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Reproduced with permission of 18 Journal of Law & Commerce (1999) 191-258

Transcript of a Workshop on the Sales Convention:
Leading CISG scholars discuss Contract Formation,
Validity, Excuse for Hardship, Avoidance, Nachfrist,
Contract Interpretation, Parol Evidence, Analogical
Application, and much more

Transcribed and edited by Harry M. Flechtner [*]

I. INTRODUCTION

On November 13, 1998, the Center for International Legal Education of the University of Pittsburgh School of Law and the Law Faculty of Meiji Gakuin University (Japan) sponsored a workshop and roundtable discussion on the United Nations Convention on Contracts for the International Sale of Goods ("CISG").[1] The workshop was held in the Rare Books Room of the Library of the University of Pennsylvania Law School, which provided generous support for the program. The purpose of the workshop was to bring together two groups of academics interested in the CISG scholars of substantive international sales law, and researchers in the field of computer artificial intelligence whose work focused on the CISG. Participants included leading CISG scholars from the United States, Japan and Europe, several of whom had been instrumental in the drafting and promulgation of the CISG, and pre-eminent scholars [page 191] of artificial intelligence and the law from Japan and the U.S.[2] Professor Hajime Yoshino of Meiji Gakuin University and Professor Harry Flechtner of the University of Pittsburgh co-moderated the program. The other participants in the workshop were Professor John O. Honnold of the University of Pennsylvania, Professor Kazuaki Sono of Tezukayana University (Japan), Professor Peter Schlechtriem of the University of Freiburg (Germany), Professor Curtis Reitz of the University of Pennsylvania, Professor Joseph Lookofsky of the University of Copenhagen (Denmark), Professor Shigeru Kagayama of Nagoya University (Japan), and Professor Kevin Ashley of the University of Pittsburgh.[page 192]

About the Participants in the CISG Workshop

JOHN O. HONNOLD is the William A. Schnader Professor of Commercial Law Emeritus at the University of Pennsylvania Law School. A graduate of the University of Illinois and Harvard Law School, he was Chief of the International Trade Law Branch of the United Nations and Secretary of the United Nations Commission on International Trade Law (UNCITRAL) from 1969 through 1974. He was Co-Chair of the U.S. delegation to the 1980 Vienna Diplomatic Conference at which the U.N. Sales Convention was concluded. Professor Honnold is widely recognized as a leading scholar on the Sales Convention. His Uniform Law for International Sales is generally regarded as a leading treatise on the Convention, and his Documentary History of the Uniform Law for International Sales is the most complete resource available on the history and drafting of the Convention. The third edition of Professor Honnold's CISG treatise, incorporating not only recent commentary on the Convention but also the extensive international case law on the CISG, has recently been published.

DR. PETER SCHLECHTRIEM is Professor of Law for Civil, Commercial, Business, Comparative and Private International Law at the University of Freiburg (Germany), where he also serves as Director of the Institute of Foreign and International Law. In addition to his legal education in Germany at the University of Freiburg, he earned a Masters degree in Comparative Law from the University of Chicago. He has served as a Visiting Assistant Professor of Law at the University of Chicago and a Visiting Scholar at Harvard. He was a member of the German delegation to the 1980 U.N. Conference in Vienna at which the text of the CISG was approved. He is the editor of the leading German commentary on the CISG, the second edition of which has appeared in English translation under the title Commentary on the UN Convention on the International Sale of Goods (CISG) (1998). He has been a member of the German Council on Private International Law since 1973, has served as President of the German Society of Comparative Law, and in 1984 became a member of the German Law Reform Commission. He has lectured and taught internationally on business, commercial and comparative law topics.

PROFESSOR KAZAUKI SONO is Professor of Law and Dean of Faculty of Law and Policy at Tezukayana University. He is also Professor Emeritus at Hokkaido University. From 1980 through 1985 he served as Secretary of the United Nations Commission on International Trade Law (UNCITRAL) and Chief of International Trade Law Branch of the United Nation's Office of Legal Affairs. From 1990 through 1993 he served as Assistant General Counsel of the International Monetary Fund (IMF).

HAJIME YOSHINO is Professor of Law at Meiji Gakuin University, Japan, and was co-organizer and co-moderator of the November, 1998 CISG workshop transcribed in this issue of the Journal of Law and Commerce. A leading researcher on artificial intelligence and the law, he is director of the "Legal Expert" project funded by the Japanese Ministry of Education and Science. The main objective of the Legal Expert project is to develop logic-based legal knowledge bases using the United Nations Convention on Contracts for the International Sale of Goods as the target domain.[page 194]

CURTIS R. REITZ is Algernon Sydney Biddle Professor of Law at the University of Pennsylvania, where he teaches domestic and international commercial law. He is a member of the National Conference of Commissioners on Uniform State Laws and of the Drafting Committee to Revise Article 2 (Sales) of the Uniform Commercial Code. His many publications in the commercial law area include Sales Transaction: Domestic and International Law (1992) (with John O. Honnold).

JOSEPH LOOKOFSKY is Professor of Private and Commercial Law at the University of Copenhagen, Denmark. After graduating from Lehigh University and New York University Law School, he earned law degrees from the University of Copenhagen and joined the University of Copenhagen Law Faculty. He has published extensively on the CISG in both Danish and English. His English-language publications on the Convention include three books -- Understanding the CISG in the USA, Understanding the CISG in Scandinavia, and Understanding the CISG in Europe (with Professor Herbert Bernstein) -- as well as a variety of law review articles and book chapters. He has authored CISG computer network exercises for students, and has instituted a mandatory CISG course component for the 4,000 law students at the University of Copenhagen.

SHIGERU KAGAYAMA is Professor of Civil Law at Osaka University and a participant in the Legal Expert project directed by Professor Hajime Yoshino. Professor Kagayama has authored A Comparative Study of the Japanese Civil Code and the CISG, available on the Internet at "http://www.law.osaka-u.ac.jp/~kagayama/Expert/Civ-CISG/CivCISG.html". In September 1989 he was elected President of the German Society of Comparative Law and since 1984 he has been the Corresponding Commentator to the National Conference of Commissioners on Uniform State Laws.

KEVIN D. ASHLEY is Professor of Law and Intelligent Systems at the University of Pittsburgh School of Law, and Senior Scientist at the Learning Research & Development Center of the University of Pittsburgh. He is a leading scholar in artificial intelligence and the law, and the creator of CATO (Case Based Argument Tutorial), an intelligent tutoring environment for teaching law students basic skills of arguing with cases. He is President of the International Association for Artificial Intelligence and the Law, and Co-editor of the journal Artificial Intelligence & Law.

HARRY M. FLECHTNER is Professor of Law at the University of Pittsburgh School of Law, where he specializes in domestic and international sales law, contracts, and bankruptcy law. He received his A.B., M.A. and J.D. degrees from Harvard University. After practicing in the Washington, D.C. offices of Wilmer, Cutler & Pickering, he joined the University of Pittsburgh faculty in 1984. Professor Flechtner has written extensively on the CISG and is the co-author (with John E. Murray, Jr.) of the book Sales and Leases: Problems and Materials on National and International Transactions. As faculty advisor to the Journal of Law and Commerce and to its special project on the Convention, Professor Flechtner has engaged in a variety of CISG-related activities. These include co-moderating the November, 1998 CISG workshop whose transcripts are published here, and co-organizing (with Professor Ronald Brand of the Center for International Legal Education at the University of Pittsburgh Law School) an October, 1997 symposium marking the 10th anniversary of the Convention (proceedings published in 17 J.L. & Com. 188 ff).

MARK S. WALTER is a 1998 graduate of the University of Pittsburgh School of Law. Before attending law school he did graduate work at the University of London's School of Oriental and African studies and worked for the British Broadcasting Corporation in India. His primary interest is in transnational contract issues.[page 195]

Professor Hajime Yoshino's Artificial Intelligence Program on the CISG

Professor Hajime Yoshino leads a group of some thirty computer scientists and attorneys in a research project entitled, "Study of Development of a Legal Expert System," funded by the Japanese Ministry of Education, Science and Culture. The goals of the project are to clarify the general structures of legal knowledge and, in particular, the detailed structures of legal knowledge in the field of contract law as embodied in the United Nations Convention on Contracts for the International Sale of Goods (CISG). The project aims to describe these structures in terms of a logical formalism, to apply this formalism in representing the CISG, and to implement a legal expert system to support automated reasoning with the CISG.

Currently, a version of the legal expert system (LES5) has been implemented and is accessible via the World Wide Web. The legal expert system is a computer program. It implements a means for performing legal inferences using logical and other kinds of inference techniques, such as analogical and case-based reasoning, and for acquiring additional legal knowledge and expertise specifically for reasoning with the CISG.

The system's database contains a representation as logical rules of a variety of the provisions of the CISG, as well as of some fundamental rules for drawing legal inferences from statutory texts. Given problem scenarios involving contract law concepts such as offer and acceptance or the delivery of non-conforming goods, LES5 can deduce the legal obligations of buyer and seller as a function of time as the events unfold. At any given time point, it determines the parties' obligations by determining which legal sentences (i.e., conclusions) are logically valid at that point.

Efforts are underway to employ the legal expert system in an instructional program to teach students basic concepts of contract law.[page 217]

The workshop

The all-day workshop featured the presentation and discussion of hypothetical cases on the CISG prepared by participants. During the morning session, Professor Yoshino described the program of joint research he is conducting in connection with his work in artificial intelligence and the CISG; then he and Professor Kagayama presented a hypothetical case (referred to as "Case 8F") that Professor Yoshino wrote as a test case for his legal expert system computer program. The balance of the morning session was spent discussing the CISG issues raised by Professor Yoshino's hypothetical case.

The afternoon session opened with a demonstration of Professor Yoshino's artificial intelligence program [3], followed by the presentation and discussion of a hypothetical CISG case written by Professor Schlechtriem. The day ended with the presentation and discussion of a hypothetical CISG case written by Professor Flechtner with assistance from University of Pittsburgh Law School graduate Mark Walter, who also attended the workshop.

What follows is an edited transcript of the workshop.

MORNING SESSION

FLECHTNER: I am just going to say a word or two of welcome. I'm Harry Flechtner of the University of Pittsburgh School of Law, and it is my great pleasure to be involved with this program along with Professor Hajime Yoshino, who was the other person responsible for perpetrating this workshop and roundtable discussion on you all. Our purpose [page 192] here today is to gather a group of people who are interested in the CISG, several of whom have been crucial to its enactment and propagation throughout the world. We will have a chance to talk about some of the developments in CISG jurisprudence, to hear Professor Yoshino talk about his work at Meiji Gakuin University on an artificial intelligence program involving the CISG, and generally, to have some good discussion of the CISG. That means I should be quiet and turn the program over to Professor Curtis Reitz to say something on behalf of the University of Pennsylvania, our gracious host today.

REITZ: Yes, thank you Harry. We are delighted to have you all with us today. Our old friend and colleague John [Honnold] comes back, seldom, so this is a nice occasion for us to have him return. I'm looking forward to an interesting discussion. If I can do anything during the day to make your visit more comfortable or enjoyable, please don't hesitate to ask. Thank you all for coming.

FLECHTNER: Now let me turn the podium over to Professor Yoshino to say a word or two about today's program and about his artificial intelligence project involving the CISG.

YOSHINO: I would like first to thank all the participants in this workshop, and I wish to thank you especially Professor Flechtner for helping to prepare this workshop, Professor Reitz who has provided this facility for the workshop, and Professor Honnold who so kindly agreed to attend the workshop and provide his comments. Before I begin my presentation I would like to mention that we just arrived yesterday, and the time here is quite different from the time in Japan. In Japan it is midnight now. If we should sleep a little bit during the discussion please forgive us, for it is not a sign of boredom with the discussion but a sign of the time difference. I hope that will not happen. Anyway, it is difficult for us to overcome this kind of time change.

Now I would like to speak first on the program of joint research and comparative knowledge analysis of the CISG that I am engaged in. First some history. In 1987 or 1988 -- I'm not sure about the exact year -- I and three of my colleagues visited the University of Pittsburgh where Professor Kevin Ashley was teaching about artificial intelligence and the law. Since then we have been engaged in the study of artificial intelligence and the CISG. We have chosen the CISG as the topic of our study because, although it is written in several languages, the content of the law is the same or should be the same no matter what language it appears in. That is very convenient for our comparative study. If, for example, we had focused on Japanese law or the application of Japanese business law, [page 193] we would have had to expend much time explaining the legal background. If we use the CISG, however, we have a common basis to come together, and that is one reason why we chose the CISG.

But another reason we chose the CISG is because this law is the product of many year of international comparative study, and it incorporates the essence of contract law from both civil law countries and common law countries. So by focusing on the CISG, we can construct a true international comparative study. The CISG can be the bridge between the different legal cultures. That is another reason we chose to study the Vienna Convention.

Now I'd like to explain the objects of our joint research. The purpose of this study is to clarify our knowledge of the CISG through the cooperative efforts of legal experts on the CISG and on artificial intelligence and the law, drawn from the important trading nations of the United States, Germany and Japan. And this process should be extended to other countries.

In the course of this research we hope to clarify the reasoning process of applying the CISG to difficult concrete cases, by taking into account the theories and interpretations of experts from different states, analyzing from a comparative law perspective, and citing to the background legal culture. Comparative legal studies cannot be accomplished merely by comparing the legal concepts of various states, but instead must be done through comparison of the different legal reasoning processes that result from applying the law to concrete cases and the resulting knowledge of the different forms of reasoning. For this purpose we have put together hypothetical cases pertaining to the CISG and involving different nations. We can then discuss with each other how each case would be resolved from each participant's point of view. During and after the discussion we will analyze the various reasoning processes and perspectives on the CISG. In the course of this analysis, we hope to clarify the approaches that we have in common, and identify where and why the reasoning processes differ among those from different states. That is the object of our studies.

I also want to comment on the program for today's workshop. The original version of the program, which was put together by me, was more oriented to discussion of artificial intelligence than is the present program. After discussions with Professor Flechtner we have changed the program so that it focuses more on CISG issues that we can discuss from the perspective of our various legal traditions and practices. We will discuss three hypothetical cases and how to solve these cases from each [page 196] point of view. The discussion should be done intensively in order that we can become aware of the differences among legal cultures and the differences among the legal theories from which one views the problems. I will observe and analyze the discussion as a knowledge engineer. Professor Kevin Ashley, who is an excellent and famous scholar in the field of artificial intelligence and the law, will also be analyzing the discussion from this perspective.

The program is divided into a morning session and an afternoon session. Between the two sessions we will have lunch, which will be provided by the University of Pittsburgh, and after the afternoon session we will be together for dinner, which will be provided by Meiji Gakuin University. You have in front of you a written program containing the details of today's schedule.

I appreciate this opportunity to explain the program of joint research. I thank each of you for participating in this workshop. I want particularly to thank Professor Schlechtriem, who changed his travel plans in order to attend the workshop, for which we all are very grateful. Thank you very much.

Discussion of "Case 8F"

FLECHTNER: Professor Yoshino are you now going to present the hypothetical case that you have prepared?

YOSHINO: Yes. Professor Kagayama will first present the problem, and then I will continue the discussion, and then Professor Sono will comment on the hypothetical.

KAGAYAMA: I will now outline our hypothetical case -- "Case 8F" -- a written version of which has been distributed to you: [The hypothetical appears in quotes, followed by Professor Kagayama's analysis at the end of each step.]

"1) On April 1, a New York manufacturer of agricultural machines, A (Anzai), dispatched to the Hamburg branch of a Japanese trading company, B (Bernard), a letter containing the following proposal: A will sell B a set of agricultural machines comprised of a tractor and a rake; the price of the tractor is $50,000; A will deliver the machinery to B by May 10; B must pay A the price of the machinery by May 20; the machinery will be transported by an American freight vessel." This description identifies the parties and the contents of the offer.

" 2) The proposal reached B's letter box on April 8." This represents the arrival of the offer at the offeree's offices.[page 197]

" 3) On April 9, B telephoned A and said, 'I accept your offer. However, I want the machinery transported by Japanese container ship.'" This describes a modified acceptance or counter-offer by the buyer under Article 19 of the CISG.

"4) A delivered the agricultural machinery to a Japanese container ship at the port of New York on May 1." This represents the seller's acceptance of the buyer's counter-offer under Article 18(3) of the CISG.

"5) The machinery was delivered to B's Hamburg branch on May 31." This constitutes the performance of the seller under the contract.

"6) B examined the machinery on June 5." This represents the buyer's examination of the goods pursuant to Article 38 of the CISG.

"7) B paid A $58,000 on May 20. (The market price of the rake was $8,000)." This depicts the performance of the buyer under the contract.

"8) On August 10, the machinery malfunctioned because of defective connecting gear." This describes a lack of conformity in the goods under Articles 35 and 36 of the CISG.

