled a first guideline to those who have to decide on issues of the CISG.[134]
Nevertheless, the existence of a fixed period of time that could be moved forward or backwards, still seems a too rigid solution. Different situations with different goods, skills and relationships call for different solutions. This is the opinion of the CISG Advisory Council which, in its "Opinion no. 2" states that it is not adequate to appreciate the existence of a reasonable time in abstract terms, of a day, fourteen days or a month, without taking into account the circumstances of each particular case.[135] For this reason, in order to finally appreciate the reasonable time, it is necessary to decide on a case-by-case basis, taking into account the relevant circumstances. In the first place, it will depend on the nature of the goods, that is, whether the goods are perishable or not since, for the former "reasonable" means "immediate"[136] (hours or, as maximum, a few days). Were the lack of conformity communicated later, it could not be remedied, or the seller could not take the necessary evidence. Moreover, it should be taken into account whether or not the goods are seasonal goods [137] (the period to communicate will be shorter in case they are [138]). Secondly, account must be taken of the necessary acts to ascertain the lack of conformity. If it is necessary an immediate examination by an expert the period of time will be shortened.[139] In third place, consideration must be given to what steps are to be taken with the goods. If the buyer has to manipulate the goods so that it will be difficult to discern whether the defects were the buyer's responsibility, this also shortens the notification period.[140] In fourth place, it should be taken into account the remedy exercised by the buyer: if the buyer intends to keep the goods and, simply, claim damages or a price reduction, the period ought to be longer than if the buyer intends to reject the goods in order to claim substitute goods or avoid the contract.[141] The reason is that, in the latter case, the seller should be given the opportunity to send substitute goods or to dispose of the ones rejected by the buyer to avoid further losses.[142] All these circumstances should be tempered by usages or practices established between the parties,[143] as well as by the degree of experience of the buyer [144] or other surrounding circumstances in each case.[145]
In summary, the "reasonable time" of Article 39 CISG will depend on the aforementioned circumstances (although case law may suggest others). More often, the period will be shorter in case of goods that require immediate examination or bear risk of loss, whereas for goods that do not pose those problems the period will be longer.
C. Cut-off rule. Reference to the rule of Article 39(2) CISG
The text of Article 39(2) CISG reads as follows:
"(2) In any event, the buyer loses the right to rely on a lack of conformity of the goods if he does not give the seller notice thereof at the latest within a period of two years from the date on which the goods were actually handed over to the buyer, unless this time-limit is inconsistent with a contractual period of guarantee."
In the notification of defects regime there is a disparity among the different domestic laws with respect to the need to set a fixed period.[146] The Uniform Commercial Code, for example, requires notice of lack of conformity,[147] but does not set a maximum fixed period,[148] while other systems establish periods of one year or less.[149] ULIS, forerunner of the CISG, set a period of one year. Finally, the two-year period of Article 39(2) CISG is the result of a compromise among the States that participated in the drafting of the Convention.[150] The period has to be calculated "from the date on which the goods were actually handed over to the buyer". That implies not to take into account the moment where the seller should have performed its obligation to put the goods at the buyer's disposal, or the effective date of performance, but the date in which the buyer enters into effective possession of the goods;[151] that is, when the buyer performs the taking of delivery.[152] This solution avoids counting the time during which goods are in transit to shorten the two years period.[153]
The period will be applied unless it is incompatible with a guarantee period agreed by the parties. The guarantee may enlarge or shorten the two-year period, since it constitutes an application of the party autonomy principle (Article 6 CISG [154]). Nor will the two-year period of Article 39(2) CISG be applied in cases where the seller knew or could not have been unaware of the lack of conformity (Article 40 CISG).[155] However, it will be applied where the buyer had a reasonable excuse to not communicate the lack of conformity (Article 44 CISG).
4. Notify. To whom? The addressee of the notification
Once having determined the requirements of the notification itself, in substance and form, we may question about to whom should the communication be addressed. Commercial relations are, nowadays, carried on among companies that may employ hundreds or thousands of persons, thereby giving sense to the issue about the addressee of the communication. That leads us to the problem of notifications made to employees, collaborators and, generally, agents or intermediaries of the seller, which will be dealt with in a first sub-heading.
On the other hand, the complexity of commercial relationships comes, very often, from the existence of third parties implicated either in the delivery of goods or rendering of the service (outsourced companies, carriers, etc.), or in the financing of the transaction (i.e., assignees of the contract or of the receivables). This problem will be dealt with in the second sub-section.
