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Commentary on Whether the UNIDROIT Principles
of International Commercial Contracts May Be
Used to Interpret or Supplement Article 55 of the CISG

Dr. Jumpita Ruangvichathorn [*]
November 2004

  1. Introduction
  2. Relationship between CISG Articles 14(1) and 55
  3. Relationship between UNIDROIT Principles Articles 2.2 and 5.7
  4. Mechanism to determine an open price: CISG Article 55 - UNIDROIT Principles Article 5.7
  5. Conclusion

1. Introduction

Article 55 of the Convention provides a mechanism for the determination of the price in an international sales contract that has been validly concluded in situations in which the contract does not state a price or expressly or impliedly make provision for determining the price. In other words, CISG Art. 55 deals with the uneasy question concerning open price contracts, and it becomes a controversial provision in the light of CISG Article 14(1), which provides that determination of price is one of the criteria for an offer. The two provisions seemingly contradict each other.[1]

Counterpart provisions regulating the same issues, but in a more detailed manner, are also found in the UNIDROIT Principles of International Commercial Contracts [the "Principles"] Articles 5.7 ["Price Determination"] and 2.2 ["Definition of Offer"].

This paper examines whether and the extent to which the provisions of the Principles may be used to aid the interpretation of Art. 55 of the Convention.

2. Relationship between CISG Arts. 14(1) and 55

CISG Art. 14 generally deals with the criteria for an offer, and Art. 14(1) expressly provides that for an offer to be sufficiently definite, the price must be expressly or implicitly fixed or a provision must be made to determine the price.

"A proposal for concluding a contract addressed to one or more specific persons constitutes an offer if it is sufficiently definite and indicates the intention of the offeror to be bound in case of acceptance. A proposal is sufficiently definite if it indicates the goods and expressly or implicitly fixes or makes provision for determining the quantity and the price."[2]

On the other hand, CISG Art. 55 permits the possibility that a contract may be validly [3] concluded even without expressly or implicitly fixing the price.

"Where a contract has been validly concluded but does not expressly or implicitly fix or make provision for determining the price, the parties are considered, in the absence of any indication to the contrary, to have impliedly made reference to the price generally charged at the time of the conclusion of the contract for such goods sold under comparable circumstances in the trade concerned."[4]

The legislative history of the Convention offers no clear or convincing explanation of the inter-relationship between CISG Arts. 14(1) and 55.[5] However, two distinct interpretations of the relationship between those two provisions are drawn from the views of two leading CISG commentators, Professors Honnold and Farnsworth, respectively.[6]

The main divergence of those two interpretative approaches to the issue is that, according to the approach propounded by Prof. Honnold, CISG Art. 14(1) should be read together with Article 55, resulting in an interpretation that a contract "may be validly concluded" - not that a contract "must already have been concluded" in the first place, either under a domestic sales law or a declaration under CISG Art. 92(1)[7], before the Convention's mechanism to determining the price under Article 55 can be activated, as per the latter approach of Prof. Farnsworth.

The former approach, the chief proponent of which is Prof. Honnold, seems to have gained most support in academic circles.[8]

3. Relationship between UNIDROIT Principles Arts. 2.2 and 5.7

The counterpart to CISG Art. 14(1) in the Principles is found in Art. 2.2, which reads:

"A proposal for concluding a contract constitutes an offer if it is sufficiently definite and indicates the intention of the offeror to be bound in case of acceptance."

In defining an offer, the Principles lay down the same two requirements also embedded in the Convention: the proposal must (i) be sufficiently definite to permit the conclusion of the contract by mere acceptance and (ii) indicate the intention of the offeror to be bound in case of acceptance.

Furthermore, the wording of the Principles is, to a degree, similar to CISG Art. 14(1), albeit not similarly detailed, because, unlike the Convention, it does not make reference to the matters of "quantity" and "price" to determine whether the proposal is sufficiently definite to constitute an offer.

The Principles merely focus on the matter of "the intention of the offeror to be bound in case of acceptance".[9] In this regard, and based on the Official Commentary on the Principles, no apparent contradiction exists similar to the one that exists in the CISG. As such, it is easier to read together Arts. 2.2 and 5.7 of the Principles.[10] In that regard, it is submitted that the Principles offer a similar but simpler regime when compared to the Convention and might arguably be used to aid the interpretation of the particular textual controversy in the Convention, discussed above.

