CONTRACTS (CISG)

CONTRACTS 2 (FROM PECL AND CISG)

INTERPRETATION

INTERPRETATION

(1) A contract is to be interpreted according to the common intention of the parties even if this differs from the literal meaning of the words.

(2) If it is established that one party intended the contract to have a particular meaning, and at the time of the conclusion of the contract the other party could not have been unaware of the first party's intention, the contract is to be interpreted in the way intended by the first party.

RELEVANT CIRCUMSTANCES In interpreting the contract, regard shall be had, in

particular, to: (a) the circumstances in which it was concluded,

including the preliminary negotiations; (b) the conduct of the parties, even subsequent to

the conclusion of the contract; (c) the nature and purpose of the contract; (d) the interpretation which has already been given

to similar clauses by the parties and the practices they have established between themselves;

(e) the meaning commonly given to terms and expressions in the branch of activity concerned and the interpretation similar clauses may already have received ;

(f) usages; and (g) good faith and fair dealing

I l l u s t r a t i o n s 1. A contract for the writing of a book

between A and B, a publisher, indicates that the book should consist of “about 300 pages”. During their negotiations B had assured A that an approximate indication of the number of pages was necessary for administrative reasons and that A was not bound to stick precisely to that number of pages, but could exceed it, substantially if need be. A submits a manuscript of 500 pages. In interpreting the meaning of “about 300 pages” due consideration should be given to these preliminary negotiations.

A, a Canadian manufacturer, and B, a United States retailer, conclude a number of contracts for the delivery of optical lenses in which the price is always expressed in Canadian dollars. A makes B a new offer indicating the price in “dollars” without further specification, but intending to refer again to Canadian dollars. In the absence of any indication to the contrary, A’s intention will prevail.

A and B conclude a contract for the sale of a cargo of oil at US$ 20.5 per barrel. The parties subsequently disagree on the size of the barrel to which they had referred, A having intended a barrel of 42 standard gallons and B one of 36 Imperial gallons. In the absence of any indications to the contrary, A’s understanding prevails, since in the international oil trade it is a usage to measure barrels in standard gallons.

A, a shipowner, concludes a charterparty agreement with B for the carriage of grain containing the standard term “whether in berth or not” with respect to the commencement of the lay-time of the ship after its reaching the port of destination. When it subsequently emerges that the parties attached different meanings to the term, preference should, in the absence of any indication to the contrary, be given to the meaning commonly attached to it in the shipping trade since the term is typical in the shipping trade.

REFERENCE TO CONTRACT OR STATEMENT AS A WHOLE

Terms and expressions shall be interpreted in the light of the whole contract or statement in which they appear.

A, a licensee, hears that, despite a provision in their contract granting A an exclusive licence, B, the licensor, has concluded a similar contract with C, one of A’s competitors. A sends B a letter complaining of B’s breach and ending with the words “your behaviour has clearly demonstrated that it was a mistake on our part to rely on your professional correctness. We hereby avoid the contract we have with you”. Despite the use of the term “avoid”, A’s words interpreted in the light of the letter as a whole, must be understood as a notice of termination.

(ALL TERMS TO BE GIVEN EFFECT)

Contract terms shall be interpreted so as to give effect to all the terms rather than to deprive some of them of effect.

A, a commercial television network, enters into an agreement with B, a film distributor, for the periodic supply of a certain number of films to be transmitted on A’s network in the afternoon, when only those films that are admissible for all viewers may be transmitted. According to the contract the films submitted must “have passed the admission test” of the competent censorship commission. A dispute arises between A and B as to the meaning of this term. B maintains that it implies only that the films must have been released for circulation, even if they are X-rated, while A insists that they must have been classified as admissible for everybody. If it is not possible otherwise to establish the meaning to be attached to the term in question, A’s understanding prevails since B’s interpretation would deprive the provision of any effect.

CONTRA PROFERENTEM RULE Where there is doubt about the meaning of

a contract term not individually negotiated, an interpretation of the term against the party who supplied it is to be preferred.

Terms which have been individually negotiated take preference over those which are not.

Where a contract is drawn up in two or more language versions none of which is stated to be authoritative, there is, in case of discrepancy between the versions, a preference for the interpretation according to the version in which the contract was originally drawn up.

A contract between A, a contractor, and B for the construction of an industrial plant contains a provision drafted by A and not discussed further stating that “[t]he Contractor shall be liable for and shall indemnify the Purchaser for all losses, expenses and claims in respect of any loss of or damage to physical property (other than the works), death or personal injury caused by negligence of the Contractor, its employees and agents”. One of A’s employees plays around with some of B’s equipment after working hours and damages it. A denies liability, contending that the provision in question covers only cases where A’s employees act within the scope of their employment. In the absence of any indication to the contrary, the provision will be interpreted in the manner which is less favourable to A, i.e. as also covering cases where his employees are not acting within the scope of their employment.