A. Notification to employees, agents or intermediaries
The addressee of the notification is the seller. Article 39 CISG only refers to the seller when dealing with the duty to communicate.[156] Nevertheless, the Vienna Convention does not determine which are the persons to whom the communication may be made,[157] persons who may be considered authorized to receive the communication "in the name of the seller" or "as the seller itself". Therefore, the law applicable to the agency relationship (according to the Conflict of Laws Rules) should determine these issues.[158] In case that the applicable law determined that a person has acted as an agent of the other, the communication to the agent is adequate according to case law.[159]
A different case is that when persons not authorized to receive a communication on behalf of the seller are used as messengers by the buyer to forward the notice to the adequate persons. In that case, those persons are used as means of communication,[160] and thus their adequacy as such should be assessed in light of Article 27 CISG. As a general rule it should be understood that they do not constitute "adequate means" according to the circumstances.[161] Article 27 CISG substitutes the expression "usual means" of ULIS and ULF by that of "adequate means". That is so in order to allow more flexibility, since, in exceptional circumstances, like a strike in postal services, or a breakdown in telecommunications may turn an unusual mean into an adequate one.[162] Nevertheless, in a normal situation, attending to criteria [163] like the time employed, the need to avoid losses or the possibility of alteration of the communication, the adequate means will presumably be the usual means. In conclusion, the aim is to facilitate for the seller the activity it has to carry on (to repair, to decide whether the claim is justified, take evidence for further litigation, etc.[164]) and, although Article 27 CISG is more flexible than its predecessor of ULIS and ULF, it seems that usual means comply better with the aim in a normal situation.
In general terms, when the notice is given to a third person not employed by the seller,[165] the buyer needs to make sure that the notice reaches the former.[166] In case of notices given to the seller's personnel it will depend upon each case. In the case decided by the Landgericht Bochum (Germany),[167] the court had to decide on these issues. The buyer communicated to "X", an employee of the seller, the existence of defects in the goods. The employee declared that he was not the adequate person to receive the notice on behalf of the seller but that he would forward the communication to the seller although, in the end, it seems he did not do it. The court decided against the buyer stating that the notice had not been sent by adequate means.[168]
In summary, as a general rule, in case the buyer utilizes persons not authorized to receive the communication on behalf of the seller as messengers, it should make sure that the notice reaches the seller.[169] In case the buyer does not make sure of this, the buyer would bear the risks in case the communication did not arrive to the seller or arrived too late. As can be seen, although the legal provision allows a certain degree of flexibility, it seems that the case law has opted for the most restrictive way to the buyer. Therefore, even in case of leniency of the seller's own employees, it would be the buyer who could bear the risk. This interpretation of the norm may not be adequate in cases where communication with the seller's personnel is fluent and the buyer's reasonable expectation is that complies with the duty to communicate by an informal communication to the seller's employee. A typical example would be that where employees of the seller stay in the buyer's facilities to install a machine or to train the buyer's personnel about its functioning. In that case, in business terms it could be reasonable to assume that an informal communication to the seller's personnel or foreman may suffice (if it complies with other requirements). However, we have examined that the interpretation made by the case law of this issue may complicate the problem, and oblige a party to depart from normal business practice to a process that could be quite bureaucratic.
B. Notification to third parties affected
The issue of the addressee is also related with the problem of third parties affected by the contractual relationship. With this mention we refer, on the one hand, to assignees of the seller and, on the other hand, to its sub-contractors. The questions are mainly twofold. In the first place, whether the buyer may comply with the duty to communicate by notifying those parties.[170] In second place, whether there exists the obligation of the buyer to communicate the existence of defects to those parties.[171] In summary, whether the communication to these parties may be made in lieu of the communication to the seller, or in addition to the communication to the seller, or none of them.
Although this issue has not been extensively discussed, my interpretation is that the answer must be negative in both cases. As to whether the communication to the third party may serve to comply with the duty to notify the seller, we have already studied the restrictive interpretation made by the courts about the possibility of the buyer to notify third parties. The criterion is that the communication to third parties does not free the buyer from its duty to notify.[172] Therefore the same rule should apply to the case of the assignee of the seller's receivables, arising out of the contract, or the carrier of the goods.