"9) B notified A of the malfunction immediately." This constitutes the buyer's notice of lack of conformity pursuant to Article 39 of the CISG.

"10) On September 1, B demanded that A repair the lack of conformity within one month." This is the buyer's demand for repair of the non-conformity pursuant to Articles 46(3) and 47 of the CISG.

"11) A did not repair the defect by October 1." This constitutes non-performance by the seller.

"12) On October 10, B declared the contract avoided." This constitutes a declaration of avoidance by the buyer under Article 49(1). Whether the declaration of is made pursuant to Article 49(1)(a) or Article 49(1)(b) is the question. Professor Yoshino will address this issue in more detail after my presentation.

"13) On December 10, B made restitution of the machine to A."

"14) On December 20, A made a restitution of the $58,000 price to B, plus interest, and gave compensation for damages B had suffered."

This is our hypothetical case. Thank you very much.

YOSHINO: Let me explain our purpose in putting together Case 8F. We have used Case 8F to help us address several tasks. One was to clarify the deductive knowledge structure of the CISG and the system of reasoning for legal justification in the field of the CISG. This task is mostly completed, in my opinion. In this regard, the case has been used by us to help discover and explain the general theory of law underlying the [page 198] CISG -- to clarify the logical structure of the system of contract law on a theoretical basis. It has been said that the goal of legal theory for the last 100 years has been to explain law as a logical system. Many legal theorists have tried to do so, but no one has succeeded. We have tried to show the law as a system from which we can deduce a conclusion when we apply it to a case description in light of implicit legal knowledge. That is our main purpose in making Case 8F, and I think it was a success. In addition, the case is used by us to construct a deductive knowledge base for the CISG on the basis of our clarification of its underlying system. We have made a knowledge base from the CISG which is used to infer the application of the law to concrete cases. This is used to demonstrate the correctness of our clarification of the structure of legal knowledge and the system of law. Thus, by demonstrating the accuracy of the results achieved when we apply our artificial intelligence system to Case 8F, we also demonstrate the correctness of our clarification of the system of law.

The second task for which we used Case 8F was to clarify the knowledge structure of the process of reasoning for legal discovery under the CISG, and to find ways to systematize this reasoning process. Legal reasoning is composed of two modes. One is the reasoning of justification and the other is the reasoning of discovery. In the reasoning of justification, logical deduction plays a fundamental role, but in the reasoning of discovery we need not only deduction, but also induction or "abduction" -- other ways of reasoning. This is very difficult for artificial intelligence to deal with, and it is very difficult for legal theory to clarify the structure of this legal knowledge in order to enable our artificial intelligence system to perform the reasoning of discovery. This task was another purpose behind Case 8F, and we have put into the case several legal issues that require the legal reasoning of discovery.

[Professor Yoshino then demonstrated how his legal expert system analyzed Case 8F in terms of the legal relationship between the parties as represented on a time line indicating changes in that relationship.]

Case 8F raises issues concerning the legal reasoning of discovery. There are two such issues, one of which is divided into two parts. One issue is whether a contract was concluded, and, if so, when was it concluded. This inquiry is divided into two parts. First, is A's proposal to B sufficiently definite to constitute an offer? Second, is B's notice of assent an acceptance with modifications that amounts to a counter-offer, or an acceptance with minor modifications that is still to be regarded as concluding the contract? Recall that A's proposal provided that the goods [page 199] would be transported by American cargo ship, but B's response indicated the goods would be transported by Japanese container ship. Also recall that A's proposal specified the price of the tractor, but did not set the price of the rake.

The second issue involves B's avoidance of the contract: May B declare the contract avoided on October 10 on the basis of A's failure to fulfil his obligation to repair the machinery by September 30? There are three approaches to this issue, according to our research. The first approach declares that if the defects in the goods did not constitute a fundamental breach of contract on August 10, then the breach is not fundamental on October 10; but, if the breach was fundamental when it was first discovered then it is also fundamental on October 10. That is one approach. The second approach declares that even if the breach of contract was not fundamental on August 10, it became fundamental when A did not perform his obligation to repair the machinery by September 30. That is in accordance with CISG article 49(1)(b), but B may declare the contract avoided under an analogical application of CISG Article 49(1)(a). We are very interested in which approach is more appropriate, and how one justifies one's own approach to this issue. I would be happy if you would discuss these issues from your point of view.

To open the discussion I would like to ask Professor Sono for his thoughts on these issues and his comments on Case 8F.

When you look at Case 8F there are many further aspects of the facts that we would have to know in order to reach conclusion. Most of you have probably already thought of some examples of such facts. To begin with, may I first just mention just some of them? With respect to step 1), you would want to know the purpose of the parties and the relationship between them. You would also like to know the parties past transactional history. It affects our thinking about the situation. In step 3), we have to find out why the transport ship was changed, because it is rather unusual. It might offer some hint of the purpose for which the machinery was intended. Moreover, we may have to ask whether this was an FOB contract or a CIF contract. Depending upon whether it was a CIF or FOB, the change of the vessel could have different consequences. If it was a CIF contract, then the change in the proposal may be important enough to make the change in the condition material. I'm talking about the counter-offer issue. In step 4), an Article 18(2) or 18(3) issue may come up. In step 5), why did delivery take so long? Shipment occurred [page 200] much earlier. But we may be able to justify this under Article 8 by interpreting the parties' intent. They might have modified their contract by agreeing to a Japanese container ship because it was necessary. That might justify the delay in delivery.

In step 6) the buyer examined the machinery on June 5. What kind of examination was made? For what purpose was the machine purchased? With respect to step 7), we don't know why payment was made before the goods were delivered. And in step 8), we would like to know how the tractor had been used before August 10. Who used it? Was it the trading company itself, or someone who had purchased the tractor from the trading company? If it was used by the trading company itself, although rather unusual, how it was used before August 10 may have important implications for our analysis. And, after all, whether the buyer's inspection of the goods on June 5 was done properly. In step 10), the buyer demanded that the seller repair the lack of conformity. Was it a kind of repair that could have been accomplished by any third party with knowledge of the machinery, or was it a kind of repair that could be done only by the seller? If it was the former, then the question of mitigation of damages may come up, and it would also raise the issue whether avoidance of contract was justified. The question whether the breach was fundamental seems to be rather an important issue here.

In this hypothetical everything went so smoothly. But, for us to have the flow of the logical analysis, there are many additional facts needed. Some aspect of the arrangement may have a totally different implication depending on the underlying relationship of the parties. Moreover, it would also be interesting to see if Professor Yoshino's program would assist us in identifying the additional facts needed. Meanwhile, I once suggested to Professor Yoshino that, whatever program he runs on his computer, Article 8 of the CISG should constantly flash from the corner of the computer screen. Of course, how the legal expert system can incorporate such things in a logical way is a big issue. For the sake of commencing discussion it might be better for me to pause here.

YOSHINO: I am very grateful that you have pointed out necessary facts that are not given in Case 8F, and that should also be brought up by means of artificial intelligence in law. Thank you. I should mention that we call each other "Professor Yoshino," "Professor Sono" and "Professor Kagayama," even if we have been friends for many years because it is the Japanese custom to use family names rather than first names. Now let us proceed to the discussion. [page 201]

SCHLECHTRIEM: Let me ask you a question, Professor Yoshino. In step 7) you mentioned that the price of the rake was $8,000 in the market. Why was this information included in your case?

YOSHINO: When we first wrote the problem this was not a part of the case. But as B pays the price in the problem, it must be the price of the whole system. In A's proposal the price of the tractor alone is specified as $50,000, so the price of the rake must be set. Therefore, I added this parenthetical fact concerning $8,000 being the price for the rake in the market. So when B would inquire what the price of the rake was, he would find that the price in the market was $8,000, and he would pay $8,000 for the rake, for a total of $58,000 for the entire system.

SCHLECHTRIEM: I'm still not sure I know the importance of knowing the value of the rake at the precise stage.

YOSHINO: But if B paid the price, then his obligation to pay the money disappeared if the buyer paid everything. Therefore, I put in a definite price.

FLECHTNER: But, originally, the price specified in the proposal did not include any amount for the rake, is that correct?

YOSHINO: Yes, at the time of the acceptance the price of the rake had not been specified.

KAGAYAMA: That's a matter of Article 55 of the CISG.

FLECHTNER: And I suppose that raises the first issue that Professor Yoshino identified was the proposal made by the seller in this case sufficiently definite to be an offer under the CISG?

SONO: Before reaching that issue we may have to ask whether the parties were serious enough to be bound, whether they had a serious intent to form a contract, or to be bound. The definiteness issue would come up later, although, in fact, both issues may have to be combined. I think Professor Yoshino is assuming in this case that both parties were to find out what was the relationship between the two parties? Had they had prior dealings? If this was the first contact between parties, I doubt there was a serious offer.

YOSHINO: At the time of the proposal the price of the rake was not set -- it was not clear.

FLECHTNER: It does seem to raise a question -- even assuming a serious intent by the parties to form a contractual relationship -- whether we can have an offer under the standards of Article 14 if a portion of the price has not been specified. And I wonder whether anyone wants to weigh in on that question. How would you approach that issue? [page 202]

LOOKOFSKY: Wouldn't one assume that the parties had some kind of additional background information about this equipment? I mean, if someone is going to buy equipment at this price level, wouldn't you assume that the buyer is aware of what is being offered -- that it is a machine of a certain character -- perhaps because the parties had prior dealings, perhaps because the seller had put out a catalog, something like that. I think my instinct would be that an offer has been made because there was an acceptance. Maybe before there is an acceptance you might wonder whether anyone would accept an offer like this. But, I think once you have an acceptance, my inclination would be -- learning the value of the rake afterwards -- that we probably have a contract here. There is at least some basis for determining what the subject matter is.

SONO: I think in this case the tractor and rake constitute one set. In the agricultural business world, a tractor may require various kinds of rakes depending upon the purpose. That might require some special design or component. But again, it depends upon the application of Article 8 and Article 9.

HONNOLD: Didn't the conduct of the buyer in paying a total price that made $8,000 the price of the rake and a part of the deal clinch their mutual intent here?

SCHLECHTRIEM: Yes, and I would say that the $8,000 comes under Article 55.

HONNOLD: Yes.

LOOKOFSKY: Based on what Professor Sono is saying, you could also imagine a situation, I suppose, where there is a contract concluded but you then get a different kind of controversy where the buyer claims that it didn't get the rake that it needed. Then perhaps you would ask whether the seller shouldn't have asked the buyer, prior to delivery, about the kind of rake needed.

YOSHINO: At the time of the proposal in Case 8F, the full price is not definite. There is only the price of the tractor specified, and the price of the rake is not definite. So, therefore, the price of the entire system of machinery is not definite, and one can ask whether the proposal as a whole is definite enough to be an offer. In order to decide this, we can refer to the Malev case involving a transaction between an airline and an aircraft engine manufacturer.[4] That contract involved a system of engines composed of several parts. The main part was the engine itself, but there were other parts -- a housing that covered the engine and components that [page 203] assisted the engine. The Malev case said that the proposal in that case was not sufficiently definite because the price of there other parts was not clear and there was no market price for these parts. Case 8F is a little different than Malev because in Case 8F there is a market price for the rake. We can infer that, at the time of the proposal, a market price existed. If a market price for the rake existed, then we can apply the Malev case or, as Professor Schlechtriem said, Article 55 to conclude that the proposal in Case 8F is sufficiently definite.

REITZ: The situation we're dealing with raises for me what is a continuing problem with the structure of the Convention, and that is, how does Part II of the Convention [containing contract formation provisions] relate to later parts of the Convention. Article 55 by its terms only applies if a contract has been validity concluded. So it is not explicitly a way to fill gaps in the formation sections of Part II. The language in Article 14 that I think is relevant to the situation on April 1 is whether the price of the rake is "implicitly" fixed. Whether one can construe the Convention, as I would, to use Article 55 to give meaning to the phrase "implicitly fixes" in Article 14 is, I think, a fair question. Article 55 is not written in a way that helps you do that. It assumes that somehow you have gotten past all the formation problems, and we are now into construing the obligations of parties to a contract. But it makes sense to me that "implicitly" fixing a price could be done by reference to markets fairly easily, or by reference to some other standard that might be implied from the relationship of the parties, as you were talking about earlier, Professor Sono. But even if you say a price could be implicitly fixed by reference to a market price, there is still a question of what market. The market in the United States and the market in Germany might be quite different, and I think maybe this was part of your concern, Professor Sono, about how the shipment terms related to the price. The shipment costs might be quite significant relative to the price, or they might be insignificant.

But when I get into a Part II problem, a formation problem, in the Convention, I usually end up becoming very unhappy with the Convention. The kind of commercial flexibility that I find in Parts III and beyond I don't find in Part II.

SONO: Yes, I think Professor Reitz has focused on the real core of the issue under Article 14(1). Some say that Article 55 is relevant only for those countries that have excluded the application of Part II of the Convention. But I see an unfortunate implication in that logic particularly around the second sentence of Article 14(1). Many scholars lightly read [page 204] the second sentence as giving a definition of an offer, even though the second sentence does not really so provide. It merely states that "[a] proposal is sufficiently definite if . . ." The second sentence of Article 14(1) only shows an example of a proposal that may become an offer. On the other hand, the requirements for a proposal to become an offer are in the first sentence of Article 14(1).

FLECHTNER: So something that falls short of meeting the requirements of the second sentence of Article 14(1) could still be sufficiently definite?

SONO: Yes. The first sentence of Article 14(1) states that a proposal is an offer if it is sufficiently definite and indicates the serious intention of the offeror to be bound. For an offer we need a serious intent to be bound, and definiteness so that a court can enforce it if it becomes necessary. Many people say that if the price is missing, it is not an offer. But how can we say it's not an offer if the party making the proposal seriously intends to be bound? And, if the other party also appears to be serious to be bound, and if something else can come in to fill any gaps in their agreement, why should we say it's not an offer? What we have to honor is the parties' intention. If they seriously intend to be bound, we can look to Article 55 regardless of whether Part II has been excluded. The point I wanted to make was that the second sentence of Article 14(1) does not provide a definition at all; it's an illustrative and educational provision only. After all, the serious intent of the parties should be honored, provided that the court can find the means to enforce the agreement -- for instance, by reference to Article 55.

HONNOLD: Can our discussion assume that we should take the facts of the case as a whole? If we take the facts of this case as a whole, there was a shipment and receipt of goods, and payment for the goods which was made and received. I think it is clear that there has been a transaction between these parties, and that a court would want not to undo it.

REITZ: That certainly is right, John, but what I understand Professor Yoshino and his colleagues want to do, in addition to taking all the facts as a whole, is to take the transaction step-by-step, and at each point evaluate the legal situation without knowing what is going to happen later.

HONNOLD: I understand. I'm just trying to emphasize the difference between taking a little bit of the case and looking at it as a whole.

REITZ: There certainly is a major difference. [Page 205]

FLECHTNER: I wonder whether we should talk a little bit about the change that the buyer suggested after seeing the seller's proposal, and its effect on the contract formation process. The original proposal by the seller had specified an American cargo ship. The buyer comes back and suggests a Japanese container ship. Would that prevent a contract from arising at that point in time under the rules of the CISG?

SONO: As I indicated before, if it was an FOB contract, the indication of an American freight vessel was only informational. If the buyer preferred a Japanese container ship, the cost would fall only on the buyer, because freight is not part of the price. But if it was a CIF contract, the change would materially alter the offer, so it's a counter-offer. That was the point that I was trying to make in differentiating between a FOB and a CIF contract.

FLECHTNER: I guess there is no disagreement about that. If the buyer's response was a counter-offer, then comes a part that I am interested in: Was there an acceptance of the counter-offer and, if so, precisely when did it occur? There would have been no contract formed at the point at which the buyer responded to the offer; then the seller goes ahead and ships the goods. I assume that can be looked at as an acceptance. What I'm interested in is, when does the acceptance occur, and when does it become effective, if the seller ships the goods in a situation like this?

HONNOLD: I am assuming the buyer has received the goods.

FLECHTNER: The buyer did receive the goods here.

HONNOLD: Who would have any doubt that there had been a transaction in this case?

FLECHTNER: But John, what would happen then if the container ship should sink on the way to the buyer?

SONO: There would be no acceptance.

FLECHTNER: No, acceptance?

SONO: Because information concerning the fact of acceptance has not reached the other party. But, he would usually inform the buyer by fax, telegram, or e-mail of the shipment, which corresponds to a notice of acceptance of the counter-offer. If the ship sinks afterwards, we then move on to FOB or CIF issues.

SCHLECHTRIEM: Doesn't it fall under 18(3)?

