Excused Performance When Circumstances Change I. Introduction Circumstances change. Contracts made in good times may have to be performed in bad times. The cost of the seller's raw materials may skyrocket, making production more expensive than was contemplated when the sale price was agreed. Governments may prohibit export or import of certain types of goods, or impose new taxes or restrictions. . . . . Wars may break out, cutting off normal trade routes. Currency values may plummet or soar, making an agreed purchase price effectively much more expensive. Recession may strike an economy. The longer performance takes, the more likely it is that something will happen to alter the assumptions that the parties made when they reached their original agreement. . . . . What should happen in such cases? Should a contracting party whose performance has become much more difficult than expected be relieved of its obligation to perform? These are questions that receive strikingly different answers in different countries, making this an area of particular sensitivity in international contracts. The different approaches stem from different philosophies about the nature of contractual obligation. . . In common law jurisdictions, breach of contract is seen as being quite distinct from fault, which is the province of the law of torts. . If I promise you that I will do something and I do not, I have breached my contract and must pay you damages, whether or not it was my fault that I failed to perform. . That philosophy is often expressed by using the Latin phrase pacta sunt servanda agreernents must be kept. 1 __ . A lawyer trained in the civil law may regard use of this phrase by the common law as a bit ) ironic; the phrase has a more robust meaning in the civil law, particularly with respect to (.remedies for breach, as we will see in Chapter 8 . . At common law, a contracting parry was relieved of its obligation only if performance became impossible. In England the impossibility defense is often grouped under the heading of discharge by frustration. . . This usage is followed in the United States to some degree, although often US law treats impossibility, or its newer version, impracticability, separately from frustration. . In a typical US analysis, impossibility or impracticability is a seller's defense when the seller can show, among other things, that it would be impossible to deliver the goods (e.g., because the contract calls for the delivery of a particular antique desk that has since been destroyed by fire). ) .( Frustration, on the other hand, is typically a buyer's defense: it may still be perfectly possible for the buyer to perform (i.e., pay, which is generally the only significant duty of the buyer), but some supervening reason has frustrated the purpose of the contractfor instance, if the parties knew the buyer was purchasing the goods for a purpose that has since become illegal. : . ) ( ) ( __ . Even the narrowly confined impossibility exception was not well established in the common law until relatively late. It is usually traced to the classic English case of Taylor v. Caldwell (1863) 3 B. & S. 826; 122 Eng. Rep. 309, where the owners of music hall were held to be relieved from their obligation to lease the music hall when it burned down accidentally. 2 . 221 . 903( B. & S. 826 3 (1863 ) ) . The doctrine of frustration was announced even later in the Coronation cases, typified by Krell v. Henry [1903] 2 K.B. 740, in which contracts to rent rooms overlooking the route of the coronation procession of King Edward VII were held to have been frustrated by the cancellation of the procession, because the whole purpose of the contract had been thwarted. . (There are US equivalents of the Coronation cases, such as Alfred Marks Realty Co. v. Hotel Hermitage Co., 156 N.Y.S. 179 (N.Y. App. Div. 191 5) in which advertisers who were to pay for advertisements in a yacht race souvenir program were held discharged when the race was canceled because of World War I.) ( The narrow and unforgiving common law view gave rise to much argument about when performance is truly impossible. For example, if I am an apple farmer and I promise to sell you 10,000 pounds of apples, should I be relieved of my obligation to perform if my entire crop of apples is destroyed by pests or fire? I may feel that I cannot perform because I have lost all of my apples, but performance is not impossible, as I could buy apples from other farmers and on-sell them to you. That may be very costly and I may take a loss but it is still possible for me to perform my promise. . 00001 . . UCC 2-615 modifies the harshness of the common law rule by excusing performance when it has been made impracticable "by the occurrence of a contingency the nonoccurrence of which was a basic assumption on which the contract was made." Although impracticability is a more forgiving criterion than impossibility, 2-615 is generally construed narrowly, as we shall soon see. 3 " ". . . How expensive do those substitute apples have to be in order for it to be impracticable for me to buy them? My view of what amounts to commercial impracticability may be very different from yours. The one point that is clear is that impracticability lays somewhere between impossibility and impracticality, and a reading of the cases suggests that it is closer to the former than the latter. . . In contrast, civil law systems generally base contractual liability on proof of fault and they are generally more forgiving of contracting parties for whom performance becomes much more difficult as a result of circumstances beyond their control. If my apples were destroyed by pests or fire despite my best efforts to protect them, it is not my fault that I cannot perform my obligation to sell them to you. . . . If liability in contract depends (at least in part) upon fault then I should be relieved of my obligations if was not at fault. . ) ( Contrast the following provision from the German Civil Code (BGB) with the US case extracted thereafter, which is a typical example of the interpretation of UCC 2-615, one of many that have arisen in the wake of the great financial crisis of 2008-2009. 2 / 516 . 2009 - 2008 As you do so, you might consider whether the relatively low bar of the civil law is associated with "adaptation of the contract," as you will see in BGB 313(1), thus leaving 4 the contract in place although in a different form, whereas the higher bar of the common law results from the common law doctrine that the contract is called off entirely. ." " 313 )1( . Relief Under the CISG for Performance Prevented by "Impediment" " " A. Introduction In general, the CISG adheres to the common law's no-fault approach to breach of contract rather than the civil law's fault-based approach. . CISG article 45(1) provides that the buyer is entitled to rights and remedies simply if "the seller fails to perform any of his obligations under the contract or this Convention," whether or not the seller was at fault. 1/54 " . " CISG article 61(1) makes identical provision for breach by the buyer. . 1/16 CISG article 79 is the only provision that excuses nonperformance for circumstances beyond a party's control, thereby opening the door a little to intrusion of civil law concepts of fault and excuse. 97 . As noted above, CISG article 79 was the subject of extensive debate during the drafting of the CISG, as the common lawyers and the civilians hammered out a compromise. 