In relation to the second issue, of whether the existence of a third party implies an additional obligation to the buyer, it is hard to enunciate a general rule, since not only the CISG comes into play, but also the rules that regulate the relationship between the third party and the buyer. Nevertheless, as a basic argument, my view is that the existence of a third party should not generally imply an additional duty for the buyer. Article 39 CISG only speaks about the need to notify the "seller", not to any other party. Given that Article 39 sets a duty, it is not reasonable to make an extensive interpretation of the rule that may include other parties, turning the duty to communicate into an excessive burden. For that reason if, in a certain situation, the buyer has to notify a third party (besides the seller), I understand that that duty will arise from the specific rules that regulate the relationship between the buyer and the third party (even by assimilation of the figure of the third party to that of the seller), but not from the CISG, which regulates the relationship between the buyer and the seller. For example, in the case of carriage or assignment of receivables, we should examine the rules that regulate the relationship between debtor and assignee (or buyer and carrier). In case of assignment, though, what the rules state is that, as a matter of principle, the assignment of the receivable should affect the debtor's situation to the lesser extent possible.[173]
The answer should be the same in a case where what operates is a substitution in the position of the seller. That would happen in a case of novation of the contract or assignment of the contract, where the seller is substituted by a third party. Again, what should be examined are the rules on assignment or novation, since this is an issue that belongs to that field of law. The Vienna Convention regulates the relationship between the buyer and the seller, without entering into the relationships of the two with third parties, since those follow their own specific rules. In this sense, the problem of the duty to communicate to third parties is not to ascertain the existence of a duty, but to determine the scope of the CISG. Article 39 CISG only talks about communication to the "seller". What I want to emphasize is that, when the CISG says "seller" it means "seller", not anyone else, and thus, in order to discuss other possibilities we should resort to specific rules in order to avoid extensive interpretations of the Convention that may cause problems rather than solve them. In any case, Article 6 of the CISG contemplates the principle of party autonomy, and thus, if that is their desire, they may set a duty to communicate more or less burdensome for the buyer, in order to adapt to the needs of each case.
5. Notify. Why? Consequences of non-compliance
Article 39(1) CISG reads "The buyer loses the right to rely on a lack of conformity of the goods". This should be understood in the sense that, as a consequence of non-compliance, the buyer will lose the right to exercise the remedies provided by Article 45 CISG.[174] Therefore, the buyer cannot resort to the remedies contemplated in Articles 46 to 52 (specific performance,[175] Nachfrist notice,[176] avoidance [177] or price reduction [178]) or to claim damages according to Articles 74 to 77 CISG. The lack of communication, thus, protects the position of the seller against the buyer's claims.[179]
6. Burden of proof
It has been discussed whether the burden of proof is an issue regulated by the Vienna Convention or falls outside its scope by virtue of its Article 4.[180] There are views that advocate the application of domestic law.[181] Nevertheless, the majority of the scholars understands that that solution would be impracticable [182] since domestic laws differ in that issue.[183] Thus, according to that view, the Vienna Convention contemplates implicit rules to determine the burden of proof.[184] Such rules would follow the principle "ei incumbit probatio, qui dicit, non qui negat."[185] That is, the proof of the fact corresponds to the party who affirms the application of a certain provision, and the proof of the exception, to the party who resorts to it.[186]
In the case of communication of defects, according to the above stated, the buyer must prove that communication was properly made.[187] Article 27 CISG is the provision applicable to the communication. According to this article, it is not necessary to demonstrate that the notification has been received by the seller, but, for example, in case of postal communication, it will suffice with the certificate from the post office.[188]
7. Delivery of an aliud
In case the goods handed over are different from those specified in the contract, would it be necessary to notify specifying the lack of conformity? This issue could constitute a source of uncertainty for any scholar coming from a legal system that distinguishes "non-conforming goods" from "different goods."[189] However, this is not the case of the Vienna Convention, whose Article 35 characterizes the lack of conformity of the goods in terms so wide that include the delivery of a peius (goods with defects or, literally, "worse" than those agreed by in the contract) as well as an aliud (different goods from those agreed upon).[190] This way, the Convention does away with the problems inherent to this distinction in rules from civil law systems.
Therefore, in case of delivery of an aliud, it will be equally necessary to effect a communication pursuant to Article 39 CISG. Nevertheless, as will be seen, it will be frequent that Article 40 CISG will apply in such a case.[191]
8. Conclusions. Article 39 CISG as a proper rule for spot transactions
The previous lines contain a study of the different aspects of the duty of the buyer to notify of the existence of defects. The first conclusion is that it constitutes an expression of the duty to communicate and cooperate between the parties, and sets certain rules necessary to enhance security and certainty.[192] This is manifest in case of spot transactions. In these cases, the parties have not much incentive to communicate and cooperate. For that reason, it was necessary that the law imposed certain procedures (i.e., 1st delivery, 2nd immediate examination, 3rd notification of defects, 4th seller's inspection). Such procedures oblige the buyer to cooperate in a context where it has no incentives. Therefore, the preclusion of its claim in case of no proper notification constitutes a strong incentive to enhance communication.
However, Article 39 CISG may not respond to the needs of closer and more interactive commercial relationships. In those cases, the parties may have their own procedures for cooperation, and to shape them into the CISG rules may lead to inadequate results.