FLECHTNER: Does it fall under 18(3)? When Article 18(3) applies, acceptance would occur when the act of acceptance was performed, which in our case would be the moment of shipping, even before notice of acceptance reached the offeree. But Article 18(3) seems to me to be [page 206] limited. It only applies "if by virtue of the offer or as a result of practices which the parties have established between themselves or of usage" you can perform the act without notice to the offeror. My question is, what does that require? Would it be met on facts like ours? I have some question about that.

SONO: I don't think Article 18(3) applies here. When we look at Article 18(1) we see that any statement made by or conduct of the offeree indicating assent -- I emphasize "any conduct," which would include shipping the goods -- constitutes acceptance. Article 18(1) is the basic rule that covers the present situation. And, under 18(2), the acceptance becomes effective when that intention reaches the offeror. In my view, situations to which Article 18(3) would apply would be very rare. If you send something in response to an order, you must have the freedom to retract the shipment, or stop the transit until you informed the other party of the fact of acceptance or shipment. Article 18(3) does not provide that once the conduct is done -- once the goods have been shipped, for instance -- then there is no way to avert.

In my view, Article 18(3) applies to such situations as unilateral contracts under American law. In a unilateral contract, the promisor incurs an obligation only if the other side does something specified, but whether the other side performs or not is for him to decide. Only if the offeree does something specified, does the promisor's promise become binding. The offer contains a unilateral promise conditioned upon a certain conduct to be done by the other party. Article 18(3) is confined to that situation. We call it a unilateral contract but it's not contract at all. Other ordinary situations are covered by the first line of Article 18(1).

SCHLECHTRIEM: We need lawyers on both sides of the case, and I would like to take the other side. We don't have an original offer and acceptance situation here. We have a counter-offer. The original offeree said, yes, I am willing to buy, but I want the Japanese container ship. According to Article 8, shouldn't we interpret this counter-offer as meaning, I accept, but I want to have a Japanese container ship, and if I don't hear from you, I will assume you agree by shipping the goods? In such a case there is already a relation between the parties. That seems to be a different situation from your case where there is just an offer and then the offeree ships the goods. Then the offeree must be free to retract before his acceptance, expressed by sending the goods, reaches the offeror. But in Case 8F, a contract had almost been established -- it's only this point about the container ship -- and I think in that situation you [page 207] could interpret the counter-offer a bit more liberally so that it would fall under Article 18(3).

SONO: And if you ship by Japanese container ship the contract is complete at that time?

SCHLECHTRIEM: Yes.

SONO: You cannot take it back once you hand over the tractor to the shipper?

SCHLECHTRIEM: Why should you be allowed to take back your acceptance when all your wishes were fulfilled?

SONO: But the acceptance becomes effective when it is known by the other party under Article 18(2).

SCHLECHTRIEM: Unless under Article 18(3) you dispense with the requirement that the other party receive the answer in such a situation. I'm arguing this as a lawyer here.

FLECHTNER: I suppose there is a practice point here, and it is, I think, exactly the point you were making Professor Sono. In the seller's position, it is much safer to give notice that you have shipped. Otherwise you may, in effect, end up bearing risk of loss depending upon how a court analyzes the contract formation situation. Should the ship sink, some courts might say no contract was ever formed. In that case, the seller is not going to get the price, and the seller would effectively bear risk of loss no matter what the contract terms would have been with respect to risk a loss.

SONO: According to Professor Schlechtriem, since loading the tractor on the Japanese container ship is acceptance, the risk could be on the buyer, right? If it is an FOB contract. But I still cannot understand why the seller, who accepted the other side's condition concerning the container ship, cannot change his mind once he places the tractor on board the ship, even before the ship has started. Can't you inform the captain, I'm going to take the goods off the ship because I've changed my mind?

LOOKOFSKY: The seller might want to do so because he has another buyer, and now he would like to send it there. But if the ship sinks, then he's going to say to the first buyer, oh, it was intended for you. I'm not sure at this point whether you get the same answer under the Convention and under domestic law, but I think that we in Scandinavia, under Scandinavian law, would require a notification of the buyer at least for the risk of loss to pass. That doesn't necessarily mean the contract has not been concluded before notice is given. But if we are talking [page 208] about whether the seller has fulfilled his performance obligations, then we would require a notification to have a passing of risk.

SCHLECHTRIEM: That is a risk of loss question.

LOOKOFSKY: Yes, but it seems to be on the table now.

SCHLECHTRIEM: Addressing the situation as a lawyer, again, let's assume that no notification of shipment was given to the buyer. The question is whether a contract was formed under Article 18(3) or not.

LOOKOFSKY: I agree with that.

SCHLECHTRIEM: Then let's assume for a minute that the seller finds another buyer who is willing to pay more for the goods while the tractor and the rake are on their way to the original buyer. And now he says, well, I didn't notify the buyer that I had fulfilled all his wishes and shipped the goods on the Japanese container ship. I'm still free, I can retract my acceptance of the counter-offer. Do you really think a court would allow the seller to do that?

YOSHINO: That would be unfair.

SCHLECHTRIEM: Well we will come to that problem, I think, this afternoon in connection with my hypothetical case. Here the question is, at what point can you say, I don't want to be bound, and luckily I didn't send any notice of my acceptance so I'm still free. In that situation, I would think that there might be a damage claim.

YOSHINO: I agree with you. The seller has done something important in connection with the contract, has performed an important part of the contract. And if the contract is concluded at the time the seller hands the goods over to the Japanese container ship, then his contractual obligation must be deemed fulfilled at that time. Under Article 31, the seller fulfills his obligation to deliver when he hands the goods over to the first carrier. So the obligation of the seller to deliver the goods is completed if the contract has been concluded. When the seller has engaged in such important behavior, it would be unfair for the courts to decide that the contract is not concluded and the goods can be sold to another buyer. I think it would be fair if the court decided that a contract was concluded, at the latest, when the goods were delivered to the Japanese container ship. I would like to add my thanks to Professor Harry Flechtner for bringing these issues to my attention. I had not expected to raise these issues when I wrote Problem 8F, but they are all very interesting.

An expert system based on artificial intelligence in law should find most of these issues. We can reason from the facts of the hypothetical as follows. The buyer made payment on May 20, so we can assume that the buyer knew the seller had shipped on May 1 and he calculated 20 days [page 209] from the day of the delivery of the goods to the Japanese container ship. According to the contract, the buyer had to pay the price on May 20, after delivery. From these facts we can infer that the buyer knew the seller had delivered the goods to the Japanese container ship. So, even applying Article 18(1), the contract would be concluded at the time the goods were delivered to the carrier. And if we applied Article 18(3), as you suggested Professor Schlechtriem, the contract would also be concluded at that point.

HONNOLD: I don't want to be taken to insert something trivial here, but we heard the voice of Scandinavia, Professor Lookofsky, a little while ago, and I seem to remember that the Scandinavian countries are the only countries that made a reservation excluding Part II of the Convention on "Formation of Contract." That includes, of course, Articles 14 and 18 and the other things we have been considering.

LOOKOFSKY: We still sometimes have to apply Part II anyway when the rule of Article 1(1)(b) points to a country that has ratified the whole CISG. So it's not as if we're uninterested in Part II.

SCHLECHTRIEM: But you don't like the reservation?

LOOKOFSKY: Well, I think that many of us would say that the reservation was ill-advised, and I think we would expect that it will be withdrawn. But at the present, we are living with it and having to apply the rules in Part II, and, in fact, we just did so very recently in our court of appeals.

HONNOLD: But you don't have to apply them, do you?

LOOKOFSKY: Well, when the rules in Article 1(1)(b) point to the law of a state that has ratified the whole Convention, even our courts feel they're bound to apply Part II.

FLECHTNER: There was a recent case that held that?

LOOKOFSKY: Yes, it applied the rules in Part II to determine whether there was jurisdiction under the Brussels Convention.

HONNOLD: That's not right. There is no rejection about the Brussels' Convention.

LOOKOFSKY: I understand that. But the court is applying the substantive rules of CISG Part II to reach the result, and if the court had accepted jurisdiction, they would have then proceeded to decide the case using Part II as well.

SCHLECHTRIEM: What are the differences between Scandinavian law on formation of contracts and the Sales Convention -- are there fundamental differences between the two?[page 210]

LOOKOFSKY: I think that the main difference people were concerned with was the idea that offers are not generally binding under the CISG. I think that was the main problem the governments had. At that point, they didn't like the Article 16 default rule. Some of us have argued that the real difference between the CISG and Scandinavian law, when you take account of the exceptions found in Article 16(2), is negligible. But as I said, I think the feeling among commentators at this point seems to be that this was an ill-advised reservation.

FLECHTNER: I don't mean to engage in advertising here, but Professor Lookofsky has in fact written a note in Danish on the case that applied Part II of the CISG despite the Article 92 reservation, and an English version of it is going to appear in our Journal of Law & Commerce. So you can all take a look at that.[5]

YOSHINO: I wonder if, in the time remaining before lunch, we could discuss the issue of the buyer's avoidance of the contract in Case 8F?

SCHLECHTRIEM: Professor Yoshino, I know we have different opinions on the possibility of setting an additional period of time for repair in order to come to an avoidance of the contract under Article 49(1)(b). I think it would be interesting to hear from Professor Honnold and our other colleagues who were present at the diplomatic conference in Vienna and were members of the working group that prepared the Convention. I'm still convinced that you cannot reach avoidance of the contract in the case of non-conforming goods where the non-conformity itself does not constitute a fundamental breach, by blowing up minor non-conformities through the process of setting an additional period of time to have them repaired. Because then you could avoid all contracts. This afternoon I will expand a little bit on this question. I think in international dealings avoidance of contract should be quite restricted. It's an entirely different matter in domestic dealings where it's no problem to send the goods back or store them. But in international dealings, avoidance of contract should be the exception and, therefore, it should be interpreted rather restrictively. Thus, my opinion is a little different than yours, but we have to discuss it a bit further.

YOSHINO: Professor Sono, what do you think?

SONO: I agree with Professor Schlechtriem's conclusion. If Article 49(1)(b) is construed liberally, then we will lose the real gain we obtained by defining what a fundamental breach is. Fundamental breach is [page 211] defined in a restrictive way. But if we give a liberal interpretation to Article 49(1)(b) to allow avoidance even for a small repair that the seller does not perform, then we lose our intent. For this reason, I agree with Professor Schlechtriem.

REITZ: I take it that the key question is, what does "non-delivery" mean in Article 49(1)(b)? Is it non-delivery of conforming goods, or non-delivery of anything, or something in between?

HONNOLD: It seems to refer to non-delivery of the whole package, doesn't it?

YOSHINO: Professor Honnold, could you explain your opinion further?

HONNOLD: Well, I'm not quite sure that I've heard everything people said, but I was just commenting that I would think that Article 49(1)(b) would only apply with respect to pure non-delivery. Otherwise, you need a fundamental breach to avoid the contract.

FLECHTNER: So if there was to be an avoidance of contract in Case 8F, you would allow it only if it can be shown there was a fundamental breach, not just a failure to repair within the time period specified, is that correct?

HONNOLD: I should have thought so.

SCHLECHTRIEM: That's convincing, I think, from the point of view of the intention of drafters. But now we should consider whether this might prove to be a shortcoming of the Convention. I'm arguing against myself for two reasons. One reason is that if you cannot set an additional period of time for repair and then avoid if the other party does not repair, then the courts are tempted to treat minor non-conformities as fundamental breaches because they want to help the aggrieved parties.

HONNOLD: Have they been doing that?

SCHLECHTRIEM: Not to my knowledge. But it could happen. And if it happened enough, that would lead to my second point. Not only is the road to avoidance by setting additional period of time barred in cases of non-conformity, if I read it literally, it is also barred in cases of non-performance of other obligations.

HONNOLD: You are speaking about Article 49(1)(b) here, correct.

SCHLECHTRIEM: Yes. Suppose you have a contract under Article 3 which includes very important services besides the delivery of goods, but still the goods constitute the preponderant part of the whole package so that the Convention applies. But now the seller defaults on the service part of the contract. The default on the service part itself is not yet fundamental, or it's unclear whether it's fundamental. Can you use Article [page 212] 49(1)(b) by setting an additional period of time for performance of the service part in order to come to avoidance of the contract? If you read Article 49(1)(b) literally, you must say no. And the effect is that the courts will say, well, then, we will treat this default in the service part as a fundamental breach, in order to allow avoidance.

HONNOLD: That's quite all right isn't it? There is more than one ground for a fundamental breach.

SCHLECHTRIEM: Let me give you another example where I have doubts. These are the French cases, where you didn't have service obligations, but for instance, an obligation not to re-import certain textiles that were sold to a South American country. Under the contract, the buyer was not allowed to re-import them to Europe. He violated this additional obligation, and the French court said that was a fundamental breach in order to permit avoidance of contract. Is that really a fundamental breach? It's an ancillary obligation.

HONNOLD: It seems to me you have two situations. One is non-delivery. Then you have the definition in Article 25: "A breach of contract committed by one of the parties is fundamental if it results in such detriment to the other party as substantially to deprive him of what he is entitled to expect under the contract. . . ." Now, I sense that you are worried about breaches that are less important.

SCHLECHTRIEM: Yes.

HONNOLD: Less important than what is defined in Article 25.

SCHLECHTRIEM: Yes. The courts would say, well, we regard that as fundamental. In the case that I used as an example, the seller also had an exclusive dealership agreement with a Spanish distributor, and when his blue jeans were re-imported to Europe by the South American buyer they appeared on the Spanish market. So the seller got in trouble legally. Was that really a fundamental breach? What I wanted to show is that there is a temptation for the courts to expand Article 25 in order to reach avoidance.

HONNOLD: I was shocked by those decisions, I'm afraid, because the language of Article 25 is, "substantially to deprive him of what he is entitled to expect under the contract."

SONO: Is that a jury matter, or a question of law?

FLECHTNER: Jury.

HONNOLD: We might have arbitrators.

SONO: Was the breach fundamental?

LOOKOFSKY: In the actual case, yes. [Page 213]

YOSHINO: I would like to call your attention to the fact that, in Case 8F, the breach is not too serious. Only the gear is not in order. The engine is still working. In this case, on August 10 when the defect is discovered the breach of contract is not fundamental. The system is working, and the problem can be repaired. But after the buyer asked the seller to repair the machine, giving an additional period of one month, the seller failed to repair the machine. In this case, on October 1 does the breach of contract become fundamental or not? If the breach is fundamental at the time of discovery, on August 10, fine. But if the breach is not fundamental on August 10, then one opinion is that it cannot become fundamental even if the seller does not fulfil his obligation to repair the machine by October 1.

But this conclusion is not a happy one for the buyer. The buyer has a right to require the seller to repair the machine. If one has a right to require another person to do something and the other party does not fulfil his obligation, what can the person who has the right do? If we say, nothing, then the right has no meaning. If the buyer has a right to require the seller to repair the machine, then the buyer should have some recourse when the seller does not fulfil his obligation to repair the machine.

SONO: Can he ask someone else to repair?

YOSHINO: That is another important point to discuss, but I don't want to pursue that question right now because it is more complicated. I would like to explain what I think about the situation in Case 8F A second approach to the question whether the buyer can avoid in that situation is that, although the breach is not fundamental on August 10, by October 1 it becomes fundamental because the seller did not fulfil his obligation to repair the machine. Under this approach the contract can be evaluated throughout the whole time period, and whether there is a fundamental breach can be evaluated at every point in time in its context. That is the second approach. But the counter-argument to this is that whether a breach is fundamental should be decided at the time the defect is discovered -- in this case, August 10 -- and its character does not change the over time.

As Professor Honnold mentioned, for me also it is very hard to conclude that this breach is fundamental at the time point of August 10, but I would like to find some way to protect the buyer after the seller fails to fulfil his obligation to repair the machine. The only way remaining to do this is to apply Article 49(1)(b) analogically -- an anological application. Article 49(1)(b) by its terms applies only to cases of non-delivery. Thus, [page 214] the provision cannot be applied directly. Therefore, we must apply it analogically because there are similarities between the situation in Case 8F and the situations covered by Article 49(1)(b). In Case 8F, the seller failed to perform his obligations relating to the goods according to the contract. The seller has not delivered goods that conform to the contract. Therefore, in the end, there is non-performance. So the structure is the same as in situations covered by Article 49(1)(b). Therefore, if we want to reach the result that the contract can be canceled, that the buyer can avoid the contract, we should apply Article 49(1)(b) analogically.

SCHLECHTRIEM: First of all, I would say that in order to apply a rule of law by analogy, you have to have a gap that must be filled. The question is whether there is a gap with regard to a non-conformity that the seller refuses to remedy. And I think it was the decision of the drafters that if the goods are non-conforming and it is a fundamental breach, then you can avoid; otherwise you have to stick with the goods and ask for damages. I don't see a gap that justifies an application of Article 49(1)(b) by analogy.

YOSHINO: You don't find any gap?

