GUIDE TO ARTICLE 7

Comparison with UNIDROIT Principles of International Commercial Contracts

• General observations on the use of the UNIDROIT Principles to help interpret the CISG
• Match-up of Article 7 with UNIDROIT Principles
• Editorial remarks: Ulrich Magnus [Germany]
• Official UNIDROIT Comments on the Principles cited
• Full text of UNIDROIT Principles
• For related comparative, go to
  o Comparison with Principles of European Contract Law (PECL)

Article 1.7 - Good Faith and Fair Dealing

(1) Each party must act in accordance with good faith and fair dealing in international trade.

(2) The parties may not exclude or limit this duty.

[The UNIDROIT articles displayed are to be read in conjunction with the Official Comments on them as "the comments on the articles are to be seen as an integral part of the Principles" (UNIDROIT).]

To examine CISG provisions displayed in their context, go to the full text of the CISG || To examine UNIDROIT Principles displayed in their context, go to the full text of the UNIDROIT Principles

1. Good Faith in the CISG and the UNIDROIT Principles

But despite these obvious differences of wording both texts accord in their essence. For, it is common ground that under the CISG the good faith principle also applies to the interpretation of the individual contract and to the parties contractual relationship as such.[1]

On the other hand the UNIDROIT commentary to the Principles acknowledges that the good faith principle "may also be seen as an expression of the underlying purpose of the Principles" and may be used in interpreting the Principles.[2]

Thus the interpretation of the unified law texts themselves as well as the interpretation of individual contracts and also the whole contractual relationship of the parties have to be guided by the maxim of good faith. Under both instruments the maxim therefore fulfills a twofold function: it governs as one of the decisive factors the meaning of the abstract law rules as well as the individual contract. There is only a slight gradual difference in weight that the CISG and the Principles grant to good faith.

Under the CISG and under the Principles it is clear that no specific national good faith concept can be applied but only one which fits for international trade relations. Both texts expressly stress this idea.[3]

Partly an international standard of good faith may already exist and may clearly be revealed and defined -- at least in business branches with a long-standing tradition. Partly that standard may not exist but remains to be developed by business circles, arbitrators and courts, for instance in fresh and modern trade branches like telesales, etc.

Evidently under the Principles the object of the good faith and fair dealing maxim is the behavior of the contract parties. The parties shall act in accordance with the maxim; their conduct is regulated.

Under the CISG the object of the principle is less clear. But the Convention also intends to secure that (sales) contracts between parties from different countries are governed by the good faith principle.[4]

Thus, the Principles can help to clarify the actual object of the good faith principle contained in the CISG.

Both the CISG and the Principles provide for a number of rules specifying what good faith is designated to mean in certain situations. And although CISG constitutes the more specific regulation concentrating on a single type of contract only, it is the Principles that despite or because of their general character contain more provisions and more detailed provisions on good -- and bad -- faith.

The CISG addresses the precontractual phase only indirectly by art. 16 (2) (b). The provision makes an offer irrevocable once the offeror has created a situation in which the offeree reasonably relied on the offer as irrevocable and acted in reliance on the offer. The same rule in identical wording is also adopted by the Principles (art. 2.4 (2) (b) Principles).

The binding effect of some particular conduct and reliance on it emanates from the good faith principle that no one should take advantage of acts or situations which are irreconcilable with his prior conduct (prohibition of venire contra factum proprium).

But in contrast to the CISG, the Principles establish a further duty not to continue or break off precontractual negotiations in bad faith (art. 2.15 (2) Principles). And according to art. 2.5 (3) Principles, it is bad faith when a party starts or continues negotiations while "intending not to reach an agreement with the other party". The good faith principle thus demands fair negotiations with a clear view to reach agreement. Misuse of the negotiation process to the detriment of the other party offends the standard of good faith recited in the Principles.[5]

And although the CISG does not govern the precontractual phase the regulation in the Principles will be helpful for cases where the parties negotiate on a modification or termination of an existing CISG contract. The solution envisaged by art. 2.15 Principles suits also under the CISG.

Under both the CISG and the Principles a contract and its alteration need no form in order to be valid.[6] Only if a written contract contains a no oral modification clause then any modification must also be in writing or in the form the parties agreed upon.[7] But to this exception, the CISG as well as the Principles allow an identical sub-exception grounded on the good faith principle: "a party may be precluded by its conduct from asserting such a clause to the extent that the other party has acted in reliance on that conduct."[8] Again conduct which creates a situation of reliance and acting on it override rules of strict formality.