97 . A substantial part of two two-week sessions of the UNCITRAL Working Group, supported by written submissions, was devoted to the subject, followed by a long discussion by 5 UNCITRAL itself, and finally by a debate at Vienna spread intermittently over four sessions of the First Committee of the Diplomatic Conference. . The US theologian Tryon Edwards wrote: "Compromise is but the sacrifice of one right or good in the hope of retaining anothertoo often ending in the loss of both." Unfortunately, that rather bleak view seems to be have been borne out in CISG article 79. : " _ ". 97 . The CISG's preeminent commentator, John Honnold, wrote: "In spite of strenuous efforts of legislators and scholars we face the likelihood that Article 79 may be the Convention's least successful part of the half-century of work towards international uniformity." : " ". 97 The main problem, present in relation to all aspects of the CISG but particularly true of CISC article 79, is: "[T]he danger that local tribunals may unconsciously read the patterns of their domestic law into the general language of the Convention." ."97 " In other words, although the text of CISG article 79 is the same everywhere, it will be read by US judges and arbitrators with UCC 2-615 in mind, by German judges and arbitrators with BCB 313 in mind, and so on around the world, thereby producing disuniformity of interpretation of an ostensible uniform provision. We will soon see some concrete examples of that prediction coming true in the United States. 97 BCB UCC 2-615 313 . . B. Impediment CISG article 79(1) imposes four requirements before the nonperforming party is granted relief: 1/97 6 That the failure in performance was prevented by an impediment beyond its control; . That the nonperforming party could not reasonably be expected to have taken the impediment into account at the time the contract was made; That the nonperforming party could not reasonably be expected to have avoided or overcome the impediment or its consequences; . That the nonperforming party gave timely notice to the other party of the impediment and its effect on performance. . Obviously, the first key question is: When does something that makes performance difficult amount to an "impediment"? The word is not defined in the CISG. In English, "impediment" usually connotes some external obstacle that gets in the way of the desired result. : " " .. " " The next case provides an example. It is also a graphic example of the accuracy of Honnold's prediction that national courts will view CISG article 79 through the lens of their domestic law. Honnold . . 97 Raw Materials, Inc. v. Manfred Forberich G.m.b.H. & Co., K.G. United States District Court for the Northern District of Illinois, 2004 53 U.C.C. Rep. Serv. 2d 878 [Plaintiff Raw Materials, Inc. (RMI), an Illinois corporation, contracted to buy 15,00018,000 metric tons of used railroad rail from Defendant Manfred Forberich G.m.b.H. & Co., K.G. (Forberich), a German limited partnership. ( 00051 - 00081 RMI) . The rail was to be shipped from the port of St. Petersburg, Russia. Under the contract as originally agreed, delivery was to be made by June 30, 2002. In June 2002, the parties agreed to extend the time for performance, although they were in dispute about what was 7 actually agreed. RMI contended that the rail was to be delivered in Illinois by December 31, 2002, but Forberich contended that December 31, 2002, was the deadline for the rail to be loaded on board the carrying ship in St. Petersburg. . 03 2002. 2002 RMI . 13 2002 13 2002 . The winter of 2002-2003 was the worst for almost 60 years in St. Petersburg. The port of St. Petersburg froze over in early December 2002, making it impossible for ships to depart from the port. 2002-3002 06 . . 2002 RMI sued Forberich, alleging breach of contract for Forberich's undisputed failure to meet its contractual obligation. Plaintiff moved for summary judgment. Defendant relied on CISG article 79, arguing that its performance had been prevented by the impediment of the port freezing over.] . Forberich RMI . 97 .[ Before Filip , District Judge: ... As set forth above, it is undisputed that Forberich was contractually obligated to ship 15,000 to 18,000 metric tons of rail to RMI and that it failed to do so. Thus, Forberich's ability to avoid summary judgment is dependent on whether it has presented sufficient evidence to support its affirmative defense of force majeure based on the theory that it was prevented from performing by the freezing over of the St. Petersburg port. For the reasons explained below, the Court denies Plaintiff's motion for summary judgment. 00051 00081 Forberich . RMI . . A. Applicable Law The parties agree that their contract is governed by the Convention on Contracts for the International Sale of Goods ("CISG"). Although the contract does not contain an express force majeure provision, the CISG provides that: . : 8 A party is not liable for failure to perform any of his obligations if he proves that failure was due to an impediment beyond his control and that he could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract or to have avoided or overcome its consequences. . RMI asserts that while no American court has specifically interpreted or applied Article 79 of the CISG, case law interpreting the Uniform Commercial Code's ("U.C.C.") provision on excuse provides guidance for interpreting the CISG's excuse provision since it contains similar requirements as those set forth in Article 79." 97 RMI .79 Under 2-615 of the UCC, "three conditions must be satisfied before performance is excused: (1) a contingency has occurred; (2) the contingency has made performance impracticable; and (3) the nonoccurrence of that contingency was a basic assumption upon which the contract was made." The third condition turns upon whether the contingency was foreseeable; "if the risk of the occurrence of the contingency was unforeseeable, the seller cannot be said to have assumed the risk. If the risk of the occurrence of the contingency was foreseeable, that risk is tacitly assigned to the seller." " . . . RMI does not dispute that the freezing over of the port in St. Petersburg was a contingency. Rather, RMI essentially argues that it is entitled to summary judgment because the second and third conditions do not apply inasmuch as the undisputed facts show that the frozen port did not prevent Forberich from performing the contract and that the freezing of the port was foreseeable. Based on the record material cited by the parties, the Court respectfully disagrees. RMI . RMI 9 . Forberich . B. Whether the Frozen Port Could Have Prevented Performance As mentioned above, RMI contends that the frozen port could not have prevented Forberich from performing because the port did not freeze over until mid-December 2002, and, since it takes 3-4 weeks for a ship carrying rail to travel from St. Petersburg to the United States, Forberich would have had to have shipped out the rail before the port: froze in order for the shipment to arrive by the December 31, 2002 deadline. RMI's argument is premised on its contention that it has established beyond genuine dispute that Forberich was obligated to ship the materials so that they would arrive by December 31, 2002 (rather than just load the ships by that date, as Forberich contends). Forberich RMI 2002 3-4 Forberich RMI : 2002 13 . 31 Forberich .( Forberich 2002 ) In this regard, RMI asserts that Forberich's admission in its answer that it "promised to deliver the aforementioned goods at RMI's place of business on or before June 30, 2002," is a judicial admission. While the Court agrees that this statement in RMI's answer is a judicial admission that establishes beyond contention the fact that Forberich initially promised to deliver the rail at RMI's place of business on or before June 30, 2002... this does not establish the inapplicability of the force mcijeure defense for at least two independent reasons. RMI " Forberich RMI . 