SCHLECHTRIEM: No. I would say the buyer has to stick with the conforming goods. Professor Sono, your question about the buyer having someone else repair is quite interesting. In the normal case, the buyer can probably have the goods repaired and ask for damages for the cost of the repair. If only the seller would be capable of repairing the non-conformity, and if he is unwilling, and if the goods cannot be used any other way -- they can't be sold at a discount price and they are entirely useless without the repair, which only the seller can do -- then I would think there was a fundamental breach from the beginning. The goods were useless from the beginning. So then we didn't really need this additional period of time.

SONO: Although it may be better if the buyer gives the seller time to repair, right? To make it fair?

SCHLECHTRIEM: Yes.

REITZ: Could I ask you whether you see any role for Article 46(1) with respect to the refusal to repair?

SCHLECHTRIEM: Article 46(1) applies to a case of non-delivery, of course.

REITZ: It might be non-delivery, but do you see a possibility of applying the language "require performance by the seller" to extend to post-delivery repair? [page 215]

FLECHTNER: Article 46(3) talks about requiring repair as a remedy. Are you talking about a repair remedy that is separate from article 46(3)?

REITZ: Article 46(3) expands on Article 46(1). If the seller is required to repair, I take it, it would be by judicial order. Or not?

SCHLECHTRIEM: What do you mean by "judicial order"?

REITZ: An order we would call specific performance.

SCHLECHTRIEM: Yes, that could be the case.

REITZ: And if the order is violated?

SCHLECHTRIEM: If it's violated? Well, you can try to execute it under the rules of procedure regulating the execution of judgments. Under German law, it would, in the end, amount to damages because the court would allow the buyer to repair the goods and charge the seller with the cost. So that would be the outcome.

REITZ: The failure to comply with the court order would not give rise to an avoidance option on the part of the buyer?

SCHLECHTRIEM: No.

FLECHTNER: I hate to stand up and say we need to break for lunch at this point, but we do have reservations for noon. So, maybe this is good point at which, not to end the discussion, but to continue it over lunch. Then we will revenue this afternoon for a demonstration of Professor Yoshino's artificial intelligence program and its analysis of Case 8F, followed by discussion of other hypothetical relating to the CISG.

AFTERNOON SESSION

[After a demonstration of Professor Yoshino's legal expert computer system applying principles of artificial intelligence to analyze Hypothetical Case 8F -- the CISG problem that had been discussed in the morning session of the workshop -- the participants turned to discussion of a hypothetical CISG case prepared by Professor Schlechtriem.]

SCHLECHTRIEM: Professor Yoshino, thank you. I am very must impressed by the program you just presented to us, and, in particular, I think it will be a very effective teaching took for students. I'm afraid what I can offer must appear rather pedestrian to you in comparison to this world of the future.

If you will allow me, despite the shortness of time, I would like to make some preliminary remarks. I think one can distinguish three phases -- at least in Germany -- in the works of scholars dealing with the Convention. The first phase came immediately after the 1980 Vienna [page 216] Conference, and it involved the task of explaining the Convention to German jurists -- comparing it with the German Civil Code, explaining what the differences were and how the Convention worked, what its inner structure was, and so on. That was the first phase, involving education of our fellow lawyers so that they could learn about the Convention.

The second phase was a phase of critical analysis where we tried to find where the deficiencies were, what concepts needed clarification. I have a few examples. One we have already discussed here -- what is the relation between Article 14 and Article 55? This was one of the problems that was discussed from the very beginning. Another problem is the correct understanding of Article 1(1)(b), in particular in States that have made an Article 95 reservation. Some scholars characterize this norm as a conflict of law norm, while I think the majority is correct in saying it presupposes the application of conflict of law rules. Only if the conflict of law rules lead to the application of the law of a Contracting State will Article 1(1)(b) come into play. Another well-known and frequently-discussed problem is the interpretation of the last part of Article 25, specifically the phrase "unless the party in breach did not foresee [page 217] and a reasonable person of the same kind in the same circumstances would not have foreseen such a result." In other words, the requirement that the fundamentally of the consequences of the breach be foreseeable -- is that a kind of excuse rule, or what exactly is meant by that? And you can find different opinions on that. This is an inherent problem in Article 25 I would think. Another problem, one that has not been very well treated so far, came up in this morning's discussion -- whether notice of avoidance of the contract or notice of price reduction under Article 50 can be withdrawn, or whether, once notice of avoidance is effectively made, for example, that is the end of it and the contract is avoided. Very often a party might have second thoughts. The party might declare a price reduction and then discover that there was a fundamental breach, that the defects were so substantial that it would be much better to avoid the contract. Or it might happen the other way around -- the party might avoid the contract and then think better of it and want to withdraw the communications of avoidance so he can keep the goods and ask for damages. This is entirely possible. That is, I think, an internal problem because the Convention is not clear on the effect of notice in these instances. Analysis of these and similar problems was the second phase, and this of course is still going on.

We are now entering a third phase. From the moment that any codification, any convention, is enacted, it is outdated because developments continue to occur. So, I think the next phase of our task as scholars, and one of the tasks to accomplished by meetings of scholars like this one, is gently to guide the necessary development of the CISG to meet changing conditions. That involves finding the boundaries within which such development is possible, and identifying the limits of the Convention beyond which we have to resort to domestic law. Let me give you a few examples. One obvious instance of a provision that was outdated from the moment the CISG came into force is Article 13. It mentions the telex nobody uses a telex any more -- but it doesn't mention the fax or other recently developed means of communication. That, I think, is an example of how quickly a convention or a civil code can become outdated. Another example involves the question, what exactly are goods? When the Convention was enacted nobody thought about whether software constitutes goods. I tend to agree with those who would regard software as goods, but I think it requires the development or cultivation of the Convention to handle the issue properly. Software that is embodied on floppy disks can easily be regarded as goods, but what about software that is transferred electronically from one computer to the other without [page 218] using a diskette or other material medium? Most of the provisions of the Convention are designed for tangible goods, so it can be difficult to apply them to this electronic transfer of information -- if, indeed, they should be applied at all. This is an area where development of the CISG is needed, and where we need to sit down together and think about what interpretation of the relevant rules is adequate to meet the problem of electronic transfer of software.

Another problem -- the Convention has a simple model of the direct exchange of goods for money. It more or less disregards networks involving suppliers, assemblers and buyers. But very often there are complex relations among the members of such a network. There might be direct contacts between the end buyer and the supplier of component parts. For these situations, I think the rules of the Convention must be interpreted and adjusted to make them workable. The same is true for long term contracts. Not even the well-known distributorship arrangement is clearly covered by the Convention. We have a number of cases in Germany dealing with distributorships, where for instance an Italian distributor was obliged to buy and resell a specified number of machines for a German manufacturer. How do you deal with this contract? Do you put aside the general distributorship agreement and treat the individual deliveries as single sales contracts? Or, if the price and other terms were specified in the general agreement, can you apply the Convention to the general agreement? This is another area where we have to think about how to develop the CISG and make it work in light of evolving business conditions and practices. Another question raised in a German case is, how does one deal with administration regulations that are different in the seller's and the buyer's country? Take, for example, pharmaceutical products produced by genetic engineering. They might be freely allowed in the seller's country, but there might be administrative restrictions on such products in the buyer's country. Should these restrictions be considered in determining whether goods are conforming or not conforming. That was the issue raised in a German case involving mussels, and, again, I think the question needs some consideration, and some additional rules need to be developed in order to make the Convention workable.

I have a long list of these areas where we have to develop the CISG. The last area I will mention involves the formation chapter of the Convention. The formation rules of the CISG are oriented toward the model of offer and acceptance, which I think in many situations is outdated. Many contracts are formed without a discernable offer or acceptance, where negotiations go point by point, step by step, and the parties [page 219] reach agreement step by step. In such situations it can be very difficult to discern the exact point at which an offer was made and accepted. The hypothetical case I will be introducing includes an illustration of such a process of agreement, leading up to a point where the parties are in full agreement, but some final ceremony is still to be held (and some champagne drunk). Was there an offer and acceptance? We can discuss that later. I think Part II of the CISG is an area where the Convention has to be developed to cover contract formation in situations where you cannot make out the offer and the acceptance.

There is another shortcoming in the formation part of the Convention. The rules on offer and acceptance determine not only the formation of the contract but also the content of the contract. This is very unfortunate, I think. You can see that in the battle-of-the-forms provision, Article 19. The battle-of-the-forms problem would be much easier to solve if determining the content of the contract were not so closely associated with the offer and acceptance scheme. If you could separate the formation of the contract from the question of the content of the contract then you could disregard Article 19 for content questions and a lot of problems could be solved, I think, more easily. These are my preliminary remarks to excuse and explain why I submitted a hypothetical based on a case I had to give an expert opinion on 20 years ago, before the Convention was in force.

HONNOLD: May I ask a question for clarification? It was very interesting to hear about places where the Convention should be developed and modified. Are you thinking of extension of it through interpretation, or by amendment?

SCHLECHTRIEM: By interpretation. And that is exactly the point I wanted to make in the last part of my remarks. We always have to be aware of the boundaries and limits of the Convention. Inside these boundaries and limits we can extend the Convention to cover issues not clearly provided for, not foreseen by the drafters.

HONNOLD: I thought and hoped that's what you meant. [Laughter.]

FLECHTNER: You mean you don't want to go through the drafting and adopting process again, John?

SCHLECHTRIEM: In the process of developing and elaborating the Convention, its boundaries cannot be overstepped. I think my hypothetical case can illustrate one of those boundaries. I would like to come back to that point during our discussion of my hypothetical. [page 220]

Hypothetical Case by Professor Schlechtriem

In May, 1998, the English shipping company Seastar Cruises ordered a cruise ship of 60,000 tons from the Netherlands shipyard Rotterdam Shipbuilding (buyer). Rotterdam invited a number of European manufacturers of diesel engines to negotiate for supplying the engines for the cruise ship. The invitation was accompanied by descriptions of and specifications for the engines, approximate delivery dates, and a general price framework. A German engine manufacturer, LMU (seller), responded to the invitation by communicating its interest in a contract, and the buyer and seller agreed to negotiate the details of an order for the engines. A letter of intent signed by the CEO's of both enterprises provided that each side would supply two teams to conduct the negotiations: one team, comprised of engineers and an authorized board member, was charged with negotiating the technical aspects of the engines' power, weight, consumption, inspection periods, etc. . . .; the second team, made up of financial and business experts and an authorized board member, was to find agreement on non-technical matters such as the exact time for delivery, the terms of payment, letter of credit requirements, and first payment guarantees for conforming deliveries.

The teams of engineers representing buyer and seller started to negotiate on June 25, 1998. As they reached agreement on specific points, the agreements were recorded in documents until they had reached agreement on all technical issues. On July 15, these documents were merged into a "memorandum of understanding" and signed by all members of the respective teams. The financial and business teams began negotiating on June 27, 1998 and followed the same procedure -- they recorded agreements on specific points and then, on July 10, incorporated these agreements into a comprehensive memorandum of understanding signed by all team members from both sides. Under the original letter of intent signed by the CEO's of buyer and seller, the two memoranda of understanding were to be merged into a single document that would be signed by both CEO's in a formal ceremony. The final signing ceremony was planned for August 15, 1998, to be followed by a celebration by all members of the negotiating teams.

On August 10, 1998, however, buyer was informed that Seastar Cruises, the company for whom the cruise ship was to be built, was in financial straits, and that a bankruptcy proceeding was imminent. Buyer therefore asked seller to delay the planned signing ceremony for several days. On August 15, 1998, buyer informed seller that the deal for the [page 221] ship engines was off because Seastar Cruises was bankrupt and had annulled the shipbuilding contract.

Seller asks for an expert opinion as to whether he can claim damages from buyer for his lost profits from the deal, or at least for the expenses seller incurred to the point of cancellation.

SCHLECHTRIEM: The case is very simple. The parties contracted for an engine to be used in a ship that the buyer intended to build for a shipping company. Buyer sent out invitations for those interested to submit offers -- but the first part of the problem doesn't need intensive discussion; it's very clear. The first part is an application of Article 14. In the second part, offers were submitted and the parties started to negotiate the details of an order. And now we come to the first interesting point: a letter of intent was signed by both CEO's defining how to proceed in these step by step, point by point negotiations. What is the character of this letter?

REITZ: What is the legal effect?

SCHLECHTRIEM: Yes, what is the effect of the letter of intent in such situation. Is this a contract to contract? How would you characterize it? And would you treat it as governed by the Convention? I would bring it under the Convention, and I would say it's a contract to contract in good faith.

HONNOLD: Are you going to leave that or come back to it?

SCHLECHTRIEM: I will give an overview of the entire problem, and then return to particular issues. The parties came to an agreement on all important points by using two negotiating teams comprised of experts -- one team for the business side of the deal and one for the technical side. These two teams each produced a memorandum of understanding signed by all team members. That raises the issue whether there is a contract at this point, and what is the legal significance of the final ceremony, provided for in the very first document between the parties, in which the CEO's of the parties would sign a written contract and then have a nice party. Is the contract not concluded until the final signing ceremony, or is it already formed when the negotiating teams signed the memoranda of understanding? The answer, I think, depends on the intention of the parties. They could have meant -- and this is quite likely on the facts of my case -- that a binding contract would be concluded when the negotiating teams signed their memoranda of understanding, because at that point you have a meeting of the minds and agreement on all points. The rest they might have intended merely as a formality. On the other hand, of course, the parties may have agreed that a formal instrument [page 222] must be signed in order to form the contract. In that case, the signing ceremony to take place on August 15 would conclude the contract, and everything before would be mere preparation.

HONNOLD: Are you going to come back to that point too?

SCHLECHTRIEM: Yes, I will later on. Suppose you decide that, by the understanding of the parties or under their contract to contract, a binding agreement could be concluded only by the final signing ceremony on August 15. Then what happens if one party walks out before the ceremony occurs and says, "I won't go through with the transaction"? I think that takes us to the question of the limits to which we can develop the Convention. Now we have a question of pre-contractual liability for breaking off negotiations at a certain point. Can there be liability in damages to the other party for the expenses so far incurred, or for even more? This, I think, is outside the boundaries of the CISG. We cannot develop the European culpa in contrahendo idea, the pre-contractual liability doctrine, as a uniform doctrine inside the boundaries of the Convention. But we will probably return to this point later. I can explain then why I'm negative about the prospects of including this idea of pre-contractual liability -- in cases involving the breaking off of negotiations that have reached a certain point, for instance -- as part of the development of uniform rules inside the boundaries or limits of the Convention. That was my overview. Now I'm willing to defend and discuss my ideas.

FLECHTNER: Do you want to go back to the first issue -- the contract to contract, the letter of intent?

SCHLECHTRIEM: The letter of intent? Fine.

HONNOLD: May I ask a question?

SCHLECHTRIEM: Yes, please.

HONNOLD: I would suppose in general you might be right about the significance of the meeting of the parties, but do you suppose the ultimate analysis would depend on the practices of the parties and the practices of the trade involved? [The impact of CISG Article 9 on practices and usages will be considered at the end of the present hypothetical case.]

SCHLECHTRIEM: Certainly that has to be taken into consideration. Let me add one point that I had been saving to rebut criticism, but so far that hasn't been necessary: If I say that a contract can be concluded without a clearly identifiable offer and acceptance, what would be the basis for developing the Convention to permit formation without offer and acceptance? I think the basis would be Article 6. Under Article 6, party autonomy allows the parties to deviate from all provisions and all rules [page 223] of the Convention, and, therefore, they can also deviate from the prescribed method of forming a contract by offer and acceptance. They can, by entering into a contract to contract, agree on a different path to formation of the contract. That would be the basis in the Convention to reach the desired result -- to have contract formation without offer and acceptance, but by this process of negotiating and agreeing on every point, step by step.

REITZ: Is the Article 6 argument that the formation provisions of the Convention are being deviated from, but not the rest of the Convention. The rest of the Convention still applies?

SCHLECHTRIEM: Yes. It's up to the parties to decide from what provisions of the Convention they want to deviate. In my case, they only wanted to deviate from the offer and acceptance rules of Part II of the CISG. Let me try to forge a link to the discussion of this morning, when we discussed the question of contract formation by shipping goods, and whether shipment was to be regarded as an acceptance despite the fact that no notice of the shipment had been communicated to the offerree. Even if you are reluctant to treat this as governed by Article 18(3), there could still be an understanding of the parties that in a situation involving a counter-offer it would not be necessary that notice of acceptance of the counter-offer be given -- thereby deviating from Article 18(1). So under the Convention, parties are free to make their own rules as to formation of contracts.

FLECHTNER: May I play the lawyer, as you did this morning?

SCHLECHTRIEM: Yes, please.