The third point is that, as a consequence, there may be negative consequences of three kinds. First, a party that behaves reasonably according to the commercial context may be deprived from its rights if those are challenged in courts. Second, Article 39 CISG (as well as Article 38 CISG) as imposing a unilateral duty on the buyer, does not induce the seller to cooperate in the same way. The seller has no incentive to accomplish inspection within a reasonable time (no prejudice is derived from that) and has no incentive to inquire about defects if notification is not specific. It only has to wait until the reasonable time elapses, and then claim that the notice was not specific.[193] In third place, Article 39's unilateralism only allows to examine the buyer's behavior. In complex transactions, the legal regime should rather allow one to address the behavior of both parties to see which was more diligent, cooperative, and tried to maintain the relationship alive; Article 39 CISG is not fit for that purpose.
The previous conclusions could be criticized on two grounds. First, it could be said that, in close and interactive relationships it is less likely that problems will be taken to court. However, the probability of an issue to be taken to court does not constitute a solid legal argument. Approaching the law in the context of the real world is good, not bad. Secondly, it could be argued that in interactive relationships, the parties implicitly modify the CISG rules, and that suffices. However, the requirements for a tacit derogation of the applicable law are strict,[194] and buyers who acted reasonably on their commercial setting could be left unprotected. Second, a more flexible approach to tacit modification should operate as a complement, not a substitute, of a flexibilization of the notification of defects regime itself.[195] Third, to admit that an implicit derogation of the CISG is the best solution indicates that the CISG is an inadequate instrument to rule transactions to which it is applicable.[196] The view held in this work is that such surrender is always a last resort, and that a purpose-oriented interpretation of the Convention provides a very powerful tool to rule the transactions involved, and help the courts analyze the parties' behavior in the light of the standard of reasonableness.[197]
VI. REASONABLE EXCUSE AS AN ATTEMPT TO MAKE THE RULE FLEXIBLE. A FAILURE
The loss by the buyer of any possibility to resort to remedies under the CISG for breach of contract is a very drastic consequence. For this reason, the Convention establishes two exceptions to the general rule. Those two exceptions totally or partially nullify the effects of Article 39 CISG.[198] One of the exceptions refers to cases where there is a reasonable excuse for not communicating the lack of conformity, and tempers the consequences of Article 39 CISG (Article 44 CISG). That provision will be analyzed under this heading. The other exception refers to cases where the seller knows defects. This exception, Article 40 CISG, can completely eliminate the effects of Article 39 CISG. Article 40 will be analyzed under the next heading.
1. Meaning and purpose of the provision
The exception contemplated under Article 44 CISG reads as follows:
"Notwithstanding the provisions of paragraph (1) of article 39 and paragraph (1) of article 43, the buyer may reduce the price in accordance with article 50 or claim damages, except for loss of profit, if he has a reasonable excuse for his failure to give the required notice."
This provision was added to the Vienna Convention as a compromise solution for those delegates who considered the rules of Article 39 CISG too harsh to buyers.[199] After all, it could be said, it is the seller who has committed a breach of contract through a lack of conformity and the communication requirements cannot be so severe as to swap positions, and turn the buyer in the "guilty party". On the other hand, the truth is that the seller could be in a very uncertain position if the buyer did not comply with the duty to communicate according to Article 39 CISG, and thus, Article 44 should take into account both circumstances.[200] Therefore, always that the buyer has a reasonable excuse, it will be able to reduce the price according to Article 50 CISG or to claim damages, except for loss of profit, pursuant to Article 74, as it would be unfair to let the seller to receive the whole price.[201] Nevertheless, the buyer will not be able to request specific performance, to avoid the contract or to request damages for loss of profit.
Finally, Article 44 CISG restricts its application to cases falling under Article 39(1) CISG. Thus, the buyer will be precluded from making its claim when the notice is made beyond the time limit of Article 39(2), that is, two years after actual handing over of the goods.[202] It seems that the provision assumes that there is no event that may impede a party from communicating the defects within two years after handing over the goods.
2. The concept of "reasonableness"
During the negotiations of the Diplomatic Conferences that led to the drafting of the Vienna Convention, commentators like Professor Farnsworth questioned the utility of Article 44 CISG due to the difficulty of defining concepts like "reasonable" and "excuse" together.[203] The scholars have tried to develop some interpretative criteria to this respect. Before proceeding to their analysis, it is worth mentioning two things. First, although Article 44 CISG applies to cases where what has not been complied with is the duty to communicate pursuant to Article 39 CISG, the scholars have also included cases where the conduct excused is a lack of prompt examination pursuant to Article 38 CISG. Nevertheless, as stated before, Article 38 CISG only has sense when it works together with Article 39 CISG, which is the provision that establishes a drastic consequence for non-compliance.[204] Consequently, it can be argued that Article 44 CISG may excuse non-compliances with Article 38 CISG, as well as non-compliance with Article 39 CISG, as the former is so closely related to the latter.[205] In addition, what matters in such a case is that the duty to notify has not been complied with, regardless of whether the cause is a non-compliance with the duty to notify itself under Article 39 CISG or that non-compliance stems from a prior non-compliance with the duty to examine the goods pursuant to Article 38 CISG.
