Reproduced with permission of 16 Journal of Law and Commerce (1997) 257-263
V. Susanne Cook [*]
Since the U.N. Convention on Contracts for the International Sale of Goods (the "Convention" or "CISG")  entered into force almost ten years ago, only two cases interpreting the Convention have arisen in the courts of the United States. This is a stunning result considering the broad scope of the Convention's application. Unless expressly opted out of by the parties, the Convention applies to all international sales contracts where the seller and the buyer maintain their places of business in different Contracting States. [page 257]
One reason for this development is the apparent reluctance of the result-oriented international business community and international legal practitioners to embrace the Convention because of the unpredictability of law in international sales transactions. The establishment of a record of litigation, wherever adjudicated, could increase this predictability. In this formative stage of U.S. jurisprudence on the Convention, courts must pay particular attention to developing a method of interpretation that takes into account the Convention's international character. Legal scholars and commentators have long recognized the enormous potential of the Convention as a historic milestone towards unification of international law. The business community and legal practitioners, however, will cast the final decisive votes by either embracing, or opting out of, the Convention based upon their perception as to whether the courts are able to implement the Convention as a unifying tool in international sales transactions.
The first reported Circuit Court decision interpreting the Convention is encouragingly insightful, yet ultimately disappointing at the same time. The court superficially recognized its additional charge to interpret the Convention in light of its "international character and the need to promote uniformity" in the application of the Convention, but ultimately failed to articulate a method of interpretation that took into account the international character of the Convention and the stated goal of uniformity in its application.[page 258]
I. Facts and Holding of the Case
The Circuit Court case, Delchi Carrier SpA v. Rotorex Corporation, arose as a warranty dispute between a U.S. seller of compressors ("Rotorex") and its Italian customer ("Delchi"), a manufacturer of air conditioner units. Delchi had ordered the compressors for use in its line of portable, room air conditioners for the 1988 summer season. The trial court determined that the compressors failed to conform to the specifications and to the sample provided by Rotorex to Delchi prior to execution of the contract. After Rotorex failed to cure the defects, Delchi brought suit for breach of contract and recovery of damages, including consequential damages for lost profits and certain incidental damages.
Interpreting Article 25 of the Convention, the court held that Rotorex' failure to deliver conforming goods constituted a "fundamental" breach, which is a breach that substantially deprived Delchi of "[what] it was entitled to expect under the contract." Having found a "fundamental" breach, the court examined Article 74 of the Convention to determine the recovery amount that would "equal . . . the loss" suffered by Delchi, including consequential and incidental damages "suffered by [Delchi] as a consequence of the breach." Although the court correctly identified "the principle of foreseeability" as the applicable limitation to recovery under Article 74 of the Convention, it incorrectly assumed, without further investigation, that "the familiar principle of foreseeability established in Hadley v. Baxendale" applied without any deviation to the principle of foreseeability established in the Convention. Fortunately for the parties, the facts of the case supported a finding of the requisite amount of foreseeability under both the Article 74 definition of foreseeability as well as under the Hadley v. Baxendale rule of foreseeability, but further analysis of the two rules would have been required to reach this result.[page 259]
A cursory reading of the two formulations of "foreseeability" illustrates the dissimilar content. Article 74 limits recovery for consequential damages to those matters that "the party in breach foresaw or ought to have foreseen at the time of the conclusion of the contract, in the light of the facts and matters of which he then knew or ought to have known, as a possible consequence of the breach of contract." In contrast, the Hadley v. Baxendale rule of foreseeability tends to restrict recovery to a greater degree in that it requires the loss to have been "such as may reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract, as the probable result of the breach of it."
The two foreseeability formulations are similar and overlapping in many respects but apply different threshold levels. For example, Hadley v. Baxendale's "probable result" limitation is much more restrictive than the "possible consequence limitation" of Article 74. Under the facts of the case, it may be a "harmless error" to simply assume to be in the familiar territory of Hadley v. Baxendale, but under different facts, the error may not have been so harmless.