FLECHTNER: Isn't there a circularity problem here in the sense that, for Article 6 to apply, the parties have to agree to derogate from the Convention's formation rules, yet the issue here is whether they have agreed at all? How can you find an agreement to derogate without having first found an agreement?

SCHLECHTRIEM: This is familiar logical problem. It is a common conflict of law issue where you have a choice of law clause and you have to decide whether the choice of law clause is valid. Under which law do you decide whether the law clause is valid? The common sense answer -- although it violates logical thinking -- is that the law designated in the choice of law clause should apply to answer the question whether the choice of law agreement was valid. And I would give the same answer here.

FLECHTNER: So you like the common sense answer despite the mild violence it does to logic? [page 224]

SCHLECHTRIEM: Yes.

LOOKOFSKY: When you don't have a classical offer and acceptance, is the question of whether a contract has been concluded under Article 23 in fact a matter which is governed by but not settled in the Convention? Isn't that another way of presenting your argument?

SCHLECHTRIEM: It's a problem that was not addressed. Whether it was overlooked or not I can't say because I do not know the thoughts of the delegates.

LOOKOFSKY: To carry this a step further, Article 23 says a contract is concluded at the moment when an acceptance of an offer becomes affective. You're saying, that's one way, but not the only way, of doing it. And under Article 7(2) we could say that the question of whether a contract for the sale of goods is concluded by other methods is a matter governed, but not settled by the Convention. We can look to general principles of the CISG to determine ways other than through offer and acceptance in which contracts can be concluded.

SCHLECHTRIEM: Right.

YOSHINO: Are you going to give us a general theory of contract formation, which is independent of the offer and acceptance regime?

SCHLECHTRIEM: I'm not going to give a general theory, but I just want to point out that different methods of forming contracts are allowed under Article 6, if the parties are in agreement.

YOSHINO: When you cite Article 6, your argument about formation of contract is grounded in the CISG. But I think in general, offer and acceptance is not required to form contracts. Today we have discussed several contract-concluding processes that do not directly correspond to the offer and acceptance process. Therefore, we could devise a theory of contract formation under which one can conclude a contract, for example, by cooperative working as in your case. It is clear that everyone can make his own rules as a result of party autonomy. Thus, we could have a general theory of formation of contract that allows a contract to be formed without an offer or acceptance. What is your opinion of that?

SCHLECHTRIEM: You can develop such a general theory on formation of contracts, but before I would dare to do so I would first want to collect all the situations where a contract appeared to be formed without offer and acceptance. I've given an example of one such situation here, where the parties agreed to negotiate point by point, step by step. Another situation where offer and acceptance does not seem to work is where the contract is fully negotiated but not yet formed, and then the representatives of the parties sit around a table and a document is passed [page 225] around and everyone signs. It would be silly to say the first signature is the offer and the next signature is the acceptance. You have to abandon the model of offer and acceptance.

I am far from claiming to know all the situations which could be covered by a general theory of contract formation outside the offer-and-acceptance model, but a third situation involves crossing offers. Suppose the parties have already had contacts, and they know what they want, and each sends a letter at the same time: one letter says, "I'm willing to deliver this," and the other indicates a willingness to buy the same thing. These crossing offers should constitute a contract. Article 23, however, creates a problem for formation of contract by any means other than offer and acceptance. Under that provision, you have to determine when exactly the contract came about.

It might also be important for particular conflict of law rules to determine where the contract was concluded. We generally say it is concluded where the last creative communication became effective. If acceptance is effective upon receipt, then the contract was formed at the place where the acceptance was received. But then you have a famous English case adopting the dispatch theory, under which the place of formation is the place where the acceptance was dispatched. As to that, I have another idea not yet fully developed. I'm reluctant to say this, but I think Article 23 should have been omitted. You don't find it in the Uniform Law on Formation [ULF], (the predecessor UNIDROIT treaty on contract formation), and for a good reason.[6] The reason is that the answer to the question where and when a contract was formed really depends on the reason we need to know the time and place of contracting. Suppose, for instance, a provision of tax law requires a determination of the time that a certain contract was concluded. The meaning of the time of contract formation in the context of a tax regulation could be quite different from the meaning of the time of contract formation in connection with another regulation. So rather than looking to Article 23 to determine the time and place of contract formation, I would look to interpreting the regulation that necessitates determining the time or place of formation. I think determining the place of contract formation for conflict of law purposes, for example, can be entirely different than determining the place of formation for purposes of other regulations. [page 226]

LOOKOFSKY: I didn't mean to imply that we should use the principle in Article 23 to determine whether a contract had been formed in an example like yours. I think the principle we should use has already been mentioned, and that's the question of whether the parties intended to reach an agreement or not. We have that principle in Article 14. So maybe we could begin to construct a general principle from that. To use Article 7(2) we are going to have to find some general principles. You're indicating what some of them might be, and you're cautious. And I think I agree. But there is an expression of a principle in Article 14 that we might be able to develop into a general principle -- that the intention of not just the offeror but of both parties is decisive.

SCHLECHTRIEM: Yes. The intention to be bound.

HONNOLD: My book played elaborate disrespect to the concept that a contract could be made only by a formal offer and acceptance. Memory being what it is at my age, I'm going to have to look back and see whether I took account of Article 18, which suddenly leaped at me during our discussion. Article 18(1) says, "[a] statement made by or other conduct of the offerree" -- conduct "indicating assent to an offer is an acceptance." I think that language is pregnant with meaning.

SCHLECHTRIEM: And the same applies to the offer, too.

HONNOLD: You may never know who is the offeror and who is the offerree when they're going back and forth, saying this or that. You can't identify number one or number two.

YOSHINO: I'd like to ask Professor Kagayama to explain his views concerning formation of contract and party autonomy, which I think are very similar to the views of Professor Schlechtriem.

KAGAYAMA: Freedom of contract means that a party can choose how to proceed. In this case, the parties wanted to form the contract with the signing ceremony.

SCHLECHTRIEM: That depends on what they meant by that ceremony -- whether it should constitute the point of contract formation, or just a ceremony celebrating that they had already reached agreement through the efforts of their two negotiating teams.

KAGAYAMA: The two parties agreed that the contract was not concluded until the signing ceremony occurred.

SCHLECHTRIEM: I do not think so. My own solution to the case would be that this last ceremony was not a special kind of formal requirement necessary for the final formation of an agreement, but it was just what is not uncommon in large transactions -- when everything is settled and everyone is in agreement there's a kind of celebration where [page 227] both parties come together. But the celebration does not create the contract, and it does not have to occur for the contract to be concluded.

KAGAYAMA: This question is governed by Article 6?

SCHLECHTRIEM: Article 6 is the basis for the deviation from the normal formation procedure under the Convention involving offer and acceptance. In my problem, the parties agreed to negotiate point by point, and in the end, when there is an agreement on all points, the negotiating teams sign a memorandum of understanding without regard to whether there was an offer and acceptance.

KAGAYAMA: The UNIDROIT Principles of International Commercial Contracts may be relevant here.

SCHLECHTRIEM: The Principles have a provision saying that a contract can be brought about by means other than offer and acceptance.

KAGAYAMA: And you agree?

SCHLECHTRIEM: Yes, of course.

LOOKOFSKY: I'm just going to get the last part of the problem into the discussion as well. Let's assume that the contract has been formed.

REITZ: Are you at the letter of intent stage?

LOOKOFSKY: No, I think we're at the memorandum of understanding stage. It was there, I believe, Professor Schlechtriem, that you said there was a CISG contract.

SCHLECHTRIEM: Yes.

LOOKOFSKY: I think we should come back later to the question whether the letter of intent was also a CISG contract. I'm not sure about that.

SCHLECHTRIEM: I also think we could come back to that.

LOOKOFSKY: Yes, but just the point I wanted to get to now was this: if there was a contract because the parties intended there to be the contract, then I suppose you will award the seller full damages for breach of contract because there is no excuse here valid under the CISG for non-performance.

SCHLECHTRIEM: Yes.

SONO: Professor Schlechtriem, now that I understand your view that the signing ceremony was a mere formality and that a contract was formed before the ceremony occurred, may I ask a question? In your hypothetical there were two teams, and each team negotiated. First one term agreed on a memorandum of understanding, and then the other team agreed on another memorandum. Then on the fifteenth of July, these two memoranda of understanding were to be merged into a single [page 228] document, and then the formal signing ceremony would occur. But the two memoranda of understanding from the negotiating teams each related to different aspects of the transaction which were distinct from one another. How can those two memoranda of understanding, relating to two different aspects, be regarded as a contract between the parties?

SCHLECHTRIEM: The two parties intended it to be so.

LOOKOFSKY: But we all know that when the lawyers from each side get together they could easily destroy this deal when it was time to merge the memoranda.

SCHLECHTRIEM: Yes, of course. The procedure used by these parties is not a foolproof one. If I had been called in before the parties signed the letter of intent describing the negotiating procedure, I would have advised them to make it clear that they intended to be bound upon the execution of the second memorandum of understanding, and also to make it clear that the signing ceremony was just a formal act to celebrate the completion of the deal. But in the real world, when a letter of intent like the one in my hypothetical is signed, the people involved are so happy to be near a deal that, even if you were sitting next to them whispering into their ears to be sure to include such a clause, they would ignore your advice in order to avoid having to open new negotiations. That is in fact what I experienced in the actual case -- there were lawyers saying, "Be careful, make it clear that the last memorandum of understanding binds the parties to a contract."

HONNOLD: Could one of the parties walk away from the transaction between the time the two memoranda of understanding were signed? Could one party say, we won't go ahead with the deal?

SCHLECHTRIEM: They certainly could, and by doing so the party could prevent the formation of the contract. Whether that would create pre-contractual liability is an issue outside the ambit of the Convention, I think. As for that question of pre-contractual liability, although I'm afraid there might other opinions, I think you have to revert to domestic law. I promised to explain why I think we cannot develop that under the Convention.

HONNOLD: When are you going to do that? I need that information.

SCHLECHTRIEM: Well, I will try to get the exact page citation to the third edition of my commentary. [Laughter.] The reason why I'm reluctant to develop uniform rules for this issue on the basis of Article 7 of the Convention is that the various legal systems of the world differ considerably in their approach to the question of pre-contractual liability.[page 229] Systems like the French and Italian, which have a general tort clause providing that you have to pay damages for any losses caused by your fault. They can cover these situations by saying it's a tort to break off negotiations at a certain point. Other systems, like the German system, don't have a general clause creating tort liability for purely economic loss, which is the issue here. They have to develop quasi-contractual tools for these situations. The so-called culpa in contrahendo doctrine is just that kind of quasi-contractual tool designed to overcome the shortcomings of our tort law, which doesn't cover, as I understand it, purely economic loss.

HONNOLD: I am right with you in thinking that you cannot get culpa in contrahendo out of the Convention, even though -- as you may know I'm very strong for developing the principles of the Convention. But I don't think you have enough principles in the Convention dealing with culpa in contrahendo to provide a scaffolding for the development of that doctrine. I'm anxious to see how you write your views up.

SCHLECHTRIEM: I shall write them up as I have tried to explain them here.

HONNOLD: That's fine.

SCHLECHTRIEM: In order to develop uniform rules on a question, it first of all must be a matter governed by the Convention. I think everything at happens before the conclusion of the contract -- although you could try to read the Convention more broadly -- isn't really governed by the Convention.

HONNOLD: I think you're saying something like what I was trying to suggest. You need some kind of structure -- some sort of a baseline or springboard.

SCHLECHTRIEM: Yes. Even if you're very liberal and say the Convention extends to the pre-contractual period, you still need to identify a principle that could be the basis for developing rules. Those steps are very uncertain and dangerous.

HONNOLD: I agree.

LOOKOFSKY: I think one of the appealing aspects of considering this question to be governed by but not settled in the Convention is that you don't need much of the scaffolding you were talking about. It seems to me that the American U.C.C. cases that try to determine whether a contract has been made or not, even though something is missing, rely to a large degree on whether the parties intended to make an agreement at that point, and there's not much more to it. There isn't really a lot more theory, at least in the cases that I'm familiar with. In other words, if we [page 230] try to stay within the Convention and to avoid going to domestic law on this issue, what are we missing? Is there something lacking that we need? I don't see that a lot is missing, if we follow this approach. On the other hand if we talk about whether other issues are within the scope of the Convention, then we may start to disagree. I think, for example, that perhaps I disagree with both of you on the question of product liability. I don't feel that the Convention has all the product liability scaffolding necessary so that it should absorb tort claims. I would rather see competing rules in some situations.

SCHLECHTRIEM: That would be a topic for an additional seminar.

LOOKOFSKY: Definitely another seminar.

SCHLECHTRIEM: And I would enthusiastically participate.

LOOKOFSKY: But right now I'm just comparing the product liability issue to the question of pre-contractual liability you raised. Here I see fewer problems.

KAGAYAMA: In this case neither party committed a culpa [wrongful act], did they?

SCHLECHTRIEM: Well, you could see a culpa in intentionally breaking off negotiations without just grounds.

YOSHINO: If the buyer had gone into bankruptcy, clearly the buyer would be responsible for breaking the negotiations. But here, it is the buyer's customer that has gone into bankruptcy.

SCHLECHTRIEM: That's a good point. You are pointing out, Professor Yoshino, that it is not the fault of the buyer that his customer went bankrupt, and, therefore, his breaking off negotiations might not constitute fault in the sense of culpa in contrahendo, making him liable for the breaking off. That's a very good point, and it shows again what was mentioned about the need for principles to develop rules on pre-contractual liability. Of course, we would need to know more facts. Without more facts, I would think it is the buyer's risk whether his customer will take the goods he is ordering. If he doesn't want to take that risk, he should insert a clause providing that his obligation to purchase is conditional upon his customer's financial ability or willingness to take the ship.

REITZ: Could that be implied?

SCHLECHTRIEM: Well, that depends on the circumstances. I don't mean to sidestep difficult questions, but I think it's really a matter of the circumstances.

REITZ: On the facts, it appears to me that this subordinate contract for engines is clearly made with knowledge of the cruise ship contract. [page 231]

SCHLECHTRIEM: Yes.

REITZ: And the engines were being purchased specifically and exclusively for that cruise ship. There is a linkage there that I think would give rise to a frustration-type defense.

SCHLECHTRIEM: But didn't the buyer assume the risk that he might not be able to use the machines he ordered? If he doesn't want to take that risk, he must put in a clause that allows him to cancel.

SONO: Does it depend on the kind of risk we are talking about? If the engines could only be used for the particular ship of the buyer's customer, and could not be used for any other purpose, perhaps then a condition should be implied.

SCHLECHTRIEM: I would think just the opposite. What would the seller do with the engines if there were no other use for them?

SONO: That's true for the buyer also.

SCHLECHTRIEM: Yes, but that's a risk he's taking in buying such a machine.

LOOKOFSKY: Is this argument any different if we are talking about the culpa in contrahendo situation as opposed to the situation where we found the parties had a binding contract?

SCHLECHTRIEM: It's an issue that arises on both sides of the line. If you say it's not entirely the risk of the buyer, then it might be justified for the buyer to break off the negotiations at the last point before the contract was concluded. And, therefore, there would be no culpa. But at least under German law, if it's your risk, then you don't have a justified reason for breaking off negotiations.

LOOKOFSKY: If we are on the side of the line where a contract has already been formed -- that is, if we say that the memoranda of understanding conclude[d] the contract -- then I would expect you to make the argument that under Article 7(2), the so-called frustration of purpose cases are subsumed or preempt by Article 79, and that if there's no excuse under Article 79, then there's no excuse at all. I agree with that. But I understand you to say that it might be somewhat different if we are prior to the binding contract stage. And the extent of the damages could also be different.

SCHLECHTRIEM: Yes.

REITZ: The Article 79 issue is subject to Article 6. And in particular fact situations there can be an implied derogation from Article 79.

YOSHINO: As regards the culpa in contrahendo issue, Professor Kagayama can introduce you to a Japanese case which relates to this issue.[page 232]

KAGAYAMA: Professor Kagayama first quoted Article 2.15 of the UNIDROIT Principles of International Commercial Contracts, which provides as follows:

"(1) A party is free to negotiate and is not liable for failure to reach an agreement.
"(2) However, a party who negotiates or breaks off negotiations in bad faith is liable for the losses caused to the other party.
"(3) It is bad faith, in particular, for a party to enter into or continue negotiations when intending not to reach an agreement with the other party." [7]

The Japanese Supreme Court has decided a case applying very similar principles -- the Decision of September 18, 1984, Conf. Hanrei Jiho No. 1137, p. 51. In that case, a dentist (buyer and defendant) wanted to open a clinic, and, therefore, entered into negotiations to conclude a contract for the purchase of space in a suitable building. During the negotiations, the buyer specified the space needed for the dental clinic, gave the seller plans for the layout of the space, pointed out that the existing space lacked the electrical capacity required for the clinic, and implicitly authorized the owner to change the design and construct facilities suitable for the clinic. After six months, however, the buyer broke off negotiations because he had decided that the space available in the seller's building was too small.