Unparalleled in the CISG are those provisions of the Principles which deal with questions of material validity of contracts (art. 3.1 - 3.20 Principles) since CISG does not govern these questions (art. 4 (a) CISG). The Principles also here apply the good faith principle.[9]

As already mentioned, only the Principles provide more or less clearly that also contract interpretation must be guided by good faith and fair dealing (art. 1.7 and 4.8 Principles). Under the CISG the same solution should prevail. Application of the Principles could and should help one interpret the CISG.

Under the CISG a few provisions on the parties' statutory obligations contain good faith elements: thus, for instance, art. 35 (2) (b) CISG obliges the seller to supply goods which are fit for a particular purpose indicated to the seller except where the buyer could not reasonably rely on the seller's skill. Or, under art. 42 (2) (b) CISG a seller is not in breach of his obligations if he delivers goods not free from third-party rights when these rights resulted from the seller's compliance with buyer's particular wishes as to the manufacture, design, etc. of the goods.

No wonder, the Principles as a general regulation for all kinds of contracts contain no comparable specific obligations.

The Principles expressly state that contractual obligations may be implied under the maxim of good faith (art. 5.2 Principles).[10] The CISG does not contain a comparable rule. Nevertheless, it is widely accepted that also under the CISG additional obligations can be implied, in particular, a general duty to cooperate.[11] Just that same rule is now expressly provided for by art. 5.3 Principles: "Each party shall cooperate with the other party when such co-operation may reasonably be expected for the performance of that party's obligations." The rule can be understood as expression of the general principle -- based on good faith -- that neither party must hinder performance through the other nor otherwise militate against the contractual purpose.[12] The Principles' rule prominently assists the mentioned CISG interpretation.

Both the CISG and the Principles state that a "party may not rely on the non-performance of the other party to the extent that such non-performance was caused by the first party's act or omission" or -- as only the Principles add -- "by another event as to which the first party bears the risk."[13] This provision again can be traced back to the sub-principle of good faith that no one should profit from own unlawful or otherwise forbidden acts. And the addition in the Principles seems to be a helpful rule for a situation not explicitly regulated by the CISG.

A principle very similar to that one just mentioned explains the well-known mitigation rule. An aggrieved party cannot claim damages for losses which she herself could have avoided. The aggrieved party should not profit from own omissions. Both the CISG and the Principles contain mitigation rules although they are differently worded.[14] The Principles' mitigation rule seems to reduce the aggrieved party's claim in any case when that party's failure to mitigate was causally connected with the loss while the CISG formulation gives some discretion in that respect ("may claim a reduction in the damages in the amount by which the loss should have been mitigated").

3. Final Remarks

The differences between the CISG and the Principles can be nearly neglected as far as the general concept of good faith in international contracts is concerned. Some textual differences do not matter in essence.

* Professor of Law at the University of Hamburg, also Judge at the Court of Appeal of Hamburg.

1. Compare Bianca/Bonell (-Bonell), Commentary on the International Sales Law (1987) Art. 7 no. 2.4.1; von Caemmerer/Schlechtriem (-Herber), Kommentar zum Einheitlichen UN-Kaufrecht (2^nd ed. 1995) Art. 7 no. 7; Staudinger (-Magnus), Kommentar zum Bürgerlichen Gesetzbuch (CISG) (13^th ed. 1994) Art. 7 no. 10.

2. UNIDROIT (ed.) Principles of International Commercial Contracts (1994) 15.

3. See also UNIDROIT, Principles 18; Bonell, An International Restatement of Contract Law (1994) 81.

4. Bianca/Bonell (-Bonell) Art. 7 no. 2.4.2; von Caemmerer/Schlechtriem (-Herber) Art. 7 no. 15.

5. For further examples of bad faith see UNIDROIT, Principles 51 et seq.

6. Art. 11 CISG; art. 1.9 (1) Principles.

7. Art. 29 (2) (1) CISG; art. 2.18 (1) Principles.

8. Art. 29 (2) (2) CISG and - in identical terms - art. 2.18 (2) Principles.

9. See art. 3.5 (1) (a): if "it was contrary to reasonable commercial standards of fair dealing to leave the mistaken party in error"; similar art. 3.8; 3.10 (2).

10. For examples of implied duties see UNIDROIT, Principles 102.

11. See Bianca/Bonell (-Bonell) Art. 7 no. 2.3.2.2; Honnold, Uniform Law for International Sales Under the 1980 United Nations Convention (2^nd 1991).

12. Magnus, Int. Trade and Bus L Ann III (1997) 46.

13. Art. 80 CISG; art. 7.1.2 Principles.

14. Art. 77 CISG; art. 7.4.8. Principles.

Comments reprinted with permission from UNIDROIT

ARTICLE 1.6

(Interpretation and supplementation of the Principles)

(1) In the interpretation of these Principles, regard is to be had to their international character and to their purposes including the need to promote uniformity in their application.