How did a court that correctly identified the international character of the Convention as the starting point of its analysis miss its mark and blindly assume that no analysis would be required to determine whether the foreseeability principle of the Convention is to be given the same meaning as the foreseeability principle of Hadley v. Baxendale? It is quite interesting to retrace the court's encouraging outset and its inadvertent deviation from the policies of adhering to "the international character" in the interpretation of the Convention and "the need to promote uniformity in its application" long before it discussed Hadley v.Baxendale.
II. Method of Interpretation Employed by the Delchi Court
The Delchi court carefully set the stage by pointing out that the case "is governed by the CISG," an international agreement that requires "that its interpretation be informed by its 'international character and . . . the need to promote uniformity in its application and the observance of [page 260] good faith in international trade.'" These encouraging initial recitals ring hollow as the court ignored its introduction and proceeded in its analysis in much the same manner as if it had been interpreting the Uniform Commercial Code or any other purely domestic statute. For guidance, it consulted exclusively U.S. decisions and U.S. commentators. In its approach, no international trace, such as non-U.S. sources or methods of analysis, can be found anywhere.
Among commentators, there is an unusual general consensus concerning the appropriate method of analysis to be employed when interpreting the articles of the Convention. As a code, the language of the Convention itself must be carefully analyzed and interpreted in accordance with "the general principles on which [the Convention] is based." By anybody's account, the "general principles" on which the Convention is based invoke broad concepts such as the requirement to interpret the Convention in "good faith" and to generally act "reasonabl[y]." In the context of the international character of the Convention, "good faith" mandates an interpretation that takes account of non-U.S. principles and interpretations developed by the other Contracting States to the Convention. To the extent the Convention and the "general principles" on which the Convention is based address an issue but fail to resolve it, Article 7(2) of the Convention directs courts to be guided by "the laws applicable by virtue of the rules of private international law," a gap-filling mechanism that permits, even requires, review of relevant U.S. and foreign decisions.
Any reference to the "general principles" upon which the Convention is based is conspicuously absent from the Delchi decision. It is obvious [page 261] that the Delchi court was unfamiliar with the framework of the Convention and restricted its review to the core articles at issue without seeking guidance from articles of general application such as Article 8. Such articles would have offered additional guidance concerning the requisite amount of knowledge required under the Convention, an important element of foreseeability.
The court observed that "there is virtually no caselaw under the Convention," a correct statement with respect to U.S. caselaw, but without merit with respect to foreign caselaw. Numerous decisions interpreting Articles 25 and 74 of the Convention have been rendered by European courts. Through benign neglect, foreign caselaw is rendered irrelevant and denied its rightful position to be heard as a formidable voice of "persuasive value" or accorded full precedential effect.
Decisions rendered by a U.S. court under the Uniform Commercial Code are very relevant and as the Delchi court observed, such decisions "may also inform a court where the language of the relevant CISG provisions tracks that of the UCC." The court cautioned, however, that the "UCC caselaw is not per se applicable." Unfortunately, the court never explained why the Uniform Commercial Code was relevant at all or why it was not per se applicable.
The Delchi court left us with plenty of useful citations for future decisions under the Convention, but no guidance on how to apply its own advice. The Delchi court was well intended, but was unable to develop a new approach that incorporates, and at the same time transcends, the familiar principles of interpretation established under U.S. jurisprudence for adjudication of purely domestic matters. The court missed an important opportunity to engage in an "international" dialogue with references to foreign decisions and commentaries, civil law principles and the international legislative history of the Convention itself.
The method of interpretation required by the Convention is unfamiliar to most U.S. courts, but does not represent a radical departure from [page 262] present practice. In the interpretation of international treaties, U.S. courts will cite, on occasion, to foreign decisions as relevant and authoritative sources, particularly if there is little or no U.S. authority on point. U.S.courts interpreting the Convention must learn to embrace foreign commentaries and decisions as a welcome friend, to guide them, particularly when deciding difficult cases of first impression, towards rendering well-reasoned decisions that take account of the international character of the Convention and the need to adhere to uniformity in its application.
