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Reproduced with permission of Camilla B. Andersen & Ulrich G. Schroeter eds., Sharing International Commercial Law across National Boundaries: Festschrift for Albert H. Kritzer on the Occasion of his Eightieth Birthday, Wildy, Simmonds & Hill Publishing (2008) 627-639

Commodity Sales and the CISG

Bruno Zeller [*]

INTRODUCTION

Whenever parties enter into contracts the correct choice of law is crucial. It determines the legal relationship as it is impossible for parties to negotiate every point. A contract normally merely settles the main points.[1] Standard form contracts appear to be a solution which businesses adopt in order to define their relationships in a standard and consistent way. It follows that the standard form contract is inevitably intertwined with domestic law including the CISG which fills the gaps left by the standard form contract.[2] Put simply, municipal law provides an 'infrastructure' for standard form contracts.[3]

It is obvious that a party, if given the choice and being the dominant partner in the negotiations, will choose its own law. The familiarity argument is often quoted to justify such a choice. If on the other hand the two parties are evenly matched, much time and energy could be saved by simply agreeing not on a neutral law but a unified law such as the CISG. Transaction costs are kept at a low level and it has been argued that the logical extension to the CISG is also to include the UNIDROIT Principles or PECL into the contract.

'The UNIDROIT Principles and the PECL encapsulate the common core of contract law principles accepted intentionally, or Europe-wide, [page 627] respectively, and constitute a concise, comprehensive, and workable set of rules.'[4]

Of special interest to this paper is whether the CISG can resolve disputes involving commodity sales. Unlike machinery and ready made consumer goods commodities are often traded while in transit and one consignment of say oil can have up to 100 sales transactions before it reaches the ultimate buyer. The question is whether the CISG takes on the mantle of a neutral law in dealing with commodity sales. It has been argued, and this is very pertinent in this case, that the most suitable law is that of a state that plays a dominant role in the particular area of trade.[5] In this case the law on commodity markets has been dominated by English law due to the special courts set up in London to deal with commodity sales disputes.

Today the commodities market is dominated by multinational traders and it is very rare to find an English commodity trader of major importance.[6] The conclusion is that the choice of law is merely driven by historical facts and not by the question whether English law is still the best law to solve commodity sales disputes.

From the outset it should be recognized that this paper is rather theoretical in nature and would currently only be applicable to a fraction of commodity sales. The reason simply is that commodity sales are regulated by powerful trade associations,[7] and it is not surprising that standard form contracts pursuant to Article 6 CISG contain clauses effectively excluding the CISG. The purpose of this paper is rather to draw attention to the' bifocal' world of international trade law [8] which Bridge explained.

'[It] represents the effort demanded of a sales law exponent in focusing on both the broad principles laid down in the [CISG] and [page 628] the finely detailed provisions of English sales law in the matter of commodity sales.'[9]

This paper, as stated above, will examine whether the CISG is restricted to govern general sales only, excluding specialist sales contracts such as the sale of commodities. Several problems have been cited as reasons. The problem which has often been discussed as a reason that English law is better suited to commodity sales is the fact that commodity sales -- unlike the sale of specific goods such as machinery -- are subject to speculative activities. String trading and circle contracts are the product of speculative trading and hence only the seller and ultimate buyer are dealing with the actual goods. Furthermore the jurisprudence of commodity sales allows traders to take advantage of technical rejection rights. This, unlike in some industries, is not a problem as loyalty in commodity trade does not appear to be one of the most prized assets and, 'cuts very little ice here.'[10]

The problem which could arguably be hindering the application of the CISG is that technical construction of a contract is not a feature of the CISG. However that does not mean that the CISG cannot take on the same technical rejection role as this would be within the mandate of Article 8 CISG namely to inquire into the subjective intent of parties and take customary practices into consideration pursuant to Article 9 CISG. In addition it is established that the CISG is a default rule. It follows that standard form contracts have priority over the CISG pursuant to Article 6 CISG. This article not only allows the parties to exclude the CISG but more importantly parties are allowed to modify or exclude sections or articles of the CISG to suit their individual needs.