The Japanese Supreme Court held that the buyer was liable to the seller for losses caused when the seller changed the design of the space and incurred construction costs, because the buyer had not acted in good faith in negotiating the contract.

The holding is similar to the position of the UNIDROIT Principles, and the case is similar to your hypothetical case, Professor Schlechtriem.

SCHLECHTRIEM: They are similar.

YOSHINO: If the buyer rather than the buyer's customer had gone bankrupt in your hypothetical, Professor Schlechtriem, the cases would be almost the same.

SCHLECHTRIEM: Your reference to the UNIDROIT Principles, Professor Kagayama, helps me give an answer to your question, Professor Reitz, concerning whether the bankruptcy of the buyer's customer would give the buyer a defense. The "Hardship" provisions of the UNIDROIT Principles, which were drafted along the lines of the German [page 233] law, I believe, and which deal with hardship interfering with the performance of a contract, have a good description of the risks that a contracting party assumes. Article 6.2.2 of the Principles says that "hardship" occurs "where the occurrence of events fundamentally alters the equilibrium of the contract either because the cost of a party's performance has increased or because the value of the performance a party receives has diminished and" -- now comes an important limitation -- "(b) the events could not reasonably have been taken into account by the disadvantaged party at the time of the conclusion of the contract."[8] I think the possibility that the customer of the buyer would become bankrupt is something that could reasonably have been foreseen by the buyer himself, and he should have inserted a clause into the contract, or into the first instrument the parties executed to allow him to get out of the negotiations at the last point.

FLECHTNER: Suppose it had been the seller of the engines who had learnt about the shipbuilding opportunity with Seastar and had realized it was a chance to promote use of its engines, and it was the seller who contacted Seastar and then structured the transaction so that the seller sold the engines to the buyer and the buyer sold the ships to Seastar. Would you that change your opinion?

SCHLECHTRIEM: Yes, because then I would regard the possibility of Seastar's bankruptcy as part of the seller's risk. He wanted to have this end-customer, and he had negotiations with the end-customer. In that situation, I would think that he shouldered at least part of the risk that the end-customer might go bankrupt.

FLECHTNER: So it's the party who dealt with the party that went bankrupt, had the relationship with the party that went bankrupt, who bears the risk of the bankruptcy?

SCHLECHTRIEM: That's right. In the variation you propose, the involvement of the buyer Rotterdam Shipbuilding would be a sort of accident. The Seastar Company could have bought the engines directly from the seller, and then it would be clear that Seastar's bankruptcy would be a risk of the seller.

REITZ: We have, at least in some parts of U.S. commercial law, a notion that when a circumstance like this arises, it is not an excuse in the sense that it would allow the disadvantaged party to walk away scot free, but it is sufficient to terminate the contract without liability for expectation losses -- only restitution damages would be required, or at least some [page 234] limited remedy based on allowing cancellation of the contract in mid-performance. Is that possible under the Convention?

SCHLECHTRIEM: I wouldn't think so, if we were talking about a contract that was not concluded. It would be possible under the UNIDROIT Principles.

REITZ: Suppose the contract was concluded, and some performance has taken place, but it is not fully performed. Then the contract is terminated, and the ultimate result is the cruise ship is not going to be built.

SCHLECHTRIEM: In its "Hardship" provisions, the UNIDROIT Principles adopted the solution that first the parties have to renegotiate. There is nothing really to renegotiate in my hypothetical situation. If the parties don't reach an agreement, they can turn to the court and the court can adapt the contract to the changed circumstances, or it can terminate the contract. I would think that is can terminate the contract and award compensation for certain reliance losses to the other party. The court can find an equitable solution.

REITZ: But could that be done under the Convention?

SCHLECHTRIEM: I have to give one of my doctoral candidates that issue, and after the doctoral thesis we will hope to know better. [Laughter.] Actually, I think doing that would stretch the Convention very far, although perhaps not too far. This point was also on my mind during out discussion this morning. You have to picture for yourselves the delegates at the 1980 Vienna Conference. They were from different legal systems, with different preconceptions and convictions. When we talked this morning about a specified price as requirement for contract under the Convention -- this was in particular the idea of the French, and they were adamant about including a requirement that an offer must specify a price. In the meantime, the Supreme Court of France has given up that requirement. The same observation might apply to this doctrine of adapting contracts to changed circumstances, in particular in these hardship cases. The French are adamantly against any interference with contracts based on a change of circumstances.

REITZ: Pacta sunt servanda.

SCHLECHTRIEM: Yes. There is a French case from the beginning of the nineteenth century where an entrepreneur promised to keep a channel free, to dig it out whenever it silted up, for 50 francs a year, and he was held to that contract a hundred years later. No change of circumstance or re-evaluation of the terms of the contract was considered. But in that regard the attitude of the French seems to have become more liberal, because my French colleagues at UNIDROIT agreed to the "Hardship" [page 235] provisions of the Principles, against the deeply held convictions of the French legal community. So perhaps we are moving to a situation where the majority of Contracting States would have a rule of hardship and of adapting contracts. There is, of course, a very strong reluctance to entrust judges with making contracts, and I think this may exist in your country too, Professor Reitz. So I hesitate to predict that in the near future there will be a favorable atmosphere for such a rule. But if there was movement toward such a rule among Contracting States, then I think it would be possible to develop a similar doctrine under Article 7(2) of the Convention by saying there is a gap in the CISG with regard to hardship rules. Then the gap could be could be filled by invoking the general principles of the Convention, and those general principles include good faith and fair dealing, and this requires that both parties try to adapt the contract in event of unforeseeable developments.

REITZ: I'm really pushing on how far your Article 6 arguments goes in circumstances other than formation.

SCHLECHTRIEM: Well, that wouldn't be an Article 6 question. That would be Article 7(2).

REITZ: It could be that also.

SCHLECHTRIEM: I would say Article 7(2) because my argument is based on the idea that there is a gap in the Convention. That could be disputed, of course, because at the time of the drafting of the Convention the hardship problem was regarded as covered by Article 79. That's my impression.

REITZ: And adaptation of the contract was not included as part of the Convention at that time?

SCHLECHTRIEM: Correct.

SONO: Would you find adaptation to be part of the Convention now?

SCHLECHTRIEM: I would be liberal in finding gaps, then finding general principles of the Convention, and then filling the gaps by rules derived from the principles.

HONNOLD: May I add a footnote to the argument I was making earlier in support of your views against a Convention rule on culpa in contrahendo? I mentioned that I thought there wasn't enough of a springboard in the Convention for such a rule. I would now add the suggestion that, in this setting, there is not enough of a springboard to create the kind of uniformity that the Convention was designed to produce. It's an area that is too amorphous to think that a few lawyers' views would produce [page 236] a basis for the kind of uniform rule that a world-wide body of people -- 53 countries now -- would be obliged to follow.

SCHLECHTRIEM: Yes, it is a bit forward perhaps to say that not all 53 Contracting States or jurists from 53 Contracting States must be of the same opinion.

HONNOLD: No, not at all. But you have to have a basis for uniformity.

SCHLECHTRIEM: Are you aiming at a rational basis for a rule for adapting contracts, adjusting to changed circumstances in hardship cases?

HONNOLD: No, I was just talking about matters that seem to be external to the Convention.

SCHLECHTRIEM: With regard to the problem of hardship and adjustment of contract, I think I could argue, first of all, that it's a matter governed by the Convention -- a disturbance in the performance of the contract brought about by certain events not fully covered by Article 79. Of course, that view could be disputed.

HONNOLD: I confess, I wasn't addressing that hardship argument. I was thinking about something else.

SCHLECHTRIEM: Yes, the pre-contractual liability argument. But if you ask me whether there is somewhere in the Convention the principle of adjustment or adaptation of contracts, I would put forward a very provoking argument. I think the remedy of price reduction in Article 50 of the Convention is a kind of adjustment of the contract to reflect a disturbed balance between performance on one side and obligation on the other side. The defects in the goods, or the non-conformities of the goods, constitute a disturbance of the equilibrium or balance of the exchanged performances. That is why we defended price reduction -- as a just instrument for adjusting the disturbed balance of performances. Of course the Common Law countries who are not familiar with the price reduction remedy regard it as something entirely different -- as a kind of damages set-off against the purchase price. But if you can accept the notion that it has an entirely different function and aim, then it could be -- it's a bit speculative, of course, but in a workshop like this you should allow such speculation -- then you could use this principle as a springboard to develop a general rule of adjustment in hardship cases.

HONNOLD: The interesting facts of our Hypothetical Case stated: Seastar ordered a cruise ship of 60,000 tons from Rotterdam (R). Of course, CISG does not govern the purchase of a ship: Article 2(d). However, the dimensions of this transaction may be relevant to the relationship [page 237] between Rotterdam (R) and the construction and purchase from LMU of the ship's engines, one of the vital steps necessary for R's construction of a large ship. The facts do not state whether Seastar and Rotterdam had agreed on the price for the ship, either prior or subsequent to the negotiations between R and LMU concerning the specifications of the ship's engines, and the cost of their construction. Normal business prudence would suggest that R would not venture large expenditures of construction costs without arrangements for payments by the buyer, Seastar. Similarly, under prudent business practices, it would be surprising if R could come to a final agreement with LMU on final costs, and payments for the ship's engines, before R had a binding agreement with Seastar with respect to total costs and procedures assuring payment.

In litigation or arbitration, against this setting it would seem useful to call witnesses, experienced in transactions of this character and magnitude, for information whether arrangements by the two mixed teams normally would be final, or whether the agreed periods between July 10 and August 15 would normally be available for consideration by the chief executive officers of the two parties, especially examination by R's officers of the financial responsibility of Seastar for outlays of this magnitude. Information by this examination that Seastar was on the verge of bankruptcy would, of course, have presented R from finalizing a contract with LMU, and precluded a claim by LMU for breach of contract. Whether LMU would have a claim against R for a share of the expense of the preliminary studies would, as earlier discussions have shown, depend on prior agreement by the parties or, in some jurisdictions, domestic law.

Now, contrary to the above views, let us assume that the preliminary studies are binding. In this setting the following might arise. Seastar's bankruptcy would prevent R from building the ship for Seastar. May LMU build the engines, at R's expense, although R would have no use for engines made to these specifications? Some of the early discussion, above, seemed to suggest that this might be possible. Would not such needless waste be barred by CISG 77: "A party who relies on a breach on contract must take such measures as are reasonable in the circumstances to mitigate the loss. . . ."

[After a short break, the workshop reconvened to discuss the hypothetical prepared by Professor Flechtner and University of Pittsburgh Law Graduate Mark Walter.][page 238]

Hypothetical Case by Professor Flechtner and Attorney Walter [9]

Volkshaus, a newly-organized German importer of home furnishings, became interested in the products of Downeast Pottery, a U.S. supplier of hand-made pottery. In July 1998 Volkshaus contacted Downeast by telephone. As neither party understood the language of the other, they employed a translation service provided by the telephone company. The parties agreed that Downeast would sell Volkshaus 10,000 pieces of pottery (bowls, mugs, plates, vases and the like) in a variety of styles at a total FOB price of US $50,000. Payment was due in two installments -- $40,000 in advance of shipment and $10,000 within 5 days after Volkshaus received the goods.

Volkshaus claims that, during the telephone conversation, it told Downeast that the pottery would have to be packaged individually in recyclable cardboard. This was important to the buyer because the German government had recently imposed additional tariffs on non-recyclable packing materials imported from countries outside the European Union.

Downeast told Volkshaus that it would prepare a written contract based upon the telephone conversation and would send it to Germany by express service to be signed by Volkshaus. Mr. Schoen, the owner of Volkshaus, replied that Downeast did not need to send the written contract to Germany because he would soon be on holiday in the U.S. -- specifically in Portland, Maine, where Downeast's headquarters were located -- and he could sign the contract in person. A week later Schoen visited Downeast's headquarters and signed, on behalf of Volkshaus, the written contract that Downeast had prepared using its standard form "Contract of Sale." At the time he signed, Schoen did not ask for, nor did Downeast offer, a German translation, or explanation of the written contract. A standard, pre-printed clause of the written contract stated that the pottery would be packaged "in the manner customary in the wholesale pottery trade." The written agreement did not contain a merger clause (i.e., there was no clause stating that the writing constituted the sole evidence of the parties' entire agreement). At the time he signed, Schoen gave Downeast a bank check for $40,000.

The goods were delivered to the designated ocean carrier and subsequently arrived in Germany. As is the common practice in the U.S. pottery industry, the goods were individually packaged in styrofoam in order to prevent breakage in shipment.[page 239]

The additional tariff imposed by the German government on the non-recyclable styrofoam packaging cost Volkshaus approximately $2,000. Volkshaus complained to Downeast about the packaging three weeks after being informed of the additional tariff by customs officials.

Volkshaus also claims that, because European consumers are highly sensitive to environmental concerns, Volkshaus had to purchase recyclable packaging from a German source and repackage all the pottery to make it marketable to its customers (retail home furnishing stores). Volkshaus claims that the re-packaging cost an additional $3,000, and that the resulting delay (including a four week wait for the new packaging to arrive) cost an additional $4,000 in warehouse charges and lost profits. Volkshaus did not inform Downcast that it had been forced to repackage the goods until the ensuing litigation began.

Finally, Volkshaus claims that, while repackaging the pottery, it discovered some $3,000 worth of the shipment had been broken during ocean transport from the U.S. because of defects in the styrofoam packaging. Volkshaus informed Downeast (by letter) of this breakage problem within a week after finishing the repackaging, which was some seven weeks after the pottery shipment had arrived in Germany.

Volkshaus refused to make the final payment of $10,000.

Downeast filed suit in an appropriate U.S. District Court for payment of the $10,000 plus interest. Downeast claims that, because of the non-payment, it was forced to take a short-term loan at 3 points above prime (a rate higher than that charged on long-term loans) in order to meet its operating costs. Volkshaus, on the other hand, argued that it properly withheld payment of the $10,000, and that Downeast, in fact, was liable for at least $2,000 in damages, plus interest.

FLECHTNER: One of the issues I would like to discuss with the group is the effect of the German purchaser signing a written contract that appears to contradict the understanding the parties reached on the telephone (as alleged by the buyer) concerning the packaging of the goods. Any thoughts on that?

REITZ: Is it your notion, Harry, that the once the telephone conversation ended, the contract had been formed?

FLECHTNER: I suppose that's the first issue we are going to have to deal with. It's very similar to the issue that came up in Professor Schlechtriem's hypothetical.

REITZ: It means the writing, has uncertain legal consequences. Was it a document that was intended to form a contract, or was it intended to be a confirmation of an earlier oral contract, or was it a modification, or [page 240] did it have some other significance? I would think that if this American company knew that the German representative of the buyer did not speak English, it would be very hard to make the case that this writing was intended to change an already formed contract. But it goes back, I think, to the question, when was this contract formed? There is no statute of frauds, I take it, operating in either country.

FLECHTNER: Would this be a much easier case if no contract was formed during the telephone conversation? If the parties, in fact, had understood that there wouldn't be a contract until there was a formal document signed?

LOOKOFSKY: I read this situation as involving one long contractual process. And I assumed that, at the time the requirement about the packaging was mentioned, the seller was willing to comply. So I saw this as a problem of proof only: is the buyer going to be able to prove that he, in fact, made the packaging requirement known to the seller. If so, he wins -- something, I don't know how much yet. If not, then he has a problem because we have a written term that says something else. I mean, you know my position on the parol evidence rule, and I guess the courts agree to some extent. That's not a problem.

FLECHTNER: This problem is modeled on a recent case that raised the issue of whether the parol evidence rule continues to apply under the CISG. My response to that question has always been, what do you mean by the parol evidence rule? If you mean the doctrine saying that, if the parties intend to express their entire agreement in a writing to supersede all that went before then that intention should be honored, I think that has survived under the Convention. But if by the parol evidence rule you mean the elaborate and rather non-understandable set of processes our courts have developed to answer the question of what the parties intended when they created a document -- well, no, I don't think they apply under the Convention. But I think ultimately the question is, how can we tell whether the parties in this case should be deemed to have intended this writing to be the complete operative statement of their agreement. We do not have a merger clause declaring such an intention. I wonder what difference a merger clause would make in this case? That is something else we can discuss.

SCHLECHTRIEM: Should I offer my analysis?

FLECHTNER: Please.