In this critical phase, U.S. courts are in a position to develop a method of interpretation under the Convention that provides predictable results to the international business community. Was the Delchi court aware of this opportunity and heavy burden? Perhaps it was, but probably not. In a literal sense, it understood its special mandate to be mindful of "the international character" in the interpretation of the Convention and "the need to promote uniformity in its application," but was clearly unable to overcome its own ethnocentric bias. We are what we are and most of us are ethnocentric, viewing the world from our own corner. Courts are no exception. Ethnocentricity can be an advantage in promoting our own national interests. When it comes to the Convention, the interests of U.S. international business is best served by promoting uniform application of the Convention throughout the world. It would be naive to believe that U.S. decisions would be accorded universal acclaim, unless due consideration and respect is accorded to the views on the Convention published by non-U.S. courts and scholars.[page 263]
* Ms. Cook is a member of the Pennsylvania Bar and practices law as a shareholder of Cohen and Gigsby, P.C. in Pittsburgh, Pennsylvania. She received her J.D. from the University of Pittsburgh School of Law in 1988, Order of the Coif. The author would like to acknowledge the encouragement of Professor Harry Flechtner and Professor Ronald Brand of the University of Pittsburgh School of Law.
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 Convention] (entered into force on Jan. 1, 1988), also 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). The ratifying countries consisted of the following countries: Argentina, Egypt, France, Hungary, Italy, Lesotho, People's Republic of China, Syrian Arab Republic, United States of America, Yugoslavia and Zambia. As of Jan. 15, 1997, the ratifying countries to the CISG are Argentina, Australia, Austria, Belgium, Bosnia and Herzegovina, Bulgaria, Byelorussian Soviet Socialist Republic (Belarus), Canada, Chile, Czechoslovakia, Czech Republic, Denmark, Ecuador, Egypt, Estonia, Federal Republic of Germany, Finland, France, Georgia, Guinea, Hungary, Iraq, Italy, Lesotho, Lithuania, Mexico, Netherlands, New Zealand, Norway, People's Republic of China, Republic of Moldova, Rumania (Romania), Russian Federation, Singapore, Slovakia, Slovenia, Spain, Sweden, Switzerland, Syrian Arab Republic, Uganda, Ukrainian Soviet Socialist Republic, Union of Soviet Socialist Republics (USSR), United States of America, Uzbekistan, Yugoslavia and Zambia. See Journal of Law and Commerce CISG Contracting States and Declarations Table, 16 J.L. & Com. 371 (1997).
2. See Delchi Carrier, SpA v. Rotorex Corp., 71 F.3d 1024 (2d Cir. 1995); Filanto, S.p.A. v. Chilewich Int'l Corp., 789 F. Supp. 1229 (S.D.N.Y. 1992).
3. Convention, supra note 1, art. 6 ("[t]he parties may exclude the application of this Convention . . ..").
4. Convention, supra note 1, art. 1. Article 1(1) provides: "This Convention applies to contracts of sale of goods between parties whose places of business are in different States: (a) when the States are Contracting States; or (b) when the rules of private international law lead to the application of the law of a Contracting State." Id.
5. See, e.g., James J. Callaghan, U.N. Convention on Contracts for the International Sale of Goods: Examining the Gap-Filling Role of CISG in Two French Decisions, 14 J.L. & Com. 183, 185 (1994) (stating that certainty in international sales would have the effect of "facilitat[ing] the flow of international trade" and generally "serve the interests of all parties engaged in commerce"). In addition, there are other reasons that may account for the under-utilization of the Convention, such as the bargaining power of one of the parties to an international sales transaction to demand application of its own national laws or failure of counsel to raise the issue of application of the Convention at trial. See Harry M. Flechtner, Another CISG Case in the U.S. Courts: Pittfalls for the Practitioner and the Potential for Regionalized Interpretations, 15 J.L. & Com. 127, 131 (1995).
6. The Convention has long been a favorite topic among commentators and scholars. For a compilation of English language writings on the Convention, see Peter Winship, The UN Sales Convention: A Bibliography of English-Language Publications, 28 Int'l Law. 401 (1994).