COMMODITY TRADE -- SOME OBSERVATIONS

It is necessary to address several arguments which are advanced in favor of excluding the CISG in commodity sales. Historically speaking Kahn raised the criticism that ULIS (the forerunner of the CISG) did not reflect the various kinds of goods which are traded. He specifically pointed to the difference [page 629] between commodity sales and the sale of complex machinery.[11] After the drafting of the CISG -- and having the benefit of evaluating ULIS, it has been noted that there were changes but that the convention is construed with the sale of goods 'in general' in mind. The conclusion is that the CISG applies to all sales regardless of differences between them.[12]

It is not surprising that it appears that the United Kingdom is still under the impression that 'the Jaw which applies to international commodities contracts conducted on standard form terms promulgated by London based trading associations [and therefore] the law of international sale of goods ... is but English domestic law writ large.'[13] This may be true in the case of the commodities market which has a rich history, is dominated by very few players, and arguably developed a private language which is incomprehensible to trade outsiders.[14] It could be argued that at least in the commodities market a uniform law is applicable, namely United Kingdom law. It follows that it is of no real consequence to commodity traders what law is applicable to the rest of the business community. All involved parties within the trade understand the Jaw and, hence, predictability and certainty is the product of a uniform law which is applied in this case.

The problem with the above argument is that it is extremely ethnocentric and does not take into account that a globalized world may demand a different approach.

As far as the trade in manufactured goods is concerned, English law is far from being the dominant force it once was. What makes the matter worse for English traders is that they are frequently involved in litigation or arbitration where the CISG is the governing law. The uniform international sales law is being interpreted and applied by courts other than English ones, and hence, the prospect of an influential interpretation of the CISG by English [page 630] courts is diminished, as the United Kingdom has not ratified the CISG.[15] In relation to commodity sales Bridge argues that:

'To cast all of that experience [in commodities contracts] aside in place of something that is incomplete and untested would be wasteful and destructive. The practical concerns of English law in the area of commodity contracts are a world away from those arising out of the type of contract facing a court or arbitrator applying the CISG.'[16]

To argue that a commodities contract is specialized and a 'world away' from other economic activities and for that reason should not be subject to a uniform law is not helpful. Schwenzer correctly argued that the problem with an approach as advocated by Bridge amounts to a 'breach categorization.'[17] Put simply, the CISG does provide a means of solving any disputes, including commodity sales, 'in a reasonable manner that extends beyond the narrow confines of national pre-conceived views.'[18]

If every country would adopt the same attitude, the introduction of a unified law would be impossible. Most trading nations have understood that it is more helpful to their trade and economy to adopt and ratify a convention than to insist that their well-tested domestic law is superior to an untested convention. Furthermore it is not very likely that only nations 'who saw the CISG as an instrument superior to their national laws for dealing with international [trade]'[19] adopted the CISG. This would mean that common law countries such as Australia, Canada and the United States who after all are a product of the English common law developed an inferior sales law than the one used in England. Such an argument is not very compelling. Japan is now in the process of ratifying the CISG which would mean that England is the only major trading nation which has not yet ratified the CISG. Can it be argued that English law therefore is the only law in the world which is superior to the [page 631] CISG? The better argument is that unification of laws is forced upon nations due to the globalization process and the increased trade by nations seeking a uniform neutral law which favors neither party.

It is also worth noting that commodities contracts are known to be strict and interpreted literally. As Bridge noted, commodity sales involve a 'hair trigger right of termination.'[20] Such endeavors are normally defended as being necessary to promote certainty. A case may illustrate this point namely The New Prosper.[21] The case involved the sale of Australian barley. Under the contract, the buyer had to nominate a ship and the seller had the right to nominate a port from an agreed range. The buyer nominated the New Prosper; which was rejected by the seller on the grounds that it could not load the ship due to local restrictions in one of the ports stipulated under the contract. The literal interpretation of the contractual clause allowed the seller to cancel the contract. The apparent reason the seller rejected the vessel was simply to avoid the contract and take advantage of a rise in the market price. It was not the inability to ship the goods which could have been loaded without any problems from another conforming port. It would be interesting to speculate whether the CISG would have come to a different conclusion by invoking Articles 8 and 9 CISG in conjunction with the principle of fundamental breach.