SCHLECHTRIEM: I would argue that a contract was concluded by telephone in July, and the content of the contract was fixed by this telephone agreement so that the seller was obliged to use cardboard packaging.[page 241] Then the seller proposed to change the contract reached on the telephone by means of the written document -- to give up the first contract and write down a new contract that had to be signed. This was within the ambit of party autonomy, if it was understood correctly by both parties. The new written contract thereby superseded the first oral contract. Now the question is whether, when he signed the contract, the German buyer thought that the content of the written contract with regard to the packaging was the same as the earlier oral contract and, if so, whether that mistake was the kind of error that would allow avoidance of the contract under domestic law. Of course questions of avoidance for mistake or error, except for mistakes about the quality of goods, are left to domestic law under Article 4(a) of the Convention. That would be how I would analyze the situation.

FLECHTNER: You would end up outside the Convention then?

SCHLECHTRIEM: In regard to avoidance of the contract because of mistake, yes.

LOOKOFSKY: A mistake? Would you specify again what the mistake consists of?

SCHLECHTRIEM: Yes -- this is a famous problem in Germany. If you sign a document that you don't understand, are you bound by every thing that's in the document? Or is it your understanding formed by prior negotiations -- in this case by an earlier oral contract -- that controls, so that you can argue that what you signed was something entirely different from what you wanted to communicate. We had cases involving foreign workers who signed a kind of settlement agreement with their employer providing that the employer would pay a sum of money and the employees would have no more claims against the employer. The written agreement was not understood by the Turkish workers. The court said that if the workers signed something they simply didn't understand, meaning that they agreed to everything, then they could not avoid the agreement for mistake. But if they signed thinking, incorrectly, that something specific was in the document, which they could not read because they did not know the language, then they could avoid for mistake.

LOOKOFSKY: You assume in your analysis, if I understand it, that what the buyer claims to have discussed on the telephone concerning the packaging is true, and you're assuming that the buyer can prove this.

SCHLECHTRIEM: Yes. I derive that from the facts. That would mean that when the buyer signed the written contract he was mistakenly under the belief that he was signing a document with a clause providing for cardboard packaging as previously discussed or agreed to orally.[page 242]

LOOKOFSKY: How would you feel about an analysis that said, this is all one contract with some oral terms and some written terms. On the particular issue of packaging, the oral term -- the actually negotiated term -- conflicts with the written standard term, and we should give precedence to the oral term.

SCHLECHTRIEM: That again is a matter of interpreting the facts. As I understand the case, when the seller told the buyer that he would prepare a written contract based upon the telephone conversation, this was an agreement that the parties would make a final written contract with the same content they had already agreed upon.

LOOKOFSKY: And, in fact, the writing was a standard form which did not do that.

FLECHTNER: Yes, the packaging provision in the written contract is a standard provision of the seller's form.

YOSHINO: I agree with Professor Schlechtriem's analysis, and I think the buyer's signing was based on a misunderstanding of the contents of the written contract. Thus, the written contract cannot derogate from the oral agreement between the parties concerning the seller's obligation to provide recyclable packaging. If the written contract had been valid, then it could derogate from the former oral contract. But, as the written contract is not effective, the earlier oral contract cannot be varied.

SONO: And the role of Article 4(a) of the Convention?

SCHLECHTRIEM: Article 4(a) merely brings into play the domestic law of avoidance for error.

SONO: So if domestic law can be brought in, the contract becomes void?

SCHLECHTRIEM: The written contract becomes void. The written contract was to supersede the oral contract, but now the written contract is void.

SONO: So the oral contract would remain valid?

SCHLECHTRIEM: Yes, it stays alive.

SONO: May I present my perspective? The written contract says that the goods must be packaged "in the manner customary in the wholesale pottery trade." Is it possible to bring in the principle underlying Article 42? The seller knew that goods were going to be sold in Germany. Therefore, if the goods must be packaged, they must be packaged in a manner that allows them to be saleable in Germany. Of course, this argument would be easier to make if it was not just a matter of additional tariffs, but of permission to import the goods.[page 243]

FLECHTNER: That would be similar to the case out of Germany involving mussels.

SCHLECHTRIEM: Yes. I would like to come back to that too, if there is time.

SONO: Under my approach, there is no need to discuss whether it is the oral contract or the written contract that prevails.

HONNOLD: Which part of Article 42 are you using in your analysis?

SONO: Article 42(1)(a) -- "if it was contemplated by the parties . . . that the goods would be resold or otherwise used in" a particular country. Article 42 deals with industrial property or intellectual property, which is not what is involved here, but this principle could be applied by analogy.

LOOKOFSKY: That's an interesting article.

SONO: The problem dealt with in this part of Article 42 is peculiar to international sales, where the parties are located in different countries.

SCHLECHTRIEM: Wouldn't the rule more closely applicable to our case be Article 35(2)(b)? The seller knew what the goods were intended for -- resale in Germany.

SONO: I would invoke both Article 35 and Article 42. Both provisions are directed toward protecting the buyer's expectations, therefore usually the goods must be usable in the buyer's country.

FLECHTNER: The question concerning the extent to which you are bound by what you sign may be one of those issues that is particularly susceptible to different approaches in different legal cultures. For example, U.S. courts have traditionally at least paid lip service to the idea that you are bound by what you sign whether or not you understand, or even read it. The idea that you are bound by signed documents, even if they are in a language you don't understand, was recently emphasized by one of our federal courts of appeals in the MCC-Marble [10] case upon which the hypothetical under discussion was, in part, based. Our courts have difficulty moving away from that principle. They have a sense of the nature of contractual relationships that I think is based upon a kind of horse-trading model, where one party is trying to get the better of the other and you really have to protect yourself. As a comparative matter, I think that's the sense in U.S. legal culture of how the contracting process occurs, and it's the contractual model that U.S. courts have adopted. In contrast, I get the sense that there is a quite different perception of what [page 244] the contractual relationship is about, a more cooperative vision, in other jurisdictions. In the case upon which this particular aspect of the problem was based, the court dropped a footnote in which it said it was outrageous that a business person would sign a document in a language he or she didn't understand -- that this just wasn't proper modern business practice -- and it indicated that in most cases the signer would suffer the consequences no matter how far the written contract may have deviated from his or her understanding going in.

LOOKOFSKY: So what is your solution then, Harry? I suspect the author of the problem may have taken a different route. We all seem to be reaching, the same result -- none of us seems willing to ignore the fact that the conversation took place. The question is, how do you do that? Perhaps you might bring in domestic law to get rid of a standard term that would be very unfair to enforce in these circumstances.

SCHLECHTRIEM: If the term was slipped in, certainly the German rules on standard form contracts would apply, and would make such a surprising term, slipped into the written contract, void. Of course matters of voidness are subject to domestic law under Article 4(a) of the Convention.

FLECHTNER: Yes, as a question of validity. In fact, my own analysis of the controversy in the problem was that it really came down to a question of validity governed by domestic law in the end. Under the Convention you might have to accept the written contract, but then you could undo that by invoking domestic law on validity and invalidating the written contract. For example, this would be a situation in which, under U.S. law, reformation doctrine might apply, and a court could actually amend the written agreement on that basis to reflect the telephone conversation.

SONO: When we say that we can invalidate the written contract, it assumes that the written contract was the contract concluded after negotiations. It does not presume any former contract -- unless we call the written contract a revision of a prior contract. In your analysis, Harry, when the written contract is annulled, do the previous oral negotiations become the contract?

FLECHTNER: I think there are two alternative analyses possible here. If you said the parties had formed a prior oral contract, and then you invalidated the "packaging" provision of the written contract, then I think you would revert to the prior oral agreement. But if the parties did not intend to enter into a contract until there was a written agreement, I still think that -- at least in a U.S. court -- the written agreement could be [page 245] reformed to coincide with the actual intent of the parties. The question of reforming the writing to reflect the parties' true intentions would not, as far as I can see, be governed by the Convention.

HONNOLD: Are you assuming that both parties had the same intention?

FLECHTNER: That they both understood the buyer's need for recyclable packaging? Yes, I am assuming that.

HONNOLD: So the party who prepared the written contract knew that he was cheating? He knew that was committing a fraud?

FLECHTNER: I suppose that's a possibility.

REITZ: Harry softened that slightly by providing in the problem that the written provision at issue was a standard form term, not one inserted into the writing for this particular transaction. It happened to be there already, I think, on the seller's printed form. So it might have been a mistake or oversight on the part of the seller to have it in there.

SCHLECHTRIEM: Wouldn't there be a remedy for someone who signed a written contract that previously had been explained to have a certain content or effect, but that, without any fault of the party preparing the document, contains deviating provisions? Wouldn't that be cause for avoiding the contract even without an intent to defraud the other party? If including the deviating clause was just a slip up -- the seller didn't remember that he had packaging provisions in his standard form, and he thought that the standard form represented the oral contract accurately -- wouldn't that be a ground for the buyer to avoid for error?

REITZ: Under United States law, yes.

SCHLECHTRIEM: Yes, in Germany too.

REITZ: We talk about fraud, accident or mistake as reasons for undoing something that's in a writing and would otherwise have legal consequences. This document looks to me more like a confirmation document than a contract document -- a confirmation that does not conform to the agreement. I don't know whether in international trade, or in Convention terms there is such a thing as a confirmation document.

SCHLECHTRIEM: Confirmations were very much disputed in connection with the CISG because in the predecessor Hague Conventions, letters of confirmation were covered.[11] Letters of confirmation are very common in Germany, and the members of the German delegation at the Hague were very proud that they had pushed through the German approach [page 246] under which a letter of confirmation that was not answered became part of the contract. This view, however, was expressly rejected in the preparation of the Vienna Convention. The other delegations said that they didn't want this German usage of letters of confirmation changing the contents of contracts. So this is certainly out of the Convention.

FLECHTNER: There's nothing in the Convention dealing with confirmations.

SCHLECHTRIEM: Yes, and the omission has a negative connotation that you can derive from the materials.

REITZ: From the legislative history?

SCHLECHTRIEM: Yes.

HONNOLD: That's correct.

REITZ: So a confirmation document that changes or adds to the contract would be ineffective under the Convention.

SCHLECHTRIEM: Yes, but it's a different situation if the exchange or the sending of letters of confirmation is a usage under Article 9(2). That provision applies to "a usage of which the parties knew or ought to have known and which in international trade is widely known to, and regularly observed, by parties to contracts of the type involved in the particular trade concerned." Under these very narrow requirements, a letter of confirmation may take effect as a usage. There's a very interesting Austrian/Swiss case on this issue. The Swiss party sent a letter of confirmation and the Austrian party did not respond. Under Swiss usages on letters of confirmation, the silence amounted to acceptance. The Swiss court said that it was sufficient to establish that the usage was international under Article 9(2) if the same usage could be found in Austrian law. It then proceeded to find the usage in Austrian law. It was wrong on both points. About ten years earlier the Supreme Court in Austria had thrown out the existing rules on letters of confirmation. Before then, the Austrians had followed the German rule. One very important scholar in Vienna had written many articles against the German rule, and finally the Austrian Supreme Court followed him, so Austria, in fact, no longer has the same rule as Switzerland and Germany. And the second mistake the Swiss court made, I think, is that it is not enough that there are parallel usages in both countries. The usages must apply to the parties in this particular trade, and must be observed by them.

HONNOLD: No. Article 9(2) refers to "contracts of the type involved in the particular trade."[page 247]

SCHLECHTRIEM: Yes, that's right. Although that's a bit wider than the formulation I gave, still it's not sufficient that a usage is just known generally in two countries.

KAGAYAMA: Would it be possible to interpret the written contract so as to conform with the prior oral understanding between the parties, particularly if the prior oral understanding corresponded to international practice?

FLECHTNER: If it is, in fact, standard in the international pottery trade that you use recyclable packaging material, that adds another fact to the case. All we are told in the hypothetical is that it is standard within the U.S. pottery industry to use non-recyclable styrofoam for packaging. The domestic U.S. practice may be all that this particular seller is familiar with, but it may, in fact, be standard in international trade to use recyclable material.

YOSHINO: It may be the common practice in Germany to use recyclable packaging, whereas, in the United States, it may be standard usage to use non-recyclable packaging. If so, there is a difference of culture between the two countries. This case is very interesting because it deals with differences of custom and differences of culture between two States. In Germany, recyclability is very common now, and in the United States, I suspect, it is less so. Thus, according to German culture, recyclability may be standard, whereas, according to the culture of the United States, recyclability may not be standard. If the packaging clause in the written contract is interpreted from the background of German culture, it may appear that the packaging must be recyclable. But if it is interpreted in the United States, then, according to the written contract, it may not be necessary that the packaging be recyclable. So this case raises the problem of differences in the culture and background of the parties. The case was co-written by Mark Walter, who has learnt some Japanese customs while working for me. I think he has become sensitive to this question of differing cultures while working in Japan, and now he has incorporated this interesting discussion point into the problem that he is sending out to representatives of the rest of the world. That process also reflects Japanese custom -- importing something into Japan, improving it, then exporting it. [Laughter.]

SCHLECHTRIEM: The Convention has something to say about the issue of interpreting the phrase "in the manner customary in the wholesale pottery trade" from the packaging clause of the American Company's standard form agreement. If we ask whether this requires styrofoam packaging under American standards or recyclable cardboard [page 248] packaging under German standards, I think Article 8 should be decisive. Article 8(2) provides that, if the subjective intentions of the parties do not coincide, then "statements made by and other conduct of a party are to be interpreted according to the understanding that a reasonable person of the same kind as the other party would have had in the same circumstances." So it is a person standing in the shoes of the German buyer whose objective understanding, reasonable understanding, is controlling. And taking into account the first oral agreement, Article 8(3) should be helpful: it provides that "in determining the intent of a party or the understanding a reasonable person would have had, due consideration is to be given to all relevant circumstances of the case including the negotiations . . . ." Thus, if there was an earlier oral contract, this certainly would be a circumstance to be considered in arriving at the objective understanding that a person in the shoes of the buyer would have. That would very strongly point to the understanding of the German buyer as controlling.

YOSHINO: That's true.

LOOKOFSKY: So we don't necessarily need to leave the Convention to reach this resolution?

SCHLECHTRIEM: That's right. We can do it within the Convention.

FLECHTNER: Suppose the German buyer had said something less specific during the negotiations -- had said to the American seller, for example, "of course the pottery should be packaged as appropriate" or something like that. Then, I take it, we would have to look to the understanding that the American seller would have had of that particular phrase, correct?

SCHLECHTRIEM: That's interesting because it brings us back again to the inadequacy of the offer and acceptance scheme of contract formation under the Convention. If the communication of the German party was the offer, then it was to be understood according to the reasonable understanding of the American offerree. On the other hand, if the statement of the German party was just an invitation for an offer and the next formative communication came from the American side, then the German understanding would be controlling. That approach is ridiculous. That can't be the result. It can't be the accidental sequence of an exchange of communications that is controlling.

FLECHTNER: But under the interpretation rule of Article 8, we give the advantage to the one who hasn't said something, who hasn't affirmatively [page 249] brought up a term, because if the other side said it, then you get your own understanding.

SCHLECHTRIEM: Yes, unless the party making the statement makes it clear what he meant.

HONNOLD: Yes, I think that's the point of Article 8(2).

SCHLECHTRIEM: It's your obligation to make clear what you mean, your real intention. If you don't, then the objective meaning from the view point of the person to whom the statement was addressed will be controlling. I think that's a general rule you will find in many jurisdictions concerning the interpretation of declarations of intention.

REITZ: In this country, the conventional wisdom on contract formation in written form -- what most American lawyers will tell you -- is always to be the author rather than the recipient of a document.

FLECHTNER: But that is a little bit of a two-edged sword.

REITZ: It is usually said that the better position is to be the person who is preparing the document rather than reacting to somebody else's document. But that goes counter to the point you were suggesting, Harry, that you get the benefit of ambiguity if you're the recipient rather than the author.

ASHLEY: Could I ask just one question. On a number of occasions I've heard people making arguments by analogy. I would venture to generalize and say that the criteria of Professor Sono and Professor Yoshino for when it is appropriate to use an argument by analogy are somewhat more liberal than Professor Schlechtriem's criteria, for example.

SONO: But he is very, very liberal. [Laughter.]

LOOKOFSKY: Professor Schlechtriem's argument about Article 50 price reduction and judicial modification of contracts for hardship was quite liberal.

SCHLECHTRIEM: Ah, but that was a different approach. It was based on finding general principles.

LOOKOFSKY: Yes. It was not analogy.

ASHLEY: That's true, and it's interesting, but I was thinking of several occasions on which Professor Sono or Professor Yoshino presented an analogy, and then Professor Schlechtriem responded that there was no gap in the Convention, or that another Convention provision was closer than the one being used in the analogy, and, therefore, you shouldn't use an analogy. Professor Reitz, you also used an analogy, although I'm not sure where you would fit in on the scale of willingness to use analogies. Could we discuss whether there's a difference of opinion as to when it is [page 250] appropriate to use analogies in the interpretation of the CISG? Is this also a "cultural thing"?

SONO: I don't think so. When we are using analogies, I think we are trying to discover general principles as per Article 7(2). That is the main purpose of using analogies.