In the second place, this provision was introduced in the Convention as a compromise in response to desires of developing countries. Therefore, some of the "reasonable excuses" analyzed by some authors respond to situations proper to buyers from those countries.[206] Those reasons may not operate in case of buyers from industrialized countries.
Once the two previous points have been made, I should detail some of the facts that, according to some authority, have been considered as giving rise to a reasonable excuse under Article 44 CISG. In the first place, a reasonable excuse would be constituted by an impediment beyond the buyer's control, i.e., a force majeure case.[207] This would include cases of problems with communications or the existence of non-working days or where the conditions under which the trade concerned is carried on are different than usual[208] (only if that affects the ability to examine the goods or to effect the notification). Another example could be cases where a general scarcity of experts may make a prompt inspection and notification not viable,[209] or those where transport and communications are not properly developed.[210]
In addition, there are scholars who consider that an insufficient knowledge by the seller may act as a reasonable excuse.[211] This would excuse a lack of specificity in the notification.[212] For example, in case of the purchase of complex machinery, were the buyer conscious that it did not work properly but incapable to describe the symptoms, Article 44 CISG would apply and excuse the buyer from the duty to specify the defects,[213] but not from the duty to timely communicate the defects. It is hard to justify a non-compliance of the duty to communicate within a reasonable time if the buyer knew of the lack of conformity.[214] This problem is closely related to that where the buyer is only conscious of the gravity of the defect after a certain period of time.[215] In that case, according to some authority, a similar criterion would apply, i.e., the buyer should communicate the existence of defects (although not being able to specify the symptoms) and, afterwards, it should accomplish a more elaborated assessment in order to better specify the defects.[216]
It will be harder to justify the application of Article 44 in a situation in which the insufficient knowledge was of the rules of the CISG on the duty to communicate. Some scholars maintain that Article 44 should apply to cases of buyers from developing countries whose laws do not contemplate the duty to communicate defects, and thus the buyer would only know the existence of the duty to communicate after requesting the services of a lawyer in relation to the seller's breach of contract.[217] Nevertheless, ignorance of the contents of the law does not excuse non-compliance with it. For this reason, it is unlikely that case law will support the inclusion of these cases under the "reasonable excuse" label.
When examining the existence of a reasonable excuse, regard should be had to aspects of the situation of the buyer, as stated by Professor Huber:[218] importance of the non-compliance with Article 39 CISG (a lack of specificity is not as serious as a considerable delay), the kind of business of the buyer (less burden should be placed on a small business than on a large corporation), the nature of the goods (in case of perishable goods the non-compliance with Article 39 CISG will be less likely to be excusable) or the experience and knowledge by the buyer.
A special case that may raise some debate is where, at the moment of discovery of the lack of conformity, the seller is immersed in insolvency proceedings.[219] In such a case, the buyer might be tempted not to communicate the defects, on the basis that the seller is incapable of accomplishing the repair task. Would this situation fall within the scope of the reasonable excuse pursuant to Article 44 CISG? The answer must be negative for several reasons: First, the purpose of notification of lacks of conformity is not only to enable the repair of goods or the sending of substitute ones.[220] The notification allows the seller to take the necessary evidence in case there is further litigation. The buyer cannot hindered this right. It could be that it was impossible to the seller to secure evidence, and the notification were pointless. However, Article 39 CISG formulates the duty to communicate in strict terms, and it does not correspond to the buyer to judge whether the notice is futile. the conclusion would change if the wording of Article 39 CISG included a reference to the finality of the communication like "in order to allow the seller to carry on its own examination of the goods the buyer should notify...", but it is definitely not the case. In addition, the ability of the seller to decide whether to repair/examine the goods corresponds to the seller itself, not to the buyer. The buyer cannot step into the shoes of the seller and decide for him.
Finally, the essence of the "reasonable excuse" relates to situations within the scope of the buyer,[221] not that of the seller. The reasonable excuse refers to cases where, for different reasons, the buyer cannot notify the defects. Thus, Article 44 CISG cannot excuse cases where, the buyer being able to notify, it simply decides not to do so.