There is no debate that in the commodities market strict standards do apply, especially where the problem of timely delivery is concerned. Therefore, the handing over of clean documents is always of the essence to the contract, and the ability to cure any defects in the documentation does not extend to commodity markets [22] The solution under the CISG would be comparable to any domestic law as, in this instance, the perfect tender rule as known in common law can also be applied under the CISG by taking into consideration customary practices [23] and the intent of the parties.[24] The CISG, in conjunction with the INCOTERMS and the UCP 500, offers a viable solution [page 632] to commodity traders. It plays a supplementary role, and domestic views to the contrary should be rejected.[25]

COMMODITY TRADE -- A COMPARATIVE ANALYSIS

There is no debate that commodity sales have two aspects. The first is, where commodities are sold directly from the seller to the buyer, and the second aspect is, where string trading takes place.

In the first instance no effective arguments can be advanced why the CISG cannot apply. After all whether a buyer purchases a machine or barley is not dramatically different in order to invoke a specialized law. If a brewery is purchasing barley their intent is to use the product and they will insist on delivery. If there is a breach, damages or other remedies will be sought which are available under the CISG.

The second possibility, and most likely the more common one, is where the commodity sale is subject to speculative buying and selling. In essence the problem is whether the CISG covers paper trading or only 'actual' trading in goods. In other words is the buying and selling of documents within the ambit of the CISG? The only exception which needs to be considered is the exclusion from the CISG of negotiable instruments. However, this situation does not apply in string contracts. Despite buying the shipping documents the buyer purchases the right to the goods and can if he wishes take physical ownership of the commodity goods. Put simply the buyer in a string purchase takes out an option to either keep or on-sell the goods. From this point of view the CISG is not excluded and can apply not only to the final contract between the eventual buyer and the eventual seller but also to any party within a sting or circle contract.

As is apparent in any contract -- and commodity sales are no exception -- the CISG will be supplemented by standard form contracts.[26] It appears that in most cases a standard form applies which has been devised by GAFTA or FOSFA on a take it or leave it basis. However an important clause in any [page 633] standard form contract is the choice of laws clause. The domicile clause 31 in GAFTA 100 states:

'Buyers and Sellers agree that, for the purpose of proceedings either legal or by arbitration, this contract shall be deemed to have been made in England, and to be performed there... and the Courts of England or Arbitrators appointed in England ... shall have exclusive jurisdiction over all disputes which may arise under this contract. Such disputes shall be settled according to the law England, whatever the domicile, residence or place of business of the parties to this contract may be or become ...'

As stated previously, most commodity traders are multinationals with none or very little connection to England. This makes the domicile clause a rather contrived one in order to bind the parties to English law. Given that the standard form contracts are identical and only price or quantity is different, any system of law could arguably fill the gaps in the standard form contract. Once the United Kingdom ratifies the CISG this clause no doubt would need to be amended as it will create a problem. The law of England will include the CISG and hence if the CISG is to be excluded it must mentioned in such a way that it is not in conflict with the domicile clause. If left as it is, the CISG could conceivably be applicable. The conclusion so far is that commodity traders historically have been tied to the English common law to fill the gaps in their standard form contracts because they can look back at 100 years or so of case law. This is not a very compelling argument though practical and certainly 'good while it lasts'. However as the European Commission is in the process of drawing up a European Contract law, often arguably the CISG would take on a leading role and English Common law would be supplanted altogether. Should that happen, commodity traders 'would not have a sort of 'legacy English law' to turn to when selecting a governing law.'[27] It would be interesting to speculate what choice of law clause would be inserted when such an event takes place. If the current evidence rule is considered St. Pierre v South American Stores Ltd.[28] supports an interesting insight. The admissibility of extrinsic evidence which is needed to add to, vary or contradict a contractual term pursuant to the Rome Convention is governed by the lex causae and not lex fori as it is substantive and not procedural in nature. The [page 634] effect was that pre-negotiations were taken into consideration which are not admissible under English law but were in essence a mirror image of Article 8 CISG. In essence if the lex causae would apply and the state is a convention state the CISG may be applicable once the European Commission does produce a 'European law.'