03 2002" Forberich RMI 03 2002 ... RMI . First, even assuming that Forberich was obligated to deliver the rails by December 31, 2002, Forberich has nonetheless presented evidence (which the Court must construe in the light most favorable to Forberich) that the frozen port prevented it from meeting this obligation. In particular, Mr. Forberich testified that ice interfered with shipping not just in mid-December, but as early as the end of November. Forberich 13 2002 Forberich ( Forberich ) Forberich . . 10 The fact that a Forberich ship left the port on approximately November20, 2002 is inconsistent with the port freezing in the remaining ten days or so of that month. Furthermore, as noted above, no conclusive evidence has been presented that any ships left the St. Petersburg port until months after November 20, 2002. In tight of the undisputed fact that delivery to a port in the U.S. from St. Petersburg takes at least 3-4 weeks and Mr. Owczarzak's testimony that he "would have been satisfied had the 15,000 to 18,000 tons, metric tons of rail, been delivered to a port: in the United States as of December 31st, 2002," Forberich has presented evidence that it would have been in position to meet a December 31, 2002 deadline for delivery to the U.S. by shipping out rail in the Last week or so of November or the first few days of December but was prevented from doing so by the frozen part. Thus, for this reason alone, there is a disputed question of fact as to whether the frozen port prevented Forberich from performing its contractual obligations. 02 2002 Forberich . 02 2002. " 00051 00081 4-3 "2002 : 13 13 2002 Forberich Owczarzak . Forberich . The second reason RMI has failed to demonstrate that the frozen port did not prevent Forberich's performance is that although it is established beyond contention that Forberich promised in the February 7, 2002, written agreement that Forberich would deliver the rail at RMI's place of business on or before June 30, 2002, an issue of fact exists regarding the nature of the extension Mr. Owczarzac orally agreed to for the time for performance of the contract. Forberich RMI Forberich 7 2002 Forberich 03 2002 RMI . Owczarzak (As indicated by the fact that the parties agreed to the extension, there is no requirement in the contract that any modification be in writing. Furthermore, under the CISG, "[a] contract may be modified or terminated by the mere agreement of the parties." CISG Art. 29.) Neither side has presented evidence of what exactly was said by Mr. Owczarzak and Mr. Forberich during the initial telephone conversation in which Mr. Owczarzak agreed to an extension. . "][ . " . 92.( 11 Forberich Owczarzak . Owczarzak On June 27, 2002, Mr. Owczarzak sent Mr. Forberich a letter stating "[w]ith reference to our telephone conversation of Wednesday, [sic] Jun 26, 2002, RAW MATERIALS, INC. has agreed to extend the delivery date from June 30, 2002 until a Later date during this calendar year on CONTRACT FORB 3464/02. This later date will be confirmed sometime during your visit to Chicago in July of this year." "][ Forberich Owczarzak 72 2002 . 03 2002 INC ][ 62 2002 . FORB 3464/02 ." However, this letter contemplates further discussions and, although the parties apparently did not meet in Chicago in July, Mr. Owczarzak testified that they did have further discussions, though he did not testify to the content of these discussions in detail. Mr. Owczarzak also testified that he conveyed to Mr. Forberich that delivery to any port in the U.S. by December 31, 2002 would be satisfactory but he did not specify when or how (orally or by letter) he made this communication. In his declaration, Mr. Forberich stated that his understanding was that Forberich was given an extension "until December 31, 2002 to load the rails and execute a bitt of lading to be in compliance with the contract." Owczarzak Forberich Owczarzak . 13 2002 ) 31 "Forberich Forberich ( . ." 2002 Given that the original contract obligated delivery to RMI's place of business in Chicago Heights by June 30, 2002, it appears unlikely that Mr. Owczarzak would have done more than agree to extend the delivery date to December 31, 2002, and change the delivery location to any U.S. port, but the evidence is unclear and contradictory and it is not the Court's role in deciding a summary judgment motion to weigh evidence,.. Thus, a question of fact exists as to whether Forberich was obligated to deliver the rail to the U.S. by December 31, 2002 or whether Forberich was merely required to load the rail by that date. Consequently, since it cannot yet be determined whether Forberich would have met its contractual obligations by shipping rail from the port at the end of December, a question Of fact exists as to whether the port's freezing prevented Forberich from performing its obligation, even assuming the port froze in mid-December. 2002 03 RMI 13 Owczarzak 2002 .. 13 2002 Forberich 12 . Forberich Forberich Forberich . C. Foresee ability RMI's sole basis for its contention that the early freezing of the port was foreseeable is the assertion, without citation to the record, in its brief in support of summary judgment, that "it hardly could come as a surprise to any experienced shipping merchant (or any grammar school geography student) that the port in St. Petersburg might become icy and frozen in the Russian winter months." However, Forberich presented evidence that the severity of the winter in 2002 and the early onset of the freezing of the port and its consequences were far from ordinary occurrences. RMI " ) ( ". 2002 Forberich . It is undisputed that although the St. Petersburg port does usually freeze over in the winter months, this typically does not happen until late January, and such freezing does not prevent the vessels from entering and exiting the port. More to the point, Mr. Forberich testified that although ice breakers are normally used to allow for shipping, the winter of 2002 was the worst winter in St. Petersburg in almost sixty years and that ice interfered with shipping at the end of November and that even the icebreakers were stuck in the ice. He also testified that these were "unexpected weather conditions." . 2002 Forberich . " ". Whether it was foreseeable that such severe weather would occur and would stop even the icebreakers from working is a question of fact for the jury. In so holding, the Court notes that the freezing over of the upper Mississippi River has been the basis of a successful force majeure defense. . . In sum, because questions of fact exist as to whether the early freezing of the port prevented Forberich's performance and was foreseeable, Forberich's force majeure affirmative defense may be viable and summary judgment would be inappropriate. 13 Forberich . Forberich CONCLUSION For the foregoing reasons, Plaintiff's motion for summary judgment is denied. . PROBLEM A US seller contracted to sell chicken parts to a Romanian buyer, with the final shipment to be by May 29. The seller shipped some chicken without incident, but on June 2, the seller had not shipped 62 containers of chicken parts still due under the contract. On that day. the Romanian government declared, without notice, that as ofJune 7, no chicken could be imported into Romania. The seller rushed out 20 of the remaining 62 containers, but as ofJune 7, 42 containers could not be shipped to Romania. The buyer proposed that the seller ship the chicken to a port in nearby Georgia. The seller refused. The buyer sued seller for breach of contract. Was the seller's performance excused by CISG article 79? . 