A final precision I would like to make is that, in order to qualify for a reasonable excuse, the absence of any negligence on the side of the buyer is not necessary. That would render Article 44 CISG virtually inapplicable.[222] However, it is also true that, in order to apply Article 44 CISG, it is necessary to complete an equitable assessment that takes into account the interests of both parties.[223] Thus, together with the buyer's interests in preserving its remedies, account must be taken of the interest of the seller to secure the necessary evidence.[224] The more time passes, the harder to establish the cause and moment of the lack of conformity. For this reason, in cases where circumstances exist that would give rise to a reasonable excuse, an undue delay in communicating defects would go against the credibility of the claim.[225] In consequence, the reasonable excuse under Article 44 CISG is seldom applied in practice.[226]
3. The case law on reasonable excuse
The records of court and arbitral practice concerning Article 44 CISG are quite hopeless for those who may think that this provision may act as an "escape clause" or "safety valve" to the rigidities of Article 39 CISG. Cases in which Article 44 CISG has been alleged are scarce.[227] In general, the courts have held the provision not applicable to the case. Few cases have admitted the existence of a reasonable excuse. In one of these cases, the holding of the court was due to the fact that the defective examination of the goods (the ultimate cause of the delay) was effected by experts appointed by both parties, and thus, the examination (and consequently the notification) could not be considered as an exclusive responsibility of the buyer.[228]
In another case, the reasoning of the arbitral tribunal was based on the fact that the examination of the goods in the loading port involved many technical problems, and thus to postpone examination to the destination port was reasonable.[229] Nevertheless, again, in order to reach this conclusion it would not have been necessary to apply Article 44 CISG, since Article 38(2) CISG provides that "If the contract involves carriage of goods, examination may be deferred until after the goods have arrived at their destination". Since Article 38(2) CISG permits the buyer to defer examination until the destination port, there was no delay in the examination of the goods and, as a result, no delay in the notice of non-conformity that could be subject to excuse under Article 44 CISG.
Among the cases that deny the application of the reasonable excuse it is worth mentioning that decided before the Oberlandesgericht Koblenz (Germany) of 11 September 1998.[230] In this case, the court held that, given the circumstances, a period of one week for the examination and another one for communicating would have sufficed.[231] The buyer alleged that, in order to carry on the proper examination of the goods, a "trial-and-error" process was appropriate for which it needed to make the machinery work. The latter was not possible, since the facilities of the buyer were still under construction, which constituted a reasonable excuse. The court disregarded this argument. In the first place, it stated that, in order to appreciate the "reasonable excuse" under Article 44 CISG it would have been necessary that the buyer had acted with reasonable care so to avail itself of adequate machinery in order to make the tests, something that the buyer did not prove. In second place, the court held that the lack of organization of the buyer is not something to be taken into account in order to appreciate the period for examination of the goods pursuant to Article 38 CISG.[232]
In other cases, the courts simply discarded the applicability of Article 44 CISG without further explanations. Given this scarce authority, it is hard to compare the theory developed in the previous sub-heading with the test of the practice. However, there are some preliminary conclusions that may be put forward.
It has been observed that Article 44 CISG is not a very "popular" provision, as it has not been applied in numerous occasions. Moreover, the criteria with which it has been interpreted by case law are quite rigid, something that goes against the use of the "reasonable excuse" as an apt concept to balance the requirements under Article 39 CISG. Although the introduction of Article 44 CISG was the result of a brave effort by delegates from developing countries, it seems that the practice has turned that effort into something futile. The reasons may be in the vagueness and indefiniteness of the language of Article 44 CISG,[233] as well as the fact that the majority of decisions taken on the issue have been by courts of western countries,[234] whose criteria tend to be more rigid, even more if the contracting parties are located also in those states.[235]
For all these reasons, Article 44 CISG is not commonly resorted in practice, and thus, does not qualify as a valid tool to balance the strict requirements of Article 39 CISG. The same rigidities examined earlier remain, and thus, further efforts are needed to find an equilibrium that allows adapting the static rules of the CISG (i.e., Article 39 CISG) to a dynamic environment.
Following the pattern I traced before, a study of the provisions on notification of defects was made under Section IV. A conclusion was reached that such provision, and the interpretation it has been subject to by case law, though perfectly suited for spot transactions, could introduce rigidities in cases where the parties engaged in an interactive relationship with usual informal contacts. For this reason, a need to balance that rigidity is needed. Under Section V, Article 44 CISG was examined as an alternative for such task, which was its purpose when it was introduced in the late times of the diplomatic conference. However, despite the efforts made to introduce it, its practical effect has been disappointing. For that reason, it is necessary to turn a glance to other possible solutions. As stated before, the other provision addressed to alleviate the burden of the notification of defects is Article 40 CISG. The position in this work is that this Article constitutes a valid alternative to pump flexibility in the interpretation of the CISG provisions on notification of defects. This new approach cannot be sustained unless certain changes in the perspective from which Article 40 CISG is perceived are accomplished. Those changes, as well as the proposed new role of Article 40 CISG in helping the courts to make an overall assessment on the diligence of both parties will be carefully dealt with in the following sub-sections.