Such an event is more than likely to occur and hence a serious comparison between English case law and the CISG would be a appropriate undertaking at this stage. A detailed comparison between the CISG and English law must be left to future research. What can be said is that commodity dealers would need to seriously consider the application of the CISG or a 'European Contract law' which will change the gap filling role of the current system. Such an endeavor must be undertaken in the near future otherwise a seamless transition from historical roots to a 'bifocal world' will not be possible.

At this stage a comparative examination of one area will give a preliminary indication whether English law is the only law capable of governing commodity sales. '[The] best example of English sales law designed for commodity sales [is] the ruling dealing with damages assessment in the event of non-delivery by the seller (or no-acceptance by the buyer).[29] Therefore damages in cases of non delivery will be examined.

NON-DELIVERY AND DAMAGES

Bridge summarizes the English position by pointing out that rule of damages is based upon the market which prevails at the date of the due delivery and not at the termination date and 'in principle ignores such transactions.'[30]

In the CISG the overarching principle is found in Article 45 CISG which explains the remedies which are open to the buyer if the seller fails to perform any if his obligations under the contract. It is obvious that the obligations of the seller whether documentary delivery is anticipated or goods ought to be delivered would be found in the standard form contract. If the remedy is not contained in the contract the buyer can resort to Article 74 CISG which [page 635] allows the buyer to claim a 'sum equal to the loss including loss of profit.'[31] The losses must be measured against a backdrop of foreseeability. The buyer can only claim those damages which the parties in breach foresaw or ought to have foreseen. In commodity sales the fact that there are price fluctuations is known and hence a seller could only avoid payment of damages in cases where the price fluctuation has been unforeseen and so unusual that it could not have been in the contemplation of the parties.

In this case a difference between English law and the CISG possibly could occur. However this is only a capping of losses affecting either party. In essence either party could profit from such a law depending which way the price fluctuation moves. In a market where deals are done on expectations of price fluctuation there is always a winner and a loser hence such a capping of losses could be regarded as an insurance policy. Arguably such a position would not be regarded as detrimental to the industry. Articles 75 and 76 CISG further assist in the determination of losses when a contract is avoided and a replacement purchase has been made or respectively where such a purchase is not contemplated.

The fact that under English law the price is calculated at the time of delivery and not at the time of avoidance or when a substitute purchase is made is of no consequence. The CISG first via Article 9 or 8 CISG assists in the determination of 'knowledge'. Secondly, Article 77 CISG demands that the aggrieved party takes all steps to mitigate the losses which would as far as possible prevent a party in a speculative market from taking advantage of a rising market. Simply put Article 77 CISG make sure that any replacement purchase is speedily executed. No doubt market forces will play an important part in determining breaches of contract as the aggrieved party is forced by Article 77 CISG to mitigate the losses and the breaching party is also interested to minimize losses.

It is interesting to note that in Shearson Lehman Hutton Inc and Another v Maclaine Watson & Co Ltd and Another (no 2) [32] the whole issue in relation to the fixing of the relevant day as to the measure of damages hinged on the proper interpretation of Article 50(3) of the Sale of Goods Act, 1979. Two issues had to be determined namely 'whether there was an available market [page 636] for sale of tin and whether it was necessary to consider the price obtained if the sale was concluded in one day'[33]