92 62 2 . . 7 . 02 26 7 . 24 . . . 97 CISG article 79(3) provides for what happens if the impediment preventing performance comes to an end: the obligation to perform is revived. In contrast, CISG article 79 does not make provision for a different kind of partial impediment, one that prevents a parry from performing some but not all of its obligations. What happens, for example, if new government regulations unexpectedly restrict the use of one of the seller's raw materials, so that the seller can now manufacture some but not all of the goods promised to the buyer ? The government regulation would constitute an "impediment" under CISG article 79, albeit not a complete one. It would be odd if the seller were to be relieved of its obligations completely because of a partial impediment of this kind. CISC arride.79(I).does not say that the contract is terminated if performance is prevented by an impediment but rather that the 14 performing party is nor liable for any failure caused by the impediment. That language suggests that the seller would be relieved of its obligations only to the extent of the partial impediment. See Honnold, op. cit., 435.2, at 491-92 (the example of the partial restriction .)on raw materials is his 97 )3( : . 97 . "" 97 . . arride.79 CISC (I) .does . . Honnold . 2.534 194-29 ) (. 51 User Name : Padideh Alai Date and Time : Sep 28, 20152:35 p.m. EDT Job Number : 24339591 Document(1) 1. Modernizing and harmonizing international contract law: the CISG and the UNIDROIT Principles continue to provide the best way forward Client/Matter: -NoneNarrowed by: Content Type Secondary Materials Narrowed by -None- | About LexisNexis | Privacy Policy | Terms & Conditions | Copyright 2015 | LexisNexis Padideh Alai Modernizing and harmonizing international contract law: the CISG and the UNIDROIT Principles continue to provide the best way forward 1 June 2014 Reporter Unif. L. Rev. (2014) 19(1), pp 114 Length: 23595 words Author: Michael J. Dennis 1, Executive Director, Department of State Advisory Committee on Private International Law, SA4 S. Building, 2430 E St NW, Washington, DC, 20037, USA, Tel: +1 202 776 8438, Email: dennismj@state.gov, , LinkedIn: www.linkedin.com/in/michaeljohndennis, . Text Commercial Law I. Introduction For the last two decades, the United Nations Convention on Contracts for the International Sale of Goods (CISG) 2 and the International Institute for the Unification of Private Laws (UNIDROIT) Principles of International Commercial Contracts (PICC) 3 have stood as cornerstones in the efforts to modernize and harmonize international contract law. However, at the two most recent sessions of the United Nations Commission on International Trade Law (UNCITRAL), the adequacy of the CISG and the PICC has been the subject of substantial debate, with some calling for the development of an entirely new framework to harmonize general contract law. The USA, however, believes that further modernization and harmonization of international contract law can best be achieved by continuing the use of the existing structure. At its 2012 plenary session, UNCITRAL endorsed the PICC, commending them for their intended purposes, identifying them as complementary to the CISG, and congratulating UNIDROIT on preparing general rules for international commercial contracts. 4 Yet, several States at the session called for consideration of a new, comprehensive codification of contract law rules and principles for businesstobusiness international transactions. 5 The proponents of this new instrument referred to the 11 Part of the material contained in this article is published in Guiding Role of the CISG and UNIDROIT Principles in Tony Angelo, Luca Castellani and YvesLouis Sage (eds),Contribution to the Study of International Trade Law and Alternative Dispute Resolution in the South Pacific (Comparative Law Journal of the Pacific and New Zealand Association for Comparative Law 2014). It builds on a presentations made by the author at an expert meeting on contract law of the United Nations Commission on International Trade Law (UNCITRAL), which was held at the UNCITRAL Regional Centre for Asia and the Pacific in February 2013, as well as on an earlier presentation setting forth the US views by Keith Loken, at another event sponsored by UNCITRAL on international contract law held at the Villanova Law School in January 2013. See Keith Loken, A New Global Initiative on Contract Law in UNCITRAL: Right Project, Right Forum? [2013] 58 Villanova Law Review 509. The author is grateful for the assistance of Harold Burman and Timothy Schnabel, also of the Office of the Legal Adviser, Private International Law, US Department of State. 22 UN Convention on Contracts for the International Sale of Goods (11 April 1980) 1489 UNTS 3 accessed 15 January 2014 [CISG]. 33 International Institute for the Unification of Private Law (UNIDROIT),Principles of International Commercial Contracts (3rd edn, Transnational 2010) [PICC]. 44 SeeReport of the UN Commission on International Trade Law, 45th Sess, 25 June6 July 2012, UN Doc A/67/17, GAOR, 67th Sess, Supp No 17 (2012) para 140 [Report of the 45th Session] (endorsing the 2010 edition of the PICC). Earlier, UNCITRAL endorsed the 2004 edition of the PICC. See Report of the UN Commission on International Trade Law, 40th Sess, 25 June12 July 2007, UN Doc A/62/17 (Part I), GAOR, 62nd Sess, Supp No 17 (2007) para 213 [Report of the 40th Session]. 55 SeeProposal by Switzerland on Possible Future Work by UNCITRAL in the Area of International Contract Law, UN Doc A/CN.9/758 (8 May 2012) 78 accessed 15 January 2014 [Swiss Proposal]. The proposal, like Article 2 of the CISG, would exclude businesstoconsumer transactions. See Ingeborg Schwenzer, Who Needs a Uniform Contract Law, and Why? [2013] 58 Villanova Law Review 723, 729: Like the CISG, the instrument on general contract law should be confined to b2b contracts without touching businesstoconsumer (b2c) relationships. Schwenzer served as a member of the Swiss delegation Padideh Alai Page 3 of 28 Modernizing and harmonizing international contract law: the CISG and the UNIDROIT Principles continue to provide the best way forward CISG as merely a sales law and a piecemeal work, leaving important areas to the applicable domestic law. 6 The PICC were characterized as a soft law instrument with a mere optin scheme. 7 Other States, including the USA, expressed strong opposition to any effort to develop an entirely new framework for international contract law, given the wide acceptance of the CISG and the PICC and the unlikelihood of achieving a much expanded new treaty on a broader range of issues. Nonetheless, the Secretariat was requested to organize symposiums and othermeetings ... to assist the Commission in the assessment of the desirability and feasibility of future work in the field of general contract law. 8 In part to fulfil this mandate, UNCITRAL cosponsored a symposium entitled Assessing the CISG and Other International Endeavors to Unify International Contract Law at the Villanova University School of Law, in Villanova, USA, in January 2013, and held an expert meeting on contract law at UNCITRALs Regional Centre for Asia and the Pacific in February 2013. 9 At its July 2013 plenary session, UNCITRAL decided, on the basis of a US proposal, to hold a colloquium in 2015 celebrating the 35th anniversary of the CISG. 10 It was pointed out that since the 2005 UNCITRAL colloquium which celebrated the 25th anniversary, 17 more States had become party to the Convention, bringing the total number of parties to 80. 