1. Meaning and purpose of the provision
The second of the exceptions to the general rule of Article 39 CISG is contemplated under Article 40 CISG, which reads as follows:
"The seller is not entitled to rely on the provisions of articles 38 and 39 if the lack of conformity relates to facts of which he knew or could not have been unaware and which he did not disclose to the buyer"
In the case contemplated under Article 40 CISG, the seller does not have a reasonable basis to demand the buyer to notify the lack of conformity.[236] This provision was drafted in order to limit the rights of the seller when it delivered defective goods to the buyer, knowing about those defects. Indeed, the context assumed for the whole regime of communication of defects was that of spot market transactions.[237] In those transactions, the parties go to the market led only by the search of the best price, sign a contract, goods are delivered in exchange for a price, and there ends the contractual relationship. In that context, Article 40 CISG would only punish cases of bad faith,[238] where the seller knew of the defects before sending the goods to the buyer. Consequently, in such a scenario the scope of application of Article 40 CISG would be quite narrow, which justifies the lack of analysis of this provision by scholars, who placed more emphasis on the "reasonable excuse" of Article 44 CISG.[239]
However, taken to a context of more dynamic relationships, Article 40 CISG may serve the purpose of tempering the rigidities of Article 39 CISG. Along the following lines I will try to demonstrate this hypothesis. There are, nevertheless, some obstacles to widening the scope of Article 40 CISG. However, I think they can be reasonable tackled, leaving Article 40 CISG a more predominant role in the CISG.
In the following sections I will try to demonstrate the efficacy of that provision as a tool to balance Article 39 CISG and provide judges and arbitrators a more flexible and less mechanistic device to examine the conduct of the parties under the reasonableness principle embodied in Article 8 (2) CISG.
2. Knowledge. Of what? The facts that the seller knew or could not be unaware of
Knowledge is subjective and, thus, it is a mental state very difficult to prove by the party alleging Article 40 CISG.[240] For that reason, the Convention, attending to an objective criterion, gives equal weight to knowledge and the situation in which the seller could not be unaware of the lack of conformity.[241]
The facts of which a party "could not be unaware" are those that are on the face of the party in question.[242] Thus, this language has the purpose to alleviate the burden of proof of the fact that certain facts that were before the eyes of the seller, reached its mind and knowledge.[243]
A. The degree of laxity demanded
Once the previous precision has been made, it is necessary to set the degree of laxity demanded from the seller in order to determine the facts it could not ignore. Among the scholars, the lines of thought are diverse. Some scholars, trying to protect the seller, restrict the application of Article 40 CISG, considering that "could not be unaware" means less than cunning and more than gross negligence.[244] Others, who plead for an application less protective to the seller consider that simple negligence suffices, that being understood as an overlook of the reasonable care in the trade concerned.[245] The position that seems to enjoy more support is the one that equalizes "facts that cannot be ignored" with gross negligence[246] or, in other words, a conscious disregard.[247] In this sense, the scholars have said that they should be obvious defects for the seller.[248]
Though this assessment of the seller's leniency has been widely debated by the scholars, its importance should be tempered for two reasons. First, because the standard of negligence constitutes an abstract term that, in the end, has to be evaluated on a case-by-case basis. In this sense, the elements to be taken into account will be addressed in the following sub-heading in order to complete the picture of the contents of the knowledge of the seller necessary to exclude Article 39 CISG. In the second place, the issue of the seller's leniency has traditionally been addressed by the scholars on the basis of a knowledge prior to delivery or handing over, i.e., from the point of view of a spot transaction. However, one of the submissions of this work is to demonstrate that Article 40 CISG may also serve to balance Article 39 CISG in cases of complex transactions where, after delivery itself has been effected, the seller is put on notice of defects through the performance of the contract, even by informal communications that may not qualify as a notice of defects in the sense of Article 39 CISG. For that reason, the laxity of the seller should not be assessed with respect to the defects in the goods, but also in relation to the later conduct of the parties.
B. Elements to take into consideration
The scholars have devoted their best efforts to assess the factual criteria to be taken into consideration when assessing the seller's negligence as a result of an overlook of obvious defects. In this sense, the conclusion that a defect was too obvious to be overlooked by the seller is something that depends upon the circumstances of the case. Those circumstances encompass the lack of conformity in itself, the position of the seller in the distribution chain (as a manufacturer or a mere intermediary) and the nature of the goods.[249]
In the first place, the lack of conformity as such; in order to qualify under Article 40 CISG, it has to be apparent. This way, either in quantity defects or in case of delivery of an aliud it should normally be assumed that the seller could not ignore the defects [250] (element of lack of conformity), unless the seller were a mere intermediary (i.e., distributor) who operated under the manufacturer's instructions [251] (situation in the distribution chain).