DETERMINATION OF PRICE

Where the contract does not fix the price or the method of determining it, the parties are to be treated as having agreed on a reasonable price.

Quality of Performance If the contract does not specify the quality, a

party must tender performance of at least average quality.

(SUPPLYING AN OMITTED TERM) (1) Where the parties to a contract have

not agreed with respect to a term which is important for a determination of their rights and duties, a term which is appropriate in the circumstances shall be supplied.

(2) In determining what is an appropriate term regard shall be had, among other

actors, to (a) the intention of the parties; (b) the nature and purpose of the

contract; (c) good faith and fair dealing; (d) reasonableness.

The parties to a construction contract agree on a special interest rate to be paid by the purchaser in the event of delay in payment of the price. Before the beginning of the work, the parties decide to terminate the contract. When the constructor delays restitution of the advance payment the question arises of the applicable interest rate. In the absence of an express term in the contract dealing with this question, the circumstances may make it appropriate to apply the special interest rate agreed for delay in payment of the price by the purchaser also to delay in restitution by the constructor.

A distribution franchise agreement provides that the franchisee may not engage in any similar business for a year after the termination of the agreement. Although the agreement is silent on the territorial scope of this prohibition, it is, in view of the particular nature and purpose of a franchise agreement, appropriate that the prohibition be restricted to the territory where the franchisee had exploited the franchise.

VALIDITY

Article 4:115: Effect of Avoidance On avoidance either party may claim restitution of

whatever it has supplied under the contract, provided it makes concurrent restitution of whatever it has received. If restitution cannot be made in kind for any reason, a reasonable sum must be paid for what has been received.

  Article 4:116: Partial Avoidance If a ground of avoidance affects only particular

terms of a contract, the effect of an avoidance is limited to those terms unless, giving due consideration to all the circumstances of the case, it is unreasonable to uphold the remaining contract.

Initial Impossibility A contract is not invalid merely because at

the time it was concluded performance of the obligation assumed was impossible, or because a party was not entitled to dispose of the assets to which the contract relates.

FUNDAMENTAL MISTAKE AS TO FACTS OR LAW (1) A party may avoid a contract for mistake of fact or law existing

when the contract was concluded if: (a) (i) the mistake was caused by information given by the other

party; or (ii) the other party knew or ought to have known of the mistake

and it was contrary to good faith and fair dealing to leave the mistaken party in error; or

(iii) the other party made the same mistake, and (b) the other party knew or ought to have known that the

mistaken party, had it known the truth, would not have entered the contract or would have done so only on fundamentally different terms.

(2) However a party may not avoid the contract if: (a) in the circumstances its mistake was inexcusable, or (b) the risk of the mistake was assumed, or in the circumstances

should be borne, by it. Inaccuracy in Communication An inaccuracy in the expression or transmission of a statement is

to be treated as a mistake of the person who made or sent the statement and above applies.

I l l u s t r a t i o n 1. A and B, when concluding a contract for

the sale of a sports car, were not and could not have been aware of the fact that the car had in the meantime been stolen. Avoidance of the contract is admissible.

A sells to B a picture “attributed” to the relatively unknown painter C at a fair price for such paintings. It is subsequently discovered that the work was painted by the famous artist D. A cannot avoid its contract with B on the ground of its mistake, since the fact that the picture was only “attributed” to C implied the risk that it might have been painted by a more famous artist.

(ERROR IN EXPRESSION OR TRANSMISSION)

An error occurring in the expression or transmission of a declaration is considered to be a mistake of the person from whom the declaration emanated.

A, a potential Italian client, asks B, an English law firm, for legal advice and by way of reply receives a telegram indicating that B’s hourly rate is “£150”, whereas the form handed by B to the English post office had read “£250”. Since it is well known that numbers in telegrams are often wrongly transmitted, B is considered to have assumed that risk and is not entitled to invoke the error in the transmission, even if the other conditions are met.

(REMEDIES FOR NON-PERFORMANCE)

A party is not entitled to avoid the contract on the ground of mistake if the circumstances on which that party relies afford, or could have afforded, a remedy for non-performance.

A, a farmer, who finds a rusty cup on the land sells it to B, an art dealer, for 10,000 euros. The high price is based upon the assumption of both parties that the cup is made of silver (other silver objects had previously been found on the land). It subsequently turns out that the object in question is an ordinary iron cup worth only 1,000 euros. B refuses to accept the cup and to pay for it on the ground that it lacks the assumed quality. B also avoids the contract on the ground of mistake as to the quality of the cup. B is entitled only to the remedies for non-performance.