4. Mechanism to determine an open price term: CISG Art. 55 - UNIDROIT Principles Art. 5.7

Regarding a sales contract which neither fixes the price to be paid for the goods, nor makes provision for determining the price, the Principles provide a presumption that the parties "have made reference to the price generally charged at the time of the conclusion of the contract for such performance in comparable circumstances in the trade concerned, or, if no such price is available, to a reasonable price" [emphasis added]. The applicable provision (Principles Art. 5.7) also permits the rebuttal of the presumption if there is any indication to the contrary.[11]

The Official UNIDROIT Commentary on Article 5.7 sheds illuminating light on the origins of this general rule governing price determination, by revealing that the provision "is inspired by Art. 55 CISG".[12]

Furthermore, the notion of "reasonableness", which prevails in that article of the Principles, is also a general principle on which the Convention is based.[13]

Thus, it is submitted that the two instruments adopt the same general policy to determine open price terms.

There are, however, three noteworthy differences between the counterpart provisions:

First, the Principles have chosen not to include in Art. 5.7(1) the words "[w]here a contract has been validly concluded [...]" that appear in CISG Art. 55. Thus, and considering the inter-relationship of Art. 5.7 to Art. 2.2 of the Principles (see Section 3, above), it may be argued that the Principles has in that manner attempted,[14] successfully it seems, to solve the apparent textual contradiction found in the corresponding provisions of the Convention (see Sections 1 and 2, above).

Secondly, in cases where a contract does not fix or make provision for determining the price, the Principles in Art. 5.7(1) has employed the concept of "reasonable price" additionally to the "market price" that is found in CISG Art. 55.

And, thirdly, the Principles, compared to CISG Art. 55, has adopted a more refined and detailed mechanism for determining the price in a contract:

  1. in the case where the price is to be determined by one party,[15]
  2. in the case where the price is to be fixed by a third person,[16] and
  3. in the case where the price is to be fixed by reference to factors which do not exist or have ceased to exist or to be accessible.[17]

5. Conclusion

Following an analysis of the counterpart provisions dealing with open price contracts under the CISG and UNIDROIT Principles, respectively, it is submitted that whereas the two instruments adopt the same general policy and also establish similar regimes to regulate the issue, the Principles offer more expansive provisions than the CISG to deal with the issue.

It is, thus, submitted that Principles Art. 5.7 could be properly and efficiently used to interpret and supplement CISG Art. 55.[18]


FOOTNOTES

* Lawyer, The Electricity Generating Authority of Thailand (EGAT); Adjunct Law Lecturer, Faculty of Law, Thammasat University, Thailand.

1. See, for example, Ziegel J., Report to the Uniform Law Conference of Canada on Convention on Contracts for the International Sale of Goods, (1981), available online at <http://cisgw3.law.pace.edu/cisg/text/ziegel55.html>. Comment 1, ibid., reads:

"Art. 55 must be read in conjunction with art. 14 which deals with the essential constituents of an offer. Art. 55 was substantially amended at Vienna. The adopted version attempts to reconcile the price requirements of art. 14 with the need to provide for a case where the contract contains no reference to the price, and does so by deeming the parties to have impliedly agreed to adopt the price generally charged for such goods at the time of the conclusion of the contract. It is not clear whether this formula is sufficient to overcome the limitations of art. 14, although it was clearly meant to. Difficulties may still be encountered because art. 55 does not come into play unless a contract has been validly concluded. [...]"

2. CISG Art. 14 (1). Emphasis added. For an online presentation of basic information and further links to the relevant legislative history, case law and scholarly commentary on CISG Art. 14, go to <http://cisgw3.law.pace.edu/cisg/text/e-text-14.html>.

3. CISG Art. 4 reads [emphasis added]:

"This Convention governs only the formation of the contract of sale and the rights and obligations of the seller and the buyer arising from such a contract. In particular, except as otherwise expressly provided in this Convention, it is not concerned with:
(a) the validity of the contract or of any of its provisions or of any usage;
(b) the effect which the contract may have on the property in the goods sold."

4. CISG Art. 55. Emphasis added. For an online presentation of basic information and further links to the relevant legislative history, case law and scholarly commentary on CISG Art. 55, go to <http://cisgw3.law.pace.edu/cisg/text/e-text-55.html>.