7. 71 F.3d 1024 (2d Cir. 1995).
8. Id. at 1028. Article 25 of the Convention provides:
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, unless the party in breach did not foresee and a reasonable person of the same kind in the same circumstances would not have foreseen such a result.
Convention, supra note 1, art. 25.
9. 71 F.3d at 1029.
10. 156 Eng. Rep. 145 (1854).
11. Delchi, 71 F.3d at 1029.
12. See Arthur G. Murphey, Jr., Consequential Damages in Contracts for the International Sale of Goods and the Legacy of Hadley, 23 Geo. Wash. J. Int'l. L. & Econ. 415 (1989) (analyzing the differences between Article 74 of the Convention and Hadley v. Baxendale); Jacob S. Ziegel, Canada Prepares to Adopt the International Sales Convention, 18 C.B.L.J. 1, 14 (1991).
13. See Murphey, supra note 12, at 420, 430-31; Ziegel, supra note 12, at 14.
14. Convention, supra note 1, art. 74.
15. Hadley, 156 Eng. Rep. at 151.
16. Delchi, 71 F.3d at 1028.
17. Id. at 1027-28.
18. In a literal sense, the Delchi court quotes one foreign source, Hadley v. Baxendale. However, this 1854 English decision has been an integral part of U.S. jurisprudence for many years. See Murphey, supra note 12, at 416 n.5 (stating that Hadley "has been one of the more important cases for students in American law schools."); see also Delchi, 71 F.3d at 1028 (referring to the Hadley rule as "the familiar principle of foreseeability").
19. See, e.g., John Honnold, Uniform Law for International Sales 135-161 (2d ed. 1991); Franco Ferrari, Uniform Interpretation of the 1980 Uniform Sales Law, 24 Georgia. J. Int'l & Comp. L. 183 (1994); Joanne M. Darkey, Note, A U.S. Court's Interpretation of Damage Provisions under the U.N. Convention on Contracts for the International Sale of Goods: A Preliminary Step Towards an International Jurisprudence of CISG or a Missed Opportunity?, 15 J.L. & Com. 139, 140-142 (1995); see also Franco Ferrari, Specific Topics of the CISG in the Light of Judicial Application and Scholarly Writing, 15 J.L. & Com. 1, 8-13 (1995).
20. Convention, supra note 1, art. 7(2).
21. Honnold, supra note 19 at 146-48.
22. Id. at 146-52; see Darkey, supra note 19, at 150-51; see also Peter Schlechtriem, The Borderland of Tort and Contract-Opening a New Frontier, 21 Cornell Int'l L.J. 467 (1988).
23. Delchi, 71 F.3d at 1028.
24. See, e.g., 2 Guide to Int'l Sale Goods Convention (Business Laws, Inc.) 201.070, 201.167 (June 1996) (providing annotations of domestic and foreign courts for each article of the Convention, specifically articles 25 and 74).
25. See John Honnold, The Sales Convention in Action-Uniform International Words: Uniform Application?, 8 J.L. & Com. 207 (1988); V. Susanne Cook, The Need for Uniform Interpretation of the 1980 United Nations Convention on Contracts for the International Sale of Goods, 50 U. Pitt. L. Rev. 197 (1988).
26. 71 F.3d at 1028 (citing Orbisphere Corp. v. United States, 726 F. Supp. 1344, 1355 (Ct. Int'l Trade 1989)).
28. See, e.g., Taisei Fire and Marine Ins. Co. v. Commissioner, 104 TC 535, 556 (1995) (interpreting a U.S.-Japan Tax Treaty and citing to a decision of the Federal Republic of Germany Tax Court of Bremen interpreting the analogous provision in a German-Netherlands Tax Treaty); United States v. Alvarez-Machain, 504 U.S. 655, 687 (1992) (Stevens, J., dissenting). In Alvarez-Machain, the dissent cites a South African case as relevant evidence that the decision of the majority is contrary to generally accepted principles of law throughout the world. Id. The dissent states: "most courts throughout the civilized world will be deeply disturbed by the 'monstrous' decision the Court announces today." Id.
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