FRAUD

(1) A party may avoid a contract when it has been led to conclude it by the other party's fraudulent representation, whether by words or conduct, or fraudulent non-disclosure of any information which in accordance with good faith and fair dealing it should have disclosed.

(2) A party's representation or non-disclosure is fraudulent if it was intended to deceive.

(3) In determining whether good faith and fair dealing required that a party disclose particular information, regard should be had to all the circumstances, including:

(a) whether the party had special expertise; (b) the cost to it of acquiring the relevant information; (c) whether the other party could reasonably acquire

the information for itself; and (d) the apparent importance of the information to the

other party.

THREATS

A party may avoid a contract when it has been led to conclude it by the other party's imminent and serious threat of an act:

(a) which is wrongful in itself, or (b) which it is wrongful to use as a means to

obtain the conclusion of the contract , unless in the circumstances the first party

had a reasonable alternative.

I l l u s t r a t i o n 1. A, who is in default with the repayment of

a loan, is threatened by B, the lender, with proceedings for the recovery of the money. The only purpose of this threat is to obtain on particularly advantageous terms a lease of A’s warehouse. A signs the lease, but is entitled to avoid the contract.

Faced with a threat by the players of a basketball team to go on strike unless they receive a much higher bonus than had already been agreed for winning the four remaining matches of the season, the owner of the team agrees to pay the requested bonus. The owner is entitled to avoid the new contract with the players, since the strike would have led automatically to the team being relegated to a minor league and therefore represented a serious and imminent threat to both the reputation and the financial position of the club.

EXCESSIVE BENEFIT OR UNFAIR ADVANTAGE (1) A party may avoid a contract if, at the time of the

conclusion of the contract: (a) it was dependent on or had a relationship of trust with

the other party, was in economic distress or had urgent needs, was improvident, ignorant, inexperienced or lacking in bargaining skill, and

(b) the other party knew or ought to have known of this and, given the circumstances and purpose of the contract, took advantage of the first party's situation in a way which was grossly unfair or took an excessive benefit.

(2) Upon the request of the party entitled to avoidance, a court may if it is appropriate adapt the contract in order to bring it into accordance with what might have been agreed had the requirements of good faith and fair dealing been followed.

(3) A court may similarly adapt the contract upon the request of a party receiving notice of avoidance for excessive benefit or unfair advantage, provided that this party informs the party who gave the notice promptly after receiving it and before that party has acted in reliance on it.

AGENCY

AUTHORITY OF AGENTS (1) Where an agent acts in the name of a

principal, the rules on direct representation apply.

(2) Where an intermediary acts on instructions and on behalf of, but not in the name of, a principal, or where the third party neither knows nor has reason to know that the intermediary acts as an agent, the rules on indirect representation apply.

 

EXPRESS, IMPLIED AND APPARENT AUTHORITY

(1) The principal's grant of authority to an agent to act in its name may be express or may be implied from the circumstances.

(2) The agent has authority to perform all acts necessary in the circumstances to achieve the purposes for which the authority was granted.

A person is to be treated as having granted authority to an apparent agent if the person’s statements or conduct induce the third party reasonably and in good faith to believe that the apparent agent has been granted authority for the act performed by it.

AGENT ACTING IN EXERCISE OF ITS AUTHORITY Where an agent is acting within its authority,

its acts bind the principal and the third party directly to each other. The agent itself is not bound to the third party.

AGENT ACTING WITHOUT OR OUTSIDE ITS AUTHORITY (1) Where a person acting as an agent acts

without authority or outside the scope of its authority, its acts are not binding upon the principal and the third party.

(2) Failing ratification by the principal, the agent is liable to pay the third party such damages as will place the third party in the same position as if the agent had acted with authority. This does not apply if the third party knew or could not have been unaware of the agent’s lack of authority.

RATIFICATION BY PRINCIPAL

(1) Where a person acting as an agent acts without authority or outside its authority, the principal may ratify the agent's acts.

(2) Upon ratification, the agent's acts are considered as having been authorised, without prejudice to the rights of other persons.

INTERMEDIARIES NOT ACTING IN THE NAME OF A PRINCIPAL (1) Where an intermediary acts: (a) on instructions and on behalf, but not

in the name, of a principal, or (b) on instructions from a principal but the

third party does not know and has no reason to know this,

the intermediary and the third party are bound to each other. (2) The principal and the third party are bound to each other only under Intermediary’s Insolvency or Fundamental Non-performance.