5. See, generally, Amato, P. "U.N. Convention on Contracts for the International Sales of Goods - the Open Price Term and Uniform Application: An Early Interpretation by the Hungarian Courts", 13 Journal of Law and Commerce (1993), p. 6; also available online at <http://cisgw3.law.pace.edu/cisg/biblio/amato.html>.

6. Ibid., pp. 4 - 6.

7. CISG Art. 92(1) reads:

"A Contracting State may declare at the time of signature, ratification, acceptance, approval or accession that it will not be bound by Part II of this Convention or that it will not be bound by Part III of this Convention."

8. Other approaches to this issue also exist; see, for example, Enderlein F and Maskow D., International Sales Law, Oceana Publications (1992), at pp. 209 - 210, also available online at <http://cisgw3.law.pace.edu/cisg/biblio/enderlein-art55.html> (stating that the validity of the contract in the case of an open-price term shall be determined solely under national law):

"Herewith reference can be made to the prerequisites for validity as contained in the CISG and to national validity conditions [...]. Some authors, therefore, proceed on the assumption that without having fixed a price there is no offer under Article 14, paragraph 1, sentence 2 and, therefore, no delivery can be taken. Hence, there will be no contract so that the rules governing the substance of the contract including Article 55 are irrelevant where there are no exceptions [...]. Others suppose, and the text speaks in favour of this assumption, that the validity of a contract in this case is to be judged only according to national law" [references omitted].

9. See the Official UNIDROIT Commentary on Article 2.2, available online at <http://cisgw3.law.pace.edu/cisg/principles/uni14.html#official>, Comment 2, "Intention to be bound":

"The second criterion for determining whether a party makes an offer for the conclusion of a contract, or merely opens negotiations, is that party's intention to be bound in the event of acceptance. Since such an intention will rarely be declared expressly, it often has to be inferred from the circumstances of each individual case. The way in which the proponent presents the proposal (e.g. by expressly defining it as an "offer" or as a mere "declaration of intent") provides a first, although not a decisive, indication of possible intention. Of even greater importance are the content and the addressees of the proposal. Generally speaking, the more detailed and definite the proposal, the more likely it is to be construed as an offer. A proposal addressed to one or more specific persons is more likely to be intended as an offer than is one made to the public at large".

10. See the Official UNIDROIT Commentary on Article 2.2, op. cit., Comment 1, "Definiteness of an offer":

"Even essential terms, such as the precise description of the goods or the services to be delivered or rendered, the price to be paid for them, the time or place of performance, etc., may be left undetermined in the offer without necessarily rendering it insufficiently definite: all depends on whether or not the offeror by making the offer, and the offeree by accepting it, intends to enter into a binding agreement, and whether or not the missing terms can be determined by interpreting the language of the agreement in accordance with Arts. 4.1 et seq., or supplied in accordance with Arts. 4.8 or 5.2. Indefiniteness may moreover be overcome by reference to practices established between the parties or to usages (see Art. 1.8), as well as by reference to specific provisions to be found elsewhere in the Principles (e.g. Arts.5.6 (Determination of quality of performance), 5.7 (Price determination), 6.1.1 (Time of performance), 6.1.6 (Place of performance), and 6.1.10 (Currency not expressed))".

11. UNIDROIT Principles Art. 5.7 reads [emphasis added]:

(1) Where a contract does not fix or make provision for determining the price, the parties are considered, in the absence of any indication to the contrary, to have made reference to the price generally charged at the time of the conclusion of the contract for such performance in comparable circumstances in the trade concerned or, if no such price is available, to a reasonable price.

(2) Where the price is to be determined by one party and that determination is manifestly unreasonable, a reasonable price shall be substituted notwithstanding any contract term to the contrary.

(3) Where the price is to be fixed by a third person, and that person cannot or will not do so, the price shall be a reasonable price.

(4) Where the price is to be fixed by reference to factors which do not exist or have ceased to exist or to be accessible, the nearest equivalent factor shall be treated as a substitute.

12. See the Official UNIDROIT Commentary on Article 5.7, available online at <http://cisgw3.law.pace.edu/cisg/principles/uni55.html#official>. Comment 1 reads:

"This article is inspired by Art. 55 CISG. The rule has the necessary flexibility to meet the needs of international trade. It is true that in some cases the price usually charged on the market may not satisfy the reasonableness test which prevails elsewhere in this article. Recourse would then have to be made to the general provision on good faith and fair dealing (Art. 1.7), or possibly to some of the provisions on mistake, fraud and gross disparity (Chapter 3). Some international contracts relate to operations which are unique or at least very specific, in respect of which it is not possible to refer to the price charged for similar performance in comparable circumstances. According to para. (1) the parties are then deemed to have made reference to a reasonable price and the party in question will fix the price at a reasonable level, subject to the possible review by courts or arbitral tribunals."