Two observations need to be made. First by relying on the Sale of Goods Act commodity sales are not relying on any other law as a sale of machinery would, hence commodity sales are not relying on a different law than general sales would. Secondly the outcome was a rather contrived legalistic one but certainty was achieved whereas the CISG would have attempted to determine the actual losses which is not fostering certainty in interpretation of law but fosters justice. To achieve certainty and justice is not always achievable as opportunity cost will play a part in the determination of ascendancy of one principle over the other one. It is one of the criticisms of the CISG namely that certain principles are vague or are based on the concept of open terms. However, jurisprudence has shown that 'notwithstanding or even because of its openness' the CISG has been successful and served as an example for recent domestic law reforms.[34]

DELIVERY OF SUBSTITUTE GOODS

If a substitute delivery is anticipated the buyer must avoid the contract. Only via avoidance will this remedy be available. It has been argued under English law that the buyer does not have to enter into a substitute transaction and can treat the contract as one for the payment of the financial difference.[35] This is precisely what the CISG in Articles 75 and 76 prescribes. However the price differential is measured with the prevailing price at the time of avoidance which is contrary to English law. However both Articles 75 and 76 CISG allow the aggrieved party to claim 'any further damages recoverable under Article 74.'[36]

One advantage that the CISG has over English law is the fact that no changes will occur for a long time to come whereas the same cannot be said for English law. One change has already taken place with the introduction of s'15A into the Sale of Goods Act 1979. Buyers are now not allowed to [page 637] terminate a contract if the variations in the description, quality and fitness of goods are only slight.[37] However in many instances even slight variations can make goods basically worthless. The CISG favors an economically oriented approach based on the actual loss suffered by the aggrieved party.'[38] The fact that economic loss is of importance is shown in a German case. The German Bundesgerichtshof in 1979 delivered what could be termed a 'classic' decision.[39] Only 3% of the delivered cheese was defective. Because at the time of contract formation both seller and buyer knew that the cheese market in Germany was saturated it was foreseeable that customers would change to other suppliers even for trivial unsatisfactory deliveries. It can be argued that the court took the foreseeable losses of the buyer into consideration which was based on the foreseeable behavior of the buyer's customers.[40]

This is arguably a better approach as economic reality takes precedent over a rigid application of the law. On the other hand it can be argued that this approach is not delivering certainty and consistency. However if it is true that 'loyalty in commodity trade does not appear to be one of the most prized assets and, cuts very little ice here' [41] then the CISG delivers a better solution.

However the CISG, like English law, determines that if the buyer has taken the goods and they do not conform with the contract a price reduction can be sought.[42]

CONCLUSION

Undoubtedly there are differences between the English law as applied to commodity sales and the CISG. However this initial paper has attempted to show that the differences are not insurmountable. Considering that international trade law is in a state of flux, the legal world of commodity trades will change. The reason is simple. Conventions are becoming more prevalent. Japan the second last big trading nation is in the process of adopting the [page 638] CISG and most importantly the European Commission is looking at a common European contract law. After all the CISG is based on general principles of law which are to be found in most legal systems. Therefore the differences arguably are not fundamental in nature and despite some differences between commodity sales and general sales a solution can be found.

It is true that a uniform sales law is not able to be provided on a one-size-fits-all basis.[43] As the CISG is a fall-back position the commodity traders can simply draw up their standard form contract to cover the specialized areas of their trade and leave the general areas to the CISG. It would be trite to argue that the whole commodity market operates completely different from say the sale or purchase of a machine. In the end the goods must be delivered on time, must conform to the contract and documents must be handed over in a timely and precise fashion. Such matters can either be left to the CISG or as pointed out above can be covered in standard form contracts. As major English commodity traders have been absorbed by multinationals so will English law be absorbed by a uniform law be it the CISG or a common European law which will be based on the CISG as well. Arguably the time has come for commodity traders to recognize the trend and consider alternatives to the current legal framework. Perhaps it is fitting to conclude that it must be realized that the legal world does not stand still for anybody and history accounts for little more than nostalgia. [page 639]


FOOTNOTES

* Dr Bruno Zeller; Assoc. Professor, Victoria University, Melbourne; Adjunct Professor, Murdoch University, Perth. I would like to thank Gerry Box from Victoria University for final reading of the draft and some useful suggestions.