11 It was also decided at the session that the scope of the 2015 colloquium would examine the Convention broadly, including its relationship to the PICC. States further agreed that the colloquium would address aspects of the proposal made at the 2012 session of the Commission calling for consideration of a new instrument for international contract law. 12 This article focuses on the issues that should be considered at the colloquium in 2015 from the perspective of the USA. The colloquium will provide a unique opportunity to promote further global awareness of both the CISG and the PICC. It will also provide an important opportunity to highlight the complementary relationship between the binding nature of the CISG and the nonbinding nature of the PICC. We do not believe that a new project on international contract law is warranted for the following reasons: * the CISG and the PICC, working together, have been remarkably successful in addressing the needs of commercial players in international commerce; * the negotiation and preparation of a new instrument is not feasible; * a new instrument might have a negative impact on the adoption of the CISG and the application of the PICC; * there are no demonstrated significant problems in the transactional community with the current structure nor a demonstrated desire for this project from those whose transactions would be governed by it; and * there are other, more practical and efficient, ways to update and harmonize international contract law. to the 2012 session of the Commission and introduced the Swiss proposal. Article 2(a) of the CISG provides that the Convention does not apply to sales of goods bought for personal, family, or household purposes. 66 Swiss Proposal (n 4) 3. 77 Ibid 5. 88 SeeReport of the 45th Session (n 3) paras 12732 (summarizing debate). 99 SeeReport of the UN Commission on International Trade Law, 46th Sess, 826 July 2013, UN Doc A/68/17, GAOR, 68th Sess, Supp No 17 (2013) para 314 [Report of the 46th Session]. The papers relating to the Villanova symposium are published in Issue 58:4 of the Villanova Law Review. Papers relating to the UNCITRAL regional expert meetings are published in Tony Angelo, Luca Castellani and YvesLouis Sage (eds), Contribution to the Study of International Trade Law and Alternative Dispute Resolution in the South Pacific (Comparative Law Journal of the Pacific and New Zealand Association for Comparative Law 2014). 1010 Report of the 46th Session (n 8) para 315. 1111 SeeProposal by the Government of the United States Regarding UNCITRAL Future Work, UN Doc A/CN.9/789 (13 June 2013) 1011 accessed 15 January 2014 [US Proposal on UNCITRAL Future Work]. For the parties to the CISG, see Status: UN Convention on Contracts for the International Sale of Goods accessed 15 January 2014 [Status CISG]. 1212 Report of the 46th Session (n 8) para 315. Padideh Alai Page 4 of 28 Modernizing and harmonizing international contract law: the CISG and the UNIDROIT Principles continue to provide the best way forward II. Is a new framework necessary and feasible? This article first considers the merits of whether further legislative work should be undertaken in UNCITRAL concerning international contract law. At its July 2013 session, the Commission reviewed the general criteria for assessing whether legislative work should be undertaken in light of the increasing number of topics referred to UNCITRAL for consideration and [b]earing in mind the scarce resources ... and particularly the limited conference room time available. 13 The Commission decided that work should only proceed if: 1. the scope of a future text and the policy issues for deliberation were sufficiently clear; 2. legislative development would not duplicate legislative work on topics being undertaken by other international or intergovernmental bodies; 3. a legislative text on the topic would enhance modernization, harmonization or unification of the international trade law ; and 4. the topic is amenable to harmonization and the consensual development of a legislative text. 14 Applying these criteria, we conclude that the case has not been made for a new instrument on general contract law. 1. The scope of a future text and the policy issues for deliberation are not sufficiently clear As has been pointed out, the proposal in UNCITRAL does not clearly delineate the scope of a future text and the policy issues for deliberation. The proposal calls for UNCITRAL to establish a new mandate for work to be undertaken but is couched in general terms and only requests that States discuss what particular form UNCITRAL s future work on international contract law might take. 15 Since the proposal does not specify the nature of the instrument, this article addresses the alternatives. It considers first the desirability of developing another soft law instrument on general contract law and whether this instrument would duplicate work that has already been undertaken. The article then addresses the desirability and feasibility of an alternate hard law instrument on general contract law. 2. Legislative development of a soft law text would duplicate existing work The development of another soft law text would duplicate work that has already been undertaken. Taken together, the CISG and the PICC already provide a substantial and sufficient modern framework for the harmonization of international sales and contract law through a combination of hard law and soft law. A. CISG In April 1980, the CISG was adopted at a diplomatic conference convoked by the UN General Assembly, after a halfcentury of work in the international arena, including a decade of work in UNCITRAL. 16 At the 2005 UNCITRAL colloquium celebrating the 25th anniversary of the CISG, Herbert Kronke, then SecretaryGeneral of UNIDROIT, cited the Convention as probably the single most successful treaty in the history of modern transnational commercial law. 17 At that time, it was recognized that together the share in crossborder trade of the then 63 contracting States to the CISG represented over two 1313 Ibid paras 294, 303. At its 2011 session, the Commission agreed to reduce its entitlement to conference services to a total of 14 weeks per year in view of the extraordinary constraints placed on the Commission and its secretariat to reduce regular budget expenditures during the 20122013 biennium. SeeReport of the UN Commission on International Trade Law, 44th Sess, 27 June 8 July 2011, UN Doc A/66/17, GAOR, 66th Sess, Supp No 17 (2011) para 347. 1414 Report of the 46th Session (n 8) paras 3034; see also ibid paras 31032 (reporting Commission conclusions concerning ongoing and possible future legislative work). 1515 Swiss Proposal (n 4) 78. 1616 See Peter Schlechtriem,Uniform Sales Law: The UN Convention on Contracts for the International Sale of Goods (Peter Doralt and Helmut H. Haschek (eds), Manzsche Verlags 1986) 1721; John O Honnold, Uniform Law for International Sales under the 1980 United Nations Convention (Harry M Flechtner (ed), 4th edn, Kluwer Law International 2009) paras 410. Padideh Alai Page 5 of 28 Modernizing and harmonizing international contract law: the CISG and the UNIDROIT Principles continue to provide the best way forward thirds of the total volume of international trade. 18 Today, with 80 contracting States, including Japan (accession in 2008) and Brazil (accession in 2013), this share likely represents a significantly greater percentage of the total volume of world trade. 