SCHLECHTRIEM: There is a very interesting article by Jan Hellner on the question of using analogy versus general principles to fill gaps under Article 7(2).[12] He says the function is almost the same, whether you use the traditional method of analogy or whether you find a principle in one of the other provisions of the Convention and use this principle to fill your gap under Article 7(2). So, if I may refer you to this article, it's really excellent, as is everything Professor Hellner writes, and I think it is quoted in my commentary [13] and cited in the bibliography.

YOSHINO: We do not have much time remaining, and I would like to return to an issue we discussed this morning in connection with my hypothetical problem. I would like to hear whether people believe, on the facts of my hypothetical, that the contract for the purchase of the tractor and rake can be avoided and, if so, whether the reason for avoidance is the existence of a fundamental breach, or the seller's failure to repair within the deadline given by the buyer. We heard Professor Schlechtriem's opinion, Professor Sono's opinion, and my opinion this morning, and I would like to hear whether others think the buyer can avoid the contract after the seller failed to repair the defect in the tractor within the time requested by the buyer.

FLECHTNER: My opinion is fairly close to Professor Schlechtriem's. I think that the buyer can avoid the contract if, but only if, he can show that there was a fundamental breach of contract, and I do not believe that the nature of this particular breach -- a defect in the goods rendering them non-conforming -- would be changed by the passage of time. In other words, if the defect was a serious, difficult-to-correct problem when it first came to light, it might be a fundament[al] breach and the buyer would have a right to avoid the contract. But if the defect was not a very serious problem that perhaps could be corrected without a great deal of difficulty, then the fact that the seller refused to repair it would still not make the breach a fundamental one in my opinion. Nor would I [page 251] be willing to permit avoidance by analogical application of the Nachfrist procedure in those circumstances. In short, I would demand that the buyer show that there was a fundamental breach of contract before I would permit avoidance.

REITZ: It may be too late to raise this now, but I thought of a problem that Professor Honnold taught me about a while ago. If the original breach is very serious and it would be fundamental, but it could be repaired, is the buyer entitled to avoid the contract even if the seller is willing to repair? This, of course, is just the opposite of the situation we have in Professor Yoshino's problem. At least as John Honnold taught me, a buyer should not be entitled abruptly to avoid the contract if a repair is coming. This suggests that the time when we measure whether a breach is fundamental is not necessarily when the goods are delivered but, at least where repair is involved, it can be at a later time. Now, if you turn the situation the other way around and you have a failure to repair rather than a repair, perhaps that could -- in combination with an extension of time into a later period -- lead closer to where Professor Yoshino was going. In other words, you arguably have a kind of double breach: the seller delivered the wrong material and refused to fix it. The failure to repair exacerbates the injury, and this might, I think, lead to an argument that the two breaches are, in combination, fundamental.

SCHLECHTRIEM: Together?

REITZ: Together.

SONG: But on this particular point, I think, Professor Yoshino is asking whether or not Article 49(1)(b) can be applied analogically to permit avoidance of contract without a fundamental breach.

YOSHINO: In my opinion, the nature of the breach of contract cannot change by the passage of time. Therefore, I applied Article 49(1)(b) analogically because there is a gap in the Convention.

SCHLECHTRIEM: I want to remind everyone that there was a conscious decision by the drafters of the CISG to limit the availability of avoidance using the so-called Nachfrist procedure. In the predecessor Hague Sales Convention, the additional-period-of-time procedure for avoidance was allowed in cases of non-conformity.[14] The drafters of the CISG consciously decided not to include this aspect in the Convention. That is why I don't see a gap unless we open one in order to develop the Convention. I also wanted to add a comment with respect to what you said, Professor Reitz. In the German literature, now it is the prevailing opinion that if a defect can be cured and the seller is willing and able to [page 252] cure it, there is no fundamental breach. As long as there's a chance that the defect could be cured, you cannot assume a fundamental breach.

LOOKOFSKY: Assuming that the buyer doesn't suffer a substantial detriment. Right?

SCHLECHTRIEM: Yes, certainly.

REITZ: Is the German view based on the Convention or on domestic law?

LOOKOFSKY: The Convention.

HONNOLD: The Supreme Court of Germany has in general been very strong in upholding the continuation of the contract.

SCHLECHTRIEM: Yes.

REITZ: I think that's the right answer.

FLECHTNER: I think so also.

REITZ: But it suggests that the behavior of the seller at the later time -- here, when the seller refused to repair the defect -- is relevant to the buyer's legal options.

SCHLECHTRIEM: Only in the sense that, if the seller refuses to cure a defect which could be cured, that could add to the seriousness of the non-conformity.

REITZ: Right.

FLECHTNER: Generally -- except in the rare situation where only the seller can repair a defect -- if the goods can be repaired by the seller, they can be repaired by someone else.

SCHLECHTRIEM: Then the seller's refusal to repair is no problem.

FLECHTNER: Then there's no problem. But if only the seller can repair and the seller refuses to repair, then it seems to me that in your fundamental breach analysis, of course, you have to take that into account. I would agree with that.

SONO: I still have two short but important questions that I want to ask Professor Schlechtriem. Number one: in your presentation this afternoon you said that a buyer can avoid a contract, but then he may change his mind and decide to reduce the price under Article 50 after the contract is avoided. You then argued that the reduction of price provision is one way that the Convention tells us that adaptation of the contract for changed circumstances is possible -- a very liberal view, and I like it. But how can a German scholar tell us that after avoiding the contract the buyer can still reduce the price? [Laughter.] Question number two: In this morning's discussion I think you argued that, if a buyer thinks that a particular function or capability of a machine that he is purchasing is very important, the buyer should clearly so state in the contract by, for example, [page 253] including a clause saying that this aspect of the merchandise is particularly important.

SCHLECHTRIEM: "Of the essence of the contract."

SONO: Yes, "of the essence of the contract." Would that kind of clause solve our avoidance problem by making it much easier for the buyer to avoid the contract? If that's the case, then the matter becomes a drafter's game.

SCHLECHTRIEM: Let me answer the second question first. I think the Convention's doctrine of fundamental breach reflects the English doctrine of conditions. If a certain expectation is a condition, or "of the essence of the contract," then the breach of this condition, of this contractual term, is a fundamental breach. A buyer can put into the contract a requirement that the machine be green in color because, for example, he intends to resell it to Libya and it has to be the color of the Prophet. He need not tell the other side why he insists on that. He can just make it a condition of the contract. What you were concerned with -- the problem of misuse of standard form clauses to escape rules designed to protect the other party -- that should be taken care of by the rules governing standard forms. So if such a clause is slipped in without any legitimate interest behind it, the rules on standard forms should invalidate it.

SONO: What if the clause is not part of a standard form?

SCHLECHTRIEM: Then it is allowed. If it's negotiated, then a clause that, for example, requires a machine to be green is, I would say, enforceable. As for your second question, I was very happy to hear you emphasize your surprise that my position came from a German scholar, because I have written an article on that topic. There is a certain dogmatic concept in German law that declarations like a notice of avoidance are communications that change the legal environment. At the beginning of the century, there was a very influential scholar who compared this changing of the legal situation by one party's declaration to a chemical process. He said that when a chemical reaction happened you could not undo it, and that it was the same with these declarations. And this was ingrained in the brains of generations of German jurists. As an example of this approach, it happens frequently that an employer declares a termination of a labor contract because of a dispute with the employees. Then they go to court and the employer says, "I take back the termination." What do the German jurists say? "You can't take back the termination, but we regard the attempt as a new contract -- your attempt to take back the termination is an offer to make a new contract." Another example -- in leases it often happens that the landlord terminates the lease, and later [page 254] the parties negotiate and the landlord retracts the termination. Again, it is regarded as a new contract. That's silly.

SONO: But termination is for the future, and avoidance is retroactive.

SCHLECHTRIEM: I don't think that matters in this context. If you have a declaration concerning the future and it dissolves the contract, then the legal environment has changed. So this is only a secondary question. My argument is that I would derive a principle from the second sentence of Article 29(2), and I would derive an argument, a principle, from Article 16(2)(b): If the addressee of a notice is not aware of the communication of avoidance or price reduction, or has not relied and changed its position, he doesn't need protection. Why shouldn't a party be able to withdraw his price reduction communication, for example, if the other party doesn't even know about it? Why should the other party be protected? So I proposed -- and I will say the same thing in the third edition of my commentary -- that under certain circumstances the party declaring avoidance or price reduction may be allowed to withdraw it, unless the other party has relied on it. And, if the other party knew about the declaration, there should be a presumption that the addressee relied on it -- a presumption that the party who wants to withdraw his communication must rebut. So I think that strikes a fair balance for the problem. Of course, it's much easier to say that if you issued notice of avoidance, well, that's it -- you're bound by it. But that goes against my notions of fairness, and I found a way out of it. Also, I have to confess I am against this conceptual thinking, this comparing with chemical processes.

FLECHTNER: On that extremely pragmatic note perhaps we should try to bring the discussion to a close. People may wish to make some concluding remarks. I have just one -- that it has been an extraordinary pleasure and honor to be here, and to witness the remarkable diversity of approaches to the Convention among the participants, and the remarkable diversity of uses to which the CISG is being put. Professor Yoshino's work with applying principles of artificial intelligence to the Convention is a good illustration of the latter point. The CISG has turned into a rather remarkable resource for a variety of purposes and applications. There are people in this room who are very much responsible for creating and for cultivating understanding of this remarkable document. I thank you all for letting me join you.

YOSHINO: As co-chair I also would like to thank you all for your participation and your contributions. Professor Flechtner has introduced me as a scholar of artificial intelligence. That it is true, but, in fact, I am [page 255] more oriented to jurisprudence. I would like to promote a general theory of law that could be developed into particular legal theories in the fields of interpretation and application of law. Scholars of jurisprudence have tried to form general theories of law that are useful for legal science, but they have not always been successful. With the help of studies in artificial intelligence, we can now create a valid general theory of law to apply to particular areas of law. That is my purpose. Therefore, I thank you for today's discussion, in which genuine legal reasoning and thought occurred, and truly excellent knowledge of the legal background was demonstrated. I will be analyzing these discussions in great detail. Given the success of today's endeavor, I would propose to you that we hold another such workshop next year, perhaps in Germany or in Japan -- but not in the United States next time, because for the moment we have had enough study of the time difference. [Laughter.] At the beginning of today's discussion, I was afraid that I could not help but fall asleep because of that time difference, but fortunately the discussion was so stimulating that lack of sleep was not a problem. It is a great pity that we have to close the discussion, but for everything there is an end.

HONNOLD: I would like to express my appreciation for all you did to make it possible for us to be here. I've been educated and I appreciate it.

LOOKOFSKY: I also found the discussion extremely interesting. Thank you very much.

REITZ: Thank you all for coming to our law school. I hope now that you know where we are, you will come back again very soon.

ASHLEY: I hope the recording has captured such an interesting and informative discussion, and that it is transcribable.

SCHLECHTRIEM: First of all I would like to thank the organizers of this workshop, and you in particular, Professor Yoshino, for your role in putting this project together. It's a very important endeavor. On a personal level, I would like to thank you, Hajime, for adjusting your agenda to my schedule by holding the workshop today, which was the only day that I could be here while I was in Philadelphia. If you will seriously consider having the next workshop in Germany, I would be glad to organize it.

KAGAYAMA: It is difficult for me to express how much I have enjoyed and benefitted from this workshop -- my English is poor, and I would like to stay two more years to improve it. Thank you very much.

SONO: If I may say a word about today's proceedings -- I noted that everyone was careful not to ask us, the Japanese participants, why Japan [page 256] has not yet ratified the Convention. [Laughter.] I believe Japan will ratify, but I have been saying that for such a long time that I now try to keep my mouth shut. In fact, the world is changing to such an extent that I believe the time is coming when the need for individual countries to ratify the Convention will disappear. I suspect that a decade or so from now, in the next century, people will look back on the 20th century and be surprised that everyone thought ratification was that important. For example, we are seeing many arbitration awards that apply the Convention regardless of whether any of the particular countries involved have ratified. Since we already have some 53 countries that are Contracting States, it has become a kind of brotherhood or fraternity. My hope is that the Sales Convention, the European Contracts Convention, and the UNIDROIT Principles will gradually develop so that it becomes a real question whether it is necessary for each country's domestic law to retain its own separate rules for contracts.

YOSHINO: This will be my last word to the workshop, because if we do not end soon this will turn into the never-ending discussion. I would, however, like to ask Mark Walter, whose help in organizing this workshop was particularly valuable, to give us his thoughts.

WALTER: I only wish to say that all of you have been my teachers about the CISG. I have been taught by Professor Schlechtriem's commentary, particularly the recent English edition;[15] by Professor Honnold's treatise on the Convention [16] and, especially for my recent work, his Documentary History;[17] by Professor Lookofsky's books;[18] and by Professor Sono's papers and his pieces in the Dubrovnik Lectures.[19] All of these have been extraordinarily valuable to me. They have provided me with the resources that I've needed as a student of the Convention. I feel extremely lucky to have been even a small part of this workshop, and to be sitting here and listening to you all, because over the past several years, the CISG and matters related to it have become my love. I wish to give a special word of thanks to Professors Yoshino and Flechtner who have [page 257] made particularly important contributions to my education in this area. I thank you very much for that.

YOSHINO. And I thank you all. Let's go to dinner.[page 258]


FOOTNOTES

* Professor of Law, University of Pittsburgh School of Law. J.D. 1981 Harvard Law School; M.A. 1975 Harvard University; A.B. 1973 Harvard College.

1. United Nations Convention on Contracts for the International Sale of Goods, Apr. 11, 1980, S. Treaty Doc. No. 98-9 (1983), 19 I.L.M. 668 (1980) [hereinafter "CISG" or "Convention"] (entered into force on Jan. 1, 1988), available in 15 U.S.C.A. app. at 49 (West Supp. 1996), 52 Fed. Reg. 6262-80, 7737 (1987), U.N. Doc. A/Conf. 97/18 (1980).

2. For further information on the participants, please see "About the Participants in the CISG Workshop" at pages 194-95.

3. For further information on Professor Yoshino's program, the demonstration of which could not be reproduced in the following transcript of the workshop, please see "Professor Hajime Yoshino's Artificial Intelligence Program on the CISG" at page 217.

4. Pratt & Whitney v. Malev Hungarian Airlines, Legfelsbb Birosag, Gf. I. 31, 349/1992/9 (Dr. Laszlo Szlavnits trans., 1992), reprinted in 13 J.L. & Com. 31 (1993).

5. See Joseph Lookofsky, Alive and Well in Scandinavia: CISG Part II, 18 J.L. & Com. 289 (1999).

6. Convention Relating to a Uniform Law on the Formation of Contracts for the International Sale of Goods, done at the Hague, July 1, 1964, 834 U.N.T.S. 169, 3 I.L.M. 864 (entered into force Aug. 23, 1972) [hereinafter "ULF" or "Hague Convention"].

7. See UNIDROIT: Principles of International Commercial Contracts, Principes d'UNIDROIT Relatifs aux Contrats du Commerce International (International Institute for the Unification of Private Law ed., 1994), 34 I.L.M. 1069 [hereinafter UNIDROIT].

8. Id.

9. J.D. 1998, University of Pittsburgh School of Law.

10. MCC-Marble Ceramic Center, Inc. v. Ceramica Nuova D'Agostino, 144 F.3d 1384 (11th Cir. 1998).

11. ULF, supra note 6; Convention Relating to a Uniform Law on the International Sale of Goods, done at the Hague July 1, 1964, 834 U.N.T.S. 107, 3 I.L.M. 855 (entered into force Aug. 18, 1972) [hereinafter "ULIS" or "Hague Convention"].

12. Jan Hellner, Gap-Filling by Analogy: Article 7 of the U.N. Sales Convention in Its Historical Context, in Studies in International Law: Festkrift till Lars Hjener 219-33 (Ramberg ed., 1990).

13. Peter Schlechtriem, Commentary on the UN Convention on the International Sale of Goods (CISG) art. 7, & 34, at 66 (Geoffrey Thomas trans., 2d ed. 1998).

14. ULIS, supra note 11.

15. Schlechtriem, supra note 13.

16. John Honnold, Uniform Law for International Sales Under the 1980 United Nations Convention (2d ed. 1991).

17. John Honnold, Documentary History of the Uniform Law for International Sales (1989).

18. E.g., Herbert Bernstein & Joseph Lookofsky, Understanding the CISG in Europe (1997).

19. Kazuaki Sono, The Vienna Sales Convention: History and Perspective, and Formation of International Contracts under the Vienna Convention: A Shift Above the Comparative Law, in International Sale of Goods: Dubrovnik Lectures 1-17 & 111-31 (Petar Sarcevic & Paul Volken eds., 1986).


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