In case of quality defects (e.g., a case where the goods are not fit for their ordinary purpose, or are different from those presented as a sample or model [252]), it depends upon factors like the existence of contract specifications. Thus, the Arbitration Court of the International Chamber of Commerce held that the seller could not be unaware of defects in goods subject to contract specifications.[253] In another case, the Landgericht Trier (Germany) stated that the buyer would not lose its remedies for lack of conformity, through application of Article 40 CISG, in case of non-compliance with internal regulations.[254] The goods (wine) were not apt for commercial trade as a consequence of the lack of conformity (addition of 9% of water) and were destroyed by the German authorities. The court considered this circumstance as sufficient not to be ignored by the seller.[255]
In the second place, attending to the position of the seller in the distribution channel, an important factor to take into account is whether the seller was the manufacturer of the goods or a mere intermediary.[256] In case of the manufacturer, it could not ignore defects easily ascertainable through a preliminary check or routine tests to which the goods are subject to during the production process.[257] Nor could defects be ignored if there is available information from products already placed in the market or through specialized press or, more generally, those that the seller could not be unaware of by exercising its duty to have the products under observation.[258] On the other hand, in case of the intermediary, it will be more difficult to establish the knowledge of hidden defects.[259] In a case decided by the Oberlandesgericht München (Germany), the court decided that Article 40 CISG could not be applied since, the goods (sweaters) having been manufactured by other companies, the requirements of the provision would have only been met had the seller not disclosed serious and very obvious defects.[260] In a similar way, the Handelsgericht des Kantons Zürich (Switzerland) decided not to apply Article 40 CISG in a case where the seller did not get to see the goods and, simply, accepted to examine them at the buyer's request, without accepting for that reason its knowledge of the lack of conformity.[261]
Likewise, it is necessary to take into consideration the experience of the seller and the information it disposed of. In a case decided before the Oberlandesgericht Köln (Germany) of 21 of May 1996,[262] Article 40 was applied in a dispute arising out of the sale of a car, the seller being a car distributor. It happened that the license year as well as the odometer of the car were falsified, something of which the seller could not have been unaware. In the opposite sense, in a case by the Oberlandesgericht Koblenz (Germany) Article 40 CISG was not applied [263] since, although the goods sold to the buyer [264] were not fit to be manufactured, that was due to the type of equipment utilized by the buyer, who had not informed the seller about the technical features.
In a case decided before the Austrian Supreme Court,[265] the court emphasized the importance of usages of trade. The goods were frozen fish. The buyer (Austrian) made an order to the seller (Dutch) for a client in Latvia, after testing the goods. Once the fish was delivered, the buyer as well as its client realized that the fish corresponded to the previous year's catch, a circumstance known to the seller. The fish was not allowed to enter Latvia since, as older than six months, it was not considered fit for human consumption. The court held that, if it was possible to demonstrate the existence of a usage of trade (applicable by virtue of Article 9(2) CISG) according to which the frozen fish could be presumed to be from the previous year's catch unless otherwise specified, the case would fall within the scope of Article 40 CISG, since the seller would have known or could not have been unaware of the lack of conformity.[266]
As stated before, the efforts allocated to assess the seller's negligence have been devoted to the analysis of the kind of defects involved, and the situation of the seller in relation to them. In other words, this assessment of extreme importance is still based upon the seller's knowledge of defects before delivering the goods. However, since my intention is to demonstrate the usefulness of Article 40 CISG as a tool to balance Article 39 CISG in cases of complex transactions,[267] regard should be had to other elements that may help to assess the seller's diligence (or lack of it) in these situations. In that scenario, I consider that the closeness of the relationship between buyer and seller would be influential. As explained before, it is not the same as a duty to communicate in a context in which the seller has no other means save the buyer's notice to know of the existence of defects, than in a context where both parties have a contractual relationship where they have to work together to achieve a satisfactory outcome, thereby leaving the seller in a position where it should be aware of how the contract is being performed. In that context, also influential would be the degree of exposure of the seller to the information of performance as well as the existence of defects, as opposed to the reasonableness of the communication of defects by the buyer in the commercial context. If the parties are involved in a contractual relationship where they have to work together to achieve a satisfactory outcome, it would not be reasonable that the buyer assumed a whole burden of communication. In this way, a seller who is in continuous dealings with the buyer will find harder to oppose the formalism of Article 39 CISG if the seller has been working tog