19 At the 2005 colloquium, it was also generally recognized that the CISG provides a neutral and modern framework for the contract of sale, which is the backbone of international trade in all countries. State parties range from the least economically developed to the most developed, and all major legal traditions of the world are represented among them. As Jernej Sekolec, then Secretary of UNCITRAL, concluded in his welcoming address, [t]his makes the Convention a world sales law and the experience with the Convention guarantees that the membership of the Convention will continue to grow. 20 During the recent discussion on whether a new initiative is appropriate, there appears to be universal agreement concerning the positive effect that the CISG has had on the harmonization of international contract law. For example, at the Villanova symposium, Anna Veneziano, the deputy SecretaryGeneral of UNIDROIT, aptly summarized the effect of the CISG as follows: The Convention indeed constitutes an extraordinary achievement not only for the unprecedented width of its scope of application and the high number of States from all continents which participated in the Diplomatic Conference in Vienna, nor just for its subsequent undeniable success in terms of ratifications and its practical application. Perhaps even more significantly, it has played a major role in building a universally shared vocabulary and a common denominator of rules which have since represented the basis for any academic discourse on international contract law, as well as serving as a model for national legislation and international and supranational instruments alike. Last but not least, it has offered the opportunity to develop various methods to strive for uniformity in the interpretation by domestic courts and arbitral tribunals in different jurisdictions. 21 B. PICC In 2011, UNIDROIT approved a third edition of the PICC, after more than three decades of work, including the earlier preparation and approval of a first edition of the Principles in 1994 and a second edition in 2004. 22 At the 2005 colloquium, 1717 Herbert Kronke, The UN Sales Convention, the UNIDROIT Contract Principles and the Way Beyond [2005] 25 Journal of Law and Commerce 451. 1818 See Jernej Sekolec, Welcome Address, 25 Years UN Convention on Contracts for the International Sale of Goods [2005] 25 Journal of Law and Commerce xv accessed 15 January 2014. cisg cisg 1919 See United Nations Information Service,Brazil Accedes to the United Nations Convention on Contracts for the International Sale of Goods, Press Release UNIS/L/182 (5 March 2013) accessed 15 January 2014; United Nations Information Service,Japan Accedes to United Nations Convention on Contracts for the International Sale of Goods, Press Release UNIS/L/120 (4 July 2008) accessed 15 January 2014. 2020 Sekolec (n 17) xv. 2121 Anna Veneziano, The Soft Law Approach to Unification of International Commercial Contract Law: Future Perspectives in Light of UNIDROITs Experience [2013] 58 Villanova Law Review 521, 5223 [footnotes omitted]. Several papers presented at the 2007 UNCITRAL Congress on Modern Law for Global Commerce further highlight that parties are increasingly selecting the CISG to govern their international contracts. See, eg, Harry M Flechtner,Changing the OptOut Tradition in the United States, (2007) accessed 15 January 2014; Eckart Brdermann,The Practice of Excluding the CISG: Time for Change? (2007) accessed 15 January 2014. Also of significance is the number of declarations that have been withdrawn by States, including the recent withdrawal of declarations regarding Article 92 of the CISG by Denmark, Finland and Sweden. These States all ratified the Convention subject to a declaration pursuant to Article 92 that they would not be bound by Part II (Formation). SeeUnited Nations Convention on Contracts for the International Sale of Goods: Declarations and Reservations, United Nations Treaty Collection (1 January 2014), accessed 15 January 2014 [Declarations and Reservations] (reporting notification of withdrawal of declarations under Article 92 by Finland on 28 November 2011, Sweden on 25 May 2012, and Denmark on 2 July 2012). Additionally, recently China, Lithuania and Latvia have withdrawn their written form declarations under Articles 12 and 96 of the CISG, thereby joining the vast majority of States that allow freedom of contractual form. See ibid (reporting notification of the withdrawal of the declaration by China on 16 January 2013, Lithuania on 1 November 2013 and Latvia on 13 November 2012). 2222 The third edition of the PICC was officially adopted by UNIDROIT in May 2011. See Governing Council of UNIDROIT,Summary of Conclusions, 90th Sess, Rome (911 May 2011), para 6 accessed 15 January 2014. As stated in the Preamble, [t]he main objective of the third edition of the UNIDROIT Principles was to address Padideh Alai Page 6 of 28 Modernizing and harmonizing international contract law: the CISG and the UNIDROIT Principles continue to provide the best way forward Kronke addressed the complementary effect of the binding nature of the CISG and the nonbinding nature of the PICC. He concluded: What we see looking at the two instrumentsthe CISG as the mother of all modern conventions on the law of specific contracts and the UPICC as the (inevitably) softlaw source of modern general contract laware neither competitors nor apples and pears. What we see is actually, and even more, potentially, a fruitful coexistence. ... [T]he UNIDROIT Contract Principles are, obviously, complementary in that they address a wide range of topics of general contract law which neither the CISG nor any other existing or future convention devoted to a specific type of transaction would ever venture to touch upon. 23 In their current form, the PICC can be used for diverse purposes. As pointed out earlier, UNCITRAL, when endorsing the PICC, commend[ed] the use of the Principles as appropriate for their intended purpose as set forth in the preamble. 24 The preamble states that: They shall be applied when the parties have agreed that their contract be governed by them. They may be applied when parties have agreed that their contract be governed by general principles of law, the lex mercatoria or the like ... [and] when the parties have not chosen any law to govern their contract. They may be used to interpret or supplement international uniform law instruments ... [and] to interpret or supplement domestic law. They may serve as a model for national and international legislators. 25 Today, more than 300 published decisions rendered worldwide refer to the PICC. 26 As has been pointed out, since most of the decisions relating to the PICC are arbitral awards which are not published, the total number of decisions referring ... to the UNIDROIT Principles is considerably greater. 27 Veneziano rightly concludes: Almost twenty years after the publication of their first edition, it is fair to say that the PICC, notwithstanding their nonbinding natureor maybe precisely as a consequence of their soft law characterhave enjoyed great success when compared with other international uniform law regulations (including the ones which have binding force). 28 C. It would be unwise to duplicate work already undertaken by UNIDROIT During the recent meetings, many felt that development of another soft law text like the PICC would not be desirable. For example, Pilar Perales Viscasillas stated at the Villanova symposium: [A] model law would not be a good tool for a general contract law instrument ... [since the] UPICC is already a model law available for the states. ... In regard to a possible soft law instrument, i.e., an optional instrument for the parties, the same reservations as mentioned before appl[y]: there is again an instrument that ... offers the parties good solutions, i.e., the PICC. In fact, the need for another optional instrument is unconvincing given the variety of options available to businesses. 