(2) Issues within the scope of these Principles but not expressly settled by them are as far as possible to be settled in accordance with their underlying general principles.

COMMENT

1. Interpretation of the Principles as opposed to interpretation of the contract

The Principles, like any other legal text, be it of a legislative or of a contractual nature, may give rise to doubts as to the precise meaning of their content. The interpretation of the Principles is however different from that of the individual contracts to which they apply. Even if the Principles are considered to bind the parties only at a contractual level, i.e. their application is made dependent on their incorporation in individual contracts, they remain an autonomous set of rules worked out with a view to their application in a uniform manner to an indefinite number of contracts of different types entered into in various parts of the world. As a consequence they must be interpreted in a different manner from the terms of each individual contract. The rules for the interpretation of the latter are laid down in Chapter 4 of the Principles. The present article deals rather with the manner in which the Principles are to be interpreted.

2. Regard to the international character of the Principles

The first criterion laid down by this article for the interpretation of the Principles is that regard is to be had to their "international character". This means that their terms and concepts are to be interpreted autonomously, i.e. in the context of the Principles themselves and not by reference to the meaning which might traditionally be attached to them by a particular domestic law.

Such an approach becomes necessary if it is recalled that the Principles are the result of thorough comparative studies carried out by lawyers coming from totally different cultural and legal backgrounds. When drafting the individual provisions, these experts had to find sufficiently neutral legal language on which they could reach a common understanding. Even in the exceptional cases where terms or concepts peculiar to one or more national laws are employed, the intention was never to use them in their traditional meaning.

3. Purposes of the Principles

By stating that in the interpretation of the Principles regard is to be had to their purposes, this article makes it clear that they are not to be construed in a strict and literal sense but in the light of the purposes and the rationale underlying the individual provisions as well as the Principles as a whole. The purpose of the individual provisions can be ascertained both from the text itself and from the comments thereon.As to the purposes of the Principles as a whole, this article, in view of the fact that the Principles' main objective is to provide a uniform framework for international commercial contracts, expressly refers to the need to promote uniformity in their application, i.e. to ensure that in practice they are to the greatest possible extent interpreted and applied in the same way in different countries. As to other purposes, see the remarks contained in the Introduction. See further Art. 1.7 which, although addressed to the parties, may also be seen as an expression of the underlying purpose of the Principles as such to promote the observance of good faith and fair dealing in contractual relations.

4. Supplementation of the Principles

A number of issues which would fall within the scope of the Principles are not settled expressly by them. In order to determine whether an issue is one that falls within the scope of the Principles even though it is not expressly settled by them, or whether it actually falls outside their scope, regard is to be had first to what is expressly stated either in the text or in the comments (see e.g. Art. 3.1, comment 3 on Art. 1.3 and comment 4 on Art. 1.4). A useful additional guide in this respect is the subject-matter index of the Principles.

The need to promote uniformity in the application of the Principles implies that when such gaps arise a solution should be found, whenever possible, within the system of the Principles itself before resorting to domestic laws.

The first step is to attempt to settle the unsolved question through an application by analogy of specific provisions. Thus, Art. 6.1.6 on place of performance should also govern restitution. Similarly, the rules laid down in Art. 6.1.9 with respect to the case where a monetary obligation is expressed in a currency other than that of the place for payment may also be applied when the monetary obligation is expressed by reference to units of account such as the Special Drawing Right (SDR) or the European Currency Unit (ECU). If the issue cannot be solved by a mere extension of specific provisions dealing with analogous cases, recourse must be made to their underlying general principles, i.e. to the principles and rules which may be applied on a much wider scale because of their general character. Some of these fundamental principles are expressly stated in the Principles (see, e.g., Arts. 1.1, 1.3, 1.5 and 1.7). Others have to be extracted from specific provisions, i.e. the particular rules contained therein must be analysed in order to see whether they can be considered an expression of a more general principle, and as such capable of being applied also to cases different from those specifically regulated.

Parties are of course always free to agree on a particular national law to which reference should be made for the supplementing of the Principles. A provision of this kind could read "This contract is governed by the UNIDROIT Principles supplemented by the law of country X", or "This contract shall be interpreted and executed in accordance with the UNIDROIT Principles. Questions not expressly settled therein shall be settled in accordance with the law of country X".

ARTICLE 1.7

(Good faith and fair dealing)

(1) Each party must act in accordance with good faith and fair dealing in international trade.