1. Fountoulakis, C (2005) 'The Parties Choice of "Neutral Law" in International Sales Contracts' (7) European Journal of Law Reform 303.

2. Hellner, J (1986) 'The Vienna Convention and Standard Form Contracts' in Sarcevic, P and Volken, P (eds) International Sales of Goods: Dubrovnik Lectures Oceana 335 at 336.

3. Ibid at 337.

4. Fountoulakis 'The Parties Choice' supra fu 1 at 329.

5. Fountoulakis 'The Parties Choice' supra fn 1 at 306.

6. Bridge, M (2003) 'Uniformity and Diversity in the Law of International Sale' (15) Pace International Law Review 55 at fn 8.

7. Such as the London based Grain and Feed Trade Association (GAFTA) or the Federation of Oil Seeds and Fats Association (FOSFA).

8. Bridge, M (1997) 'The Bifocal World of International Sales: Vienna and Non-Vienna' in Cranston, R (ed) Making Commercial Law Oxford University Press 277.

9. Bridge 'Uniformity and Diversity' supra fn 6 at 55.

10. Bridge, M (1991) 'International Private Commodity Sales' (19) Canadian Business Law Journal 485 at 488.

11. Kahn, p (1961) La Vente Commerciale Internationale Sirey at p 20. For a brief summary of the arguments see Hellner 'The Vienna Convention and Standard Form Contracts' supra fu 2 at 337-8.

12. Hellner 'The Vienna Convention and Standard Form Contracts' supra fu 2 at 339.

13. Bridge 'The Bifocal World of International Sales' supra fu 8 at 277.

14. See Leible, S ( 1998) , Aussenhandel und Rechtssicherheit' (97) Zeitschrift für Vergleichende Rechtswissenschafl 286 at 289.

15. Bridge 'The Bifocal World of International Sales' supra fu 8 at 278.

16. Bridge 'The Bifocal World of International Sales' supra fu 8 at 279.

17. Schwenzer, I (2005) 'The Danger of Domestic Pre-Conceived Views with Respect to the Uniform Interpretation of the CISG: The Question of Avoidance in the Case of Non-Conforming Goods and Documents' (36) Victoria University of Wellington Law Review 795 at 800.

18. Ibid.

19. Bridge 'Uniformity and Diversity' supra fu 6 at 68.

20. Ibid.

21. Richco International Ltd v Bungee & Co Ltd [1991] Lloyd's Rep. 93.

22. Schwenzer 'The Danger of Domestic Pre-Conceive Views' supra fu 17 at 806.

23. Article 9 CISG.

24. Article 8 CISG.

25. Schwenzer 'The Danger of Domestic Pre-Conceived Views' sup a fu 17 at 807.

26. The fact that the CISG can accommodate standard form contracts is well established in the literature. See for examples on the Pace website such as Hellner 'The Vienna Convention and Standard Form Contracts' supra fu 2 at 35-363.

27. Bridge 'Uniformity and Diversity' supra fu 6 at 72.

28. [1937] 1 All. E.R. 206, at 209.

29. Ibid at 68.

30. Ibid.

31. Article 74 CISG.

32. [1990] 3 All ER 733, [1990] 1 Lloyd's Rep. 441.

33. Ibid see catchwords.

34. Fountoulakis 'The Parties Choice' supra fu 1 at 318.

35. Bridge 'Uniformity and Diversity' supra fu 6 at 68.

36. Article 76 CISG.

37. Bridge 'Uniformity and Diversity' supra fu 6 at 69.

38. Graffi, L (2003) 'Case Law on the Concept of "Fundamental Breach" in the Vienna Sales Convention' International Business Law Journal 338 at 343.

39. <http://www.cisg.law.pace.edu/cisg/wais/db/cases2/791024g1.html>.

40. Ibid.

41. Bridge 'International Private Commodity Sales' supra fu 10 at 488.

42. Article 50 CISG.

43. Bridge 'Uniformity and Diversity' supra fu 6 at 55.


Pace Law School Institute of International Commercial Law - Last updated January 26, 2009
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