13. See "Overview Comments on Reasonableness", Kritzer A., available online at <http://cisgw3.law.pace.edu/cisg/text/reason.html>:

"Reasonableness is specifically mentioned in thirty-seven provisions of the CISG and clearly alluded to elsewhere in the Uniform Sales Law. Reasonableness is a general principle of the CISG."

14. There is, however, no mention of any such motivation in the Official Commentary on the Principles.

15. If that determination is "manifestly unreasonable", Principles Art. 5.7(2) provides that "a reasonable price shall be substituted notwithstanding any contract term to the contrary".

See also Official Commentary, op .cit., Comment 2, which elaborates as follows:

"In those cases where the parties have made such a provision for determining the price, it will be enforced. To avoid possible abuses however, para. (2) enables judges or arbitrators to replace a manifestly unreasonable price by a reasonable one. This provision is mandatory."

16. If the designated third party cannot or will not do so, Principles Art. 5.7(3) provides that "the price shall be a reasonable price".

See also Official Commentary, op .cit., Comment 3, which explains:

"[I]f that third person is unable to accomplish the mission (not being the expert he or she was thought to be) or refuses to do so. Para. (3) provides that the price, possibly determined by judges or arbitrators, shall be reasonable".

17. If reference cannot be made to the specific external factor, Principles Art. 5.7(4) provides that the "nearest equivalent factor shall be treated as a substitute".

See also the Official Commentary, op .cit., Comment 4, which explains and illustrates the point:

"In some situations the price is to be fixed by reference to external factors, typically a published index, or quotations on a commodity exchange. In cases where the reference factor ceases to exist or to be accessible, para. (4) provides that the nearest equivalent factor shall be treated as a substitute.

Illustration

The price of a construction contract is linked to several indexes, including the "official index of charges in the construction sector", regularly published by the local Government. Several installments of the price still have to be calculated when that index ceases to be published. The Construction Federation, a private trade association, decides however to start publishing a similar index to replace the former one and in these circumstances the new index will serve as a substitute."

18. For an analysis of CISG Art. 55 compared to another Restatement of Contract Law, the Principles of European Contract Law, see Vincze A., "Remarks on whether and the extent to which the Principles of European Contract Law (PECL) may be used to help interpret Article 55 of the CISG", available online at <http://cisgw3.law.pace.edu/cisg/text/peclcomp55.html#er>.

For selective references of relevant case law interpreting CISG Art. 55, please see the following cases:

     -      RUSSIA 30 May 2001 Arbitration proceeding 185/2000, case presentation including English translation available online at <http://cisgw3.law.pace.edu/cases/010530r2.html> (the Tribunal found the parties' contract was "valid although it did not specify the price, since CISG Art. 55 contains provisions for determination of the price for contracts that are validly concluded");
     -      ICC Arbitration Case No. 9819 of September 1999, case presentation available online at <http://cisgw3.law.pace.edu/cases/999819i1.html> (in dicta reference to CISG, the Tribunal stated: "Sale without prior fixing of a price is common in international trade, as is shown by the Vienna Convention of 11 April 1980 on the international sale of goods (art. 55) ...")
     -      SWITZERLAND 3 July 1997 Bezirksgericht [District Court] St. Gallen, CLOUT abstract no. 215, case presentation available at <http://cisgw3.law.pace.edu/cases/970703s1.html> (the purchase price had not been fixed by the parties and was determined by the court in application of CISG Art. 55);
     -      RUSSIA 3 March 1995 Arbitration proceeding 309/1993, CLOUT abstract no. 139, case presentation available online at <http://cisgw3.law.pace.edu/cases/950303r1.html> (the tribunal held that CISG Art. 55 was not applicable because the parties had implicitly indicated the need to reach agreement on the price in future);
     -      AUSTRIA 10 November 1994 Oberster Gerichtshof [Supreme Court], CLOUT abstract no. 106, case presentation including English translation available online at <http://cisgw3.law.pace.edu/cases/941110a3.html> (the Austrian Supreme Court found that the proposal in that case was sufficiently definite to constitute an offer under CISG Art. 14, since it could be perceived as such by a reasonable person in the same circumstances as the seller (CISG Art. 8(2) and (3)). In determining that the order was sufficiently definite, the Court took into consideration the behavior of the buyer who accepted the delivered goods and sold them further without questioning their price, quality or quantity. As the price was found to be sufficiently definite, the Court held that the application of Article 55 CISG was unnecessary in that case);
     -      HUNGARY 10 January 1992 Fovárosi Biróság [Metropolitan Court] (Pratt & Whitney v. Malev) case presentation including English translation available online at <http://cisgw3.law.pace.edu/cases/920110h1.html> (the Court held that, in accordance with CISG Art. 14(1), the offers in question were sufficiently definite, notwithstanding they granted the buyer the unilateral power in respect to its choice of the aircraft engines and relative quantity and they indicated the price of only some of the engines offered);
     -      HUNGARY 25 September 1992 Legfelsobb Bíróság [Supreme Court] (Pratt & Whitney v. Malev), CLOUT abstract no. 53, case presentation including English translation available online at <http://cisgw3.law.pace.edu/cases/920925h1.html> (the Supreme Court of Hungary held, inter alia, (i) an offer must indicate the product, the quantity and the price, or contain directions as to how these terms can be identified, (ii) the description of the goods, its quantity and the price are all essential elements of an offer, (iii) CISG Art. 55 cannot be used to determine the price term of an offer for a product, such as a jet engine, which has no market price, (iv) a party's declaration merely that it intends to conclude a contract is insufficient for the conclusion of a contract. On the facts, the Court found that the offer was vague and, therefore, ineffective because it failed to explicitly or implicitly fix or make provision for determining the price of the engines ordered; thus, the Court overturned the decision of the first instance and held that there was no valid contract concluded);
     -      FRANCE 26 April 1995 Cour d'appel [Appellate Court] Grenoble (Alain Veyron v. Ambrosio), CLOUT abstract no. 151, case presentation including English translation available online at <http://cisgw3.law.pace.edu/cases/950426f1.html> (the court found that "the reference made by article 55 CISG to a market price, in as much as this article is applicable to the case, is overridden by a contrary agreement between the parties, such as the provisions of CISG in their entirety, with the exception of article 12 (art. 6)");
     -      HUNGARY 24 March 1992 Fovárosi Biróság [Metropolitan Court] (Adamfi Video v. Alkotók Studiósa Kisszövetkezet), CLOUT abstract no. 52, case presentation available online at <http://cisgw3.law.pace.edu/cases/920324h1.html> (the Court held that an offer was sufficiently definite, as the quality, quantity and price of the goods were impliedly fixed by the practices established between the parties (Art. 9(1) CISG), whereby the seller had repeatedly delivered the same type of goods ordered by the buyer who had paid the price after delivery);
     -      RUSSIA 22 November 1995 Arbitration proceeding 99/1994, case presentation including English translation available online at <http://cisgw3.law.pace.edu/cases/951122r1.html> (the tribunal held that CISG Art. 55 was applicable to a contract between the parties that had provided for the basic price for the goods having a minimum content of a certain indicator. There was no provision as to the price for the goods in which a content of the indicator was below the minimum level. In such a situation, pursuant to the contract, the price was to be agreed upon by the parties. In some of the delivered goods the level of content of the indicator was below minimum. In this situation, the ICAC deemed it possible to apply Article 55 to determine the price.

For criticism of the tribunal's judgment, see Saidov D., "Cases on CISG Decided in the Russian Federation", 7 Vindobona Journal of International Commercial Law and Arbitration (2003) 1 - 62, at 37 - 38: "It is not clear why the Tribunal deemed it possible to apply Article 55. Such a decision seems to run counter to the provision of the contract according to which in the situation that took place in the case, a price was to be agreed upon by the parties. It is submitted that Article 55 could only be applied where the parties intended to regard an open price contract as valid. Therefore, a price could be determined according to Article 55 only if such a determination of a price stemmed from interpretation of the contract. The decision does not make it clear whether the Tribunal interpreted the agreement. On the basis of the information available, it seems that the parties' intention was not to leave the price open, but to come to an agreement to this effect. In such a case, Article 55 could not be applied. This decision appears to be inconsistent with the decision taken in a case No 304/1993 [of 3 March 1995] where Article 55 was held to be inapplicable in the situation where the parties have agreed to negotiate the price in future and failed to do so" [citations omitted]).


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