(2) The parties may not exclude or limit this duty.

COMMENT

1. "Good faith and fair dealing" as a fundamental idea underlying the Principles

There are a number of provisions throughout the different chapters of the Principles which constitute a direct or indirect application of the principle of good faith and fair dealing. See, for instance, Articles 2.4(2)(b), 2.15, 2.16, 2.18, 2.20, 3.5, 3.8, 3.10, 4.1(2), 4.2(2), 4.6, 4.8, 5.2, 5.3, 6.1.3, 6.1.5, 6.1.16(2), 6.1.17(1), 6.2.3(3)(4), 7.1.2, 7. 1.6, 7.1.7, 7.2.2(b)(c), 7.4.8 and 7.4.13. This means that good faith and fair dealing may be considered to be one of the fundamental ideas underlying the Principles. By stating in general terms that each party must act in accordance with good faith and fair dealing para. (1) of this article makes it clear that even in the absence of special provisions in the Principles the parties' behaviour throughout the life of the contract, including the negotiation process, must conform to good faith and fair dealing.

Illustrations

1. A grants B forty-eight hours as the time within which B may accept its offer. When B, shortly before the expiry of the deadline, decides to accept, it is unable to do so: it is the weekend, the fax at A's office is disconnected and there is no telephone answering machine which can take the message. When on the following Monday A refuses B's acceptance A acts contrary to good faith since when it fixed the time-limit for acceptance it was for A to ensure that messages could be received at its office throughout the forty-eight hour period.

2. A contract for the supply and installation of a special production line contains a provision according to which A, the seller, is obliged to communicate to B, the purchaser, any improvements made by A to the technology of that line. After a year B learns of an important improvement of which it had not been informed. A is not excused by the fact that the production of that particular type of production line is no longer its responsibility but that of C, a wholly-owned affiliated company of A. It would be against good faith for A to invoke the separate entity of C, which was specifically set up to take over this production in order to avoid A's contractual obligations vis-à-vis B.

3. A, an agent, undertakes on behalf of B, the principal, to promote the sale of B's goods in a given area. Under the contract A's right to compensation arises only after B's approval of the contracts procured by A. While B is free to decide whether or not to approve the contracts procured by A, a systematic and unjustified refusal to approve any contract procured by A would be against good faith.

4. Under a line of credit agreement between A, a bank, and B, a customer, A suddenly and inexplicably refuses to make further advances to B whose business suffers heavy losses as a consequence. Notwithstanding the fact that the agreement contains a term permitting A to accelerate payment "at will", A's demand for payment in full without prior warning and with no justification would be against good faith.

2. "Good faith and fair dealing in international trade"

The reference to "good faith and fair dealing in international trade" first makes it clear that in the context of the Principles the two concepts are not to be applied according to the standards ordinarily adopted within the different national legal systems. In other words, such domestic standards may be taken into account only to the extent that they are shown to be generally accepted among the various legal systems. A further implication of the formula used is that good faith and fair dealing must be construed in the light of the special conditions of international trade. Standards of business practice may indeed vary considerably from one trade sector to another, and even within a given trade sector they may be more or less stringent depending on the socio-economic environment in which the enterprises operate, their size and technical skill, etc.

It should be noted that the provisions of the Principles and/or the comments thereto at times refer only to "good faith" or to "good faith and fair dealing". Such references should always be understood as a reference to "good faith and fair dealing in international trade" as specified in this article.

Illustrations

5. Under a contract for the sale of high-technology equipment the purchaser loses the right to rely on any defect in the goods if it does not give notice to the seller specifying the nature of the defect without undue delay after it has discovered or ought to have discovered the defect. A, a buyer operating in a country where such equipment is commonly used, discovers a defect in the equipment after having put it into operation, but in its notice to B, the seller of the equipment, A gives misleading indications as to the nature of the defect. A loses its right to rely on the defect since a more careful examination of the defect would have permitted it to give B the necessary specifications.

6. The facts are the same as in Illustration 5, the difference being that A operates in a country where this type of equipment is so far almost unknown. A does not lose its right to rely on the defect because B, being aware of A's lack of technical knowledge, could not reasonably have expected A properly to identify the nature of the defect.

3. The mandatory nature of the principle of good faith and fair dealing

The parties' duty to act in accordance with good faith and fair dealing is of such a fundamental nature that the parties may not contractually exclude or limit it (para. (2)). As to specific applications of the general prohibition to exclude or limit the principle of good faith and fair dealing between the parties, see Arts. 3.19, 7.1.6 and 7.4.13.

On the other hand, nothing prevents parties from providing in their contract for a duty to observe more stringent standards of behaviour.