29 additional topics ... Thus 26 new articles have been added dealing with restitution in case of failed contracts, illegality, conditions, [and] plurality of obligors and obligees. PICC preamble. 2323 Kronke (n 16) 4589. 2424 SeeReport of the 45th Session (n 3) para 140; Report of the 40th Session (n 3) para 213. 2525 PICC (n 2) preamble. 2626 For international case law and bibliography relating to the PICC, see UNILEX,On CISG and UNIDROIT Principles accessed 15 January 2014. 2727 Ibid. 2828 Veneziano (n 20) 525. 2929 Pilar Perales Viscasillas, Applicable Law, the CISG, and the Future Convention on International Commercial Contracts [2013] 58 Villanova Law Review 733, 737 [footnotes omitted]. See also Venzenano (n 20) 527: [I]t would appear to be unwise to duplicate efforts at a Padideh Alai Page 7 of 28 Modernizing and harmonizing international contract law: the CISG and the UNIDROIT Principles continue to provide the best way forward At this same symposium, Ingeborg Schwenzer was of the view that: If a model law may bring about some harmonization at the beginning this will soon be lost after some time. This can especially be expected in a traditional field such as contract law where firm dogmatic conceptions and convictions prevail that have been shaped over centuries and that every lawyer has internalized from the very first day of law school. 30 Instead, proponents of further work generally called for a binding convention such as the CISG, except that it would apply to a wide scope of international contracts and not just to sales. 31 This article evaluates the proposal on this basis in the next sections. 3. It has not been demonstrated that a new binding convention on general contract law would best enhance the modernization, harmonization, or unification of international contract law We believe that the continued implementation of the current framework provided by the CISG and the PICC will best enhance the modernization and progressive harmonization of international contract law. 32 First, premature harmonization through a new convention on international contract law might do more harm than good, given the wide diversity in State law approaches. Second, the business community does not seem to believe that a new instrument is desirable at this time. Third, the PICC are more than adequate, particularly in international commercial arbitration, to provide the basis for further harmonization of general contract law, given party autonomy to choose the governing legal principles. Fourth, the PICC might also serve as a basis for gap filling with the CISG, under among other rationales, Article 7(2) (general principles of contract law). Fifth, efforts to harmonize regional contract law do not justify a new global negotiation on international contract law. Differences in regional practices, to the extent they exist, have not been shown to create significant obstacles in a transactional context. A. Harmonization through a new convention on international contract law might do more harm than good Proposals for a new global commercial contract code are not new. The possible value of a new global contract code as either a nonbinding or binding mandatory instrument was also considered at the 2005 UNCITRAL colloquium celebrating the 25th anniversary of the CISG. At this conference, Kronke advised against being seduced by what he termed the neversubsiding charm of codes. 33 He made the plea that the focus of private international lawformulating agencies be on the effective implementation of existing instruments in the field of international contract law. 34 The value of a global contract code was again discussed at the UNCITRAL Congress on Modern Law for Global Commerce in 2007. One of the themes of this Congress was whether the formulating agencies should attempt complete harmonization of international contract law or live with diversitya mix of harmonized international rules and national law. The conference raised serious doubts as to whether the benefits of complete harmonization (including the potential for lower transaction costs and global level and start developing yet another set of nonbinding rules with a potentially universal application on the same issues already addressed by the PICC. 3030 Schwenzer (n 4) 728. 3131 Ibid: The scope of the envisaged instrument on general contract law should be similar to the [CISG], except that it should apply to all kinds of contracts and not just to sales. Viscasillas (n 28) 738: [I]t is probably the time to undertake a more ambitious project that should take the form of an international convention [footnote omitted]. 3232 SeeUS Proposal on UNCITRAL Future Work (n 10) 1011. 3333 Kronke (n 16) 4623. In discussing various proposals for a global code, Kronke notes that [w]hile Professor Bonell is envisaging the UPICC [PICC] assuming that function in maintaining their present status of soft law, Professor Lando insists on their being elevated to binding rules, to be mandatorily applied to nondomestic and noninterEuropean transactions. Ibid 463. Recently, Bonell continued his dialogue with Lando, maintaining support for development of a Global Commercial Code but only as a compilation of existing uniform law instruments that contain a reference to the [PICC] in their present nonbinding form as a sort of "background law. See Michael Joachim Bonell and Ole Lando, Future Prospects of the Unification of Contract Law in Europe and Worldwide [2013] Uniform Law Review 17, 21. Bonell further observed that transforming the PICC into binding legislation seems hardly feasible and frankly not even necessary... I seriously doubt that States will ever be able to agree at a worldwide level and in a binding form, on a set of principles and rules as comprehensive and, in part at least, as innovative as are the PICC (212). Bonell served as a member of the Italian delegation to the Diplomatic Conference for the adoption of the CISG in 1980 and later as the chairman of the working group for the preparation of all three editions of the PICC. 3434 Kronke (n 16) 4634. Padideh Alai Page 8 of 28 Modernizing and harmonizing international contract law: the CISG and the UNIDROIT Principles continue to provide the best way forward increased trade) outweighed the costs of eliminating legal diversity (including the ability of jurisdictions to compete and learn from each other). 35 The conference also demonstrated that substantive harmonization depends on, at least to some degree, procedural harmonization. 36 Both the CISG and the PICC reflect decisions by the international formulating agencies to proceed cautiously in harmonizing international contract law. Except for private international law commercial treaties, only rarely are international conventions developed with an optout clause such as Article 6 of the CISG, which promotes party autonomy and permits the parties to utilize a national system they prefer. 37 The Convention provides the parties, neither of whom wants to contract under the other s law, with a neutral set of principles, which they can adapt as necessary. The Convention also operates as a gap filler to supply terms that the parties have not negotiated. 38 On the other hand, the soft law optin nature of the PICC allows for a stepbystep approach to general contract law harmonization that permits corrections and underscores the significance of freedom of the parties to set their own contract terms and choose the applicable law. 39 Together, both operate effectively and provide for a naturally evolving harmonization through progressive interpretation that is workable and useful and, at the same time, facilitates the use of contractually incorporated rules such as those produced by the International Chamber of Commerce (ICC) 40 as well as best practices. It has not been shown that the benefits of a new international hard law instrument on general contract law, even if it were feasible, would outweigh the costs. The CISG demonstrates that the most that can be achieved in an international convention would be relative harmonization of general contract law through an optout procedure (as opposed to the harmonization of 3535 The UNCITRAL Congress in 2007 included a discussion on harmonization of commercial law: practical importance and economic value, chaired by Kazuaki Sono, the former Secretary of UNCITRAL and chairman of the Commission. Two of the participants, Gerhard Wagner and Jan Smits, emphasized the need to live with a mix of harmonized and national law and adopt a stepbystep approach to any further harmonization efforts. See Gerhard Wagner, Transaction Costs, Choice of Law and Uniform Contract Law in UNCITRAL (ed),Modern Law for Global Commerce: Proceedings of the Congress of the United Nations Commission on International Trade Law Held on the Occasion of the Fortieth Session of the Commission (United Nations 2007) 39, 45 accessed 15 January 2014: If decision makers ask whether they should harmonize commercial law or continue to live with diversityor rather, a mix of harmonized and national lawthe answer must be that this depends on whether the balance of costs and benefits is positive. Although it is impossible to arrive at a definitive answer, even a sketchy analysis raises serious doubts whether the benefits will really outweigh the costs. Therefore, it is crucial to leave the parties the choice of opting out of instruments of international law to come back to the national system they prefer. Jan Smits, Economic Arguments in the Harmonization Debate: The Practical Importance of Harmonization of Commercial Contract Law in UNCITRAL (ibid) 46, 52: [I]t seems wrong to link an increase in international contracting to uniform law... If one is uncertain about the effects of uniformity on international contracting, it is best to adopt a stepbystep approach. It means the time is not ripe for grand projects. Instead, one should adopt a model that allows corrections at an early stage and allows business and consumers to get acquainted with a new contract law regime. This points in the direction of drafting an optional contract code that parties can choose if they find this code suits their interests best. Sono further pointed out that with regard to businesstobusiness transactions an optional contract code can and does coexist in the world already with uniform contract law (52). 3636 See Helmut Wagner, Costs of Legal Uncertainty: Is Harmonisation of Law a Good Solution? in UNCITRAL (n 34) 53, 60: [I]t does not follow that full harmonization is necessary, because harmonization itself generates substantial costs. These include not only direct costs for developing new bureaucracies or demolishing old structures, but also costs arising from a loss of the advantages of system competition... Correspondingly, it might be better to adopt a stepbystep approach... [L]egal harmonization only makes sense if it is accompanied by a thorough reform of the system of civil justice and a harmonization of procedural law. 3737 See Loukas Mistelis, Is Harmonisation a Necessary Evil? The Future of Harmonisation and New Sources of International Trade Law in Ian Fletcher, Lukas Mistelis and Marise Cremona (eds),Foundations and Perspectives of International Trade Law (Sweet and Maxwell 2001) 3, 16. 3838 See Honnold (n 15) para 2: In short, like most domestic sales rules applicable to commercial contracts, the Conventions rules play a supporting role, supplying answers to problems that the parties have failed to solve by contract. Roy Goode,Commercial Law in the Next Millenium (Sweet and Maxwell 1998) 95: What the convention does is to provide parties neither of whom wishes to contract under the other s law with a set of neutral provisions which they can adapt as necessary. The convention also fulfils a second and important function, namely as a gapfiller to supply terms which the parties have not negotiated. 3939 Mistelis (n 36) 17, 25. 4040 The International Chamber of Commerce (ICC) has developed a number of standard term contractual rules that have contributed to the harmonization of international commercial law, such as the INCOTERMS and the Uniform Customs and Practices relating to Documentary Credits (UCP). UNCITRAL has endorsed both instruments concluding that they constitute a valuable contribution to facilitating the conduct of global trade. SeeReport of the 45th Session (n 3) para 144 (endorsing ICC INCOTERMS 2010); Report of the UN Commission on International Trade Law, 42d Sess, 29 June 17 July 2009, UN Doc A/64/17, GAOR, 64th Sess, Supp No 17 (2009) paras 3567 (endorsing UCP 600). Padideh Alai Page 9 of 28 Modernizing and harmonizing international contract law: the CISG and the UNIDROIT Principles continue to provide the best way forward general contract law through an optin procedure currently offered by the PICC). Conversely, one of the major drawbacks to a binding convention is that it cannot be easily modified as the law evolves, unlike a soft law instrument such as the PICC. 41 Given the wide diversity in approaches to general contract law, it would not be prudent to attempt to harmonize such a broad area of contract law through an international convention that tries to freeze further development. The likely result would be vacuous and therefore harmful harmonization, reducing the current benefits of regulatory competition without any real compensatory gain. B. What are the needs of business? Obviously, it is important that any new product reflects the needs of crossborder commerce; otherwise, the parties will simply choose other options as the governing law (either by opting out or in). Based on our consultations and other analysis, we have found no support for a new initiative, nor concerted views from the business community that significant transactional impediments exist that could justify such a project. In businesstobusiness international transactions (the focus of the proposal for additional work), it would appear that the market is operating effectively and that differences in contract law do not pose a serious obstacle to crossborder trade. (i) Surveys Proponents of a new contract law initiative generally assert that [d]ifferent surveys conducted during the last years revealed that traders themselves conceive differences in contract law as one of the main obstacles for crossborder transactions. 42 We are not aware of any significant surveys that have been conducted on a global basis that would support such a proposition. The proponents appear to be referencing surveys conducted in the context of the European Commission s proposal for a regional Common European Sales Law (CESL). 43 While these surveys may support the view that differences in mandatory consumer protection laws pose an obstacle to cross border businesstoconsumer trade in Europe, they do not establish that differences in contract law pose a significant obstacle to crossborder businesstobusiness trade (the focus of the UNCITRAL proposal) across the European Union (EU), let al